As filed with the Securities and Exchange Commission on February 23, 2005


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

                                                    1933 Act File No. 333-108137
                                                    1940 Act File No. 811-21417

                     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. 5


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


[X]      Amendment No. 5


                 NFJ Dividend, Interest & Premium Strategy Fund
         (Exact Name of Registrant as Specified in Declaration of Trust)


                           c/o PA 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 PA 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.
                                Ropes & Gray LLP
                             One International Place
                           Boston, Massachusetts 02110

                  Approximate Date of Proposed Public Offering:

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

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

     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)

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




                           CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
--------------------------------------------------------------------------------------------------------------------------
                                                            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      100,000,000 Shares        $ 25.00          $ 2,500,000,000          $ 294,250
-------------------------------------------------------------------------------------------------------------------------



/1/ Estimated solely for the purpose of calculating the registration fee.

/2/ $2.03 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.
================================================================================



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.


              SUBJECT TO COMPLETION, DATED                , 2005

PROSPECTUS
[LOGO] Allianz
Global Investors

                                        Shares

                NFJ Dividend, Interest & Premium Strategy Fund

                                 Common Shares

                               $25.00 per share

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

   Investment Objectives.  The Fund is a newly organized, diversified,
closed-end management investment company. The Fund's primary investment
objective is to seek current income and gains, with a secondary objective of
long-term capital appreciation.

   Portfolio Management Strategies.  The Fund will pursue its investment
objectives by investing in a diversified portfolio of dividend-paying common
stocks (the "Equity Component") and income-producing convertible securities
(the "Convertible Component"). The Fund will also employ a strategy of writing
(selling) call options on equity indexes in an attempt to generate gains from
option premiums (the "Index Option Strategy").

   The Equity Component is initially expected to represent approximately 75%,
and the Convertible Component approximately 25%, of the net proceeds of this
offering. Thereafter, the percentage of the Fund's assets represented by each
component is expected to vary based on relative investment performance, market
fluctuations and other factors, but the Fund's entire portfolio will be
rebalanced on an annual basis (so that the Equity Component will represent
approximately 75% and the Convertible Component approximately 25% of the
portfolio immediately after each rebalancing). The first rebalancing will take
place in January, 2006.

   The Fund cannot assure you that it will achieve its investment objectives.
                                                  (continued on following page)

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

Investing in the Fund's common shares involves certain risks. See "Risks"
beginning on page 37 of this prospectus. Certain of these risks are summarized
in "Prospectus Summary--Special Risk Considerations" beginning on page 12.

   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.

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


                                                Per Share Total(2)
                                                --------- --------
                                                    
              Public Offering Price              $ 25.00     $
              Sales Load                         $ 1.125     $
              Estimated Offering Expenses(1)(2)  $   .05     $
              Proceeds to the Fund               $23.825     $


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

(1) The Fund will pay or reimburse offering expenses estimated at $
    from the proceeds of the offering. PA Fund Management LLC has agreed to pay
    the amount by which the Fund's offering costs (other than the sales load,
    but inclusive of the reimbursement of underwriter expenses of $.005 per
    share) exceed $.05 per share. PA Fund Management LLC has agreed to pay all
    of the Fund's organizational expenses.
(2) The Underwriters may also purchase up to an additional      common shares
    at the public offering price, less the sales load, within 45 days from the
    date of this prospectus to cover over-allotments, if any. If such option is
    exercised in full, the total public offering price, sales load, estimated
    offering expenses and proceeds to the Fund will be       ,       , and
          , respectively.

   The Underwriters expect to deliver the common shares to purchasers on or
about         , 2005.

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


                                              
Citigroup                   Merrill Lynch & Co.                    UBS Investment Bank
A.G. Edwards                Wachovia Securities               Deutsche Bank Securities
Advest, Inc.               Robert W. Baird & Co.    H&R Block Financial Advisors, Inc.


                                                       
Banc of America                   Crowell, Weedon & Co.           Ferris, Baker Watts
Securities LLC                                                           Incorporated
J.J.B. Hilliard, W.L.            Janney Montgomery Scott
Lyons, Inc.                                LLC                KeyBanc Capital Markets
Legg Mason Wood Walker              Oppenheimer & Co.                   Raymond James
     Incorporated
RBC Capital Markets                  Ryan Beck & Co.               Stifel, Nicolaus &
                                                                              Company
                                                                         Incorporated
SunTrust Robinson
Humphrey                      Wedbush Morgan Securities Inc.   Wells Fargo Securities


        , 2005



(continued from previous page)

   PA Fund Management LLC (the "Manager") serves as the investment manager of
the Fund. The Fund utilizes three affiliated sub-advisers to manage different
elements of the Fund's portfolio. NFJ Investment Group L.P. ("NFJ") manages the
Equity Component by focusing on undervalued common stocks with relatively high
dividend yields. Nicholas-Applegate Capital Management LLC ("NACM") manages the
Convertible Component by using traditional credit analysis combined with a
disciplined, fundamental bottom-up research process. PEA Capital LLC ("PEA")
implements the Fund's Index Option Strategy using quantitative and statistical
analysis designed to produce gains from index option premiums.

   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, which creates a risk
of loss for investors purchasing shares in the initial public offering. The
common shares have been authorized for listing on the New York Stock Exchange,
subject to notice of issuance, under the trading or "ticker" symbol "NFJ."

   Portfolio Contents.  Under normal circumstances, the Fund will invest at
least 80% of its net assets (plus any borrowings for investment purposes) in
securities and other instruments that provide dividends, interest or option
premiums.

   The Equity Component will ordinarily consist principally of dividend-paying
common stocks, but may also include preferred stocks and dividend-paying real
estate investment trusts. The assets of the Equity Component will be invested
principally in securities of U.S. issuers, but may also include American
Depository Receipts ("ADRs"). Up to 10% of the component's assets may be
invested in foreign securities other than ADRs, including emerging market
securities.

   The Convertible Component will ordinarily consist of convertible securities,
including synthetic convertible securities, and may include convertible
securities that are of below investment grade quality. Debt 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 debt securities. The risks involved in investing in high yield
securities are such that an investment in the Fund should be considered
speculative. Up to 20% of the Convertible Component may consist of U.S.
dollar-denominated securities of foreign issuers based in developed countries.

   The Fund will employ its Index Option Strategy by writing (selling) call
options on equity indexes such that the underlying value of the indexes are
approximately equal to and do not exceed the value of the Equity Component of
the Fund--i.e., approximately 75% of the Fund's net assets, subject to future
fluctuations in the assets attributable to the Equity Component and annual
rebalancings. For these purposes, the Fund treats options on indexes as being
written on securities held by the Fund having an aggregate value equal to the
face or notional amount of the index subject to the options. Most of the
options written by the Fund will be exchange-traded, although the Fund may
utilize over-the-counter options. The Fund may also utilize other derivative
strategies involving call and put options, futures and forward contracts, swap
agreements, short sales and other derivative instruments in an attempt to hedge
against market and other risks in the portfolio. The Fund may invest up to 15%
of its total assets in illiquid securities.

   Although it has no current intention to do so, the Fund may in the future
determine to issue preferred shares, borrow money or issue debt securities to
add leverage to its portfolio, provided that the leverage does not represent
more than 38% of the Fund's total assets. See "Leverage and Borrowings." The
Fund may enter into derivatives transactions that may in certain circumstances
produce effects similar to leverage. See "The Fund's Investment Objectives and
Strategies--Portfolio Contents and Other Information--Other Derivatives."

   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         , 2005
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 66 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.



   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.

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

                               TABLE OF CONTENTS



                                                                     Page
                                                                     ----
                                                                  
      Prospectus Summary............................................   1

      Summary of Fund Expenses......................................  23

      The Fund......................................................  24

      Use of Proceeds...............................................  24

      The Fund's Investment Objectives and Strategies...............  24

      Leverage and Borrowings.......................................  36

      Risks.........................................................  37

      How the Fund Manages Risk.....................................  46

      Management of the Fund........................................  47

      Net Asset Value...............................................  52

      Distributions.................................................  53

      Dividend Reinvestment Plan....................................  54

      Description of Shares.........................................  55

      Anti-Takeover and Other Provisions in the Declaration of Trust  56

      Repurchase of Common Shares; Conversion to Open-End Fund......  57

      Tax Matters...................................................  58

      Underwriting..................................................  62

      Custodian and Transfer Agent..................................  65

      Legal Matters.................................................  65

      Table of Contents for the Statement of Additional Information.  66

      Appendix A--Description of Securities Ratings.................  67


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



                              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..................    NFJ Dividend, Interest & Premium Strategy 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
                                $.00001 per share, at $25.00 per share through
                                a group of underwriters (the "Underwriters")
                                led by Citigroup Global Markets Inc., Merrill
                                Lynch, Pierce, Fenner & Smith Incorporated, UBS
                                Securities LLC, A.G. Edwards & Sons, Inc.,
                                Wachovia Capital Markets, LLC, Deutsche Bank
                                Securities Inc., Advest, Inc., Robert W. Baird
                                & Co. Incorporated, Banc of America Securities
                                LLC, H&R Block Financial Advisors, Inc.,
                                Crowell, Weedon & Co., Ferris, Baker Watts,
                                Incorporated, J.J.B. Hilliard, W.L. Lyons,
                                Inc., Janney Montgomery Scott LLC, KeyBanc
                                Capital Markets, a Division of McDonald
                                Investments Inc., Legg Mason Wood Walker,
                                Incorporated, Oppenheimer & Co. Inc., Raymond
                                James & Associates, Inc., RBC Capital Markets
                                Corporation, Ryan Beck & Co., Inc., Stifel,
                                Nicolaus & Company, Incorporated, SunTrust
                                Capital Markets, Inc., Wedbush Morgan
                                Securities Inc., and Wells Fargo Securities,
                                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." PA Fund Management LLC (the
                                "Manager") has agreed to pay the amount by
                                which the Fund's offering costs (other than the
                                sales load, but inclusive of the reimbursement
                                of underwriter expenses of $.005 per share)
                                exceed $.05 per share. The Manager has agreed
                                to pay all of the Fund's organizational
                                expenses.

Investment Objectives and
Strategies................    The Fund's primary investment objective is to
                                seek current income and gains, with a secondary
                                objective of long-term capital appreciation.
                                The Fund cannot assure you that it will achieve
                                its investment objectives.

                              The Fund will pursue its investment objectives by
                                investing in a diversified portfolio of
                                dividend-paying common stocks (the "Equity
                                Component") and income-producing convertible
                                securities (the "Convertible Component"). The
                                Fund will also employ a
                                strategy of writing (selling) call options on
                                equity indexes in an attempt to generate gains
                                from option premiums (the "Index Option
                                Strategy"). The types of investments that will
                                ordinarily comprise the Equity Component and
                                the Convertible Component, and the

                                      1



                                instruments used to implement the Index Option
                                Strategy, are summarized under "--Portfolio
                                Contents" below.

                              The Manager serves as the investment manager of
                                the Fund. The Fund utilizes three affiliated
                                sub-advisers (the "Sub-Advisers") to manage the
                                Fund's portfolio. NFJ Investment Group L.P.
                                ("NFJ") manages the Equity Component,
                                Nicholas-Applegate Capital Management LLC
                                ("NACM") manages the Convertible Component and
                                PEA Capital LLC ("PEA") implements the Index
                                Option Strategy. See "Sub-Advisers" below. The
                                portfolio management strategies and techniques
                                utilized by each Sub-Adviser are described
                                below.

                              Asset Allocation and Annual Rebalancing.  The
                                Equity Component is initially expected to
                                represent approximately 75%, and the
                                Convertible Component approximately 25%, of the
                                net proceeds of the offering. The Manager will
                                cause the Fund's entire portfolio to be
                                rebalanced annually to this initial asset
                                allocation between the Equity Component and the
                                Convertible Component. The first rebalancing
                                will take place in January, 2006. These annual
                                rebalancings may result in additional
                                transaction costs for the Fund and may increase
                                the amount of capital gains (and, in
                                particular, short-term gains) realized by the
                                Fund on which shareholders may pay tax.
                                Although the portfolio will be rebalanced
                                annually, it is expected that the relative
                                percentage of the Fund's assets represented by
                                the Equity and Convertible Components will vary
                                during interim periods in relation to the
                                relative investment performance of each
                                Component, as well as market fluctuations and
                                other factors. Therefore, the Fund's assets
                                attributable to each Component from time to
                                time may be significantly higher or lower than
                                the initial 75%/25% allocation described above,
                                and the risk/return profile of the Fund (taken
                                as a whole) will vary accordingly.

Investment Selection
Strategies................    Equity Component.  In selecting common stocks for
                                the Equity Component, NFJ considers an initial
                                selection universe consisting of the 1,000
                                largest publicly traded companies (in terms of
                                market capitalization) in the U.S. to identify
                                150 to 200 companies that exhibit the best
                                fundamental characteristics. NFJ classifies the
                                universe by industry, and then identifies the
                                most undervalued stocks in each industry based
                                mainly on relative price-to-earnings (P/E)
                                ratios, calculated both with respect to
                                trailing operating earnings and forward
                                earnings estimates. From this group of common
                                stocks, NFJ buys a number of stocks with the
                                highest dividend yields. NFJ then screens the
                                most undervalued companies in each industry by
                                dividend yield to identify the highest yielding
                                common stocks in each industry. From this
                                group, NFJ buys an approximately equal number
                                of additional stocks with the lowest P/E
                                ratios. In selecting individual stocks, NFJ
                                also considers
                                quantitative factors such as price momentum
                                (based on analysts' earnings per share
                                estimates and revisions to those estimates),
                                relative dividend yields, valuations relative
                                to the overall market and trading liquidity.
                                NFJ will ordinarily replace an investment when
                                a similar investment opportunity within the
                                same industry

                                      2



                                group has a considerably higher dividend yield
                                or lower valuation than the current holding.
                                The Equity Component may include common stocks
                                outside of the selection universe described
                                above, consistent with the Fund's investment
                                objectives and policies.

                              To the extent that NFJ invests in preferred
                                stocks or real estate investment trusts for the
                                Equity Component, NFJ considers quantitative
                                factors similar to those used for common stocks
                                as described above, and also uses traditional
                                credit analysis, taking into account factors
                                such as changes in credit fundamentals, changes
                                in attractiveness relative to other securities
                                and changes in industry fundamentals.

                              NFJ will also manage the Equity Component with a
                                view toward reducing the portion of Fund
                                distributions that are taxed as ordinary income
                                by focusing investments in common stocks that
                                pay dividends that may qualify for taxation to
                                individual Common Shareholders as "qualified
                                dividend income," and thus be eligible for
                                taxation at favorable rates applicable to
                                long-term capital gains. See "Tax Matters."
                                However, it is expected that a substantial
                                portion of the Fund's net investment income
                                (including income derived from the Convertible
                                Component and a portion of the gains received
                                from index option premiums) will be taxed to
                                Common Shareholders at ordinary income tax
                                rates. Therefore, the Fund should not be viewed
                                as a vehicle designed to maximize after-tax
                                returns. See "Tax Risk."

                              Convertible Component.  In selecting convertible
                                securities for the Convertible Component, NACM
                                attempts to identify issuers that successfully
                                adapt to change. NACM evaluates each
                                convertible security's investment
                                characteristics as an income-producing
                                security, using the credit analysis techniques
                                described below, 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 also 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. NACM attempts to identify
                                potential investments that it expects will
                                exceed minimum credit statistics and exhibit
                                the highest visibility of future expected

                                      3



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

                              NACM's discipline in selling investments that
                                have become less attractive is clearly defined
                                and designed to drive the Convertible Component
                                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.

                              Index Option Strategy.  In implementing the
                                Fund's Index Option Strategy, PEA will "sell"
                                or "write" call options on equity indexes such
                                that the underlying value of the indexes are
                                approximately equal to (and do not exceed) the
                                net asset value of the Fund's Equity
                                Component--i.e., approximately 75% of the
                                Fund's net assets, subject to future
                                fluctuations in the assets attributable to the
                                Equity Component and annual rebalancings as
                                described above. For these purposes, the Fund
                                treats options on indexes as being written on
                                securities having an aggregate value equal to
                                the face or notional amount of the index
                                subject to the option. This index option
                                writing strategy is designed to produce gains
                                from index option premiums.

                              Index call options are contracts representing the
                                right to purchase the cash value of an index at
                                a specified price (the "strike price") at or
                                until a specified future date (the "expiration
                                date"). The Fund will sell index options that
                                are "European style," meaning that the options
                                may be exercised only on the expiration date.
                                For conventional listed call options, the
                                option's expiration date can be up to nine
                                months from the date the call options are first
                                listed for trading. Longer-term call options
                                can have expiration dates up to three years
                                from the date of listing. The Fund expects that
                                it will normally write options whose terms to
                                expiration range from two months to one year,
                                although the Fund may write options with both
                                longer and shorter terms. PEA will not write
                                call options on individual equity securities,
                                but may write options on exchange-traded funds
                                and other similar instruments designed to
                                correlate with the performance of an equity
                                index or market segment.

                              As the writer (seller) of an equity index call
                                option, the Fund would receive cash (the
                                premium) from the purchaser of the option, and
                                the purchaser would have the right to receive
                                from the Fund any appreciation in the cash
                                value of the index over the strike price on the
                                expiration date. If, at expiration, the
                                purchaser exercises the index option sold by
                                the Fund, the Fund would pay the purchaser the
                                difference between the cash value of the index
                                and the strike price. In effect, the Fund sells
                                the potential appreciation in the value of the
                                index above the strike price in exchange for the

                                      4



                                premium. PEA may cause the Fund to repurchase
                                an index call option prior to its expiration
                                date, extinguishing the Fund's obligation, in
                                which case the cost of repurchasing the option
                                (net of any premiums received) will determine
                                the gain or loss realized by the Fund.

                              Equity index options differ from options on
                                individual securities in that (i) the exercise
                                of an index option requires cash payments and
                                does not involve the actual purchase or sale of
                                securities, (ii) the holder of an index option
                                has the right to receive cash upon exercise of
                                the option if the level of the index upon which
                                the option is based is greater than the strike
                                price of the option and (iii) index options
                                reflect price fluctuations in a group of
                                securities or segments of the securities market
                                rather than price fluctuations in a single
                                common stock.

                              In pursuing the Index Option Strategy, PEA may
                                cause the Fund to sell call options on
                                "broad-based" equity indexes, such as the
                                Standard & Poor's 500 Index, as well as
                                narrower market indexes, such as the Standard &
                                Poor's 100 Index, or on indexes of securities
                                of companies in a particular industry or
                                sector, including (but not limited to)
                                financial services, technology, pharmaceuticals
                                and consumer products. An equity index assigns
                                relative values to the securities included in
                                the index (which change periodically), and the
                                index fluctuates with changes in the market
                                values of these securities. PEA will actively
                                manage the Fund's index options positions using
                                quantitative and statistical analysis that
                                focuses on relative value and risk/return. In
                                determining which equity index options to
                                utilize, PEA will consider market factors, such
                                as current market levels and volatility, and
                                options specific factors, such as premium/cost,
                                strike price and time to expiration. PEA will
                                attempt to create a portfolio of equity index
                                call options that is diversified across
                                multiple strike prices and expiration dates.

                              PEA will attempt to maintain for the Fund written
                                call options positions on equity indexes whose
                                price movements, taken in the aggregate, are
                                correlated with the price movements of the
                                common stocks and other securities held in the
                                Fund's Equity Component. In doing so, PEA will
                                take into account periodic data provided by NFJ
                                with respect to the Equity Component, including
                                net assets, industry and sector weightings,
                                historic volatility as well as periodic
                                (typically 30 days after month-end) reports
                                detailing portfolio holdings. However, other
                                than through periodic holdings reports, PEA
                                will not have access to the actual securities
                                purchased, sold or held by or for the Equity
                                Component due to
                                informational barriers in place between NFJ and
                                PEA. Therefore, the Index Option Strategy
                                involves significant risk that the changes in
                                value of the indexes underlying the Fund's
                                written call options positions will not
                                correlate closely with changes in the market
                                value of securities held by the Equity
                                Component. To the extent that there is a lack
                                of correlation, movements in the indexes
                                underlying the options positions may result in
                                losses to the Fund, which may more than offset
                                any gains received by the Fund from options
                                premiums. See "Risks - Index Options Risk."

                                      5



                              PEA does not intend to write call options on
                                equity indexes where the underlying value of
                                the indexes exceed the net asset value of the
                                Equity Component (i.e., write "naked"
                                positions). The Fund will "cover" its written
                                equity index call positions by segregating
                                liquid assets in an amount equal to the
                                contract value of the index and/or by entering
                                into offsetting positions (e.g., by holding a
                                call option on the same index as the call
                                written where the strike price of the call held
                                is equal to or less than the strike price of
                                the call written).

                              The Fund will generally sell index call options
                                which are "out-of-the-money" or "at-the-money"
                                at the time of sale. Out-of-the-money call
                                options are options with a strike price above
                                the current cash value of the index and
                                at-the-money call options are options with a
                                strike price equal to the cash value of the
                                index. In addition to providing possible gains
                                through premiums, out-of-the-money index call
                                options allow the Fund to potentially benefit
                                from appreciation in the equity securities held
                                by the Fund with respect to which the option
                                was written (to the extent correlated with the
                                index) up to the strike price. The Fund will
                                generally write out-of-the-money call options
                                where the strike price is not more than 10%
                                higher than the cash value of the index at the
                                time of sale, although PEA reserves the
                                flexibility to utilize written call options
                                that are more deeply out-of-the-money if it
                                deems appropriate depending upon market
                                conditions and other factors. The Fund also
                                reserves the flexibility to sell index call
                                options that are "in-the-money" - i.e., those
                                with a strike price below the cash value of the
                                index at the time of sale, and will generally
                                limit these to options where the strike price
                                is not more than 5% lower than the cash value
                                of the index (although the Fund may utilize
                                options that are more deeply in-the-money
                                depending upon market conditions and other
                                factors). When the prices of the equity index
                                upon which a call option is written rise, call
                                options that were out-of-the-money when written
                                may become in-the-money (i.e., the cash value
                                of the index rises above the strike price of
                                the option), thereby increasing the likelihood
                                that the options could be exercised and the
                                Fund forced to pay the amount of appreciation
                                over the strike price of the option upon
                                expiration.

                              Most option contracts are originated and
                                standardized by an independent entity called
                                the Options Clearing Corporation (the "OCC").
                                The Fund will write (sell) call options that
                                are generally issued, guaranteed and cleared by
                                the OCC. Listed call options are currently
                                traded on the American Stock Exchange, Chicago
                                Board
                                Options Exchange, International Securities
                                Exchange, New York Stock Exchange, Pacific
                                Stock Exchange, Philadelphia Stock Exchange and
                                various other U.S. options exchanges. The Fund
                                may also write unlisted (or "over-the counter")
                                call options.

                              Diversification.  Subject to the availability of
                                suitable investment opportunities and subject
                                to the Fund's limitations, NFJ and NACM will
                                attempt to diversify the investments in their
                                respective Components broadly in an attempt to
                                minimize the Component's sensitivity to market
                                risk, credit risk and/or other risks associated

                                      6



                                with a particular issuer, industry or sector,
                                or to the impact of a single economic,
                                political or regulatory occurrence.

                              Portfolio Contents.  Under normal circumstances,
                                the Fund will invest at least 80% of its net
                                assets (plus any borrowings for investment
                                purposes) in securities and other instruments
                                that provide dividends, interest or option
                                premiums.

                              The Equity Component will ordinarily consist
                                principally of dividend-paying common stocks,
                                but may also include preferred stocks and
                                dividend-paying real estate investment trusts.
                                The assets of the Equity Component will be
                                invested principally in securities of U.S.
                                issuers, but may include American Depository
                                Receipts ("ADRs") without limit. Up to 10% of
                                the Component's assets may be invested in
                                foreign securities other than ADRs, including
                                emerging market securities.

                              The Convertible Component will ordinarily consist
                                of convertible securities, including synthetic
                                convertible securities, and may include
                                convertible securities that are of below
                                investment grade quality (i.e., rated, at the
                                time of investment, below Baa by Moody's or
                                below BBB by S&P, or unrated but judged by NACM
                                to be of comparable quality). NACM may invest
                                in distressed securities on behalf of the
                                Convertible Component, but will not invest in
                                securities which are in default (rated "D" by
                                Moody's or S&P) at the time of purchase (but
                                may hold securities which have gone into
                                default after they have been purchased). Up to
                                20% of the Convertible Component may consist of
                                U.S. dollar-denominated securities of foreign
                                issuers based in developed countries.
                                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. A synthetic convertible
                                security represents the combination of separate
                                securities that possess the two principal
                                characteristics of a traditional convertible
                                security, i.e., an income-producing security
                                and the right to acquire an equity security,
                                such as the combination of a traditional
                                corporate bond with a warrant to purchase
                                equity securities of the issuer of the bond.

                              The Fund will employ its Index Option Strategy by
                                writing (selling) call options on equity
                                indexes such that the underlying value of the
                                indexes are approximately equal to and do not
                                exceed the value of the Equity Component of the
                                Fund - i.e., approximately 75% of
                                the Fund's net assets, subject to future
                                fluctuations in the assets attributable to the
                                Equity Component and annual rebalancings. For
                                these purposes, the Fund treats options on
                                indexes as being written on securities held by
                                the Fund having an aggregate value equal to the
                                face or notional amount of the index subject to
                                the options. Most of the options written by the
                                Fund will be exchange-traded, although the Fund
                                may utilize over-the-counter options.

                              In addition to the use of written options under
                                the Index Option Strategy, the Fund may utilize
                                other derivative strategies involving

                                      7



                                call and put options, futures and forward
                                contracts, swap
                                agreements, short sales and other derivative
                                instruments in an attempt to hedge against
                                market and other risks in the portfolio.

                              The Fund may invest in securities of issuers with
                                small market capitalizations. The Fund may
                                invest up to 15% of its total assets in
                                illiquid securities.

                              As a diversified fund, the Fund generally may
                                not, with respect to 75% of its 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 will not concentrate its investments
                                in a particular "industry" by investing more
                                than 25% of its total assets in that industry.
                                See "How the Fund Manages Risk--Investment
                                Limitations." 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).

Leverage and Borrowings...    Although it has no current intention to do so,
                                the Fund reserves the flexibility to issue
                                preferred shares or debt securities or engage
                                in borrowings to add leverage to its portfolio.
                                The Fund may also enter into derivative
                                transactions that may in some circumstances
                                give rise to a form of financial leverage. Any
                                leverage used by the Fund would be limited to
                                38% of the Fund's total assets (including the
                                proceeds of the leverage). See "Leverage and
                                Borrowings." To the extent that the Fund uses
                                leverage, it would seek to obtain a higher
                                return for shareholders than if the Fund did
                                not use leverage. Leveraging is a speculative
                                technique and there are special risks involved.
                                See "Risks--Leverage Risk."

Investment Manager........    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 0.90% of the Fund's average
                                daily total managed assets. "Total managed
                                assets" means the total assets of the Fund
                                (including assets attributable to any
                                borrowings that may be outstanding) minus
                                accrued liabilities (other than liabilities
                                representing borrowings). The Manager is
                                located at 1345 Avenue of the Americas, New
                                York, New York
                                10105. Organized in 2000 as a subsidiary
                                successor 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, 2004, the Manager
                                had approximately $37.5 billion in assets under
                                management. Allianz Global Investors of America
                                L.P. is the direct parent company of PA Retail
                                Holdings LLC, of which the Manager is a
                                wholly-owned subsidiary. As of December 31,
                                2004, Allianz

                                      8



                                Global Investors of America L.P. and its
                                subsidiaries, including NFJ, NACM and PEA, had
                                approximately $564.8 billion in assets under
                                management.

                              The Manager has retained its affiliates, NFJ,
                                NACM and PEA (each a "Sub-Adviser" and
                                collectively, the "Sub-Advisers"), as
                                sub-advisers to manage the Fund's portfolio
                                investments. See "--Sub-Advisers" below.

Sub-Advisers..............    NFJ will serve as the Fund's Sub-Adviser
                                responsible for managing the Fund's Equity
                                Component. Subject to the supervision of the
                                Manager and pursuant to the terms of its
                                portfolio management agreement, NFJ has full
                                investment discretion and makes all
                                determinations with respect to the investment
                                of the Equity Component's assets. NFJ is
                                located at 2121 San Jacinto, Suite 1840,
                                Dallas, Texas 75201. NFJ is the successor
                                investment adviser to NFJ Investment Group,
                                Inc., which commenced operations in 1989. NFJ
                                provides investment management services to a
                                number of institutional accounts, including
                                investment companies, employee benefit plans,
                                college endowment funds and foundations. As of
                                December 31, 2004, NFJ had approximately $9.3
                                billion in assets under management.

                              NACM will serve as the Fund's Sub-Adviser
                                responsible for managing the Convertible
                                Component. Subject to the supervision of the
                                Manager and pursuant to the terms of its
                                portfolio management agreement, NACM has full
                                investment discretion and makes all
                                determinations with respect to the investment
                                of the Convertible Component'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, 2004, NACM had approximately
                                $14.5 billion in assets under management.

                              PEA will serve as the Fund's Sub-Adviser
                                responsible for implementing the Index Option
                                Strategy. Subject to the supervision of the
                                Manager and pursuant to the terms of its
                                portfolio management agreement, PEA has full
                                investment discretion and makes all
                                determinations with respect to the
                                implementation of the Index Option Strategy.
                                PEA is located at 1345 Avenue of the Americas,
                                50th Floor, New York, New York 10105. PEA
                                provides equity-related advisory services to
                                mutual funds and institutional accounts. As of
                                February 15, 2005, PEA had approximately $3.1
                                billion in assets under management.

                              The Manager (and not the Fund) will pay a portion
                                of the fees it receives from the Fund to the
                                Sub-Advisers in return for their services.

                                      9



Distributions.............    Commencing with the Fund's first dividend, the
                                Fund intends to make quarterly cash
                                distributions to Common Shareholders at a rate
                                that reflects the past and projected
                                performance of the Fund. The Fund
                                expects to receive substantially all of its
                                current income and gains from the following
                                sources: (i) capital gains (short-term and
                                long-term) from net index option premiums and
                                the sale of portfolio securities; (ii)
                                dividends received by the Fund that are paid on
                                the common stocks and other equity securities
                                held in the Equity Component; and (iii)
                                interest income received by the Fund from the
                                securities held in the Convertible Component.
                                Distributions are likely to be variable, and
                                the Fund's distribution rate will depend on a
                                number of factors, including the net earnings
                                on the Fund's portfolio investments and the
                                rate at which such net earnings change as a
                                result of changes in the timing of and rates at
                                which the Fund receives income from the sources
                                described above. The net investment income of
                                the Fund consists of all income (other than net
                                short-term and long-term capital gains) less
                                all expenses of the Fund.

                              The Fund's quarterly distributions will be made
                                from the Fund's net investment income and net
                                gains from index option premiums and the sale
                                of portfolio securities. The tax treatment and
                                characterization of the Fund's distributions
                                may vary significantly from time to time
                                because of the varied nature of the Fund's
                                investments. Pursuant to the requirements of
                                the Investment Company Act of 1940, as amended
                                (the "1940 Act") and other applicable laws,
                                absent an exemption, a notice will accompany
                                each quarterly distribution with respect to the
                                estimated source (as between net income and
                                gains) of the distribution made. (The Fund will
                                indicate the proportion of its capital gains
                                distributions that constitute long-term and
                                short-term gains annually.) The ultimate tax
                                characterization of the Fund's distributions
                                made in a calendar or fiscal year cannot
                                finally be determined until after the end of
                                the fiscal year. As a result, there is a
                                possibility that the Fund may make total
                                distributions during a calendar or fiscal year
                                in an amount that exceeds the Fund's net
                                investment income and net realized capital
                                gains for the relevant fiscal year. For
                                example, the Fund may distribute amounts early
                                in the calendar or fiscal year that derive from
                                short-term capital gains, but incur net
                                short-term capital losses later in the year,
                                thereby offsetting short-term capital gains out
                                of which distributions have already been made
                                by the Fund. In such a situation, the amount by
                                which the Fund's total distributions exceed net
                                investment income and net realized capital
                                gains would generally be treated as a tax-free
                                return of capital up to the amount of your tax
                                basis in your shares, with any amounts
                                exceeding such basis treated as gain from the
                                sale of shares.

                              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 all of its net
                                investment income and net short-term capital
                                gains. In addition, at least annually, the
                                Fund intends to distribute net realized
                                long-term capital gains not previously
                                distributed, if any. The 1940 Act currently
                                limits the number of times the Fund may
                                distribute long-term capital gains in

                                      10



                                any tax year, which may increase the
                                variability of the Fund's distributions and
                                result in certain dividends being comprised
                                more heavily of long-term capital gains
                                eligible for favorable income tax rates. The
                                Fund intends to apply for exemptive relief from
                                the Securities and Exchange Commission to allow
                                it to distribute long-term capital gains more
                                frequently, and if granted would intend to
                                regularly include long-term capital gains in
                                Fund distributions, subject to approval by the
                                Board of Trustees. However, there is no
                                assurance that any such exemptive relief will
                                be granted. During periods in which the Index
                                Option Strategy does not generate sufficient
                                option premiums or results in net losses, a
                                substantial portion of the Fund's dividends may
                                be comprised of capital gains from the sale of
                                equity securities held in the Equity Component,
                                which would involve transaction costs borne by
                                the Fund and may also result in realization of
                                taxable short-term capital gains taxed at
                                ordinary income tax rates (particularly during
                                the initial year of the Fund's operations when
                                all of the Fund's portfolio securities will
                                have been held for less than one year). See
                                "Tax Matters."

                              Your initial distribution is expected to be
                                declared approximately 75 days, and paid
                                approximately 120 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." Although it does not now
                                intend to do so, the Board of Trustees may
                                change the Fund's distribution 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 net short- and long-term capital gains and
                                historical and projected net investment income
                                and net short- and long-term capital gains.

Listing...................    The Common Shares have been authorized for
                                listing on the New York Stock Exchange, subject
                                to notice of issuance, under the trading or
                                "ticker" symbol "NFJ." See "Description of
                                Shares."

Custodian and Transfer
Agent.....................    Brown Brothers Harriman & Co. will serve as
                                custodian of the Fund's assets and will also
                                provide certain compliance services to the
                                Manager on behalf of the Fund. PFPC Inc. will
                                serve as the Fund's transfer and dividend
                                disbursement agent. See "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 or reimbursed by the
                                Fund. See "Use of Proceeds." In addition to net
                                asset value, market price may be affected by
                                factors relating to the Fund such as dividend
                                levels and stability (which will in turn be

                                      11



                                affected by levels of dividend and interest
                                payments by the Fund's portfolio holdings, the
                                timing and success of the Fund's Index Option
                                Strategy, regulation affecting the timing and
                                character of Fund distributions, Fund expenses
                                and other factors), portfolio credit quality,
                                liquidity, call protection, market supply and
                                demand, and similar factors relating to the
                                Fund's portfolio holdings. See "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   The following describes various principal risks
                                of investing in the Fund. A more detailed
                                description of these and other risks of
                                investing in the Fund are described under
                                "Risks" in this prospectus and under
                                "Investment Objectives and Policies" in the
                                Fund's Statement of Additional Information.

                              No Prior 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 Common 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 offering expenses paid or
                                reimbursed 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 their initial offering
                                price. This risk may be greater for investors
                                who sell their shares relatively shortly after
                                completion of the initial public offering.

                              Equity Securities and Related Market Risk.  The
                                Fund will ordinarily have substantial exposure
                                to common stocks and other equity securities in
                                pursuing its investment objectives and
                                policies. The market price of common stocks and
                                other equity securities in which the Fund
                                invests 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.

                                      12



                                Equity securities generally have greater price
                                volatility than bonds and other debt securities.

                              Issuer Risk.  The value of securities 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.

                              Dividend and Income Risk.  The income
                                shareholders receive from the Fund is based
                                primarily on the dividends and interest it
                                earns from its investments as well as the gains
                                the Fund receives from writing options and
                                selling portfolio securities, each of which can
                                vary widely over the short and long term. The
                                dividend income from the Fund's investments in
                                equity securities will be influenced by both
                                general economic activity and issuer-specific
                                factors. In the event of a recession or adverse
                                events affecting a specific industry or issuer,
                                the issuers of the equity securities held by
                                the Fund may reduce the dividends paid on such
                                securities. If prevailing market interest rates
                                decline, interest rates on convertible
                                securities and other debt instruments held by
                                the Fund, and shareholders' income from the
                                Fund, would likely decline as well. Please see
                                "Distributions" above for a description of
                                other risks associated with the level, timing
                                and character of the Fund's distributions.

                              Convertible Securities Risk.  Convertible
                                securities generally offer lower interest or
                                dividend yields than non-convertible debt
                                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 approaches or 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.

                              Synthetic Convertible Securities Risk.  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 element of the security 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

                                      13



                                "Risks - Other Derivatives Risks." In addition,
                                if the value of the underlying common stock or
                                the level of the index involved in the
                                convertible element falls below the strike
                                price of the warrant or option, the warrant or
                                option may lose all value.

                              Credit Risk/High Yield Risk.  Credit risk is the
                                risk that one or more investments in
                                convertible securities, preferred stocks or
                                other debt instruments in the Fund's portfolio
                                will decline in price, or fail to pay
                                dividends, interest, liquidation value or
                                principal when due, because the issuer of the
                                obligation or the issuer of a reference
                                security experiences an actual or perceived
                                decline in its financial status. The
                                Convertible Component may invest in debt
                                securities rated below investment grade (i.e.,
                                rated, at the time of investment, below Baa by
                                Moody's or below BBB by S&P, or unrated but
                                determined by NACM to be of comparable
                                quality). NACM may invest in distressed
                                securities on behalf of the Convertible
                                Component, but will not invest in securities
                                which are in default (rated "D" by Moody's or
                                S&P) at the time of purchase (but may hold
                                securities which have gone into default after
                                they have been purchased). Debt 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 may also be considered to
                                possess some speculative characteristics by
                                certain rating agencies. The prices of these
                                lower grade debt securities are generally more
                                volatile and sensitive to actual or perceived
                                negative developments, such as a decline in the
                                issuer's revenues or a general economic
                                downturn, than are the prices of higher grade
                                debt securities.

                              Index Options Risk.  There are various risks
                                associated with the Fund's Index Option
                                Strategy. The purchaser of an index option
                                written by the Fund has the right to any
                                appreciation in the cash
                                value of the index over the strike price on the
                                expiration date. Therefore, as the writer of an
                                index call option, the Fund forgoes, during the
                                option's life, the opportunity to profit from
                                increases in the market value of the equity
                                securities held by the Fund with respect to
                                which the option was written (to the extent
                                that their performance is correlated with that
                                of the index) above the sum of the premium and
                                the strike price of the call. However, the Fund
                                has retained the risk of loss (net of premiums
                                received) should the price of the Fund's
                                portfolio securities decline.

                              In addition, 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. PEA will
                                attempt to maintain for the Fund written call
                                options positions on equity indexes whose price
                                movements, taken in the aggregate, are

                                      14



                                correlated with the price movements of the
                                common stocks and other securities held in the
                                Fund's Equity Component. In doing so, PEA will
                                take into account periodic data provided by NFJ
                                with respect to the Equity Component, including
                                net assets, industry and sector weightings,
                                historic volatility as well as periodic
                                (typically 30 days after month-end) reports
                                detailing portfolio holdings. However, other
                                than through periodic holdings reports, PEA
                                will not have access to the actual securities
                                purchased, sold or held by or for the Equity
                                Component due to informational barriers in
                                place between NFJ and PEA. Therefore, the Index
                                Option Strategy involves significant risk that
                                the changes in value of the indexes underlying
                                the Fund's written call options positions will
                                not correlate closely with changes in the
                                market value of securities held by the Equity
                                Component. To the extent that there is a lack
                                of correlation, movements in the indexes
                                underlying the options positions may result in
                                losses to the Fund, which may more than offset
                                any gains received by the Fund from options
                                premiums. In these and other circumstances, the
                                Fund may be required to sell portfolio
                                securities to satisfy its obligations as the
                                writer of an index call option when it would
                                not otherwise choose to do so, or may choose to
                                sell portfolio securities to realize gains to
                                supplement Fund distributions. Such sales would
                                involve transaction costs borne by the Fund and
                                may also result in realization of taxable
                                capital gains, including short-term capital
                                gains taxed at ordinary income tax rates, and
                                may adversely impact the Fund's after-tax
                                returns.

                              There can be no assurance that a liquid market
                                will exist when the Fund seeks to close out an
                                option position. Reasons for the absence of a
                                liquid secondary market on an exchange include
                                the following: (i) there may be insufficient
                                trading interest in certain options; (ii)
                                restrictions may be imposed by an exchange on
                                opening transactions or closing transactions or
                                both; (iii) trading halts, suspensions or other
                                restrictions may be imposed with respect to
                                particular classes or series of options; (iv)
                                unusual or unforeseen circumstances may
                                interrupt normal operations on an exchange; (v)
                                the facilities of an exchange or the OCC may
                                not at all times be adequate to handle current
                                trading volume; or (vi) one or more exchanges
                                could, for economic or other reasons, decide or
                                be compelled at some future date to discontinue
                                the trading of options (or a particular class
                                or series of options). If trading were
                                discontinued, the secondary market on that
                                exchange (or in that class or series of
                                options) would cease to exist. However,
                                outstanding options on that exchange that had
                                been issued by the OCC as a result of trades on
                                that exchange would continue to be exercisable
                                in accordance with their terms. The Fund's
                                ability to terminate over-the-counter options
                                is more limited than with exchange-traded
                                options and may involve the risk that
                                broker-dealers participating in such
                                transactions will not fulfill their obligations.

                              The hours of trading for options may not conform
                                to the hours during which securities held by
                                the Fund are traded. To the extent that the

                                      15



                                options markets close before the markets for
                                underlying securities, significant price and
                                rate movements can take place in the underlying
                                markets that cannot be reflected in the options
                                markets. Call options are marked to market
                                daily and their value will be affected by
                                changes in the value of and dividend rates of
                                securities represented in an index, an increase
                                in interest rates, changes in the actual or
                                perceived volatility of the stock market and
                                underlying securities represented in an index,
                                and the remaining term to the option's
                                expiration. The value of options also may be
                                adversely affected if the market for options is
                                reduced or becomes illiquid.

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

                              Other Derivatives Risk.  In addition to writing
                                index call options, PEA may write call options
                                on behalf of the Fund with respect to exchange
                                traded funds (ETFs) and similar products, which
                                involves many of the risks associated with
                                index option writing as discussed above.
                                However, PEA will not write call options on
                                individual securities. NACM may buy and sell
                                put and call options on individual securities
                                and indexes in creating synthetic convertible
                                securities for the Convertible Component. The
                                Fund may otherwise
                                use a variety of derivative instruments for
                                hedging or risk management purposes, including
                                purchased call options, purchased or written
                                put options, futures contracts, options on
                                futures contracts, forward contracts and swap
                                agreements. The Fund also may use derivatives
                                to gain exposure to equity and other securities
                                in which the Fund may invest (e.g., pending
                                investment of the proceeds of this offering).

                              Derivatives are subject to a number of risks
                                described elsewhere in this prospectus, such as
                                liquidity risk, issuer risk, interest rate
                                risk, credit risk, counterparty risk, and
                                management 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 a 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
                                to reduce exposure to other risks when that
                                would be beneficial.

                                      16



                              The Fund may enter into derivatives transactions
                                that may in certain circumstances produce
                                effects similar to leverage and expose the Fund
                                to related risks. See "Leverage Risk" below.

                              Tax Risk.  Call option premiums received by the
                                Fund on many equity index call options will be
                                subject to mark-to-market treatment, and gains
                                will be recognized based on the fair market
                                value of the options on October 31st and at the
                                end of the Fund's taxable year (or, if disposed
                                of, upon disposition). Under this system, 60%
                                of the gains or losses from such equity index
                                call options will be treated as long-term
                                capital gains or losses and 40% will be treated
                                as short-term capital gains or losses. Such
                                short-term gains will be subject to ordinary
                                income tax rates to the extent not offset by
                                short-term capital losses. Other call option
                                premiums received by the Fund will be
                                recognized upon exercise, lapse or other
                                disposition of the option and generally will be
                                treated by the Fund as short-term capital gain
                                or loss. Some of the call options and other
                                devices employed by the Fund reduce risk to the
                                Fund by substantially diminishing its risk of
                                loss in offsetting positions in substantially
                                similar or related property, thereby giving
                                rise to "straddles" under the federal income
                                tax rules. The straddle rules require the Fund
                                to defer certain losses on positions within a
                                straddle, and terminate or suspend the holding
                                period for certain securities in which the Fund
                                does not yet have a long-term holding period or
                                has not yet satisfied the holding period
                                required for qualified dividend income. Thus,
                                the Fund cannot assure you as to any level of
                                regular quarterly net investment income (income
                                other than net long-term capital gain) that
                                will be treated as ordinary income, cannot
                                assure you as to any level of short-term or
                                long-term capital gains distributions and
                                cannot assure you as to any ratio of regular
                                quarterly distributions to capital gain
                                distributions. In addition, certain of the
                                Fund's call writing activities and investment
                                in certain debt obligations may affect the
                                character, timing and recognition of income and
                                could cause the Fund to liquidate other
                                investments in order to satisfy its
                                distributions requirements. See "Tax Matters."

                              While the Equity Component will be managed with a
                                view toward reducing the portion of Fund
                                distributions that are taxed as ordinary
                                income, there can be no assurance as to the
                                percentage (if any) of the Fund's distributions
                                that will qualify for taxation to individual
                                Common Shareholders as "qualified dividend
                                income," and thus be eligible for taxation at
                                favorable rates applicable to long-term capital
                                gains. The portion of the Fund's net investment
                                income (including net income from the
                                Convertible Component and portions of the gains
                                received from the Index Option Strategy) that
                                will be taxed to Common Shareholders at
                                ordinary income tax rates is unknown at this
                                time and cannot be predicted with any
                                certainty. Therefore, the Fund should not be
                                viewed as a vehicle designed to maximize
                                after-tax returns. In addition, the tax
                                treatment of Fund distributions of income
                                generated by the Equity Component may be
                                adversely affected as a result of the "sunset"
                                provisions that will

                                      17



                                eliminate the favorable tax treatment of any
                                tax-favored dividend income unless Congress
                                acts to eliminate the "sunset" provisions, and
                                may be adversely affected by future changes in
                                tax laws and regulations. See "Tax Matters."

                              The tax treatment and characterization of the
                                Fund's distributions may vary significantly
                                from time to time because of the varied nature
                                of the Fund's investments. The ultimate tax
                                characterization of the Fund's distributions
                                made in a taxable year cannot finally be
                                determined until after the end of that taxable
                                year. As a result, there is a possibility that
                                the Fund may make total distributions during a
                                taxable year in an amount that exceeds the
                                Fund's net investment income and net realized
                                capital gains for that year, in which case the
                                excess would generally be treated as a tax-free
                                return of capital up to the amount of the
                                shareholder's tax basis in the applicable
                                Common Shares, with any amounts exceeding such
                                basis treated as gain from the sale of the
                                shares. See "Tax Matters."


                              Preferred Stock Risk.  In addition to equity
                                securities risk (see "--Equity Securities and
                                Related Market Risk" above) and credit risk
                                (see "--Credit Risk/High Yield Risk" above),
                                investment in preferred stocks involves certain
                                other risks. Certain preferred stocks contain
                                provisions that allow an issuer under certain
                                conditions to skip or defer distributions. If
                                the Fund owns a preferred stock that is
                                deferring its distribution, the Fund may be
                                required to report income for tax purposes
                                despite the fact that it is not receiving
                                current income on this position. Preferred
                                stocks often are subject to legal provisions
                                that allow for redemption in the event of
                                certain tax or legal changes or at the issuer's
                                call. In the event of redemption, the Fund may
                                not be able to reinvest the proceeds at
                                comparable rates of return. Preferred stocks
                                are subordinated to bonds and other debt
                                securities in an issuer's capital structure in
                                terms of priority for corporate income and

                                liquidation payments, and therefore will be
                                subject to greater credit risk than those debt
                                securities. Preferred stocks may trade less
                                frequently and in a more limited volume and may
                                be subject to more abrupt or erratic price
                                movements than many other securities, such as
                                common stocks, corporate debt securities and
                                U.S. Government securities.

                              Foreign (Non-U.S.) Investment Risk.  The Fund's
                                investments in ADRs and other securities of
                                foreign issuers, securities denominated in
                                foreign currencies and/or securities traded
                                principally in securities markets outside the
                                United States 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. The value of securities
                                denominated in foreign currencies may fluctuate
                                based on changes in the value of those
                                currencies relative to the U.S. dollar, and a
                                decline in applicable foreign exchange rates
                                could reduce the value of such securities held
                                by the Fund. Although the Sub-Advisers have the
                                flexibility to hedge against this foreign
                                currency risk, they may determine not to do so
                                or to do so only in unusual circumstances or
                                market

                                      18



                                conditions. Foreign settlement procedures may
                                involve additional risks. Foreign investment
                                risk may be particularly high to the extent
                                that the Fund invests in securities of issuers
                                based in or securities denominated in the
                                currencies of developing or "emerging market"
                                countries.

                              Value Securities Risk.  The Equity Component will
                                tend to focus its investments in companies that
                                may not be expected to experience significant
                                earnings growth, but whose securities NFJ
                                believes are selling at a price lower than
                                their true value. These so-called "value"
                                securities may be issued by companies that have
                                experienced adverse business developments or
                                may be subject to special risks that have
                                caused their securities to be out of favor. If
                                NFJ's assessment of a company's prospects is
                                wrong, or if the market does not recognize the
                                value of the company, the price of its
                                securities may decline or may not approach the
                                value anticipated.

                              Smaller Company Risk.  The general risks
                                associated with the types of securities in
                                which the Fund invests 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.

                              Interest Rate Risk.  Generally, when market
                                interest rates rise, the prices of convertible
                                securities, preferred stocks paying fixed
                                dividend rates, REITs and debt obligations
                                fall, and vice versa.
                                Interest rate risk is the risk that securities
                                in the Fund's portfolio will decline in value
                                because of increases in market interest rates.
                                During periods of declining interest rates, an
                                issuer of convertible securities or other debt
                                securities may exercise an option to redeem
                                securities prior to maturity, forcing the Fund
                                to invest in lower-yielding securities. During
                                periods of rising interest rates, the average
                                life of certain types of securities may be
                                extended due to slower than expected payments.
                                This may lock in a below market yield, increase
                                the security's duration and reduce the
                                security's value. Rising interest rates may
                                also have an adverse impact on the equity
                                markets. 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 as market
                                interest rates rise.

                              Management Risk.  The Fund is subject to
                                management risk because it is an actively
                                managed portfolio. NFJ, NACM, PEA and the
                                individual portfolio managers 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. Management risk is
                                particularly significant for the Fund because
                                the Fund involves three separately managed
                                components. In particular, the Index Option
                                Strategy includes sophisticated

                                      19



                                investment strategies to be implemented by PEA
                                and there can be no guarantee that these
                                strategies will be successful. As described
                                above under "Index Options Risk," PEA's ability
                                to implement the Index Option Strategy
                                successfully may be hindered due to
                                informational barriers between NFJ and PEA with
                                respect to specific portfolio holdings and
                                trading data relating to the Equity Component.

                              Component Weighting Risk.  As noted under
                                "Investment Objectives and Strategies--Asset
                                Allocation and Annual Rebalancing" above, the
                                Manager will cause the Fund's entire portfolio
                                to be rebalanced annually to the initial
                                approximate 75%/25% asset allocation between
                                the Equity Component and the Convertible
                                Component. These annual rebalancings may result
                                in additional transaction costs for the Fund
                                and may increase the amount of capital gains
                                (and, in particular, short-term gains) realized
                                by the Fund, on which shareholders may pay tax.
                                Although the portfolio will be rebalanced
                                annually, it is expected that the relative
                                percentage of the Fund's assets represented by
                                the Equity and Convertible Components will vary
                                during interim periods in relation to the
                                relative investment performance of each
                                Component, as well as market fluctuations and
                                other factors. Therefore, the Fund's assets
                                attributable to each Component may from time to
                                time be significantly higher or lower than the
                                initial 75%/25% allocation described above, and
                                the risk/return profile of the Fund (taken as a
                                whole) will vary accordingly. For instance, an
                                investment in the Fund would be more
                                susceptible to interest rate, high yield and
                                other risks associated with convertible
                                securities if the Convertible Component were to
                                appreciate in value more or depreciate less (in
                                relative terms) than the Equity Component.

                              Leverage Risk.  Although it has no current
                                intention to do so, the Fund reserves the
                                flexibility to issue preferred shares or debt
                                securities or to engage in borrowings to add
                                leverage to its portfolio. The Fund may also
                                enter into derivative transactions that may in
                                some circumstances give rise to a form of
                                financial leverage. However, the Fund
                                ordinarily will cover its positions in these
                                derivative transactions so that there is no
                                resulting leverage. Any leverage used by the
                                Fund would be limited to 38% of the Fund's
                                total assets (including the proceeds of the
                                leverage).

                              The Fund manages some of its derivative positions
                                by segregating an amount of cash or liquid
                                securities equal to the face value of those
                                positions. The Fund may also offset derivatives
                                positions against one another or against other
                                assets to manage effective market exposure
                                resulting from derivatives in its portfolio. To
                                the extent that the Fund does not segregate
                                liquid assets or otherwise cover its
                                obligations under such transactions (e.g.,
                                through offsetting positions), such
                                transactions will be treated as senior
                                securities representing indebtedness
                                ("borrowings") for purposes of the requirement
                                under the 1940 Act that the Fund may not enter
                                into any such transactions if the Fund's
                                borrowings would thereby exceed 33 1/3% of its
                                total assets. See "Leverage and Borrowings."

                                      20



                                In addition, to the extent that any offsetting
                                positions do not behave in relation to one
                                another as expected, the Fund may perform as if
                                it is leveraged. The Fund's use of leverage
                                would create the opportunity for increased
                                Common Share net income, but also
                                would result in special risks for Common
                                Shareholders. If used, there is no assurance
                                that the Fund's leveraging strategies will be
                                successful. Leverage creates the likelihood of
                                greater volatility of net asset value and
                                market price of Common Shares.

                              Because the fees received by the Manager and the
                                Sub-Advisers are based on the total managed
                                assets of the Fund (including assets
                                attributable to any borrowings that may be
                                outstanding), the Manager and the Sub-Advisers
                                have a financial incentive for the Fund to use
                                borrowings, which may create a conflict of
                                interest between Manager and the Sub-Advisers,
                                on the one hand, and the Common Shareholders,
                                on the other hand.

                              Counterparty Risk.  The Fund will be subject to
                                credit risk with respect to the counterparties
                                to the derivative contracts purchased or sold
                                by the Fund. 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.

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

                              Inflation/Deflation 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. As inflation
                                increases, the real value of the Fund's
                                portfolio could decline. Deflation risk is the
                                risk that prices throughout the economy decline
                                over time. Deflation may have an adverse effect
                                on the creditworthiness of issuers and may make
                                issuer default more likely, which may result in
                                a decline in the value of the Fund's portfolio.

                              Liquidity Risk.  The Fund may invest up to 15% of
                                its total assets in illiquid securities
                                (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 readily dispose of illiquid
                                securities when that would be beneficial at a
                                favorable time or price or at prices
                                approximating those at which the Fund currently
                                values them.


                                      21



                              REITs and Mortgage-Related Risk.  Real estate
                                investment trusts ("REITs") involve certain
                                unique risks in addition to those of investing
                                in the real estate industry in general. REITs
                                are subject to interest rate risk (especially
                                mortgage REITs) and the risk of non-payment or
                                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 more limited volume and may
                                be subject to more abrupt or erratic price
                                movements than larger company securities.
                                Mortgage REITs are also 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 REIT's returns to the Fund or the value of
                                the Fund's investment in the REIT because the
                                REIT may have to reinvest that money at lower
                                prevailing interest rates.

                              Market Disruption and Geopolitical Risk.  The war
                                with Iraq, its aftermath and the continuing
                                occupation of Iraq are 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 occupation
                                and the potential costs of rebuilding the Iraqi
                                infrastructure 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 future events
                                cannot be ruled out. The war and occupation,
                                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 also adversely affect individual
                                issuers and securities markets, interest rates,
                                secondary trading, ratings, credit risk,
                                inflation and other factors relating to the
                                Common Shares.

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. See "Anti-Takeover and Other
                                Provisions in the Declaration of Trust." 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 or at net asset value.

                                      22



                           SUMMARY OF FUND EXPENSES

   The following table shows Fund expenses as a percentage of net assets
attributable to Common 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).            .20%(1)
   Dividend Reinvestment Plan Fees......................................           None(2)

                                                                         Percentage of Net Assets
                                                                             Attributable to
                                                                              Common Shares
                                                                         ------------------------
Annual Expenses
   Management Fees(3)...................................................            .90%
   Other Expenses.......................................................            .05%(1)
   Total Annual Expenses................................................           0.95%


--------
(1) The Fund will pay offering expenses estimated at $       from the proceeds
    of the offering. The Manager has agreed to pay the amount by which the
    Fund's offering costs (other than the sales load, but inclusive of the
    reimbursement of underwriter expenses of $.005 per share) exceed $.05 per
    share (.20% of the offering price). The Manager has agreed to pay all of
    the Fund's organizational expenses. The offering costs to be paid or
    reimbursed by the Fund are not included among the expenses shown in the
    table. However, these expenses will be borne by Common Shareholders and
    result in a reduction of the net asset value of the Common Shares.
(2) You will pay brokerage charges if you direct the plan agent to sell your
    Common Shares held in a dividend reinvestment account.
(3) Although the Fund's management fees are calculated 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 and
    borrowings.


   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 $45.00
and estimated offering expenses of this offering of $2) 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
0.95% in years one through 10, and (b) a 5% annual return(1):





                                    1 Year 3 Years 5 Years 10 Years
                                    ------ ------- ------- --------
                                               
            Total Expenses Incurred  $56     $76     $97     $158


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

                                      23



                                   THE FUND

   The Fund is a newly organized, diversified, closed-end management investment
company registered under the 1940 Act. The Fund was organized as a
Massachusetts business trust on August 20, 2003, pursuant to the Declaration,
which is governed by the laws of The Commonwealth of Massachusetts. 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 overallotment option in full)
after payment or reimbursement of the estimated offering costs. The Manager has
agreed to pay the amount by which the Fund's offering costs (other than the
sales load, but inclusive of reimbursement of Underwriter expenses of $.005 per
share) exceed $.05 per share. The Manager has agreed to pay all of the Fund's
organizational expenses. The Fund will invest the net proceeds of the offering
in accordance with the Fund's investment objectives and policies as stated
below. It is presently anticipated that the Fund will be able to invest
substantially all of the net proceeds in investments that meet its investment
objectives and policies within three months after the completion of the
offering. Pending such investment, it is anticipated that the proceeds will be
invested in high grade, short-term securities, or in derivative instruments
designed to give the Fund (and its respective components) exposure to the types
of securities and markets in which it will ordinarily invest while the
Sub-Advisers select specific securities. These may include equity index futures
contracts.

                THE FUND'S INVESTMENT OBJECTIVES AND STRATEGIES

Investment Objectives

   The Fund's primary investment objective is to seek current income and gains,
with a secondary objective of long-term capital appreciation. The Fund cannot
assure you that it will achieve its investment objectives.


   The Fund will pursue its investment objectives by investing in a diversified
portfolio of dividend-paying common stocks (the "Equity Component") and
income-producing convertible securities (the "Convertible Component"). The Fund
will also employ a strategy of writing (selling) call options on equity indexes
in an attempt to generate gains from option premiums (the "Index Option
Strategy"). The types of investments that will ordinarily comprise the Equity
Component and the Convertible Component, and the instruments used to implement
the Index Option Strategy, are summarized under "--Portfolio Contents and Other
Information" below.


   The Fund utilizes three affiliated Sub-Advisers to manage the Fund's
portfolio. NFJ Investment Group L.P. ("NFJ") manages the Equity Component,
Nicholas-Applegate Capital Management LLC ("NACM") manages the Convertible
Component and PEA Capital LLC ("PEA") implements the Index Option Strategy. See
"Management of the Fund--Sub-Advisers" below. The portfolio management
strategies and techniques utilized by each Sub-Adviser are described below.

Asset Allocation and Annual Rebalancing

   The Equity Component is initially expected to represent approximately 75%
and the Convertible Component approximately 25% of the net proceeds of this
offering. The Manager will cause the Fund's entire portfolio to be rebalanced
annually to this initial asset allocation between the Equity Component and the

                                      24



Convertible Component. The first rebalancing will take place in January, 2006.
These annual rebalancings may result in additional transaction costs for the
Fund and may increase the amount of capital gains (and, in particular, short
term gains) realized by the Fund, on which shareholders may pay tax. Although
the portfolio will be rebalanced annually, it is expected that the relative
percentage of the Fund's assets represented by the Equity and Convertible
Components will vary during interim periods in relation to the relative
investment performance of each Component, as well as market fluctuations and
other factors. Therefore, the Fund's assets attributable to each Component from
time to time may be significantly higher or lower than the initial 75%/25%
allocation described above, and the risk/return profile of the Fund (taken as a
whole) will vary accordingly.

Investment Selection Strategies

   Equity Component.  In selecting common stocks for the Equity Component, NFJ
considers an initial selection universe consisting of the 1,000 largest
publicly traded companies (in terms of market capitalization) in the U.S. to
identify 150 to 200 companies that exhibit the best fundamental
characteristics. NFJ classifies the universe by industry, and then identifies
the most undervalued stocks in each industry based mainly on relative
price-to-earnings (P/E) ratios, calculated both with respect to trailing
operating earnings and forward earnings estimates. From this group of common
stocks, NFJ buys a number of stocks with the highest dividend yields. NFJ then
screens the most undervalued companies in each industry by dividend yield to
identify the highest yielding common stocks in each industry. From this group,
NFJ buys an approximately equal number of additional stocks with the lowest P/E
ratios. In selecting individual stocks, NFJ also considers quantitative factors
such as price momentum (based on analysts' earnings per share estimates and
revisions to those estimates), relative dividend yields, valuations relative to
the overall market and trading liquidity. NFJ will ordinarily replace an
investment when a similar investment opportunity within the same industry group
has a considerably higher dividend yield or lower valuation than the current
holding. The Equity Component may include common stocks outside of the
selection universe described above, consistent with the Fund's investment
objectives and policies.

   To the extent that NFJ invests in preferred stocks or real estate investment
trusts for the Equity Component, NFJ considers quantitative factors similar to
that used for common stocks as described above and also uses traditional credit
analysis, taking into account factors such as changes in credit fundamentals,
changes in attractiveness relative to other securities and changes in industry
fundamentals.

   NFJ will also manage the Equity Component with a view toward reducing the
portion of Fund distributions that are taxed as ordinary income by focusing
investments in common stocks that pay dividends that may qualify for taxation
to individual Common Shareholders as "qualified dividend income," and thus be
eligible for taxation at favorable rates applicable to long-term capital gains.
See "Tax Matters." However, it is expected that a substantial portion of the
Fund's net investment income (including income derived from the Convertible
Component and a portion of gains received from the Index Option Strategy) will
be taxed to Common Shareholders at ordinary income tax rates. Therefore, the
Fund should not be viewed as a vehicle designed to maximize after-tax returns.
See "Risks--Tax Risk."

   Convertible Component.  In selecting convertible securities for the
Convertible Component, NACM attempts to identify issuers that successfully
adapt to change. NACM evaluates each convertible security's investment
characteristics as an income-producing security, using the credit analysis
techniques described below, 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.

                                      25



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

   NACM's discipline in selling investments that have become less attractive is
clearly defined and designed to drive the Convertible Component 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.

   Index Option Strategy.  In implementing the Fund's Index Option Strategy,
PEA will "sell" or "write" call options on equity indexes such that the
underlying value of the indexes are approximately equal to (and do not exceed)
the net asset value of the Fund's Equity Component--i.e., approximately 75% of
the Fund's net assets, subject to future fluctuations in the assets
attributable to the Equity Component and annual rebalancings as described
above. For these purposes, the Fund treats options on indexes as being written
on securities having an aggregate value equal to the face or notional amount of
the index subject to the option. This index option writing strategy is designed
to produce gains from index option premiums.

   Index call options are contracts representing the right to purchase the cash
value of an index at a specified price (the "strike price") at or until a
specified future date (the "expiration date"). The Fund will sell index options
that are "European style," meaning that the options may be exercised only on
the expiration date. For conventional listed call options, the option's
expiration date can be up to nine months from the date the call options are
first listed for trading. Longer-term call options can have expiration dates up
to three years from the date of listing. The Fund expects that it will normally
write options whose terms to expiration range from two months to one year,
although the Fund may write options with both longer and shorter terms. PEA
will not write call options on individual equity securities, but may write
options on exchange-traded funds and other similar instruments designed to
correlate with the performance of an equity index or market segment.

   As the writer (seller) of an equity index call option, the Fund would
receive cash (the premium) from the purchaser of the option, and the purchaser
would have the right to receive from the Fund any appreciation in the cash
value of index over the strike price on the expiration date. If, at expiration,
the purchaser exercises the index option sold by the Fund, the Fund would pay
the purchaser the difference between the cash value of the index and the strike
price. In effect, the Fund sells the potential appreciation in the value of the
index above the strike price in exchange for the premium. PEA may cause the
Fund to repurchase an index call option prior to its expiration date,
extinguishing the Fund's obligation, in which case the cost of repurchasing the
option (net of any premiums received) will determine the gain or loss realized
by the Fund.

   Equity index options differ from options on individual securities in that
(i) the exercise of an index option requires cash payments and does not involve
the actual purchase or sale of securities, (ii) the holder of an index option
has the right to receive cash upon exercise of the option if the level of the
index upon which the option is based is greater than the strike price of the
option and (iii) index options reflect price fluctuations in a group of
securities or segments of the securities market rather than price fluctuations
in a single common stock.

   In pursuing the Index Option Strategy, PEA may cause the Fund to sell call
options on "broad-based" equity indexes, such as the Standard & Poor's 500
Index, as well as narrower market indexes, such as the Standard & Poor's 100
Index, or on indexes of securities of companies in a particular industry or
sector, including (but not limited to) financial services, technology,
pharmaceuticals and consumer products. An equity index assigns relative values
to the securities included in the index (which change periodically), and the
index fluctuates with

                                      26



changes in the market values of these securities. PEA will actively manage the
Fund's index options positions using quantitative and statistical analysis that
focuses on relative value and risk/return. In determining which equity index
options to utilize, PEA will consider market factors, such as current market
levels and volatility, and options specific factors, such as premium/cost,
strike price and time to expiration. PEA will attempt to create a portfolio of
equity index call options that is diversified across multiple strike prices and
expiration dates.

   PEA will attempt to maintain for the Fund written call options positions on
equity indexes whose price movements, taken in the aggregate, are correlated
with the price movements of the common stocks and other securities held in the
Fund's Equity Component. In doing so, PEA will take into account periodic data
provided by NFJ with respect to the Equity Component, including net assets,
industry and sector weightings, historic volatility as well as periodic
(typically 30 days after month-end) reports detailing portfolio holdings.
However, other than through periodic holdings reports, PEA will not have access
to the actual securities purchased, sold or held by or for the Equity Component
due to informational barriers in place between NFJ and PEA. Therefore, the
Index Option Strategy involves significant risk that the changes in value of
the indexes underlying the Fund's written call options positions will not
correlate closely with changes in the market value of securities held by the
Equity Component. To the extent that there is a lack of correlation, movements
in the indexes underlying the options positions may result in losses to the
Fund, which may more than offset any gains received by the Fund from options
premiums. See "Risks--Index Options Risk."

   PEA does not intend to write call options on equity indexes where the
underlying value of the indexes exceed the net asset value of the Equity
Component (i.e., write "naked" positions). The Fund will "cover" its written
equity index call options by segregating liquid assets in an amount equal to
the contract value of the index and/or by entering into offsetting positions
(e.g., by holding a call option on the same index as the call written where the
strike price of the call held is equal to or less than the strike price of the
call written).

   The Fund will generally sell index call options which are "out-of-the-money"
or "at-the-money" at the time of sale. Out-of-the-money call options are
options with a strike price above the current cash value of the index and
at-the-money call options are options with a strike price equal to the cash
value of the index. In addition to providing possible gains through premiums,
out-of-the-money index call options allow the Fund to potentially benefit from
appreciation in the equity securities held by the Fund with respect to which
the option was written (to the extent correlated with the index) up to the
strike price. The Fund will generally write out-of-the-money call options where
the strike price is not more than 10% higher than the cash value of the index
at the time of sale, although PEA reserves the flexibility to utilize written
call options that are more deeply out-of-the-money if it deems appropriate
depending upon market conditions and other factors. The Fund also reserves the
flexibility to sell index call options that are "in-the-money"--i.e., those
with a strike price below the cash value of the index at the time of sale, and
will generally limit these to options where the strike price is not more than
5% lower than the cash value of the index (although the Fund may utilize
options that are more deeply in-the-money depending upon market conditions and
other factors). When the prices of the equity index upon which a call option is
written rise, call options that were out-of-the-money when written may become
in-the-money (i.e., if the cash value of the index rises above the strike price
of the option), thereby increasing the likelihood that the options could be
exercised and the Fund forced to pay the amount of appreciation over the strike
price of the option upon expiration.

   Most option contracts are originated and standardized by an independent
entity called the Options Clearing Corporation (the "OCC"). The Fund will write
(sell) call options that are generally issued, guaranteed and cleared by the
OCC. Listed call options are currently traded on the American Stock Exchange,
Chicago Board Options Exchange, International Securities Exchange, New York
Stock Exchange, Pacific Stock Exchange, Philadelphia Stock Exchange and various
other U.S. options exchanges. The Fund may also write unlisted (or "over-the
counter") call options.

   Diversification.  Subject to the availability of suitable investment
opportunities and subject to the Fund's limitations, NFJ and NACM will attempt
to diversify the investments in their respective Components broadly in

                                      27



an attempt to minimize the Component's sensitivity to market risk, credit risk
and/or other risks associated with a particular issuer, industry or sector, or
to the impact of a single economic, political or regulatory occurrence.

Portfolio Contents and Other Information

   Under normal circumstances, the Fund will invest at least 80% of its net
assets (plus any borrowings for investment purposes) in securities and other
instruments that provide dividends, interest or option premiums.

   The Equity Component will ordinarily consist principally of dividend-paying
common stocks, but may also include preferred stocks and dividend-paying real
estate investment trusts. The assets of the Equity Component will be invested
principally in securities of U.S. issuers, but may include American Depository
Receipts ("ADRs") without limit. Up to 10% of the component's assets may be
invested in foreign securities other than ADRs, including emerging market
securities.

   The Convertible Component will ordinarily consist of convertible securities,
including synthetic convertible securities, and may include convertible
securities that are of below investment grade quality (i.e., rated, at the time
of investment, below Baa by Moody's or below BBB by S&P, or unrated but judged
by NACM to be of comparable quality). NACM may invest in distressed securities
on behalf of the Convertible Component, but will not invest in securities which
are in default (rated "D" by Moody's or S&P) at the time of purchase (but may
hold securities which have gone into default after they have been purchased).
Up to 20% of the Convertible Component may consist of U.S. dollar-denominated
securities of foreign issuers based in developed countries. 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. A synthetic convertible security
represents the combination of separate securities that possess the two
principal characteristics of a traditional convertible security, i.e., an
income-producing security and the right to acquire an equity security, such as
the combination of a traditional corporate bond with a warrant to purchase
equity securities of the issuer of the bond.

   The Fund will employ its Index Option Strategy by writing (selling) call
options on equity indexes such that the underlying value of the indexes are
approximately equal to and do not exceed the value of the Equity Component of
the Fund - i.e., approximately 75% of the Fund's net assets, subject to future
fluctuations in the assets attributable to the Equity Component and annual
rebalancings. For these purposes, the Fund treats options on indexes as being
written on securities held by the Fund having an aggregate value equal to the
face or notional amount of the index subject to the options. Most of the
options written by the Fund will be exchange-traded, although the Fund may
utilize over-the-counter options.

   In addition to the use of written call options under the Index Option
Strategy, the Fund may utilize other derivative strategies involving call and
put options, futures and forward contracts, swap agreements, short sales and
other derivative instruments in an attempt to hedge against market and other
risks in the portfolio.

   The Fund may invest up to 15% of its total assets in illiquid securities
(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). The Fund may invest in securities
of issuers with small market capitalizations.

   The Fund cannot change its investment objectives without the approval of the
holders of a "majority of the outstanding" Common Shares. 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. The Fund may
not change its policy to normally invest at least 80% of its net assets (plus
any borrowings for investment purposes) in securities and other instruments
that provide dividends, interest or option premiums unless it provides
shareholders with at least 60 days' written notice of such change.

                                      28



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

   The Fund may engage in active and frequent trading of portfolio securities
(i.e., portfolio turnover), particularly during periods of volatile market
movements. In addition, the Fund's portfolio turnover rate will increase to the
extent that the Fund is required to sell portfolio securities to satisfy its
obligations under the Index Option Strategy or to realize additional gains to
be distributed to shareholders if the Index Option Strategy is unsuccessful.
The annual rebalancing of the Fund's portfolio to adjust the asset allocation
between the Equity Component and the Convertible Component, as described above,
may also tend to increase the portfolio turnover rate for the Fund. Portfolio
turnover involves some expense to the Fund, including brokerage commissions or
dealer mark-ups and other transaction costs on the sale of securities and
reinvestment in other securities. Such sales may also result in realization of
taxable capital gains, including short-term capital gains taxed at ordinary
income tax rates, and may adversely impact the Fund's after-tax returns to Fund
shareholders. Please see "Investment Objectives 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
Objectives and Policies" in the Statement of Additional Information.

Common Stocks

   Common stock represents an equity ownership interest in a company. The Fund
may hold or have exposure to common stocks of issuers of any size (in terms of
market capitalization or otherwise) and in any industry or sector. Because the
Fund will ordinarily have substantial exposure to common stocks, historical
trends would indicate that the Fund's portfolio and investment returns will be
subject at times, and over time, to higher levels of volatility and market and
issuer-specific risk than if it invested exclusively in debt securities.

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. 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.

                                      29



   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

   To the extent that NACM invests in "synthetic" convertible securities for
the Convertible Component, they will be selected based on the similarity of
their economic characteristics to those of a traditional convertible security
through the combination of separate securities that possess the two principal
characteristics of a traditional convertible security, i.e., an
income-producing security ("income-producing element") and the right to acquire
an equity security ("convertible element"). The income-producing element is
achieved by investing in non-convertible, income-producing securities such as
bonds, preferred stocks and money market instruments. The convertible element
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 Convertible Component may also include synthetic securities created by
other parties, typically investment banks or other financial institutions,
including convertible structured notes. The income-producing and convertible
elements 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 convertible component. For this
reason, the values of a synthetic convertible and a traditional convertible
security may respond differently to market fluctuations.

Index Call Options

   Index call options are contracts representing the right to purchase the cash
value of an index at a specified price (the "strike price") at or until a
specified future date (the "expiration date"). The Fund will sell index options
that are "European style," meaning that the options may be exercised only on
the expiration date. For conventional listed call options, the option's
expiration date can be up to nine months from the date the call options are
first listed for trading. Longer-term call options can have expiration dates up
to three years from the date of listing. The Fund expects that it will normally
write options whose terms to expiration range from two months to one year,
although the Fund may write options with both longer and shorter terms. PEA
will not write call options on individual equity securities, but may write
options on exchange-traded funds and similar instruments designed to correlate
with the performance of an equity index or market segment.

   As the writer (seller) of an equity index call option, the Fund would
receive cash (the premium) from the purchaser of the option, and the purchaser
would have the right to receive from the Fund any appreciation in the cash
value of the index over the strike price on the expiration date. If, at
expiration, the purchaser exercises the index option sold by the Fund, the Fund
would pay the purchaser the difference between the cash value of the index and
the strike price. In effect, the Fund sells the potential appreciation in the
value of the index above the strike price in exchange for the premium. PEA may
cause the Fund to repurchase an index call option prior to its expiration date,
extinguishing the Fund's obligation, in which case the cost of repurchasing the
option (net of any premiums received) will determine the gain or loss realized
by the Fund.

   Equity index options differ from options on individual securities in that
(i) the exercise of an index option requires cash payments and does not involve
the actual purchase or sale of securities, (ii) the holder of an index option
has the right to receive cash upon exercise of the option if the level of the
index upon which the option is based is greater than the strike price of the
option and (iii) index options reflect price fluctuations in a group of
securities or segments of the securities market rather than price fluctuations
in a single common stock.

                                      30



   In pursuing the Index Option Strategy, PEA may cause the Fund to sell call
options on "broad-based" equity indexes, such as the Standard & Poor's 500
Index, as well as narrower market indexes, such as the Standard & Poor's 100
Index, or on indexes of securities of companies in a particular industry or
sector, including (but not limited to) financial services, technology,
pharmaceuticals and consumer products. An equity index assigns relative values
to the securities included in the index (which change periodically), and the
index fluctuates with changes in the market values of these securities.

   PEA does not intend to write call options on equity indexes where the
underlying value of the indexes exceed the net asset value of the Equity
Component (i.e., write "naked" positions). The Fund will "cover" its written
equity index call options by segregating liquid assets in an amount equal to
the contract value of the index and/or by entering into offsetting positions
(e.g., by holding a call option on the same index as the call written where the
strike price of the call held is equal to or less than the strike price of the
call written).

   The Fund will generally sell index call options which are "out-of-the-money"
or "at-the-money" at the time of sale. Out-of-the-money call options are
options with a strike price above the current cash value of the index and
at-the-money call options are options with a strike price equal to the cash
value of the index. In addition to providing possible gains through premiums,
out-of-the-money index call options allow the Fund to potentially benefit from
appreciation in the equity securities held by the Fund with respect to which
the option was written (to the extent correlated with the index) up to the
strike price. The Fund will generally write out-of-the-money call options where
the strike price is not more than 10% higher than the cash value of the index
at the time of sale, although PEA reserves the flexibility to utilize written
call options that are more deeply out-of-the-money if it deems appropriate
depending upon market conditions and other factors. The Fund also reserves the
flexibility to sell index call options that are "in-the-money" --i.e., those
with a strike price below the cash value of the index at the time of sale, and
will generally limit these to options where the strike price is not more than
5% lower than the cash value of the index (although the Fund may utilize
options that are more deeply in-the-money depending upon market conditions and
other factors). When the prices of the equity index upon which a call option is
written rise, call options that were out-of-the-money when written may become
in-the-money (i.e., if the cash value of the index rises above the strike price
of the option), thereby increasing the likelihood that the options could be
exercised and the Fund forced to pay the amount of appreciation over the strike
price of the option upon expiration.

   Most option contracts are originated and standardized by an independent
entity called the Options Clearing Corporation (the "OCC"). The Fund will write
(sell) call options that are generally issued, guaranteed and cleared by the
OCC. Listed call options are currently traded on the American Stock Exchange,
Chicago Board Options Exchange, International Securities Exchange, New York
Stock Exchange, Pacific Stock Exchange, Philadelphia Stock Exchange and various
other U.S. options exchanges. The Fund may also write unlisted (or "over-the
counter") call options.

Other Derivatives

   In addition to writing index call options, PEA may write call options on
behalf of the Fund with respect to exchange-traded funds and similar
instruments. However, PEA will not write call options on individual securities.
NACM may buy and sell put and call options and warrants on individual
securities and indexes in creating synthetic convertible securities for the
Fund's Convertible Component. The Fund also may (but is not required to)
utilize a variety of derivative instruments for hedging or risk management
purposes. The Fund may also use derivatives to gain exposure to equity and
other securities in which the Fund may invest (e.g., pending investment of the
proceeds of this offering). 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, securities,
interest rates, currencies or other assets. In addition to written call
options, derivative instruments that may be used by the Fund include, but are
not limited to, warrants, purchased call options, purchased or written put
options, futures contracts, options on futures contracts, forward contracts,
swap agreements and short sales. The Fund's use of derivative instruments
involves risks different from, or possibly

                                      31



greater than, the risks associated with investment directly in securities and
other more traditional investments. See "Risks--Other Derivatives Risk." Please
see "Investment Objectives and Policies--Other 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.

   The Fund may enter into derivatives transactions that may in certain
circumstances produce effects similar to leverage. To the extent that the Fund
does not segregate liquid assets or otherwise cover its obligations under such
transactions (e.g., through offsetting positions), such transactions will be
treated as senior securities representing indebtedness ("borrowings") for
purposes of the requirement under the 1940 Act that the Fund may not enter into
any such transactions if the Fund's borrowings would thereby exceed 33 1/3% of
its total assets. See "Risks--Leverage Risk."

   There is no assurance that the Fund's derivative strategies will be
available at any time or that a Sub-Adviser will determine to use them for the
Fund or, if used, that the strategies will be successful. The Sub-Advisers may
determine not to engage in hedging strategies or to do so only in unusual
circumstances or market conditions. Income generated from derivatives hedging
techniques will not be eligible to be treated as qualified dividend income. In
addition, dividends received on securities with respect to which the Fund is
obligated to make payments (pursuant to short sales or otherwise) will be
treated as income taxed at ordinary, rather than long-term capital gains,
rates. See "Tax Matters."

High Yield Securities

   As noted above, the Convertible Component may invest in securities rated
below investment grade (i.e., rated, at the time of investment, below Baa by
Moody's or below BBB by S&P, or unrated but determined by NACM to be of
comparable quality). The Fund may invest in distressed securities, but will not
invest in securities which are in default (rated "D" by Moody's or S&P) at the
time of purchase (but may hold securities which have gone into default after
they have been purchased). Below investment grade debt 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 debt
securities. 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 debt 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, S&P and other ratings agencies. 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, 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. Ratings
agencies such as 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.

                                      32



   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 the Sub-Adviser 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
debt obligations.

Preferred Stocks

   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 liquidation of the company. Unlike common stocks, preferred stocks usually
do not have voting rights. Preferred stocks in some instances are convertible
into common stock, such as those that may be purchased for the Convertible
Component. 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 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, 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.

Foreign (Non-U.S.) Investments and Currencies

   The Equity Component may invest without limit in American Depository
Receipts ("ADRs"), and may invest up to 10% of its total assets in foreign
securities other than ADRs, including emerging market securities. Up to 20% of
the Convertible Component may consist of U.S. dollar-denominated securities of
foreign issuers based in developed countries.

   ADRs are U.S. dollar-denominated receipts issued generally by domestic banks
and representing the deposit with the bank of a security of a foreign issuer,
and are publicly traded on exchanges or over-the-counter in the United States.

   Although it expects to do so only in limited circumstances, the Fund may
engage in a variety of transactions involving foreign currencies in order to
hedge against foreign currency risk, to increase exposure to a foreign
currency, or to shift exposure to foreign currency fluctuations from one
currency to another. For instance, the Fund may purchase foreign currencies on
a spot (cash) basis and enter into forward foreign currency exchange contracts,
foreign currency futures contracts and options on foreign currencies and
futures. Suitable hedging transactions may not be available in all
circumstances and there can be no assurance that the Fund will engage in such
transactions at any given time or from time to time when that would be
beneficial. Although the Sub-Advisers have the flexibility to engage in such
transactions, they may determine not to do so or to do so only in unusual
circumstances or market conditions. Also, these transactions may not be
successful and may eliminate any chance for the Fund to benefit from favorable
fluctuations in relevant foreign currencies.

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

Other Debt Securities

   The Fund may invest in debt securities, including, but not limited to,
corporate bonds, debentures, notes and other similar types of corporate debt
instruments, as well as commercial paper, bank certificates of deposit, fixed

                                      33



time deposits, bankers' acceptances and U.S. Government securities. The Fund's
investments in debt instruments may have fixed or variable principal payments
and all types of interest rate and dividend payment and reset terms, including
fixed rate, adjustable rate, contingent, deferred and auction-rate features.

Warrants

   The Fund may invest in equity and index warrants, which are securities that
give the holder the right, but not the obligation, to subscribe for newly
created equity issues of the issuing company or a related company at a
specified price either on a certain date or during a specified period. The
Convertible Component may make significant investments in warrants as part of
its use of synthetic convertible securities. Changes in the value of a warrant
do not necessarily correspond to changes in the value of its underlying
security. The price of a warrant may be more volatile than the price of its
underlying security, and a warrant may offer greater potential for capital
appreciation as well as capital loss. Warrants do not entitle a holder to
dividends or voting rights with respect to the underlying security and do no
represent any rights in the assets of the issuing company. A warrant ceases to
have value if it is not exercised prior to its expiration date. These factors
can make warrants more speculative than other types of investments.

Certain Interest Rate Transactions

   The Fund may enter into long and short interest rate swap, cap or floor
transactions for hedging or risk management purposes. One possible use of
interest rate swaps involves 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. The payment obligation would be based on the notional
amount of the swap. The Fund may use an interest rate cap or floor, which would
require the Fund to pay a premium to the cap or floor 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 or a counterparty may seek to
terminate early all or a portion of any swap, cap or floor transaction. Any
early termination by the Fund or a counterparty could result in a termination
payment by or to the Fund.

Repurchase Agreements

   The Fund may enter into repurchase agreements, in which the Fund purchases a
security from a bank or broker-dealer and the bank or broker-dealer agrees to
repurchase the security at the Fund's cost plus interest within a specified
time. If the party agreeing to repurchase should default, the Fund will seek to
sell the securities which it holds. This could involve transaction costs or
delays in addition to a loss on the securities if their value should fall below
their repurchase price. Repurchase agreements maturing in more than seven days
are considered to be illiquid securities.

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 Objectives 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, although amounts received from
the borrower will not be eligible to be treated as qualified dividend income.
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.

Real Estate Investment Trusts (REITs)

   The Fund may invest a portion of its assets 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

                                      34



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. 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. Distributions
received by the Fund from REITs may consist of dividends, capital gains and/or
return of capital.

   Please see "Investment Objectives and Policies--Real Estate Investment
Trusts (REITs)" in the Statement of Additional Information and "Risks--REIT and
Mortgage-Related Risk" in this prospectus for a more detailed description of
REITs and their related risks.

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.
This 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.

Variable and Floating Rate Securities

   Variable or floating rate securities are securities that pay interest at
rates which adjust whenever a specified interest rate changes, float at a fixed
margin above a generally recognized base lending rate and/or reset or are
redetermined (e.g., pursuant to a auction) on specified dates (such as the last
day of a month or calendar quarter). These instruments may include, without
limitation, variable rate preferred stock, bank loans, money market instruments
and certain types of mortgage-backed and other asset-backed securities. Due to
their variable or floating rate features, these instruments will generally pay
higher levels of income in a rising interest rate environment and lower levels
of income as interest rates decline. For the same reason, the market value of a
variable or floating rate instrument is generally expected to have less
sensitivity to fluctuations in market interest rates than a fixed-rate
instrument, although the value of a floating rate instrument may nonetheless
decline as interest rates rise and due to other factors, such a changes in
credit quality.

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, although the Fund may determine that certain Rule 144A Securities are
liquid in accordance with procedures adopted by the Board of Trustees.

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.

Short Sales

   A short sale is a transaction in which the Fund sells an instrument that it
does not own in anticipation that the market price will decline. The Fund may
use short sales for hedging and risk management purposes. When

                                      35



the Fund engages in a short sale, it must borrow the security sold short and
deliver it to the counterparty. The Fund may have to pay a fee to borrow
particular securities and would often be obligated to pay over any payments
received on such borrowed securities. If the Fund is required to pay over any
dividends received by the Fund pursuant to a short sale, such dividends will
not be treated as qualified dividend income. The Fund's obligation to replace
the borrowed security will be secured by collateral deposited with the lender,
which is usually a broker-dealer, and/or with the Fund's custodian. The Fund
may not receive any payments (including interest) on its collateral. Short
sales expose the Fund to the risk that it will be required to cover its short
position at a time when the securities have appreciated in value, thus
resulting in a loss to the Fund. However, the Fund will not engage in so-called
"naked" short sales where it does not own or have the immediate right to
acquire the security sold short at no additional cost.

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.

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

                            LEVERAGE AND BORROWINGS

   Although it has no current intention to do so, the Fund reserves the
flexibility to issue preferred shares or debt securities or engage in
borrowings to add leverage to its portfolio. The Fund may also enter into
derivative transactions that may in some circumstances produce effects similar
to leverage. However, the Fund ordinarily will cover its positions in these
transactions so that there is no resulting leverage. Any leverage used by the
Fund would be limited to 38% of the Fund's total assets (including the proceeds
of the leverage). To the extent that the Fund uses leverage, it would seek to
obtain a higher return for shareholders than if the Fund did not use leverage.
Leveraging is a speculative technique and there are special risks involved,
including the risk of increased volatility of the Fund's investment portfolio
and potentially larger losses than if the strategies were not used.

   If there is a net decrease (or increase) in the value of the Fund's
investment portfolio, any 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 certain forms of leverage, the fees
paid to the Manager and the Sub-Advisers 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 borrowings that may be outstanding.
Thus, the Manager and the Sub-Advisers have a financial incentive for the Fund
to utilize certain forms of leverage, which may result in a conflict of
interest between the Manager and the Sub-Advisers, on the one hand, and the
Common Shareholders, on the other hand. Fees and expenses paid by the Fund are
borne entirely by the Common Shareholders. These include costs associated with
any borrowings or other forms of leverage utilized by the Fund.

   Under the 1940 Act, the Fund generally is not permitted to have outstanding
senior securities representing indebtedness ("borrowings") (including through
the use of reverse repurchase agreements, dollar rolls, futures contracts,
loans of portfolio securities, swap contracts and other derivatives, as well as
when-issued, delayed delivery or forward commitment transactions, to the extent
that these instruments constitute senior securities) unless immediately after
the financing giving rise to the borrowing, the value of the Fund's total
assets less liabilities (other than such borrowings) is at least 300% of the
principal amount of such borrowing (i.e., the 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

                                      36



value of the Fund's total assets, less liabilities other than borrowings, is at
least 300% of such principal amount. If the Fund enters into these
transactions, it intends, to the extent possible, to prepay all or a portion of
the principal amount due 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 holders of any
senior securities of the Fund 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 as the writer of an index call option by segregating liquid assets at
least equal in amount to the contract value of the index.

                                     RISKS

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

No Prior History

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

Market Discount Risk

   As with any stock, the price of the Fund's Common 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 offering
expenses paid or reimbursed 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 public offering.

Equity Securities and Related Market Risk

   The Fund will ordinarily have substantial exposure to common stocks and
other equity securities in pursuing its investment objectives and policies. The
market price of equity securities, including common and preferred stocks, 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, and particularly common stocks, generally have greater price
volatility than bonds and other debt securities.

                                      37



Issuer Risk

   The value of securities 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.

Dividend and Income Risk

   The income shareholders receive from the Fund is based primarily on the
dividends and interest it earns from its investments as well as the gains the
Fund receives from writing options and selling portfolio securities, each of
which can vary widely over the short and long term. The dividend income from
the Fund's investments in equity securities will be influenced by both general
economic activity and issuer-specific factors. In the event of a recession or
adverse events affecting a specific industry or issuer, the issuers of the
equity securities held by the Fund may reduce the dividends paid on such
securities. If prevailing market interest rates decline, interest rates on
convertible securities and other debt instruments held by the Fund, and
shareholders' income from the Fund, would likely decline as well. Please see
"Distributions" for a description of other risks associated with the level,
timing and character of the Fund's distributions.

Convertible Securities Risk

   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 approaches or 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.

Synthetic Convertible Securities Risk

   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 element 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--Other
Derivatives Risk." In addition, if the value of the underlying common stock or
the level of the index involved in the convertible element falls below the
exercise price of the warrant or option, the warrant or option may lose all
value.

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 Convertible Component may invest in
securities that are of below investment grade quality. NACM may invest in
distressed securities on behalf of the Convertible Component, but will not
invest in securities which are in default (rated "D" by Moody's or S&P) at the
time of purchase (but may hold securities which have gone into default after
they have been purchased). Debt 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

                                      38



negative developments, such as a decline in the issuer's revenues or a general
economic downturn, than are the prices of higher grade debt securities.
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 Objectives and Strategies--Portfolio Contents and Other
Information--High Yield Securities," for additional information. The risks
involved in investing in high yield securities are such that an investment in
the Fund should be considered speculative.

   High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade debt
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 non-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.

   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 a Sub-Adviser downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, a Sub-Adviser may consider such factors as its 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. Analysis of creditworthiness may be more complex for
issuers of high yield securities than for issuers of higher quality debt
securities.

Index Options Risk

   There are various risks associated with the Fund's Index Option Strategy.
The purchaser of an index option written by the Fund has the right to any
appreciation in the cash value of the index over the strike price on the
expiration date. Therefore, as the writer of an index call option, the Fund
forgoes, during the option's life, the opportunity to profit from increases in
the market value of the equity securities held by the Fund with respect to
which the option was written (to the extent that their performance is
correlated with that of the index) above the sum of the premium and the strike
price of the call. However, the Fund has retained the risk of loss (net of
premiums received) should the price of the Fund's portfolio securities decline.

   In addition, 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. PEA will attempt to
maintain for the Fund written call options positions on equity indexes whose
price movements, taken in the aggregate, are correlated with the price
movements of the common stocks and other securities held in the Fund's Equity
Component. In doing so, PEA will take into account periodic data provided by
NFJ with respect to the Equity Component, including net assets, industry and
sector weightings, historic volatility as well as periodic (typically 30 days
after month-end) reports detailing portfolio holdings. However, other than
through periodic holdings reports, PEA will not have access to the actual
securities purchased, sold or held by or for the Equity Component due to
informational barriers in place between NFJ and PEA. Therefore, the Index
Option Strategy involves significant risk that the changes in value of the
indexes underlying the Fund's written call options positions will not correlate
closely with changes in the market value of securities held by the Equity
Component. To the extent that there is a lack of correlation, movements in the
indexes underlying the options positions may result in losses to the Fund,
which may more than offset any gains received by the Fund from options
premiums. In these and other circumstances, the Fund may be required to sell
portfolio securities to satisfy its obligations as the writer of an index call
option when it would not otherwise choose to do so, or may choose to sell
portfolio securities to realize gains to supplement Fund distributions. Such
sales would involve

                                      39



transaction costs borne by the Fund and may also result in realization of
taxable capital gains, including short-term capital gains taxed at ordinary
income tax rates, and may adversely impact the Fund's after-tax returns.

   There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the
facilities of an exchange or the OCC may not at all times be adequate to handle
current trading volume; or (vi) one or more exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options). If trading
were discontinued, the secondary market on that exchange (or in that class or
series of options) would cease to exist. However, outstanding options on that
exchange that had been issued by the OCC as a result of trades on that exchange
would continue to be exercisable in accordance with their terms. The Fund's
ability to terminate over-the-counter options is more limited than with
exchange-traded options and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations.

   The hours of trading for options may not conform to the hours during which
securities held by the Fund are traded. To the extent that the options markets
close before the markets for underlying securities, significant price and rate
movements can take place in the underlying markets that cannot be reflected in
the options markets. Call options are marked to market daily and their value
will be affected by changes in the value of and dividend rates of securities
represented in an index, an increase in interest rates, changes in the actual
or perceived volatility of the stock market and underlying securities
represented in an index, and the remaining term to the option's expiration. The
value of options also may be adversely affected if the market for options is
reduced or becomes illiquid.

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

Other Derivatives Risk

   In addition to writing index call options, PEA may write call options on
behalf of the Fund with respect to exchange traded funds (ETFs) and similar
products, which involves many of the risks associated with index option writing
as discussed above. However, PEA will not write call options on individual
securities. NACM may buy and sell put and call options and warrants on
individual securities and indexes in creating synthetic convertible securities
for the Fund's Convertible Component. The Fund may otherwise use a variety of
derivative instruments for hedging or risk management purposes, including
purchased call options, purchased or written put options, futures contracts,
options on futures contracts, forward contracts and swap agreements. The Fund
also may use derivatives to gain exposure to equity and other securities in
which the Fund may invest (e.g., pending investment of the proceeds of this
offering).

   Derivatives are subject to a number of risks described elsewhere in this
prospectus, such as liquidity risk, issuer risk, interest rate risk, credit
risk, counterparty risk, and management 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 a 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 to reduce exposure to other risks
when that would be beneficial.

                                      40



   The Fund may enter into derivatives transactions that may in certain
circumstances produce effects similar to leverage and expose the Fund to
related risks. See "Leverage Risk" below.

Tax Risk

   Call option premiums received by the Fund on many equity index call options
will be subject to mark-to-market treatment and gains will be recognized based
on the fair market value of the options on October 31st and at the end of the
Fund's taxable year (or, if disposed of, upon disposition). Under this system,
60% of the gains or losses from such equity index call options will be treated
as long term capital gains or losses and 40% will be treated as short-term
capital gains or losses. Such short-term gains will be subject to ordinary
income tax rates to the extent not offset by short-term capital losses. Other
call option premiums received by the Fund will be recognized upon exercise,
lapse or other disposition of the option and generally will be treated by the
Fund as short-term capital gain or loss. Some of the call options and other
devices employed by the Fund reduce risk to the Fund by substantially
diminishing its risk of loss in offsetting positions in substantially similar
or related property, thereby giving rise to "straddles" under the federal
income tax rules. The straddle rules require the Fund to defer certain losses
on positions within a straddle, and terminate or suspend the holding period for
certain securities in which the Fund does not yet have a long-term holding
period or has not yet satisfied the holding period required for qualified
dividend income. Thus, the Fund cannot assure you as to any level of regular
quarterly net investment income (income other than net long-term capital gain)
that will be treated as ordinary income, cannot assure you as to any level of
short-term or long-term capital gains distributions and cannot assure you as to
any ratio of regular quarterly distributions to capital gain distributions. In
addition, certain of the Fund's call writing activities and investment in
certain debt obligations may affect the character, timing and recognition of
income and could cause the Fund to liquidate other investments in order to
satisfy its distributions requirements. See "Tax Matters."

   While the Equity Component will be managed with a view toward reducing the
portion of Fund distributions that are taxed as ordinary income, there can be
no assurance as to the percentage (if any) of the Fund's distributions that
will qualify for taxation to individual Common Shareholders as "qualified
dividend income," and thus be eligible for taxation at favorable rates
applicable to long-term capital gains. The portion of the Fund's net investment
income (including net income from the Convertible Component and a portion of
the gains received from the Index Option Strategy) that will be taxed to Common
Shareholders at ordinary income tax rates is unknown at this time and cannot be
predicted with any certainty. Therefore, the Fund should not be viewed as a
vehicle designed to maximize after-tax returns. See "Tax Matters."

   In addition, the tax treatment of Fund distributions of income generated by
the Equity Component may be adversely affected as a result of the "sunset"
provisions that will eliminate the favorable tax treatment of any tax- favored
dividend income unless Congress acts to eliminate the "sunset" provisions, and
may be adversely affected by future changes in tax laws and regulations. See
"Tax Matters."

   The tax treatment and characterization of the Fund's distributions may vary
significantly from time to time because of the varied nature of the Fund's
investments. The ultimate tax characterization of the Fund's distributions made
in a taxable year cannot finally be determined until after the end of that
taxable year. As a result, there is a possibility that the Fund may make total
distributions during a taxable year in an amount that exceeds the Fund's net
investment income and net realized capital gains for that year, in which case
the excess would generally be treated as a tax-free return of capital up to the
amount of the shareholder's tax basis in the applicable Common Shares, with any
amounts exceeding such basis treated as gain from the sale of the shares. See
"Tax Matters."

Preferred Stock Risk

   In addition to equity securities risk and credit risk, investment in
preferred stocks involves certain other risks. Certain preferred stocks contain
provisions that allow an issuer under certain conditions to skip or defer
distributions. If the Fund owns a preferred stock that is deferring its
distribution, the Fund may be required to

                                      41



report income for tax purposes despite the fact that it is not receiving
current income on this position. Preferred stocks often are subject to legal
provisions that allow for redemption in the event of certain tax or legal
changes or at the issuer's call. In the event of redemption, the Fund may not
be able to reinvest the proceeds at comparable rates of return. Preferred
stocks are subordinated to bonds and other debt securities in an issuer's
capital structure in terms of priority for corporate income and liquidation
payments, and therefore will be subject to greater credit risk than those debt
securities. Preferred stocks may trade less frequently and in a more limited
volume and may be subject to more abrupt or erratic price movements than many
other securities, such as common stocks, corporate debt securities and U.S.
Government securities.

Foreign (Non-U.S.) Investment Risk

   The Fund's investments in ADRs and other securities of foreign issuers,
securities denominated in foreign currencies and/or securities traded
principally in securities markets outside the United States 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. There may be less
information publicly available about a foreign issuer than about a U.S. issuer,
and foreign issuers 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. The value of securities
denominated in foreign currencies may fluctuate based on changes in the value
of those currencies relative to the U.S. dollar, and a decline in applicable
foreign exchange rates could reduce the value of such securities held by the
Fund. Although the Sub-Advisers have the flexibility to hedge against this
foreign currency risk, they may determine not to do so or to do so only in
unusual circumstances or market conditions. The values of these foreign
investments and the investment income derived from them also may be affected
unfavorably by changes in currency exchange control regulations.

   Foreign investment risk may be particularly high to the extent that the Fund
invests in securities of issuers based in or securities denominated in the
currencies of "emerging market" countries. These securities may present market,
credit, currency, liquidity, legal, political and other risks different from,
and greater than, the risks of investing in developed foreign countries.
Investing in securities of issuers based in underdeveloped or "emerging"
markets entails all of the risks of investing in securities of foreign issuers
to a heightened degree. These heightened risks include: (i) greater risks of
expropriation, confiscatory taxation, nationalization and less social,
political and economic stability; (ii) the smaller size of the market for such
securities and a lower volume of trading, resulting in lack of liquidity and in
price volatility; and (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investing in issuers
or industries deemed sensitive to relevant national interests.

Value Securities Risk

   The Equity Component will tend to focus its investments in companies that
may not be expected to experience significant earnings growth, but whose
securities NFJ believes are selling at a price lower than their true value.
These so-called "value" securities may be issued by companies that have
experienced adverse business developments or may be subject to special risks
that have caused their securities to be out of favor. If NFJ's assessment of a
company's prospects is wrong, or if the market does not recognize the value of
the company, the price of its securities may decline or may not approach the
value anticipated.

Smaller Company Risk

   The general risks associated with the types of securities in which the Fund
invests are particularly pronounced for securities issued by companies with
smaller market capitalizations. Companies which are smaller

                                      42



and less well-known or seasoned than larger, more widely held companies may
offer greater opportunities for capital appreciation, but may also involve
risks different from, or greater than, risks normally associated with larger
companies. Larger companies generally have greater financial resources, more
extensive research and development, manufacturing, marketing and service
capabilities, and more stability and greater depth of management and technical
personnel than smaller companies. Smaller companies may have limited product
lines, markets or financial resources or may depend on a small, inexperienced
management group. Securities of smaller companies may trade less frequently and
in lesser volume than more widely held securities and their values may
fluctuate more abruptly or erratically than securities of larger companies.
They may also trade in the over-the-counter market or on a regional exchange,
or may otherwise have limited liquidity. These securities may therefore be more
vulnerable to adverse market developments than securities of larger companies.
Also, there may be less publicly available information about smaller companies
or less market interest in their securities as compared to larger companies,
and it may take longer for the prices of the securities to reflect the full
value of a company's earnings potential or assets. Companies with medium-sized
market capitalizations may have risks similar to those of smaller companies.

Interest Rate Risk

   Generally, when market interest rates rise, the prices of convertible
securities, preferred stocks paying fixed dividend rates, REITs and debt
obligations fall, and vice versa. Interest rate risk is the risk that
securities in the Fund's portfolio will decline in value because of increases
in market interest rates. During periods of declining interest rates, an issuer
of convertible securities or other debt securities may exercise an option to
redeem securities prior to maturity, forcing the Fund to invest in
lower-yielding securities. During periods of rising interest rates, the average
life of certain types of securities may be extended due to slower than expected
payments. This may lock in a below market yield, increase the security's
duration and reduce the security's value. Rising interest rates may also have
an adverse impact on the equity markets. 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 as market interest rates rise.

Management Risk

   The Fund is subject to management risk because it is an actively managed
portfolio. NFJ, NACM, PEA and the individual portfolio managers 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. Management risk is particularly significant for the Fund because the
Fund involves three separately managed components. In particular, the Index
Option Strategy includes sophisticated investment strategies to be implemented
by PEA and there can be no guarantee that these strategies will be successful.
As described above under "Index Options Risk," PEA's ability to implement the
Index Option Strategy successfully may be hindered due to informational
barriers between NFJ and PEA with respect to specific portfolio holdings and
trading data relating to the Equity Component.

Component Weighting Risk


   As noted under "The Fund's Investment Objectives and Strategies--Asset
Allocation and Annual Rebalancing" above, the Manager will cause the Fund's
entire portfolio to be rebalanced annually to the initial approximate 75%/25%
asset allocation between the Equity Component and the Convertible Component.
These annual rebalancings may result in additional transaction costs for the
Fund and may increase the amount of capital gains (and, in particular,
short-term gains) realized by the Fund, on which shareholders may pay tax.
Although the portfolio will be rebalanced annually, it is expected that the
relative percentage of the Fund's assets represented by the Equity and
Convertible Components will vary during interim periods in relation to the
relative investment performance of each Component, as well as market
fluctuations and other factors. Therefore, the Fund's assets attributable to
each Component may from time to time be significantly higher or lower than the
initial 75%/25% allocation described above, and the risk/return profile of the
Fund (taken as a whole) will vary accordingly. For instance, an investment in
the Fund would be more susceptible to interest rate, high yield and


                                      43



other risks associated with convertible securities if the Convertible Component
were to appreciate in value more or depreciate less (in relative terms) than
the Equity Component.

Leverage Risk

   Although it has no current intention to do so, the Fund reserves the
flexibility to issue preferred shares or debt securities or engage in
borrowings to add leverage to its portfolio. The Fund may also enter into
transactions that include, among others, reverse repurchase agreements, dollar
rolls, futures contracts, loans of portfolio securities, swap contracts and
other derivatives, as well as when-issued, delayed delivery or forward
commitment transactions, that may in some circumstances give rise to a form of
financial leverage. However, the Fund ordinarily will cover its positions in
these derivative transactions so that there is no resulting leverage. Any
leverage used by the Fund would be limited to 38% of the Fund's total assets
(including the proceeds of the leverage).

   The Fund manages some of its derivative positions by segregating an amount
of cash or liquid securities equal to the face value of those positions. The
Fund may also offset derivatives positions against one another or against other
assets to manage effective market exposure resulting from derivatives in its
portfolio. To the extent that the Fund does not segregate liquid assets or
otherwise cover its obligations under these transactions (e.g., through
offsetting positions), these transactions will be treated as senior securities
representing indebtedness ("borrowings") for purposes of the requirement under
the 1940 Act that the Fund may not enter into any such transactions if the
Fund's borrowings would thereby exceed 33 1/3% of its total assets. See
"Leverage and Borrowings." In addition, to the extent that any offsetting
positions do not behave in relation to one another as expected, the Fund may
perform as if it is leveraged. The Fund's use of leverage would create the
opportunity for increased Common Share net income, but also would result in
special risks for Common Shareholders. If used, there is no assurance that the
Fund's leveraging strategies will be successful. Leverage creates the
likelihood of greater volatility of net asset value and market price of Common
Shares.

   Because the fees received by the Manager and the Sub-Advisers are based on
the total managed assets of the Fund (including assets attributable to any
borrowings that may be outstanding), the Manager and the Sub-Advisers have a
financial incentive for the Fund to utilize borrowings, which may create a
conflict of interest between the Manager and the Sub-Advisers, on the one hand,
and the Common Shareholders, on the other hand.

Counterparty Risk

   The Fund will be subject to credit risk with respect to the counterparties
to the derivative contracts purchased or sold by the Fund. 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.

Reinvestment Risk

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

Inflation/Deflation 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. As inflation increases, the real value of
the Fund's portfolio could decline. Deflation risk is the risk that prices
throughout the economy decline over time.

                                      44



Deflation may have an adverse effect on the creditworthiness of issuers and may
make issuer default more likely, which may result in a decline in the value of
the Fund's portfolio.

Liquidity Risk

   The Fund may invest up to 15% 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 trade at a discount from comparable, more liquid investments,
and 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 a Sub-Adviser 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.

REIT and Mortgage-Related Risk

   Real estate investment trusts ("REITs") involve certain unique risks in
addition to those of investing in the real estate industry in general. REITs
are subject to interest rate risk (especially mortgage REITs) and the risk of
non-payment or 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 more limited volume and may be
subject to more abrupt or erratic price movements than larger company
securities. Mortgage REITs are also 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 REIT's returns to the Fund or the
value of the Fund's investment in the REIT because the REIT may have to
reinvest that money at lower prevailing interest rates.

Market Disruption and Geopolitical Risk

   The war with Iraq, its aftermath and the continuing occupation of 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 occupation
and the potential costs of rebuilding the Iraqi infrastructure 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 future events cannot be ruled out. The war
and occupation, 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 also adversely affect individual issuers and
securities markets, interest rates, secondary trading, ratings, credit risk,
inflation and other factors relating to the Common Shares.

Certain Affiliations

   Certain broker-dealers may be considered to be affiliated persons of the
Fund, the Manager, NFJ, NACM and/or PEA due to their possible affiliations with
Allianz AG, the ultimate parent of the Manager, NFJ, NACM and PEA. 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

                                      45



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.

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. See "Anti-Takeover and Other Provisions in the Declaration of
Trust." 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 or at net asset
value.

                           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. 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 more than 25% 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).

Hedging and Related Strategies

   The Fund may (but is not required to) use various investment strategies
designed to limit the risk of price fluctuations of its portfolio securities
and to preserve capital. For instance, the Fund may invest in derivative
instruments for the purpose of hedging its exposure to certain issuers and/or
markets. See "The Fund's Investment Objectives and Strategies." Hedging
strategies that the Fund may use include, but are not limited to, options
contracts (including options on futures contracts), futures contracts, forward
contracts, swap agreements and short sales, including such instruments based on
either an index or other asset or individual securities whose prices, a
Sub-Adviser believes, correlate with the prices of the Fund's investments. The
Fund may (but is not required to) also engage in hedging transactions relating
to interest rates and foreign currencies. See "The Fund's Investment Objectives
and Strategies--Certain Interest Rate Transactions" and "The Fund's Investment
Objectives and Strategies--Foreign (Non-U.S.) Investments and Currencies."
Income from these hedging activities will not be eligible to be treated as
qualified dividend income. In addition, dividends received on securities with
respect to which the Fund is obligated to make payments (pursuant to short
sales or otherwise) will be treated as income, taxed at ordinary, rather than
long-term capital gains, rates. Income earned by the Fund from many hedging
activities will be treated as capital gain and, if not offset by net realized
capital loss, will be distributed to shareholders in taxable distributions.
There is no assurance that these hedging strategies will be available at any
time or that a Sub-Adviser will determine to use them or, if used, that the
strategies will be successful. A Sub-Adviser may determine not to engage in
hedging strategies or to do so only in unusual circumstances or market
conditions.

                                      46



                            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, NFJ, NACM and
PEA. There are currently three Trustees of the Fund, none of whom is 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

   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 is located at 1345 Avenue of the Americas, New York, New York 10105.

   Organized in 2000 as a subsidiary successor 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, 2004, the Manager had approximately $37.5 billion in assets under
management. Allianz Global Investors of America L.P. is the direct parent
company of PA Retail Holdings LLC, of which the Manager is a wholly-owned
subsidiary. As of December 31, 2004, Allianz Global Investors of America L.P.
and its subsidiaries, including NFJ, NACM and PEA, had approximately $564.8
billion in assets under management.

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

Sub-Advisers

   NFJ.  NFJ serves as the Sub-Adviser for the Equity Component pursuant to a
portfolio management agreement between the Manager and NFJ. Subject to the
supervision of the Manager, NFJ has full investment discretion and makes all
determinations with respect to the investment of the Equity Component's assets.

   NFJ is located at 2121 San Jacinto, Suite 1840, Dallas, Texas 75201. NFJ is
the successor investment adviser to NFJ Investment Group, Inc., which commenced
operations in 1989. NFJ provides investment management services to a number of
institutional accounts, including investment companies, employee benefit plans,
college endowment funds and foundations. As of December 31, 2004, NFJ had
approximately $9.3 billion in assets under management.

   For its services pursuant to the portfolio management agreement, the Manager
(and not the Fund) will pay to NFJ an annual fee payable on a monthly basis at
the annual rate of .25% of the Fund's average daily total managed assets
attributable to the Equity Component.

                                      47



   The following individuals at NFJ constitute the team that shares primary
responsibility for the day-to-day portfolio management of the Equity Component,
with Mr. Fischer serving as head of the team:



         Name              Since              Recent Professional Experience
----------------------- ----------- ---------------------------------------------------
                              
Benno J. Fischer.......  February,  Managing Director and founding partner of NFJ.
                           2005     He has over 31 years' experience in portfolio
                        (Inception) management, investment analysis and research.
                                    Prior to the formation of NFJ in 1989, he was
                                    Chief Investment Officer (institutional and fixed
                                    income), Senior Vice President and Senior
                                    Portfolio Manager at NationsBank, which he
                                    joined in 1971. Prior to joining NationsBank, Mr.
                                    Fischer was a securities analyst at Chase
                                    Manhattan Bank and Clark, Dodge.

E. Clifton Hoover......   February, Managing Director of NFJ. He is a Portfolio
                           2005     Manager with 19 years' experience in financial
                        (Inception) analysis and portfolio management. Prior to
                                    joining NFJ in 1997, he was associated with Credit
                                    Lyonnais from 1991 to 1997, where he served as a
                                    vice-president and was responsible for the
                                    financial analysis and portfolio management of a
                                    diversified portfolio. He began his career as a
                                    financial analyst with NationsBank in 1985.

Jeffrey S. Partenheimer  February,  Managing Director of NFJ. He is a Portfolio
                           2005     Manager with over 19 years' experience in
                        (Inception) financial analysis, portfolio management and large
                                    corporate finance. Prior to joining NFJ in 1999, he
                                    spent 10 years in commercial banking (8 of those
                                    years managing investment portfolios) and 4 years
                                    as a treasury director for DSC Communications in
                                    Plano, Texas. He began his career as a financial
                                    analyst with First City Bank of Dallas in 1985. He
                                    is both a CFA and a CPA.


   NACM.  NACM serves as the Sub-Adviser for the Convertible Component pursuant
to a portfolio management agreement between the Manager and NACM. Subject to
the supervision of the Manager, NACM has full investment discretion and makes
all determinations with respect to the investment of the Convertible
Component'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, 2004, NACM had approximately $14.5 billion in assets under management.

   For its services pursuant to the portfolio management agreement, the Manager
(and not the Fund) will pay to NACM an annual fee payable on a monthly basis at
the annual rate of .40% of the Fund's average daily total managed assets
attributable to the Convertible Component.

                                      48



   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 Convertible Component, with Mr. Forsyth
serving as the head of the team:



          Name               Since              Recent Professional Experience
          ----            ----------- ---------------------------------------------------
                                
Douglas Forsyth, CFA.....  February,  Mr. Forsyth is a Senior Portfolio Manager and
                             2005     Member of the Executive Committee at NACM. He
                          (Inception) 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......  February,  Mr. Stickney is a portfolio manager at NACM. He
                             2005     joined NACM in 1999 after an aggregate of ten
                          (Inception) years of investment experience with ABN AMRO,
                                      Inc., Cowen & Company and Wayne Hummer &
                                      Company. Mr. Stickney holds a B.S. from Miami
                                      University and an M.B.A. from Northwestern
                                      University, J.L. Kellogg School of Management.

Michael E. Yee...........  February,  Mr. Yee is a portfolio manager at NACM. He
                             2005     joined NACM in 1995 and has been a portfolio
                          (Inception) 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..............  February,  Mr. Kass is an investment analyst at NACM. He
                             2005     joined NACM in 2000 after serving as an intern on
                          (Inception) 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.....  February,  Ms. Lemesevski is an investment analyst at
                             2005     NACM. She joined NACM in 2001 after an
                          (Inception) 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..........  February,  Ms. Larrabee is a trading assistant/analyst at
                             2005     NACM. She joined NACM in 2000 after an
                          (Inception) 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.


   PEA.  PEA serves as the Sub-Adviser responsible for implementing the Fund's
Index Option Strategy pursuant to a portfolio management agreement between the
Manager and PEA. Subject to the supervision of the Manager, PEA has full
investment discretion and makes all determinations with respect to the
implementation of the Index Option Strategy.

                                      49



   PEA is located at 1345 Avenue of the Americas, New York, New York 10105. PEA
provides equity-related advisory services to mutual funds and institutional
accounts. As of February 15, 2005, PEA had approximately $3.1 billion in assets
under management.

   For its services pursuant to the portfolio management agreement, the Manager
(and not the Fund) will pay to PEA an annual fee payable on a monthly basis at
the annual rate of .20% of the Fund's average daily total managed assets
attributable to the Equity Component.

   The following individual at PEA has the primary responsibility for the
day-to-day implementation of the Index Option Strategy.



      Name         Since             Recent Professional Experience
  ------------- ----------- -------------------------------------------------
                      
  Greg Tournant  February,  Portfolio Manager for PEA. Prior to joining PEA
                   2005     in 2001, he was a Senior Research Analyst at
                (Inception) Eagle Asset Management, a division of Raymond
                            James Financial. Before that he spent three years
                            as a strategy consultant for McKinsey & Co. and
                            two years as a research analyst for Eagle Asset
                            Management. He has over eight years of
                            investment management experience.


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 0.90% 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
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 are based on the total managed
assets of the Fund (including assets attributable to any borrowings that may be
outstanding), the Manager has a financial incentive for the Fund to utilize
borrowings, which may create a conflict of interest between the Manager and the
holders of the Fund's Common Shares.

Regulatory and Litigation Matters

   On September 13, 2004, the Securities and Exchange Commission announced that
the Manager, PEA and PA Distributors LLC ("PAD") had agreed to a settlement of
charges that they and certain of their officers had, among other things,
violated various antifraud provisions of the federal securities laws in
connection with an alleged market-timing arrangement involving trading of
shares of certain open-end investment companies ("open-end funds") advised or
distributed by the Manager and certain of its affiliates. In their settlement
with the Securities and Exchange Commission, the Manager, PEA and PAD consented
to the entry of an order by the Securities and Exchange Commission and, without
admitting or denying the findings contained in the order, agreed to implement
certain compliance and governance changes and consented to cease-and-desist
orders and censures. In addition, the Manager, PEA and PAD agreed to pay civil
money penalties in the aggregate amount of $40 million and to pay disgorgement
in the amount of $10 million, for an aggregate payment of $50 million. In
connection with the settlement, the Manager, PEA and PAD have been dismissed
from the related complaint by the Securities and Exchange Commission filed on
May 6, 2004 in the U.S. District Court in the Southern District of New York.

                                      50



   In a related action, on June 1, 2004, the Attorney General of the State of
New Jersey announced that it had entered into a settlement agreement with PEA
and PAD and their parent, Allianz Global Investors of America L.P. (formerly
Allianz Dresdner Asset Management of America L.P., or "Allianz"), in connection
with a complaint filed by the New Jersey Attorney General ("NJAG") on February
17, 2004. In the settlement, Allianz, PEA and PAD neither admitted nor denied
the allegations or conclusions of law, but did agree to pay New Jersey a civil
fine of $15 million and $3 million for investigative costs and further
potential enforcement initiatives against unrelated parties. They also
undertook to implement certain governance changes. The complaint relating to
the settlement alleged, among other things, that Allianz, PEA and PAD had
failed to disclose that they improperly allowed certain hedge funds to engage
in "market timing" in various open-end funds advised or distributed by the
Manager and certain of its affiliates.

   On September 15, 2004, the Securities and Exchange Commission announced that
the Manager, PEA and PAD had agreed to settle a Securities and Exchange
Commission enforcement action in connection with charges that they violated
various antifraud and other provisions of federal securities laws as a result
of, among other things, their failure to disclose to the board of trustees and
shareholders of various open-end funds advised or distributed by the Manager
and its affiliates material facts and conflicts of interest that arose from
their use of brokerage commissions on portfolio transactions to pay for
so-called "shelf space" arrangements with certain broker-dealers. In their
settlement with the Securities and Exchange Commission, the Manager, PEA and
PAD consented to the entry of an order by the Securities and Exchange
Commission without admitting or denying the findings contained in the order. In
connection with their settlement, the Manager, PEA and PAD agreed to undertake
certain compliance and disclosure reforms and consented to cease-and-desist
orders and censures. In addition, the Manager, PEA and PAD agreed to pay a
civil money penalty of $5 million and to pay disgorgement of approximately $6.6
million based upon the aggregate amount of brokerage commissions alleged to
have been paid by such open-end funds in connection with these shelf-space
arrangements (and related interest). In a related action, the California
Attorney General announced on September 15, 2004 that it had entered an
agreement with PAD in resolution of an investigation into matters that are
similar to those discussed in the Securities and Exchange Commission order. The
settlement agreement resolves matters described in a complaint filed
contemporaneously by the California Attorney General in the Superior Court of
the State of California alleging, among other things, that PAD violated certain
antifraud provisions of California law by failing to disclose matters related
to the shelf-space arrangements described above. In the settlement agreement,
PAD did not admit to any liability but agreed to pay $5 million in civil
penalties and $4 million in recognition of the California Attorney General's
fees and costs associated with the investigation and related matters.

   Since February 2004, the Manager, PEA, NFJ, NACM and certain of their
affiliates and employees have been named as defendants in a total of 14
lawsuits filed in one of the following: U.S. District Court in the Southern
District of New York, the Central District of California and the Districts of
New Jersey and Connecticut. Ten of those lawsuits concern "market timing," and
they have been transferred to and consolidated for pre-trial proceedings in the
U.S. District Court for the District of Maryland; the remaining four lawsuits
concern "revenue sharing" with brokers offering "shelf space" and have been
consolidated into a single action in the U.S. District Court for the District
of Connecticut. The lawsuits have been commenced as putative class actions on
behalf of investors who purchased, held or redeemed shares of affiliated funds
during specified periods or as derivative actions on behalf of the funds. The
lawsuits generally relate to the same facts that are the subject of the
regulatory proceedings discussed above. The lawsuits seek, among other things,
unspecified compensatory damages plus interest and, in some cases, punitive
damages, the rescission of investment advisory contracts, the return of fees
paid under those contracts and restitution. The Manager, PEA, NFJ and NACM
believe that other similar lawsuits may be filed in federal or state courts
naming as defendants the Manager, Allianz, PEA, NFJ, NACM, open- and closed-end
funds advised or distributed by the Manager, PEA, NFJ, NACM and/or their
affiliates, the boards of trustees of those funds, and/or other affiliates or
employees as defendants.

   Under Section 9(a) of the 1940 Act, if any of the various regulatory
proceedings or lawsuits were to result in a court injunction against the
Manager, PEA, Allianz and/or their affiliates, they and their affiliates
(including NACM and NFJ) would, in the absence of exemptive relief granted by
the Securities and Exchange Commission,

                                      51



be barred from serving as an investment adviser/sub-adviser or principal
underwriter for any registered investment company, including the Fund. In
connection with an inquiry from the Securities and Exchange Commission
concerning the status of the New Jersey settlement under Section 9(a), the
Manager, Allianz and certain of their affiliates (together, the "Applicants")
sought exemptive relief from the Securities and Exchange Commission under
Section 9(c) of the 1940 Act. The Securities and Exchange Commission has
granted the Applicants a temporary exemption from the provisions of Section
9(a) with respect to the New Jersey settlement until the earlier of (i)
September 13, 2006 and (ii) the date on which the Securities and Exchange
Commission takes final action on their application for a permanent order. There
is no assurance that the Securities and Exchange Commission will issue a
permanent order.

   Various legislative and regulatory proposals are pending in or before, or
have been adopted by the U.S. Congress, state legislatures and the various
regulatory agencies that supervise the operations of the Fund and its service
providers. These proposals, to the extent enacted or adopted, could have a
substantial impact on the regulation and operation of registered funds,
investment advisers and broker-dealers. Additionally, the Securities and
Exchange Commission, the National Association of Securities Dealers, Inc. and
other regulators, as well as Congress, are investigating certain practices
generally within the investment company industry and also engage in regular,
routine inspections. The Fund, the Manager and the Sub-Advisers intend to
cooperate fully with all regulatory inquiries.

   It is possible that the various matters referenced in this section and/or
other developments resulting from these matters could lead to a decrease in the
market value of the Fund's Common Shares or other adverse consequences to the
Fund and its shareholders. However, the Manager and the Sub-Advisers believe
that these matters are not likely to have a material adverse effect on the Fund
or on their ability to perform their respective investment advisory services
relating to the Fund.

   In addition, a putative class action lawsuit captioned Charles Mutchka et
al. v. Brent R. Harris, et al., filed in January 2005 by and on behalf of
individual shareholders of certain open-end funds that hold equity securities
and that are sponsored by the Manager and certain of its affiliates, including
the Sub-Advisers, is currently pending in the federal district court for the
Central District of California. The plaintiff alleges that fund trustees,
investment advisers and affiliates breached fiduciary duties and duties of care
by failing to ensure that the open-end funds participated in securities class
action settlements for which those funds were eligible. The plaintiff has
claimed as damages disgorgement of fees paid to the investment advisers,
compensatory damages and punitive damages. The Manager believes that the claims
made in the lawsuit against the Manager and its affiliates, including the
Sub-Advisers, are baseless, and the Manager, its affiliates and the
Sub-Advisers intend to vigorously defend the lawsuit. As of the date of this
prospectus, the Manager believes a decision, if any, against the defendants is
not likely to have a material adverse effect on the Fund or on the ability of
the Manager or the Sub-Advisers to perform their respective investment advisory
services relating to the Fund.

                                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 readily available are stated at market value. Market value is generally
determined on the basis of the last reported sales price or, if available, the
closing price reported for an issue traded on an over-the-counter stock market
(including the NASDAQ Official Closing Price for NASD traded securities), or if
no sales or closing prices are reported, based on quotes obtained from a
quotation reporting system, established market makers or pricing services.
Certain securities or investments for which daily 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

                                      52



amortized cost. Exchange traded options, futures and options on futures are
valued at the settlement price determined by the exchange. 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 their
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 that the New York Stock Exchange is open. Domestic debt
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.

   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 the
Manager, NACM, NFJ or PEA. Fair valuation also may be required due to material
events that occur after the close of the relevant market but prior to the NYSE
Close.

                                 DISTRIBUTIONS

   Commencing with the Fund's first dividend, the Fund intends to make
quarterly cash distributions to Common Shareholders at a rate that reflects the
past and projected performance of the Fund. The Fund expects to receive
substantially all of its current income and gains from the following sources:
(i) capital gains (short-term and long-term) from net index option premiums and
the sale of portfolio securities; (ii) dividends received by the Fund that are
paid on the common stocks and other equity securities held in the Equity
Component; and (iii) interest income received by the Fund from the securities
held in the Convertible Component. Distributions are likely to be variable, and
the Fund's distribution rate will depend on a number of factors, including the
net earnings on the Fund's portfolio investments and the rate at which such net
earnings change as a result of changes in the timing of and rates at which the
Fund receives income from the sources described above. The net investment
income of the Fund consists of all income (other than net short-term and
long-term capital gains) less all expenses of the Fund.

   The Fund's quarterly distributions will be made from the Fund's net
investment income and net gains from index option premiums and the sale of
portfolio securities. The tax treatment and characterization of the Fund's
distributions may vary significantly from time to time because of the varied
nature of the Fund's investments. Pursuant to the requirements of the 1940 Act
and other applicable laws, absent an exemption, a notice will accompany each
quarterly distribution with respect to the estimated source (as between net
income and gains) of the distribution made. (The Fund will indicate the
proportion of its capital gains distributions that constitute long-term and
short-term gains annually.) The ultimate tax characterization of the Fund's
distributions made in a calendar or fiscal year cannot finally be determined
until after the end of the fiscal year. As a result, there is a possibility
that the Fund may make total distributions during a calendar or fiscal year in
an amount that exceeds the Fund's net investment income and net realized
capital gains for the relevant fiscal year. For example, the Fund may
distribute amounts early in the calendar year that derive from short-term
capital gains, but incur net short-term capital losses later in the year,
thereby offsetting short-term capital gains out of which distributions have
already been made by the Fund. In such a situation, the amount by which the
Fund's total distributions exceed net investment income and net realized
capital gains would generally be treated as a tax-free return of capital up to
the amount of your tax basis in your shares, with any amounts exceeding such
basis treated as gain from the sale of shares.

                                      53



   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 all of its net investment income and net short-term capital
gains. In addition, at least annually, the Fund intends to distribute net
realized long-term capital gains not previously distributed, if any. The 1940
Act currently limits the number of times the Fund may distribute long-term
capital gains in any tax year, which may increase the variability of the Fund's
distributions and result in certain dividends being comprised more heavily of
long-term capital gains eligible for favorable income tax rates. The Fund
intends to apply for exemptive relief from the Securities and Exchange
Commission to allow it to distribute long-term capital gains more frequently,
and if granted would intend to regularly include long-term capital gains in
Fund distributions, subject to approval by the Board of Trustees. However,
there is no assurance that any such exemptive relief will be granted. During
periods in which the Index Option Strategy does not generate sufficient option
premiums or results in net losses, a substantial portion of the Fund's
dividends may be comprised of capital gains from the sale of equity securities
held in the Equity Component, which would involve transaction costs borne by
the Fund and may also result in realization of taxable short-term capital gains
taxed at ordinary income tax rates (particularly during the initial year of the
Fund's operations when all of the Fund's portfolio securities will have been
held for less than one year). See "Tax Matters."

   Your initial distribution is expected to be declared approximately 75 days,
and paid approximately 120 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 "Dividend
Reinvestment Plan." Although it does not now intend to do so, the Board of
Trustees may change the Fund's distribution 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 net short- and long-term capital
gains and historical and projected net investment income and net short- and
long-term capital gains.

                          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.

   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 on the payment date the net asset value of the Common Shares is equal
       to or less than the market price per Common Share plus estimated
       brokerage commissions that would be incurred upon the purchase of Common
       Shares on the open market, 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 on the payment date the net asset value of the Common Shares is
       greater than the market price per Common Share plus estimated brokerage
       commissions that would be incurred upon the purchase of Common Shares on
       the open market, the Plan Agent will receive the dividend or
       distribution in cash

                                      54



       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., P.O. Box 43027, Providence, RI 02940-3027, telephone
number (800) 331-1710.

                             DESCRIPTION OF SHARES

   The Declaration authorizes the issuance of an unlimited number of Common
Shares. The Common Shares will be issued with a par value of $.00001 per share.
All Common Shares have equal rights to 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.

   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 annual meetings are required as a condition of such
listing.

   Net asset value will be reduced immediately following the offering by the
amount of the sales load and offering expenses paid or reimbursed by the Fund.
The Manager has agreed to pay the amount by which the Fund's offering costs
(other than the sales load, but inclusive of the reimbursement of underwriter
expenses of $.005 per share) exceed $.05 per share. The Manager has agreed to
pay all of the Fund's organizational expenses.

                                      55



   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.
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."

   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 or reimbursed by the
Fund. See "Use of Proceeds." In addition to net asset value, market price may
be affected by factors relating to the Fund such as dividend levels and
stability (which will in turn be affected by levels of dividend and interest
payments by the Fund's portfolio holdings, the timing and success of the Fund's
Index Option Strategy, regulation affecting the timing and character of Fund
distributions, Fund expenses and other factors), portfolio credit quality,
liquidity, call protection, market supply and demand, and similar factors
relating to the Fund's portfolio holdings. 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 the Statement of
Additional Information under "Repurchase of Common Shares; Conversion to
Open-End Fund."

        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 to authorize certain Fund
transactions not in the ordinary course of business, including a merger or
consolidation, issuance or transfer by the Fund of the Fund's shares (except as
may be made pursuant to a public offering, the Fund's dividend reinvestment
plan or upon exercise of any stock subscription rights), a sale, transfer or
other disposition of Fund assets, or any shareholder proposal regarding
specific investment decisions, 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 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 required by
the 1940 Act with respect to the conversion).

                                      56



   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 of the Fund by a third
party. They provide, however, the advantage of potentially requiring persons
seeking control of the Fund to negotiate with its management regarding the
price to be paid and facilitating the continuity of the Fund's investment
objectives and 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 factors relating to the Fund such as dividend levels and stability (which
will in turn be affected by dividend and interest payments by the Fund's
portfolio holdings, the timing and success of the Fund's Index Option Strategy,
regulations affecting the timing and character of Fund distributions, Fund
expenses and other factors), portfolio credit quality, liquidity, call
protection, market supply and demand, and similar factors relating to the
Fund's portfolio holdings. 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
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
any market discount.

   If the Fund were to convert to an open-end company, 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

                                      57



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 any 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 LLP, 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 must
qualify for the dividends-paid deduction.

   For federal income tax purposes, distributions of investment income are
generally taxable as ordinary income to the extent of the Fund's current and
accumulated earnings and profits. Taxes on distributions of capital gains are
determined by how long the Fund owned (and is treated under federal income tax
rules as having owned) the investments that generated them, rather than how
long a shareholder has owned his or her shares. Distributions of net capital
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 long-term 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. Call option premiums received by the Fund on many (but not
all) equity index call options will be subject to mark-to-market treatment and
gains will be recognized based on the fair market value of the options on
October 31st and at the end of the Fund's taxable year (January 31) (or if the
option is disposed of, upon disposition). Under this system, 60% of the gains
or losses from such equity index call options will be treated as long-term
capital gains or losses and 40% will be treated as short-term capital gains or
losses. Such short-term gains will be subject to ordinary income tax rates to
the extent not offset by short-term losses. Other call option premiums received
by the Fund will be recognized upon exercise, lapse or other disposition of the
option, the Fund will treat any gain or loss as short-term capital gain or
loss, unless the option is actually exercised after the stock (or any related
"substantially similar" stock or other property) is treated for federal income
tax purposes as

                                      58



having been held for more than a year. Distributions in excess of the Fund's
current and accumulated earnings and profits are treated as returns of capital
to the extent of the shareholder's basis in the shares, and thereafter as
capital gain.

   The Fund's call option writing activities may affect the period for which it
is respected as having held stocks that the Fund owns that are also included in
the indexes on which such calls are written (or for which such options
substantially diminish the risk, as set forth in Service regulations) for
federal income tax purposes. Some of the call options and other devices
employed by the Fund reduce risk to the Fund by substantially diminishing its
risk of loss in offsetting positions in substantially similar or related
property, thereby giving rise to "straddles" under the federal income tax
rules. The straddle rules require the Fund to defer certain losses on positions
within a straddle and to terminate the holding period for shares which become
part of a straddle before the long-term capital gains period has been reached.
In other words, the Fund will not be respected as having owned the shares for
any time before the options lapse or are otherwise terminated. Because the Fund
intends to sell mainly out-of-the-money and at-the-money options, the Fund
expects that many of its covered call options that are considered to offset
substantially similar or related property will constitute "qualified covered
call options" that are generally excepted from the straddle rules. As such,
they generally will not trigger the loss deferral provisions of the straddle
rules, so that the holding period for the substantially similar property will
not be terminated but instead will be suspended while the call options are
outstanding. At this time, it is unclear the extent to which the gains from the
sale of Fund portfolio securities underlying (or substantially similar to) such
call options will be treated as short-term capital gains and thus, in so far as
not offset by short term losses, taxable as ordinary income when distributed.

   For taxable years beginning on or before December 31, 2008, the Fund may
designate distributions of investment income derived from dividends of U.S.
corporations and some foreign corporations as "qualified dividend income,"
provided holding period and other requirements are met by the Fund. Qualified
dividend income will be taxed in the hands of individuals at the rates
applicable to long-term capital gain, provided the same holding period and
other requirements are met by the shareholder. Fund dividends representing
distributions of interest income and short-term capital gains (including a
portion of premiums received by the Fund as the seller (writer) of expired
options contracts) cannot be designated as qualified dividend income and will
not qualify for the reduced rates. In addition, the straddle rules described
above, which terminate or suspend the holding period of Fund portfolio
securities substantially similar to covered calls and other reduced-risk
investments, may bear adversely on the Fund's ability to designate
distributions as qualified dividend income. There can be no assurance as to the
percentage (if any) of the Fund's distributions that will qualify for taxation
to individual Common Shareholders as qualified dividend income.

   In addition to investing in stocks that pay tax-favored dividends, the Fund
intends to invest a portion of its assets in convertible securities, as well as
stocks and other securities that generate ordinary income not taxed at
long-term capital gains rates. For example, income produced by the Convertible
Component, the assets of which will ordinarily constitute approximately 25% of
the Fund's portfolio, will be taxed at ordinary income rates. Also, dividends
received by the Fund from REITs will constitute qualified dividend income only
to the extent that the REIT pays an entity-level tax, and REITs are generally
operated in a manner designed to ensure that they are not required to pay such
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.

   Some of the debt obligations 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 taxable income (and required to be distributed) 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. 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.

                                      59



The Fund may invest in debt obligations that are in the lowest rating
categories or are unrated, and may hold 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. The Fund will address these and other
related issues when, as and if it holds 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.

   Some of the debt obligations that may be acquired by the Fund in the
secondary market may be treated as having market discount. 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.

   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 are taxable whether
shareholders receive them in cash or reinvest them in additional shares through
the Dividend Reinvestment Plan. Shareholders will be notified annually as to
the U.S. federal tax status of distributions. The ultimate tax characterization
of the Fund's distributions made in a taxable year cannot finally be determined
until after the end of that taxable year. As a result, there is a possibility
that the Fund may make total distributions during a taxable year in an amount
that exceeds the Fund's net investment income and net realized capital gains
for that year. For example, the Fund may distribute amounts early in the
calendar year that derive from short-term capital gains, but incur net
short-term capital losses later in the year, thereby offsetting short-term
capital gains out of which distributions have already been made by the Fund. In
such a situation, the amount by which the Fund's total distributions exceed net
investment income and net realized capital gains would generally be treated as
a tax-free return of capital up to the amount of your tax basis in your Common
Shares, with any amounts exceeding such basis treated as gain from the sale of
shares. Any gain resulting from the sale or exchange of Fund shares generally
will be taxable as capital gains.

   The long-term capital gain rates applicable to most shareholders will be 15%
(with lower rates applying to taxpayers in the 10% and 15% ordinary income tax
brackets) for taxable years beginning on or before December 31, 2008. 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 or foreign currencies
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 is 28% for amounts paid
through 2010 and will be 31% for amounts paid after December 31, 2010. The Fund
is required to apply backup withholding to certain taxable distributions and
redemption proceeds including, for example, distributions paid to any
individual shareholder who fails to properly furnish the Fund with a correct
taxpayer identification number. Please see "Tax Matters" in the Statement of
Additional Information for additional information about backup withholding.

   In general, dividends (other than capital gain dividends) paid to a
shareholder that is not a "U.S. person" within the meaning of the Code (such
shareholder, a "foreign person") are subject to withholding of U.S. federal
income tax at a rate of 30% (or lower applicable treaty rate). However,
effective for taxable years of the Fund beginning before January 1, 2008, the
Fund generally will not be required to withhold any amounts with respect to
distributions of (i) U.S.-source interest income that would not be subject to
U.S. federal income tax if earned directly by an individual foreign person, and
(ii) net short-term capital gains in excess of net long-term capital losses, in
each case to the extent such distributions are properly designated by the Fund.

   Recent legislation modifies the tax treatment of distributions from the Fund
that are paid to a foreign person and are attributable to gain from "U.S. real
property interests" ("USRPIs"), which the Code defines to include

                                      60



direct holdings of U.S. real property and interests (other than solely as a
creditor) in "U.S. real property holding corporations" such as REITs. In
respect of dividends paid or deemed paid on or before December 31, 2007,
distributions to foreign persons attributable to gains from the sale or
exchange of USRPIs will give rise to an obligation for those foreign persons to
file a U.S. tax return and pay tax, and may well be subject to withholding
under future regulations.

   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 as well as possible
estate tax consequences of fund shareholdings by foreign persons. Please see
"Tax Matters" in the Statement of Additional Information for additional
information regarding the tax aspects of investing in the Fund.

                                      61



                                 UNDERWRITING

   Subject to the terms and conditions stated in the Fund's underwriting
agreement dated         , 2005, each Underwriter named below has severally
agreed to purchase, and the Fund has agreed to sell to such Underwriter, the
number of Common Shares set forth opposite the name of such Underwriter.



                                                                     Number of
Underwriters                                                       Common Shares
------------                                                       -------------
                                                                
Citigroup Global Markets Inc......................................
Merrill Lynch, Pierce, Fenner & Smith.............................
         Incorporated.............................................
UBS Securities LLC................................................
A.G. Edwards & Sons, Inc..........................................
Wachovia Capital Markets, LLC.....................................
Deutsche Bank Securities Inc......................................
Advest, Inc.......................................................
Robert W. Baird & Co. Incorporated................................
Banc of America Securities LLC....................................
H&R Block Financial Advisors, Inc.................................
Crowell, Weedon & Co..............................................
Ferris, Baker Watts, Incorporated.................................
J.J.B. Hilliard, W.L. Lyons, Inc..................................
Janney Montgomery Scott LLC.......................................
KeyBanc Capital Markets, A Division of McDonald Investments Inc. .
Legg Mason Wood Walker, Incorporated..............................
Oppenheimer & Co. Inc.............................................
Raymond James & Associates, Inc...................................
RBC Capital Markets Corporation...................................
Ryan Beck & Co., Inc..............................................
Stifel, Nicolaus & Company, Incorporated..........................
SunTrust Capital Markets, Inc.....................................
Wedbush Morgan Securities Inc.....................................
Wells Fargo Securities, LLC.......................................
                                                                     --------
   Total..........................................................
                                                                     ========


   The underwriting agreement provides that the obligations of the Underwriters
to purchase the Common Shares included in this offering are subject to approval
of legal matters by counsel and to other conditions. The Underwriters are
obligated to purchase all the Common Shares (other than those covered by the
over-allotment option described below) if they purchase any of the Common
Shares.

   The Underwriters, for whom Citigroup Global Markets Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, UBS Securities LLC, A.G. Edwards & Sons,
Inc., Wachovia Capital Markets, LLC, Deutsche Bank Securities Inc., Advest,
Inc., Robert W. Baird & Co. Incorporated, Banc of America Securities LLC, H&R
Block Financial Advisors, Inc., Crowell, Weedon & Co., Ferris, Baker Watts,
Incorporated, J.J.B. Hilliard, W.L. Lyons, Inc., Janney Montgomery Scott LLC,
KeyBanc Capital Markets, a Division of McDonald Investments Inc., Legg Mason
Wood Walker, Incorporated, Oppenheimer & Co. Inc., Raymond James & Associates,
Inc., RBC Capital Markets Corporation, Ryan Beck & Co., Inc., Stifel, Nicolaus
& Company, Incorporated, SunTrust Capital Markets, Inc., Wedbush Morgan
Securities Inc., and Wells Fargo Securities, LLC are acting as representatives,
propose to offer some of the Common Shares directly to the public at the public
offering price set forth on the cover page of this prospectus and some of the
Common Shares to dealers at the public offering price less a concession not to
exceed $     per Common Share. The sales load the Fund will pay of $1.125 per
Common

                                      62



Share is equal to 4.5% of the initial offering price. The Underwriters may
allow, and such dealers may reallow, a concession not to exceed $     per
Common Share on sales to certain other dealers. If all of the Common Shares are
not sold at the initial offering price, the representatives may change the
public offering price and other selling terms. Investors must pay for any
Common Shares purchased on or before         , 2005. The representatives have
advised the Fund that the Underwriters do not intend to confirm any sales to
any accounts over which they exercise discretionary authority.

   The Fund has granted to the Underwriters an option, exercisable for 45 days
from the date of this prospectus, to purchase up to     additional Common
Shares at the public offering price less the sales load. The Underwriters may
exercise such option solely for the purpose of covering over-allotments, if
any, in connection with this offering. To the extent such option is exercised,
each Underwriter will be obligated, subject to certain conditions, to purchase
a number of additional Common Shares approximately proportionate to such
Underwriter's initial purchase commitment.

   The Fund and the Manager have agreed that, for a period of 180 days from the
date of this prospectus, they will not, without the prior written consent of
Citigroup Global Markets Inc, on behalf of the Underwriters, dispose of or
hedge any Common Shares or any securities convertible into or exchangeable for
Common Shares. Citigroup Global Markets Inc., in its sole discretion, may
release any of the securities subject to these agreements at any time without
notice.

   Prior to the offering, there has been no public market for the Common
Shares. Consequently, the initial public 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
the Common Shares will sell in the public market 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 Common Shares have been authorized for listing on the New York
Stock Exchange, subject to notice of issuance.

   The Fund and the Manager have each agreed to indemnify the several
Underwriters or contribute to losses arising out of certain liabilities,
including liabilities under the Securities Act of 1933, as amended, or to
contribute to payments the Underwriters may be required to make because of any
of these liabilities.

   The Fund has agreed to pay the Underwriters $.005 per Common Share as a
partial reimbursement of expenses incurred in connection with the offering. The
Manager has agreed to pay the amount by which the Fund's offering costs (other
than the sales load but inclusive of the reimbursement of Underwriter expenses
of $.005 per share) exceed $.05 per share. The Manager has agreed to pay all of
the Fund's organizational expenses.

   The Manager (and not the Fund) has agreed to pay each of Merrill Lynch,
Pierce, Fenner and Smith Incorporated ("Merrill Lynch") and UBS Securities LLC
("UBS") a fee at an annual rate of .15% of the Fund's average daily total
managed assets attributable to Common Shares sold by such Underwriters. This
fee will not exceed     % of the total initial price to the public of the
Common Shares offered hereby and will be payable in arrears at the end of each
calendar quarter during the continuance of the investment management agreement
or other advisory agreement between the Manager and the Fund. In return for
such fees Merrill Lynch and UBS have agreed (i) to provide services related to
the sale and distribution of the Common Shares, (ii) to provide certain
after-market support services designed to maintain the visibility of the Fund
on an ongoing basis, (iii) to provide relevant information, studies or reports
regarding general trends in the closed-end investment company and asset
management industries, if reasonably obtainable, and to consult with
representatives of the Manager in connection therewith and (iv) to provide
information to and consult with the Manager with respect to applicable
strategies designed to address market value discounts, if any. Additionally,
the Manager (and not the Fund) will

                                      63



pay to Citigroup Global Markets Inc. from its own assets a structuring fee for
advice relating to the structure and design of the Fund and the organization of
the Fund as well as services related to the sale and distribution of the Fund's
Common Shares in an amount equal to $    , which in the aggregate is     % of
the total initial price to the public of the Common Shares offered hereby. The
sum of the noted fees to be paid to Merrill Lynch, UBS and Citigroup Global
Markets Inc., the amounts paid by the Fund to reimburse certain Underwriters
and other expenses and the sales load to be paid by the Fund will not exceed
9.00% of the total price to the public of the Common Shares offered hereby.

   In connection with the requirements for listing the Common Shares on the New
York Stock Exchange, the Underwriters have undertaken to sell lots of 100 or
more Common Shares to a minimum of 2,000 beneficial owners in the United
States. The minimum investment requirement is 100 Common Shares.

   Certain Underwriters may make a market in the Common Shares after trading in
the Common Shares has commenced on the New York Stock Exchange. No Underwriter
is, however, obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice, at the sole
discretion of the Underwriter. No assurance can be given as to the liquidity
of, or the trading market for, the Common Shares as a result of any
market-making activities undertaken by any Underwriter. This prospectus is to
be used by any Underwriter in connection with the offering and, during the
period in which a prospectus must be delivered, with offers and sales of the
Common Shares in market-making transactions in the over-the-counter market at
negotiated prices related to prevailing market prices at the time of the sale.

   The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), certain
persons participating in the offering may engage in transactions, including
stabilizing bids, covering transactions or the imposition of penalty bids,
which may have the effect of stabilizing or maintaining the market price of the
Common Shares at a level above that which might otherwise prevail in the open
market. A "stabilizing bid" is a bid for, or the purchase of, the Common Shares
on behalf of an Underwriter for the purpose of fixing or maintaining the price
of the Common Shares. A "covering transaction" is a bid for, or purchase of,
the Common Shares on behalf of an Underwriter to reduce a short position
incurred by the Underwriters in connection with the offering. A "penalty bid"
is a contractual arrangement whereby if, during a specified period after the
issuance of the Common Shares, the Underwriters purchase Common Shares in the
open market for the account of the underwriting syndicate and the Common Shares
purchased can be traced to a particular Underwriter or member of the selling
group, the underwriting syndicate may require the Underwriter or selling group
member in question to purchase the Common Shares in question at the cost price
to the syndicate or may recover from (or decline to pay to) the Underwriter or
selling group member in question any or all compensation (including, with
respect to a representative, the applicable syndicate management fee)
applicable to the Common Shares in question. As a result, an Underwriter or
selling group member and, in turn, brokers may lose the fees that they
otherwise would have earned from a sale of the Common Shares if their customer
resells the Common Shares while the penalty bid is in effect. The Underwriters
are not required to engage in any of these activities, and any such activities,
if commenced, may be discontinued at any time. These transactions may be
effected on the New York Stock Exchange or otherwise.

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

   Prior to the public offering of Common Shares, the Manager will purchase
Common Shares from the Fund in an amount satisfying the net worth requirements
of Section 14(a) of the 1940 Act.

   The principal business address of Citigroup Global Markets Inc. is 388
Greenwich Street, New York, NY 10013.

                                      64



                         CUSTODIAN AND TRANSFER AGENT

   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 as well as compliance services on behalf of the Fund.

   PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027, serves as the Fund's
transfer agent, registrar, dividend disbursement agent and shareholder
servicing 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 LLP, Boston, Massachusetts, and for the
Underwriters by Simpson Thacher & Bartlett LLP. Simpson Thacher & Bartlett LLP
may rely as to certain matters of Massachusetts law on the opinion of Ropes &
Gray LLP.

                                      65



         TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL INFORMATION


                                                                   

       Use of Proceeds...............................................   3

       Investment Objectives and Policies............................   3

       Investment Restrictions.......................................  42

       Management of the Fund........................................  44

       Investment Manager and Sub-Advisers...........................  53

       Portfolio Transactions........................................  58

       Distributions.................................................  60

       Description of Shares.........................................  62

       Anti-Takeover and Other Provisions in the Declaration of Trust  63

       Repurchase of Common Shares; Conversion to Open-End Fund......  65

       Tax Matters...................................................  66

       Performance Related and Comparative Information...............  77

       Custodian, Transfer Agent and Dividend Disbursement Agent.....  77

       Independent Registered Public Accounting Firm.................  78

       Counsel.......................................................  78

       Registration Statement........................................  78

       Report of Independent Registered Public Accounting Firm.......  79

       Financial Statements..........................................  80

       Appendix A--Proxy Voting Policies............................. A-1


                                      66



                                                                     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 the Fund 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 the Fund.

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

   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.

                                      67



   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 funds employed; conservative capitalization structure with moderate reliance
on debt and ample asset protection; broad margins in

                                      68



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.

   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.

                                      69



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.

   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.

                                      70



   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.

   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.

                                      71



   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.

                                      72



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

                                    Shares

                NFJ Dividend, Interest & Premium Strategy Fund

                                 Common Shares

[LOGO] Allianz
Global Investors

                                   --------

                              P R O S P E C T U S

                                         , 2005

                                   --------

                                   Citigroup
                              Merrill Lynch & Co.
                              UBS Investment Bank
                                 A.G. Edwards
                              Wachovia Securities
                           Deutsche Bank Securities
                                 Advest, Inc.
                             Robert W. Baird & Co.
                        Banc of America Securities LLC
                      H&R Block Financial Advisors, Inc.
                             Crowell, Weedon & Co.
                              Ferris, Baker Watts
                                 Incorporated
                       J.J.B. Hilliard, W.L. Lyons, Inc.
                          Janney Montgomery Scott LLC
                            KeyBanc Capital Markets
                            Legg Mason Wood Walker
                                 Incorporated
                               Oppenheimer & Co.
                                 Raymond James
                              RBC Capital Markets
                                Ryan Beck & Co.
                          Stifel, Nicolaus & Company
                                 Incorporated
                          SunTrust Robinson Humphrey
                        Wedbush Morgan Securities Inc.
                          Wells Fargo Securities, LLC

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

   Until           , 2005 (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.

CENFJP_12471



     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           , 2005
                                               ----------


                 NFJ DIVIDEND, INTEREST & PREMIUM STRATEGY FUND


                       STATEMENT OF ADDITIONAL INFORMATION

                                         , 2005
                                  -------


     NFJ Dividend, Interest & Premium Strategy 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           , 2005 (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
(877) 819-2224. 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 OBJECTIVES AND POLICIES.............................................3
INVESTMENT RESTRICTIONS.......................................................42
MANAGEMENT OF THE FUND........................................................44
INVESTMENT MANAGER AND SUB-ADVISERS...........................................53
PORTFOLIO TRANSACTIONS........................................................58
DISTRIBUTIONS.................................................................60
DESCRIPTION OF SHARES.........................................................62
ANTI-TAKEOVER AND OTHER PROVISIONS IN THE DECLARATION OF TRUST................63
REPURCHASE OF COMMON SHARES; CONVERSION TO OPEN END FUND......................65
TAX MATTERS...................................................................66
PERFORMANCE RELATED AND COMPARATIVE INFORMATION...............................77
CUSTODIAN, TRANSFER AGENT AND DIVIDEND DISBURSEMENT AGENT.....................77
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.................................78
COUNSEL.......................................................................78
REGISTRATION STATEMENT........................................................78
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.......................79
FINANCIAL STATEMENTS..........................................................80
APPENDIX A -- Proxy Voting Policies..........................................A-1



         This Statement of Additional Information is dated       , 2005.
                                                           ------

                                      -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 or reimbursement of organization
and offering costs and the sales load.


     PA Fund Management LLC (the "Manager") has agreed to pay the amount by
which the Fund's offering costs (other than the sales load, but inclusive of
reimbursement of underwriter expenses of $.005 per common share) exceed $.05 per
share. The Manager has agreed to pay all of the Fund's organizational expenses.


     Pending investment in securities and investments that meet the Fund's
investment objectives and policies, it is anticipated that the net proceeds of
the offering will be invested in high grade, short-term securities, or in
derivative instruments designed to give the Fund exposure to the types of
securities and markets in which the Fund will ordinarily invest while the Fund's
sub-advisers select specific securities. This may include, without limitation,
equity index futures contracts.

                       INVESTMENT OBJECTIVES AND POLICIES

     The investment objectives and general investment policies of the Fund are
described in the Prospectus. The Fund has three sub-advisers, NFJ Investment
Group L.P. ("NFJ"), Nicholas-Applegate Capital Management LLC ("NACM") and PEA
Capital LLC ("PEA") (each a "Sub-Adviser" and collectively the "Sub-Advisers")
each of which manages a separate portion of the Fund's portfolio. The portion of
the Fund's portfolio sub-advised by NFJ (the "Equity Component") will ordinarily
focus its investments in dividend-paying common stocks, but may also include
preferred stocks and dividend-paying real estate investment trusts. The portion
of the Fund's portfolio sub-advised by NACM (the "Convertible Component") will
ordinarily consist of convertible securities, including synthetic convertible
securities. On behalf of the Fund, PEA will also employ a strategy of writing
(selling) call options on equity indexes in an attempt to generate gains from
option premiums (the "Index Option Strategy"). Additional information concerning
the characteristics of certain of the Fund's investments is set forth below.


Investments in Equity Securities


     The Fund may hold or have exposure to equity securities of issuers of any
size (in terms of market capitalization or otherwise) and in any industry or
sector. Because the Fund will ordinarily have substantial exposure to equity
securities, historical trends would indicate that the Fund's portfolio and
investment returns will be subject at times, and over time, to higher levels of
volatility and market and issuer-specific risk than if it invested exclusively
in debt securities. 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 decline in the stock market may depress
the price of equity securities held by the Fund. 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

                                      -3-



production costs. The value of preferred stocks 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.


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.


     As described below, the Fund may invest in preferred stocks that pay fixed
or adjustable rates of return. Preferred shares are subject to issuer-specific
and market risks applicable generally to equity securities. See "--Investments
in Equity Securities" above. 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 preferred stocks 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 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

                                      -4-



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.


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. 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 objectives. 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 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 debt 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

                                      -5-



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


     The Fund may also create a "synthetic" convertible security by combining
separate securities that possess the two principal characteristics of a
traditional convertible security, i.e., an income-producing security
("income-producing element") and the right to acquire an equity security
("convertible element"). The income-producing element is achieved by investing
in non-convertible, income-producing securities such as bonds, preferred stocks
and money market instruments. The convertible element 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 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 income-producing element and its convertible element. For this reason, the
values of a synthetic convertible security and a traditional 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 elements are issued by a
single issuer, thus making the synthetic convertible security similar to the
traditional convertible security, the character of a synthetic convertible
security allows the combination of elements representing distinct issuers, when
NACM (the Sub-Adviser of the Fund's Convertible Component) believes that such a
combination would better promote the Fund's investment objectives. A synthetic
convertible security also is a more flexible investment in that its two elements
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.

                                      -6-



     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
element, 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 element 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 element.

     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.


Equity Index Call Options

     As described in the Prospectus, PEA will implement the Index Option
Strategy by "selling" or "writing" call options on equity indexes such that the
underlying value of the indexes are approximately equal to (and do not exceed)
the net asset value of the Fund's Equity Component. This "index option writing"
strategy is designed to generate gains from index option premiums.

     Index call options are contracts representing the right to purchase the
cash value of an index at a specified price (the "strike price") at or until a
specified future date (the "expiration date"). The Fund will sell index options
that are "European style," meaning that the options may be exercised only on the
expiration date. For conventional listed call options, the option's expiration
date can be up to nine months from the date the call options are first listed
for trading. Longer-term call options can have expiration dates up to three
years from the date of listing. The Fund expects that it will normally write
options whose terms to expiration range from two months to one year, although
the Fund may write options of both longer and shorter terms. PEA will not write
call options on individual equity securities, but may write options on
exchange-traded funds and other similar instruments designed to correlate with
the performance of an equity index or market segment.

     As the writer (seller) of an equity index call option, the Fund would
receive cash (the premium) from the purchaser of the option, and the purchaser
would have the right to receive from the Fund any appreciation in the cash value
of index over the strike price on the expiration date. If, at expiration, the
purchaser exercises the index option sold by the Fund, the Fund would pay the
purchaser the difference between the cash value of the index and the strike
price. In effect, the Fund sells the potential appreciation in the value of the
index above the strike price in exchange for the premium. PEA may cause the Fund
to repurchase an index call option prior to its expiration date, extinguishing
the Fund's obligation, in which case the cost of repurchasing the option (net of
any premiums received) will determine the gain or loss realized by the Fund.

                                      -7-



     Equity index options differ from options on individual securities in that
(i) the exercise of an index option requires cash payments and does not involve
the actual purchase or sale of securities, (ii) the holder of an index option
has the right to receive cash upon exercise of the option if the level of the
index upon which the option is based is greater than the strike price of the
option and (iii) index options reflect price fluctuations in a group of
securities or segments of the securities market rather than price fluctuations
in a single common stock.

     In pursuing the Index Option Strategy, PEA may cause the Fund to sell call
options on "broad-based" equity indexes, such as the Standard & Poor's 500
Index, as well as narrower market indexes, such as the Standard & Poor's 100
Index, or on indexes of securities of companies in a particular industry or
sector, including (but not limited to) financial services, technology,
pharmaceuticals and consumer products. An equity index assigns relative values
to the securities included in the index (which change periodically), and the
index fluctuates with changes in the market values of these securities. PEA will
actively manage the Fund's index options positions using quantitative and
statistical analysis that focuses on relative value and risk/return. In
determining which equity index options to utilize, PEA will consider market
factors, such as current market levels and volatility, and options specific
factors, such as premium/cost, strike price and time to expiration. PEA will
attempt to create a portfolio of equity index call options that is diversified
across multiple strike prices and expiration dates.

     PEA will attempt to maintain for the Fund written call options positions on
equity indexes whose price movements, taken in the aggregate, are correlated
with the price movements of the common stocks and other securities held in the
Fund's Equity Component. In doing so, PEA will take into account periodic data
provided by NFJ with respect to the Equity Component, including net assets,
industry and sector weightings, historic volatility as well as periodic
(typically 30 days after month-end) reports detailing portfolio holdings.
However, other than through periodic holdings reports, PEA will not have access
to the actual securities purchased, sold or held by or for the Equity Component
due to informational barriers in place between NFJ and PEA. Therefore, the Index
Option Strategy involves significant risk that the changes in value of the
indexes underlying the Fund's written call options positions will not correlate
closely with changes in the market value of securities held by the Equity
Component. To the extent that there is a lack of correlation, movements in the
indexes underlying the options positions may result in losses to the Fund, which
may more than offset any gains received by the Fund from options premiums. See
"--Risks Associated with Index Call Options" below.

     PEA does not intend to write call options on equity indexes where the
underlying value of the indexes exceed the net asset value of the Equity
Component (i.e., write "naked" positions). The Fund will "cover" its written
equity index call option positions by segregating liquid assets in an amount
equal to the contract value of the index and/or by entering into offsetting
positions (e.g., by holding a call option on the same index as the call written
where the strike price of the call held is equal to or less than the strike
price of the call written).

     The Fund will generally sell index call options which are
"out-of-the-money" or "at-the-money" at the time of sale. Out-of-the-money call
options are options with a strike price above the current cash value of the
index and at-the-money call options are options with a strike price equal to the
cash value of the index. In addition to providing possible gains through
premiums,

                                      -8-



out-of-the-money index call options allow the Fund to potentially benefit from
appreciation in the equity securities held by the Fund with respect to which the
option was written (to the extent correlated with the index) up to the strike
price. The Fund will generally write out-of-the-money call options where the
strike price is not more than 10% higher than the cash value of the index at the
time of sale, although PEA reserves the flexibility to utilize written call
options that are more deeply out-of-the-money if it deems appropriate depending
upon market conditions and other factors. The Fund also reserves the flexibility
to sell index call options that are "in-the-money" - i.e., those with a strike
price below the cash value of the index at the time of sale, and will generally
limit these to options where the strike price is not more than 5% lower than the
cash value of the index (although the Fund may utilize options that are more
deeply in-the-money depending upon market conditions and other factors). When
the prices of the equity index upon which a call option is written rise, call
options that were out-of-the-money when written may become in-the-money (i.e.,
the cash value of the index rises above the strike price of the option), thereby
increasing the likelihood that the options could be exercised and the Fund
forced to pay the amount of appreciation over the strike price of the option
upon expiration.






     Please see "Other Derivative Instruments - Options on Securities, Swap
Agreements and Indexes" for other information regarding the Fund's use of equity
index options and other types of options.

     Risks Associated with Index Call Options. There are various risks
associated with the Fund's Index Option Strategy. The purchaser of an index
option written by the Fund has the right to any appreciation in the cash value
of the index over the strike price on the expiration date. Therefore, as the
writer of an index call option, the Fund forgoes, during the option's life, the
opportunity to profit from increases in the market value of the equity
securities held by the Fund with respect to which the option was written (to the
extent that their performance is correlated with that of the index) above the
sum of the premium and the strike price of the call. However, the Fund has
retained the risk of loss (net of premiums received) should the price of the
Fund's portfolio securities decline.


     In addition, 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. PEA will attempt to
maintain for the Fund written call options positions on equity indexes whose
price movements, taken in the aggregate, are correlated with the price movements
of the common stocks and other securities held in the Fund's Equity Component.
In doing so, PEA will take into account periodic data provided by NFJ with
respect to the Equity Component, including net assets, industry and sector
weightings, historic volatility as well as periodic (typically 30 days after
month-end) reports detailing portfolio holdings. However, other than through
periodic holdings reports, PEA will not have access to the actual securities
purchased, sold or held by or for the Equity Component due to informational
barriers in place between NFJ and PEA. Therefore, the Index Option Strategy
involves significant risk that the changes in value of the indexes underlying
the Fund's written call options positions will not correlate closely with
changes in the market value of securities held by the Equity Component. To the
extent that there is a lack of correlation,

                                      -9-



movements in the indexes underlying the options positions may result in losses
to the Fund, which may more than offset any gains received by the Fund from
options premiums. In these and other circumstances, the Fund may be required to
sell portfolio securities to satisfy its obligations as the writer of an index
call option when it would not otherwise choose to do so, or may choose to sell
portfolio securities to realize gains to supplement Fund distributions. Such
sales would involve transaction costs borne by the Fund and may also result in
realization of taxable capital gains, including short-term capital gains taxed
at ordinary income tax rates, and may adversely impact the Fund's after-tax
returns.


     There can be no assurance that a liquid market will exist when the Fund
seeks to close out an option position. Reasons for the absence of a liquid
secondary market on an exchange include the following: (i) there may be
insufficient trading interest in certain options; (ii) restrictions may be
imposed by an exchange on opening transactions or closing transactions or both;
(iii) trading halts, suspensions or other restrictions may be imposed with
respect to particular classes or series of options; (iv) unusual or unforeseen
circumstances may interrupt normal operations on an exchange; (v) the facilities
of an exchange or the OCC may not at all times be adequate to handle current
trading volume; or (vi) one or more exchanges could, for economic or other
reasons, decide or be compelled at some future date to discontinue the trading
of options (or a particular class or series of options). If trading were
discontinued, the secondary market on that exchange (or in that class or series
of options) would cease to exist. However, outstanding options on that exchange
that had been issued by the OCC as a result of trades on that exchange would
continue to be exercisable in accordance with their terms. The Fund's ability to
terminate over-the-counter options is more limited than with exchange-traded
options and may involve the risk that broker-dealers participating in such
transactions will not fulfill their obligations.

     The hours of trading for options may not conform to the hours during which
securities held by the Fund are traded. To the extent that the options markets
close before the markets for underlying securities, significant price and rate
movements can take place in the underlying markets that cannot be reflected in
the options markets. Call options are marked to market daily and their value
will be affected by changes in the value of and dividend rates of securities
represented in an index, an increase in interest rates, changes in the actual or
perceived volatility of the stock market and underlying securities represented
in an index, and the remaining time to the options' expiration. The value of
options also may be adversely affected if the market for options is reduced or
becomes illiquid.

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

                                      -10-



Other Derivative Instruments


     In addition to writing index call options, PEA may write call options on
ETFs or similar instruments; however, PEA will not write call options on
individual securities. NACM may buy and sell put and call options on individual
securities and indexes in creating synthetic convertible securities for the
Convertible Component. The Fund otherwise may (but is not required to) utilize a
variety of derivative instruments for hedging or risk management purposes. The
Fund may also use derivatives to gain exposure to equity and other securities in
which the Fund may invest (e.g., pending investment of the proceeds of this
offering) or as components of synthetic convertible securities. 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. In
addition to written Equity Index call options, derivative instruments that may
be used by the Fund include, but are not limited to, warrants, purchased call
options, purchased or written put options, futures contracts, options on futures
contracts, forward contracts, swap agreements and short sales.






     The Fund may enter into derivatives transactions that may in certain
circumstances produce effects similar to leverage. To the extent that the Fund
does not segregate liquid assets or otherwise cover its obligations under such
transactions (e.g., through offsetting positions), such transactions will be
treated as senior securities representing indebtedness ("borrowings") for
purposes of the requirement under the 1940 Act that the Fund may not enter into
any such transactions if the Fund's borrowings would thereby exceed 33 1/3% of
its total assets. See "Leverage and Borrowings" below.

     No assurance can be given that any strategy used (including the use of
equity index call options) will succeed. As is the case with the other
investments of the Fund, the ability of the Fund to successfully use derivative
instruments may depend in part upon the ability of a Sub-Adviser to assess the
issuer's credit characteristics and to forecast stock and other market movements
and other economic factors correctly. If a Sub-Adviser incorrectly forecasts
these factors and has taken positions in derivative instruments contrary to
prevailing market trends, the Fund could be exposed to the risk of loss. If a
Sub-Adviser incorrectly forecasts stock and other market movements or other
economic factors in employing a derivatives strategy for the Fund, the Fund
might have been in a better position if it had not employed that derivatives
strategy at all. Also, suitable derivative transactions may not be available in
all circumstances.

     The Fund's use of derivative strategies involves some special risks,
including the risk of 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, among other reasons, (a) the possible inability of the Fund
to purchase or sell a portfolio security at a time that otherwise would be
favorable, (b) 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 (c) the possible inability of the Fund to close out or to liquidate its
derivatives positions. Income

                                      -11-



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.


     If other types of derivative instruments not described in this section are
traded in the future, the Fund may also use those instruments, provided that
their use is consistent with the Fund's investment objectives.

     Options on Securities, Swap Agreements and Indexes. As described in the
Prospectus, the Fund will normally utilize a principal strategy of writing
(selling) call options on equity indexes. While PEA will not write call options
on individual securities, the Fund may also purchase and sell both covered put
and call options on securities, swap agreements, ETFs, and other indexes in
standardized contracts traded on domestic or other securities exchanges, boards
of trade, or similar entities, or quoted on NASDAQ.

     An option on a security 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. As described in "Equity Index Call Options" above, 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.)

     A put option on a security or an index is covered if the Fund segregates
assets determined to be liquid by the Fund in accordance with procedures
established by the Board of Trustees equal to the entire 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 in accordance with procedures
established by the Board of Trustees. The Fund may also cover a put option by
entering into a short position in the underlying security or index. Obligations
under written call and put options so covered will not be construed to be
"senior securities" for purposes of the Fund's investment restrictions
concerning senior securities and borrowings.


     If an option written by the Fund expires unexercised, the Fund realizes on
the expiration date a capital gain equal to the premium the Fund received 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. Before
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.

                                      -12-



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

     Option contracts are originated and standardized by an independent entity
called the OCC. The Fund will write (sell) call options that are generally
issued, guaranteed and cleared by the OCC. Listed call options are currently
traded on the American Stock Exchange, Chicago Board Options Exchange,
International Securities Exchange, New York Stock Exchange, Pacific Stock
Exchange, Philadelphia Stock Exchange and various other U.S. options exchanges.
The Fund may also write unlisted (or "over-the counter") call options.


     Spreads. The Fund may pursue an option strategy that includes the purchase
and sale of calls and puts, called spreads. All of these positions will be
limited loss positions in which the maximum loss will be known and fixed at the
time of investment. These strategies may produce a considerably higher return
than the Fund's primary strategy of written call writing, but involve a higher
degree of risk and potential volatility. Because spreads involve multiple
trades, they result in higher transaction costs and may be more difficult to
open and close out.

     Straddles. The Fund may write straddles consisting of a combination of a
call and a put written on the same underlying security or index. A straddle will
be covered when sufficient liquid assets are segregated to meet the Fund's
immediate obligations. The Fund may use the

                                      -13-



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."
Because straddles involve multiple trades, they result in higher transaction
costs and may be more difficult to open and close out.

     Risks Associated with Options on Securities and Indexes. In addition to
those risks discussed in "--Equity Index Call Options - Risks Associated with
Index Call Options" above, there are several other risks associated with
transactions in options on securities and on indexes. For example, during the
option period, a call writer that has written the option on a portfolio security
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 or
the value of the equity index 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 or index is
purchased to hedge against price movements in a related security or basket of
securities, the price of the put or call option may move more or less than the
price of the related security or securities.


     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 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.

     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 exercises were
imposed, the Fund might be unable to exercise an option it 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.

     OTC Options. OTC options differ from traded options in that they are
two-party contracts, with price and other terms negotiated between buyer and
seller, and generally do not have as much market liquidity as exchange-traded
options. The Fund may be required to treat as illiquid over-the-counter options
purchased and securities being used to cover certain written over-the-counter
options, and they will treat the amount by which such formula price exceeds the
intrinsic value of the option (i.e., the amount, if any, by which the market
price of the underlying security exceeds the exercise price of the option) as an
illiquid investment. OTC options are subject to the risk that the counter-party
will not fulfill its obligations under the contract.

                                      -14-



     Foreign Currency Options. The Fund may buy or sell put and call options on
foreign currencies for investment purposes or as a hedge against changes in the
value of the U.S. dollar (or another currency) in relation to a foreign currency
in which the Fund's securities may be denominated. The Fund may additionally use
currency options to cross-hedge or to increase total return when a Sub-Adviser
anticipates that the currency will appreciate or depreciate in value, but the
securities quoted or denominated in that currency do not present attractive
investment opportunities and are not held in the Fund's portfolio. In addition,
the Fund may buy or sell put and call options on foreign currencies either on
exchanges or in the over-the-counter market. A put option on a foreign currency
gives the purchaser of the option the right to sell a foreign currency at the
exercise price until the option expires. A call option on a foreign currency
gives the purchaser of the option the right to purchase the currency at the
exercise price until the option expires. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability of
the Fund to reduce foreign currency risk using such options.


     Futures Contracts and Options on Futures Contracts. The Fund may invest in
futures contracts and options thereon ("futures options"), including with
respect to equity securities, indexes, or other instruments or assets, as well
as purchase put and call options on such futures contracts. The Fund may incur
commission expenses when it opens or closes a futures position.

     A futures contract is an agreement to buy or sell a security (or deliver a
cash settlement price, in the case of a contract relating to an index or
otherwise not calling for physical delivery of the security) at a specified
price and time. A futures contract on an index (an "Index Future") is an
agreement in 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
generally not made. A public market exists in futures contracts covering a
number of indexes as well as financial instruments, including, without
limitation: the S&P 500; the S&P Midcap 400; the Nikkei 225; the NYSE composite;
U.S. Treasury bonds; U.S. Treasury notes; GNMA Certificates; three-month U.S.
Treasury bills; 90-day commercial paper; bank certificates of deposit;
Eurodollar certificates of deposit; the Australian dollar; the Canadian dollar;
the British pound; the Japanese yen; the Swiss franc; the Mexican peso; and
certain multinational currencies, such as the euro. It is expected that other
futures contracts will be developed and traded in the future.

     The Fund may close open positions on the futures exchanges on which Index
Futures are traded at any time up to and including the expiration day. All
positions which remain open at the close of the last business day of the
contract's life are required to settle on the next business day (based upon the
value of the relevant index on the expiration day), with settlement made with
the appropriate clearing house. Because the specific procedures for trading
foreign stock Index Futures on futures exchanges are still under development,
additional or different margin requirements as well as settlement procedures may
be applicable to foreign stock Index Futures at the time the Fund purchases such
instruments. Positions in Index Futures may be closed out by the Fund only on
the futures exchanges upon which the Index Futures are then traded.

                                      -15-



     The following example illustrates generally the manner in which Index
Futures operate. The Standard & Poor's 100 Index is composed of 100 selected
common stocks, most of which are listed on the New York Stock Exchange. The S&P
100 Index assigns relative weightings to the common stocks included in the
Index, and the Index fluctuates with changes in the market values of those
common stocks. In the case of the S&P 100 Index, contracts are to buy or sell
100 units. Thus, if the value of the S&P 100 Index were $180, one contract would
be worth $18,000 (100 units x $180). The Index Future specifies that no delivery
of the actual stocks making up the Index will take place. Instead, settlement in
cash must occur upon the termination of the contract, with the settlement being
the difference between the contract price and the actual level of the Index at
the expiration of the contract. For example, if the Fund enters into a futures
contract to buy 100 units of the S&P 100 Index at a specified future date at a
contract price of $180 and the S&P 100 Index is at $184 on that future date, the
Fund will gain $400 (100 units x gain of $4). If the Fund enters into a futures
contract to sell 100 units of the Index at a specified future date at a contract
price of $180 and the S&P 100 Index is at $182 on that future date, the Fund
will lose $200 (100 units x loss of $2).


     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.

     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 the Fund 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 and 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

                                      -16-



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, index or other asset, in many cases these obligations are
closed out prior to delivery by offsetting purchases or sales of matching
futures contracts (involving the same exchange, underlying security, index or
other asset, 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.


     Straddles of Futures. The Fund may write straddles consisting of a call and
a put written on the same underlying futures contract. A straddle will be
covered when sufficient liquid assets are segregated 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 these
cases, the Fund will also segregate liquid assets equivalent to the amount, if
any, by which the put is "in the money." Because straddles involve multiple
trades, they result in higher transaction costs and may be more difficult to
open and close out.


     Combined Positions. The Fund may purchase and write options in combination
with each other, or in combination with futures or forward contracts, to adjust
the risk and return characteristics of the overall position. For example, a Fund
could construct a combined position whose risk and return characteristics are
similar to selling a futures contract by purchasing a put option and writing a
call option on the same underlying instrument. Alternatively, a Fund could write
a call option at one strike price and buy a call option at a lower price to
reduce the risk of the written call option in the event of a substantial price
increase. Because combined options positions involve multiple trades, they
result in higher transaction costs and may be more difficult to open and close
out.

     The Fund is operated by a person who has claimed an exclusion from the
definition of the term "commodity pool operator" under the Commodity Exchange
Act (the "CEA"), and, therefore, such person is not subject to registration or
regulation as a pool operator under the CEA.


     Limitations on Use of Futures and Futures Options. 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 the Fund 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 the Fund
in accordance with procedures established by the Board of Trustees, that are
equal to the market value of the

                                      -17-



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 the Fund 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 the Fund 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.


     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, including 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 objective. 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, when and how 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.

                                      -18-



     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 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.

     Forward Foreign Currency Exchange Contracts. A forward foreign currency
contract involves an obligation to purchase or sell a specific amount of
currency at a future date or date range at a specific price. In the case of a
cancelable forward contract, the holder has the unilateral right to cancel the
contract at maturity by paying a specified fee. Forward foreign currency
exchange contracts differ from foreign currency futures contracts in certain
respects. These contracts may be bought or sold to protect the Fund against a
possible loss resulting from an adverse change in the relationship between
foreign currencies and the U.S. dollar or to increase exposure to a particular
foreign currency. Although forwards are intended to minimize the risk of loss
due to a decline in the value of the hedged currencies, at the same time, they
tend to limit any potential gain which might result should the value of such
currencies increase.

     By entering into a forward foreign currency exchange contract, the Fund
"locks in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. As a result, the Fund
reduces its exposure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the currency it will exchange
into. Contracts to sell foreign currencies would limit any potential gain which
might be realized by the Fund if the value of the hedged currency increases. The
Fund may enter into these contracts for the purpose of hedging against foreign
exchange risks arising from the Fund's investment or anticipated investment in
securities denominated in foreign currencies. Suitable hedging transactions may
not be available in all circumstances. Also, such hedging transactions may not
be successful.

     The Fund may also enter into forward foreign currency exchange contracts
for purposes of increasing exposure to a foreign currency or to shift exposure
to foreign currency fluctuations from one currency to another. To the extent
that it does so, the Fund will be subject to the additional risk that the
relative value of currencies will be different than anticipated by The Fund. The
Fund may additionally enter into forward contracts to protect against
anticipated changes in future foreign currency exchange rates. The Fund may use
one currency (or a basket of currencies) to hedge against adverse changes in the
value of another currency (or a basket of currencies) when exchange rates
between the two currencies are positively correlated. The Fund

                                      -19-



may also use related options on currencies for the same reasons for which
forward foreign currency exchange contracts are used.

     Unlike futures contracts, forward contracts:

     (i)  do not have standard maturity dates or amounts (i.e., the parties to
          the contract may fix the maturity date and the amount);

     (ii) are traded in the inter-bank markets conducted directly between
          currency traders (usually large commercial banks) and their customers,
          as opposed to futures contracts, which are traded only on exchanges
          regulated by the Commodity Futures Trading Commission;

     (iii) do not require an initial margin deposit; and


     (iv) may be closed by entering into a closing transaction with the currency
          trader who is a party to the original forward contract, as opposed to
          a commodities exchange.






     Tax Consequences of Hedging. It is important to note that hedging costs are
treated as capital transactions and are not, therefore, deducted from the Fund's
dividend distribution and are not reflected in its yield. Under applicable tax
law, the Fund's hedging activities may result in the application of the
mark-to-market and straddle provisions of the Internal Revenue Code of 1986 (the
"Code"). Those provisions could result in an increase (or decrease) in the
amount of taxable dividends paid by the Fund and could affect whether dividends
paid by the Fund are classified as capital gains or ordinary income. See "Tax
Matters."

     Additional Risks of Options on Securities and Indexes, Futures Contracts,
Options on Futures Contracts and Forward Currency Exchange Contracts and Options
thereon. Options on securities and Indexes, futures contracts, options on
futures contracts and options on currencies 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 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. In addition, unless the Fund hedges against fluctuations in the
exchange rate between the U.S. dollar and the currencies in which trading is
done on foreign exchanges, any profits that the Fund might realize in trading
could be eliminated by adverse changes in the exchange rate, or the Fund could
incur losses as a result of those changes. 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. A swap is a financial instrument that typically involves
the exchange of cash flows between two parties on specified dates (settlement
dates), where the cash flows are

                                      -20-



based on agreed-upon prices, rates, indices, etc. Swaps are individually
negotiated and structured to include exposure to a variety of different types of
investments or market factors.


     The Fund may enter into swap agreements with respect to individual
securities, indexes of securities, interest rates, currencies 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 caps, under which, in return
for a premium, one party agrees to make payments to the other to the extent
that, for example, the return on a given equity index exceeds a specified rate,
or "cap"; floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that, for example, the return on a given
equity index falls below a specified rate, or "floor"; and collars, under which
a party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against movements exceeding given minimum or maximum levels. 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.


     Many 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 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


                                      -21-



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).
Although it has no current intention to do so, 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 the Fund 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 objectives will depend on the Fund'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. Moreover, if a
counter-party's creditworthiness declined, the value of a swap agreement would
be likely to decline, potentially resulting in losses. The performance of swap
agreements may be affected by a change in the specific currency, or by other
factors that determine the amount of payments due. If a swap agreement calls for
a payment by the Fund, the Fund must be prepared to make such payments when due.





     The swaps market is a relatively new market and is largely unregulated. The
Fund's ability to terminate or transfer a swap agreement is generally very
limited. Swap agreements may increase the overall volatility of the investments
of a Fund. 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 CEA and,
therefore, are not regulated as futures or commodity option transactions under
the CEA.




High Yield Securities ("Junk Bonds")


     The Convertible Component may consist of securities that are, at the time
of purchase, rated below investment grade (below Baa by Moody's Investors
Service, Inc. ("Moody's"), or below BBB by Standard & Poor's ("S&P")) or in
securities that are unrated but judged to be of comparable quality by the Fund.
These securities are sometimes referred to as "high yield" securities or "junk
bonds." NACM may invest in distressed securities on behalf of the Convertible
Component, but will not invest in securities which are in default (rated "D" by

                                      -22-



Moody's or S&P) at the time of purchase (but may hold securities which have gone
into default after they have been purchased).


     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 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 non-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.


     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 Fund's 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
a Sub-Adviser's research and analysis when investing in high yield securities.

     A general description of the ratings of securities by Moody's, S&P and
other ratings agencies 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, 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.

                                      -23-



     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 a Sub-Adviser downgrades its assessment of the credit
characteristics of a particular issue. In determining whether to retain or sell
such a security, a Sub-Adviser may consider such factors as its own 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.


Warrants and Rights

     A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life, usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued together
with a debt security or preferred stock and that give the holder the right to
buy a proportionate amount of common stock at a specified price. Warrants are
freely transferable and are traded on major exchanges. Unlike rights, warrants
normally have a life that is measured in years and entitle the holder to buy
common stock of a company at a price that is usually higher than the market
price at the time the warrant is issued. Corporations often issue warrants to
make the accompanying debt security more attractive.

     Warrants and rights may entail greater risks than certain other types of
investments. Generally, rights and warrants do not carry the right to receive
dividends or exercise voting rights with respect to the underlying securities,
and they do not represent any rights in the assets of the issuer. In addition,
their value does not necessarily change with the value of the underlying
securities, and they cease to have value if they are not exercised on or before
their expiration date. If the market price of the underlying stock does not
exceed the exercise price during the life of the warrant or right, the warrant
or right will expire worthless. Rights and warrants may increase the potential
profit or loss to be realized from the investment as compared with investing the
same amount in the underlying securities. Similarly, 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.

     Warrants may relate to the purchase of equity or debt securities. 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 sell such
warrants at a profit. If interest rates rise, these warrants would generally
expire with no value.

Foreign (Non-U.S.) Securities


     As described in the Prospectus, the Fund may invest in foreign securities.
The Equity Component may invest without limit in American Depository Receipts
("ADRs") and may invest up to 10% its total assets in securities of foreign
issues or securities traded in foreign securities markets, including "emerging
market" securities. The Convertible Component may invest up to

                                      -24-



20% of its total assets in U.S. dollar-denominated convertible securities of
foreign issuers based in developed countries.

     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.
The Fund also may invest in European Depository Receipts ("EDRs"). EDRs are
foreign currency-denominated receipts similar to ADRs and are issued and traded
in Europe, and are publicly traded on exchanges or over-the-counter in the
United States. The Fund may also invest in Global Depository Receipts ("GDRs"),
which may be offered privately in the United States and also trade in public or
private markets in other countries. ADRs, EDRs 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, EDRs 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 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. 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 (primarily the U.S. dollar) 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

                                      -25-



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.


     Sovereign Debt. The Fund may invest in sovereign debt issued by foreign
developed and emerging market governments and their respective sub-divisions,
agencies or instrumentalities, government sponsored enterprises and
supra-national government entities. Supra-national entities include
international organizations that are organized or supported by one or more
government entities to promote economic reconstruction or development and by
international banking institutions and related governmental agencies. 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

                                      -26-



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.



     Foreign Currencies. The Fund may invest directly in foreign currencies and
may enter into forward foreign currency exchange contracts to reduce the risks
of adverse changes in foreign exchange rates. In addition, the Fund may buy and
sell foreign currency futures contracts and options on foreign currencies and
foreign currency futures. Although the Sub-Advisers have the flexibility to
hedge against foreign currency risk, they may determine not to do so or to do so
only in unusual circumstances or market conditions. The Fund may employ currency
management techniques to enhance the Fund's total return. See "other Derivative
Instruments" above for a description of various foreign currency transactions
and instruments that the Fund may use.






     The Fund's investments in foreign securities involve special risks. There
may be less information publicly available about a foreign issuer than about a
U.S. issuer, and foreign issuers 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, adverse changes in investment or exchange control regulations (which
may include suspension of the ability to transfer currency from a country),
potential restrictions on the flow of international capital, 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. Changes in foreign exchange rates will affect the
value of those securities which are denominated or quoted in currencies other
than the U.S. dollar.

     The risks of investing in foreign securities are particularly high when
securities of issuers based in developing (or "emerging market") countries are
involved. These risks include: greater risks of nationalization or expropriation
of assets or confiscatory taxation; currency devaluations and other currency
exchange rate fluctuations; greater social, economic and political uncertainty
and instability (including the risk of war); more substantial government
involvement in the economy; less government supervision and regulation of the
securities markets and participants in those markets; controls on foreign
investment and limitations on repatriation of invested capital and on the Fund's
ability to exchange local currencies for U.S. dollars; unavailability of
currency hedging techniques in certain emerging market countries; the fact that
companies in emerging market countries may be smaller, less seasoned and newly
organized; the difference in, or lack of, auditing and financial reporting
standards, which may result in unavailability of material information about
issuers; the risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and greater price volatility,
substantially less liquidity and significantly smaller market capitalization of
securities markets. In addition, a number of emerging market countries restrict,
to various degrees, foreign investment in securities, and high rates of
inflation and rapid fluctuations in

                                      -27-



inflation rates have had, and may continue to have, negative effects on the
economies and securities markets of certain emerging market countries. Also, any
change in the leadership or politics of emerging market countries, or the
countries that exercise a significant influence over those countries, may halt
the expansion of or reverse the liberalization of foreign investment policies
now occurring and adversely affect existing investment opportunities


Real Estate Investment Trusts ("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 more 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.

                                      -28-



Stocks of Small and Medium Capitalization Companies

     The Fund may invest in securities of companies with market capitalizations
that are small compared to those of other publicly traded companies. Investments
in larger companies present certain advantages in that such companies generally
have greater financial resources, more extensive research and development,
manufacturing, marketing and service capabilities, and more stability and
greater depth of management and technical personnel. Investments in smaller,
less seasoned companies may present greater opportunities for growth but also
may involve greater risks than customarily are associated with more established
companies. The securities of smaller companies may be subject to more abrupt or
erratic market movements than larger, more established companies. These
companies may have limited product lines, markets or financial resources, or
they may be dependent upon a limited management group. Their securities may be
traded in the over-the-counter market or on a regional exchange, or may
otherwise have limited liquidity. Owning large positions in this type of
security involves the additional risk of possibly having to sell portfolio
securities at disadvantageous times and prices if redemptions require the Fund
to liquidate its securities positions.

     The Fund may also invest in securities of companies with medium market
capitalizations. These investments share some of the risk characteristics of
investments in securities of companies with small market capitalizations
described above, although such companies tend to have longer operating
histories, broader product lines and greater financial resources, and their
securities tend to be more liquid and less volatile than those of smaller
capitalization issuers.

Corporate Bonds

     The Fund may invest in a variety of bonds and related debt obligations of
varying maturities issued by U.S. corporations, foreign corporations, domestic
banks, foreign banks and other business entities. Bonds include 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 variable or fixed 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'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/deflation risk, liquidity risk, smaller company risk and management
risk.

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 objectives and policies, including unrated
commercial paper for which a Sub-Adviser 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

                                      -29-



may be linked or indexed to the level of exchange rates between the U.S. dollar
and a foreign currency or currencies.


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.

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 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. Loans and other types
of direct indebtedness may not be readily marketable and may be subject to
restrictions on resale.

     Investments in loans through assignments (i.e., 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

                                      -30-



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 a Sub-Adviser'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 Code of 1986, 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.

Mortgage-Related and Other Asset-Backed Securities


     The Fund may invest in mortgage-related securities and in other
asset-backed securities. Mortgage-related securities include mortgage
pass-through securities, collateralized mortgage obligations ("CMOs"),
commercial mortgage-backed securities, mortgage dollar rolls, CMO residuals,
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 value of some mortgage-related and other asset-backed securities may be
particularly sensitive to changes in prevailing interest rates. Early repayment
of principal on some mortgage-related securities may expose a Portfolio to a
lower rate of return upon reinvestment of principal. 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 fixed income securities.
The rate of prepayments on underlying mortgages will affect the price and
volatility of a


                                      -31-



mortgage-related security, and may shorten or extend the effective maturity of
the security beyond what was anticipated at the time of purchase. If
unanticipated rates of prepayment on underlying mortgages increase the effective
maturity of a mortgage-related security, the volatility of the security can be
expected to increase. The value of these securities may fluctuate in response to
the market's perception of the creditworthiness of the issuers. Additionally,
although mortgages and mortgage-related securities are generally supported by
some form of government or private guarantee and/or insurance, there is no
assurance that private guarantors or insurers will meet their obligations.






     One type of SMBS has one class receiving all of the interest from the
mortgage assets (the interest-only, or "IO" class), while the other class will
receive all of the principal (the principal-only, or "PO" class). The yield to
maturity on an IO class is extremely sensitive to the rate of principal payments
(including prepayments) on the underlying mortgage assets, and a rapid rate of
principal payments may have a material adverse effect on a Portfolio's yield to
maturity from these securities.






     The Fund may invest in collateralized debt obligations ("CDOs"), which
include collateralized bond obligations ("CBOs"), collateralized loan
obligations ("CLOs") and other similarly structured securities. CBOs and CLOs
are types of asset-backed securities. A CBO is a trust which is backed by a
diversified pool of high-risk, below investment grade fixed income securities. A
CLO is a trust typically collateralized by a pool of loans, which may include,
among others, domestic and foreign senior secured loans, senior unsecured loans,
and subordinate corporate loans, including loans that may be rated below
investment grade or equivalent unrated loans. The Fund may invest in other
asset-backed securities that have been offered to investors.






     Rising interest rates tend to extend the duration of mortgage-related
securities, making them more sensitive to changes in interest 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.




Credit-Linked Trust Certificates

     Among the income-producing securities in which the Convertible Component
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. The Fund may invest in credit-linked
trust certificates during the period when the net proceeds of this offering are
being invested. Thereafter, the Fund may invest up to 5% of its total assets in
these instruments.

                                      -32-



     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 Objectives and
Policies-- Other Derivative Instruments" 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, counterparty 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 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" in the Prospectus. 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. The Fund may lose its entire investment in a
credit-linked trust certificate.


Variable and Floating Rate Securities

     Variable or floating rate securities are securities that pay interest at
rates which adjust whenever a specified interest rate changes, float at a fixed
margin above a generally recognized base lending rate and/or reset or are
redetermined (e.g., pursuant to an auction) on specified dates (such as the last
day of a month or calendar quarter). These instruments may include, without
limitation, variable rate preferred stock, bank loans, money market instruments
and certain types of mortgage-backed and other asset-backed securities. Due to
their variable or floating rate features, these instruments will generally pay
higher levels of income in a rising interest rate environment and lower levels
of income as interest rates decline. For the same reason, the market value of a
variable or floating rate instrument is generally expected to have less
sensitivity to fluctuations in market interest rates than a fixed-rate
instrument, although the value of a floating rate instrument may nonetheless
decline as interest rates rise and due to other factors, such as changes in
credit quality.

                                      -33-



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 and the FHLMC, 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. Although U.S. Government sponsored enterprises such as
Federal Home Loan Banks, FNMA, FHLMC, and the Student Loan Marketing Association
may be chartered or sponsored by Congress, they are not funded by Congressional
appropriations and their securities are not issued by the U.S. Treasury or
supported by the full faith and credit of the U.S. Government, and include
increased credit risks. 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. 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

                                      -34-



zero-coupon Treasury securities (e.g., STRIPs and CUBEs) are direct obligations
of the U.S. Government.


Rule 144A Securities

     The Fund may invest in securities that have not been registered for public
sale, but that are eligible for purchase and sale pursuant to Rule 144A under
the 1933 Act ("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.

Initial Public Offerings


     The Fund may purchase securities in initial public offerings ("IPOs").
These securities are subject to many of the same risks of investing in companies
with smaller market capitalizations. Securities issued in IPOs have no trading
history, and information about the companies may be available for very limited
periods. In addition, the prices of securities sold in IPOs may be highly
volatile. At any particular time or from time to time the Fund may not be able
to invest in securities issued in IPOs, or invest to the extent desired because,
for example, only a small portion (if any) of the securities being offered in an
IPO may be made available to the Fund. In addition, under certain market
conditions a relatively small number of companies may issue securities in IPOs.
Similarly, as the number of accounts to which IPO securities are allocated
increases, the number of securities issued to any one account (including the
Fund) may decrease. The investment performance of the Fund during periods when
it is unable to invest significantly or at all in IPOs may be lower than during
periods when the Fund is able to do so. In addition, if the Fund increases in
size, the impact of IPOs on the Fund's performance will generally decrease.


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 the Fund
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.

                                      -35-



     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.




Leverage and Borrowings


     Although it has no current intention to do so, the Fund reserves the
flexibility to issue preferred shares or debt securities or engage in borrowings
to add leverage to its portfolio. The Fund may also enter into derivative
transactions that may in some circumstances give rise to a form of financial
leverage. However, the Fund ordinarily will cover its positions in these
transactions so that there is no resulting leverage. Any leverage used by the
Fund would be limited to 38% of the Fund's total assets (including the proceeds
of the leverage). To the extent that the Fund uses leverage, it would seek to
obtain a higher return for shareholders than if the Fund did not use leverage.
Leveraging is a speculative technique and there are special risks involved,
including the risk of increased volatility of the Fund's investment portfolio
and potentially larger losses than if the strategies were not used.






     If there is a net decrease (or increase) in the value of the Fund's
investment portfolio, any 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 certain forms of leverage, the fees
paid to the Manager and the Sub-Advisers 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 borrowings that may be outstanding. Thus, the
Manager and the Sub-Advisers have a financial incentive for the Fund to utilize
certain forms of leverage, which may result in a conflict of interest between
the Manager and the Sub-Advisers, on the one hand, and the Common Shareholders,
on the other hand. Fees and expenses paid by the Fund are borne entirely by the
Common Shareholders. These include costs associated with any borrowings or other
forms of leverage utilized by the Fund.

     Under the 1940 Act, the Fund generally is not permitted to have outstanding
senior securities representing indebtedness ("borrowings") (including through
the use of reverse repurchase agreements, dollar rolls, futures contracts, loans
of portfolio securities, swap contracts and other derivatives, as well as
when-issued, delayed delivery or forward commitment transactions, to the extent
that these instruments constitute senior securities) unless immediately after
the financing giving rise to the borrowing, the value of the Fund's total assets
less liabilities (other than such borrowings) is at least 300% of the principal
amount of such borrowing (i.e., the principal amount may not exceed 331/3% 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
borrowings, is at least 300% of such principal amount. If the Fund enters into
these transactions, it intends, to the extent possible, to prepay all or a
portion of the principal amount due to the extent necessary in order to maintain
the required asset coverage. Failure to maintain certain

                                      -36-



asset coverage requirements could result in an event of default and entitle
holders of any senior securities of the Fund 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 may determine in the future to issue preferred shares to add
leverage to its portfolio. Any such preferred shares would have complete
priority upon distribution of assets over the Common Shares. Under the 1940 Act,
the Fund would not be permitted to issue preferred shares unless immediately
after such issuance the value of the Fund's total net assets was 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 indebtedness may not exceed 50% of the Fund's total net assets). In
addition, the Fund would not be 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 any preferred shares are issued, the Fund intends, to
the extent possible, to purchase or redeem such preferred shares from time to
time to the extent necessary in order to maintain coverage of at least 200%. As
noted above, if the Fund were to issue preferred shares, the leverage obtained
through the preferred shares, together with any other borrowings utilized by the
Fund, would not exceed 38% of the Fund's total assets. If the Fund were to have
preferred shares outstanding, two of the Fund's Trustees would be elected by the
holders of the preferred shares, voting separately as a class. The remaining
Trustees of the Fund would be elected by holders of Common Shares and the
preferred shares voting together as a single class. In the event the Fund were
to fail to pay dividends on any preferred shares it issues for a period of two
years, the Fund's preferred shareholders would be entitled to elect a majority
of the Trustees of the Fund.






     As used in this Statement of Additional Information and in the 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
and preferred shares from "net assets," so long as any preferred shares have
redemption features that are not solely within the control of the Fund. For all
regulatory and tax purposes, and preferred shares issued by the Fund will be
treated as stock (rather than indebtedness).


Reverse Repurchase Agreements


     The Fund may enter into reverse repurchase agreements and economically
similar transactions for hedging or cash management purposes. Although it has
not current intention to do so, the Fund may also utilize these transactions to
add leverage to its portfolio. A reverse repurchase agreement involves the sale
of a portfolio-eligible security by the Fund, coupled with its agreement to
repurchase the instrument at a specified time and price. Generally, the effect
of

                                      -37-



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 the Fund 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. See "Leverage and Borrowings" above.

     The Fund also may effect simultaneous purchase and sale transactions that
are known as "sale buybacks." A sale buyback is similar to a reverse repurchase
agreement, except that in a sale buyback, the counterparty who purchases the
security is entitled to receive any payments made on the underlying security
pending settlement of the Fund's repurchase of the underlying security.


Repurchase Agreements


     For the purposes of maintaining liquidity and achieving income, the Fund
may enter into repurchase agreements with domestic commercial banks or
registered broker/dealers. A repurchase agreement is a contract under which the
Fund would acquire a security for a relatively short period (usually not more
than one week) subject to the obligation of the seller to repurchase and the
Fund to resell such security at a fixed time and price (representing the Fund's
cost plus interest). In the case of repurchase agreements with broker-dealers,
the value of the underlying securities (or collateral) will be at least equal at
all times to the total amount of the repurchase obligation, including the
interest factor. The Fund bears a risk of loss in the event that the other party
to a repurchase agreement defaults on its obligations and the Fund is delayed or
prevented from exercising its rights to dispose of the collateral securities.
This risk includes the risk of procedural costs or delays in addition to a loss
on the securities if their value should fall below their repurchase price. The
applicable Sub-Adviser will monitor the creditworthiness of the counter parties.


Short Sales

     The Fund may make short sales of securities for hedging or risk management
purposes. 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.

                                      -38-



     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 Fund is required to pay over any dividends received by the
Fund pursuant to a short sale, such dividends will not be treated as qualified
dividend income.

     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. The Fund will engage in short sales that are
"against the box" -- i.e., where the Fund contemporaneously owns, or has the
right to obtain at no added cost, securities identical to those sold short. The
Fund will not engage in so-called "naked" short sales where it does not own or
have the immediate right to acquire the security sold short at no additional
cost. Otherwise, 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 15% 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 value 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, repurchase agreements with
maturities in excess of seven days, 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 a Sub-Adviser 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 objectives
of the Fund. In addition, a security may be sold and another of comparable
quality purchased at approximately the same time to take advantage of what a
Sub-Adviser believes to be a temporary

                                      -39-



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 securities, as compared with other securities of
like quality and characteristics. Securities may be sold in anticipation of a
market decline or purchased in anticipation of a market rise and later sold, or
to recognize a gain.

     A change in the securities held by the Fund is known as "portfolio
turnover." The Fund's Index Option Strategy may result in increased portfolio
turnover to the extent that the Fund is required to sell portfolio securities to
satisfy its obligations as the writer of an index call option or to realize
additional gains to be distributed to shareholders if the Index Option Strategy
is unsuccessful. The use of certain other derivative instruments with relatively
short maturities may tend to exaggerate the portfolio turnover rate for the
Fund. The annual rebalancing of the Fund's portfolio to adjust the asset
allocation between the Equity Component and the Convertible Component, as
described in the Prospectus, is likely to increase the portfolio turnover rate
for the Fund. There is no stated limit on the Fund's portfolio turnover rate.
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 equity securities generally involves the payment of
brokerage commissions. 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.
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 the Fund's 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 the Fund 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

                                      -40-



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. Such
amounts will not be eligible to be treated as qualified dividend income. 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 of creditors and debtors. The Fund would
participate on such committees only when a the Manager 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 recommendation of a Sub-Adviser, for temporary defensive purposes, the
Fund may deviate from its investment objectives and the typical portfolio
securities in which the Fund invests by investing some or all of its total
assets in investments such as high grade debt securities, including high
quality, short-term debt securities, and cash and cash equivalents. The Fund may
not achieve its investment objectives when this occurs. The Fund also may
deviate from its investment objectives in order to keep its assets fully
invested, including during the period in which the net proceeds of this offering
are being invested. See "Use of Proceeds" in the Prospectus.

                                      -41-



                             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 Fund's outstanding
shares:


          (1) 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.

          (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) 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.

          (5) 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.

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

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

     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

                                      -42-



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.




     For purposes of the foregoing, "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 or a
particular Component'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 a Sub-Adviser to be of comparable
quality), or change in the percentage of the Fund's or a Component's total
assets invested in certain securities or other instruments, or change in the
average maturity or duration of the Fund's or a Component's investment
portfolio, resulting from market fluctuations or other changes in the Fund's or
a Component's total assets, will not require the Fund to dispose of an
investment until the applicable Sub-Adviser determines that it is practicable to
sell or close out the investment without undue market or tax consequences to the
Fund or a Component. In the event that rating agencies assign different ratings
to the same security, the applicable Sub-Adviser 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 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 normally to invest at least 80% of its
net assets (plus any borrowings for investment purposes) in securities and other
instruments that provide dividends, interest or option premiums unless it
provides shareholders with written 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 reverse repurchase
agreement or derivative instrument or other borrowing by the segregation of
liquid assets, equal in value to the amount of the Fund's commitment, or by
entering into offsetting positions, such instrument will not be considered a
"senior security" for purposes of the asset coverage requirements otherwise
applicable to borrowings by the Fund.


     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 an exemptive order of the SEC.

                                      -43-



                             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 Fourth Amended 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 (as defined in SEC regulations) 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 PA Fund Management LLC, 1345
Avenue of the Americas, New York, New York 10105.

                                      -44-



                              Independent Trustees




                                                                                           Number of
                                        Term of                                          Portfolios in
                        Position(s)    Office and                                         Fund Complex        Other
                         Held with     Length of    Principal Occupation(s) During the    Overseen by     Directorships
Name, Address and Age       Fund      Time Served              Past 5 Years                 Trustee      Held by Trustee
---------------------   -----------   -----------   ----------------------------------   -------------   ---------------
                                                                                               
Robert E. Connor*       Trustee       Since         Trustee, Fixed Income SHares,              21             None.
Age 70                                Inception     Nicholas-Applegate Convertible &
                                      (February,    Income Fund, Nicholas Applegate
                                      2005.)        Convertible & Income Fund II,
                                                    PIMCO Corporate Opportunity Fund,
                                                    PIMCO Corporate Income Fund, PIMCO
                                                    High 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, PIMCO Floating Rate Income
                                                    Fund and PIMCO Floating Rate
                                                    Strategy Fund; Director, Municipal
                                                    Advantage Fund, Inc.; Corporate
                                                    Affairs Consultant. Formerly,
                                                    Senior Vice President, Corporate
                                                    Office, Smith Barney.


                                      -45-





                                                                                           Number of
                                        Term of                                          Portfolios in
                        Position(s)    Office and                                         Fund Complex        Other
                         Held with     Length of    Principal Occupation(s) During the    Overseen by     Directorships
Name, Address and Age       Fund      Time Served              Past 5 Years                 Trustee      Held by Trustee
---------------------   -----------   -----------   ----------------------------------   -------------   ---------------
                                                                                               
John J. Dalessandro     Trustee       Since         Trustee, Nicholas-Applegate                16             None.
II                                    Inception     Convertible & Income Fund,
Age 66                                (February,    Nicholas-Applegate Convertible &
                                      2005)         Income Fund II, PIMCO Corporate
                                                    Opportunity Fund, PIMCO
                                                    Corporate Income Fund, PIMCO
                                                    High 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, PIMCO
                                                    Floating Rate Income Fund and
                                                    PIMCO Floating Rate Strategy
                                                    Fund. Formerly, President and
                                                    Director, J.J. Dalessandro II
                                                    Ltd., registered broker-dealer
                                                    and member of the New York Stock
                                                    Exchange.

Hans W. Kertess         Trustee       Since         President, H. Kertess & Co.;               16             None.
Age 65                                Inception     Trustee, PIMCO Corporate Income
                                      (February,    Fund, PIMCO High Income Fund,
                                      2005)         Nicholas Applegate Convertible &
                                                    Income Fund II, 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 Municipal
                                                    California Municipal Income Fund
                                                    III, PIMCO New York Municipal
                                                    Income Fund III, PIMCO Floating
                                                    Rate Income Fund and PIMCO
                                                    Floating Rate Strategy Fund;
                                                    Formerly, Managing Director and
                                                    Consultant, Royal Bank of Canada
                                                    Capital Markets.



                                      -46-




     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 shareholders.

                                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
---------------------   -----------   --------------   -----------------------------------------------
                                              
Brian S. Shlissel       President     Since            Executive Vice President and Chief
Age 40                  and Chief     inception        Administrative Officer, PA Fund Management LLC;
                        Executive     (February,       President and Chief Executive Officer, PIMCO
                        Officer       2005).           Advisors VIT (formerly OCC Accumulation Trust);
                                                       President and Chief Executive Officer, Fixed
                                                       Income SHares, Nicholas-Applegate Convertible &
                                                       Income Fund, Nicholas-Applegate Convertible &
                                                       Income Fund II, 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, Municipal Advantage
                                                       Fund, Inc., PIMCO High Income Fund, PIMCO
                                                       Floating Rate Income Fund and PIMCO Floating
                                                       Rate Strategy Fund.

Lawrence G. Altadonna   Treasurer;    Since            Senior Vice President, PA Fund Management LLC;
Age 38                  Principal     inception        Treasurer and Principal Financial and
                        Financial     (February,       Accounting Officer, Nicholas-Applegate
                        and           2005).           Convertible & Income Fund, Nicholas-Applegate
                        Accounting                     Convertible & Income Fund II, PIMCO Corporate
                        Officer                        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, Municipal Advantage
                                                       Fund, Inc., PIMCO High Income Fund, PIMCO
                                                       Floating Rate Income Fund and PIMCO Floating
                                                       Rate Strategy Fund; Treasurer, Fixed Income
                                                       SHares; Assistant Treasurer, PIMCO Advisors VIT
                                                       (formerly OCC Accumulation Trust). Formerly,
                                                       Director of Fund Administration, Prudential
                                                       Investments.


                                      -47-





                        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
---------------------   -----------   --------------   -----------------------------------------------
                                              
Thomas J. Fuccillo      Secretary     Since            Vice President, Senior Fund Attorney, Allianz
1345 Avenue of the      and Chief     inception        Global Investors of America L.P., Secretary,
Americas                Legal         (February,       PIMCO Municipal Income Fund, PIMCO California
New York, NY 10105      Officer       2005).           Municipal Income Fund, PIMCO New York Municipal
Age 36                                                 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, PIMCO Corporate
                                                       Income Fund, PIMCO Corporate Opportunity Fund,
                                                       PIMCO High Income Fund, Nicholas-Applegate
                                                       Convertible & Income Fund, Nicholas-Applegate
                                                       Convertible & Income Fund II, PIMCO Floating
                                                       Rate Income Fund, PIMCO Floating Rate Strategy
                                                       Fund, Municipal Advantage Fund Inc., Fixed
                                                       Income SHares and PIMCO Advisors VIT. Formerly,
                                                       Vice President and Associate General Counsel,
                                                       Neuberger Berman Management Inc.

Youse Guia              Chief         Since            Senior Vice President, Group Compliance
888 San Clemente        Compliance    inception        Manager, Allianz Global Investors of America
Drive,                  Officer       (February,       L.P. (since 2004). Chief Compliance Officer,
Suite 100                             2005).           PIMCO Funds: Multi-Manager Series, PIMCO
Newport Beach,                                         Municipal Income Fund, PIMCO California
CA 92660                                               Municipal Income Fund, PIMCO New York Municipal
Age 32                                                 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, PIMCO Corporate
                                                       Income Fund, PIMCO Corporate Opportunity Fund,
                                                       Nicholas-Applegate Convertible & Income Fund,
                                                       PIMCO High Income Fund, Nicholas-Applegate
                                                       Convertible & Income Fund II, PIMCO Floating
                                                       Rate Income Fund, PIMCO Floating Rate Strategy
                                                       Fund, Municipal Advantage Fund, Inc, Fixed
                                                       Income SHares and PIMCO Advisors VIT. Formerly,
                                                       Vice President, Group Compliance Manager,
                                                       Allianz Global Investors of America L.P.
                                                       (since 2002). Audit Manager,
                                                       PricewaterhouseCoopers LLP (1996-2002).


                                      -48-





                        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
---------------------   -----------   --------------   -----------------------------------------------
                                              
Newton B. Schott, Jr.   Vice          Since            Managing Director, Chief Administrative
2187 Atlantic Street    President     inception        Officer, General Counsel and Secretary, PA
Stamford, CT 06902                    (February,       Distributors LLC; Managing Director, Chief
Age 62                                2005).           Legal Officer and Secretary, PA Fund Management
                                                       LLC; Vice President and Secretary, PIMCO Funds:
                                                       Multi-Manager Series; Vice President, Fixed
                                                       Income SHares, 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, PIMCO Corporate
                                                       Income Fund, PIMCO Corporate Opportunity Fund,
                                                       Nicholas-Applegate Convertible & Income Fund,
                                                       PIMCO High Income Fund, Nicholas-Applegate
                                                       Convertible & Income Fund II, PIMCO Floating
                                                       Rate Income Fund and PIMCO Floating Rate
                                                       Strategy Fund; Executive Vice President,
                                                       Municipal Advantage Fund, Inc.



     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
---------------------   -----------------------------------------
Brian S. Shlissel                       See above.
Lawrence Altadonna                      See above.
Newton B. Schott, Jr.                   See above.
Thomas J. Fuccillo                      See above.
Youse Guia                              See above.


Committees of the Board of Trustees

     Audit Oversight Committee


     The Fund has established an Audit Oversight Committee in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The
Fund's Audit Oversight Committee provides oversight with respect to the internal
and external accounting and auditing procedures of the Fund and, among other
things, determines the selection of the independent registered public accounting
firm for the Fund and considers the scope of the audit, approves all audit and
permitted non-audit services proposed to be performed by the independent
registered public accounting firm on behalf of the Fund, and services to be
performed by the independent registered public accounting firm for certain
affiliates, including the Manager and the Sub- Advisers, and the entities in a
control relationship with the Manager or Sub-Advisers that provide services to
the Fund where the engagement relates directly to the operations and financial
reporting of the Fund. Messrs. Connor, Kertess and D'Alessandro, each of whom is
an Independent Trustee, serve on this committee.

                                      -49-



     Nominating Committee


     The Nominating Committee is 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 Thomas J. Fuccillo, 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. Connor and Kertess, each of
whom is an Independent Trustee, serve on this committee.


     Valuation Committee


     The Board has a Valuation Committee, to which the Board has delegate the
responsibility to determine or cause to be determined the fair value of the
Fund's portfolio securities and other assets when market quotations are not
readily available. The Valuation Committee reviews and approves procedures for
the fair valuation of the Fund's portfolio securities and periodically reviews
information from the Manager and Sub-Advisers regarding fair value and liquidity
determinations made pursuant to the Board-approved procedures, and makes related
recommendations to the full Board and assists the full Board in resolving
particular fair valuation and other valuation matters. Messrs. Connor and
Kertess, each of whom is an Independent Trustee, serve on this committee.


     Compensation Committee


     The Compensation Committee meets as the Board deems necessary to review and
make recommendations regarding compensation payable to the Trustees of the Fund
who are not directors, officers, partners or employees of the Manager,
Sub-Advisers or any entity controlling, controlled by or under common control
with the Manager or Sub-Advisers. Messrs. Connor and Kertess, 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, 2004:




                                                   Aggregate Dollar Range of Equity Securities in
                          Dollar Range of Equity    All Registered Investment Companies Overseen
    Name of Trustee       Securities in the Fund    by Trustee in Family of Investment Companies
-----------------------   ----------------------   ----------------------------------------------
                                                                  
Robert E. Connor                   None.                                None.
John J. D'Alessandro II            None.                                None.
Hans W. Kertess                    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

                                      -50-



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, 2004:




                            Name of Owners
                          and Relationships                               Value of    Percent of
    Name of Trustee           to Trustee      Company   Title of Class   Securities      Class
-----------------------   -----------------   -------   --------------   ----------   ----------
                                                                       
Robert E. Connor                None.
John J. D'Alessandro II         None.
Hans W. Kertess                 None.



     As of February 18, 2005, the Fund's officers and Trustees as a group owned
less than 1% of the outstanding Common Shares.

     As of February 18, 2005, the following persons owned of record the number
of Common Shares noted below, representing the indicated percentage of the
Fund's outstanding equity securities as of such date. Many of these shares are
believed to be held only as nominee. To the knowledge of the Fund, no other
person owned of record or beneficially 5% or more of the Fund's outstanding
equity securities on such date.



                                                               Percentage of the
                                                              Fund's outstanding
                                           Number of Common      shares as of
Shareholder                                     Shares         February 18, 2005
----------------------------------------   ----------------   ------------------
Allianz Global Investors of America L.P.         4,189               100%
1345 Avenue of the Americas
New York, New York  10105


Compensation


     Messrs. Connor, Kertess and D'Alessandro 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"),
Nicholas-Applegate Convertible & Income Fund, Nicholas-Applegate Convertible &
Income Fund II, PIMCO Corporate Opportunity Fund, PIMCO High Income Fund, PIMCO
Corporate Income Fund, PIMCO Floating Rate Income Fund and PIMCO



Floating Rate Strategy Fund, sixteen closed-end funds for which the Manager
serves as investment manager and affiliates of the Manager serve as portfolio
manager. Mr. Connor also is a director or trustee, as the case may be, of one
open-end investment company (comprising four separate investment portfolios). As
indicated above, certain of the officers of the Fund are affiliated with the
Manager.



     The Municipal Funds, Nicholas-Applegate Convertible & Income Fund,
Nicholas-Applegate Convertible & Income Fund II, PIMCO Corporate Opportunity
Fund, PIMCO High Income Fund, PIMCO Corporate Income Fund, PIMCO Floating Rate
Income Fund, PIMCO

                                      -51-



Floating Rate Strategy Fund and the Fund (together, the "PA 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, NFJ, NACM, PEA or any entity controlling,
controlled by or under common control with the Manager, NFJ, NACM or PEA,
receives compensation for their attendance at joint meetings and their service
on Board committees. For their service as Trustees of the PA Closed-End Funds,
Messrs. Connor, Kertess and Dalessandro receive $25,000 for each joint meeting
for the first four joint meetings in each year and $5,000 for each additional
joint meeting in such year if the meetings are attended in person. Messrs.
Connor, Kertess and Dalessandro receive $1,000 per joint meeting if the meetings
are attended telephonically. For their services as members of various Audit
Oversight Committees, Messrs. Connor, Kertess and Dalessandro will each receive
$1,000 per fund per meeting respectively, for each of those PA Closed-End Funds
for which they serve as Trustee. Mr. Kertess receives $500 per fund per year for
each of the PA Closed-End Funds for which he serves as Chair of the Audit
Committee. Trustees will also be reimbursed for meeting-related expenses. As
Chairman of the PA Closed-end Funds, Mr. Connor receives $2,500 per fund per
year.


     Each Trustee's compensation and other costs of joint meetings will be
allocated pro rata among the PA Closed-End Funds for which such Trustee serves
as Trustee based on each such Fund's relative net assets.


     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 January 31,
2006. For the calendar year ended December 31, 2004, the Trustees received the
compensation set forth in the following table for serving as trustees of other
funds in the "Fund Complex." Each officer or Trustee who is a director, officer,
partner or employee of the Manager, a Sub-Adviser or any entity controlling,
controlled by or under common control with the Manager or a Sub-Adviser serves
without any compensation from the Fund.



                                                        Total Compensation
                          Estimated Compensation       from the Fund Complex
                           from the Fund for the   Paid to the Trustees for the
                            Fiscal Year Ending         Calendar Year Ending
    Name of Trustee          January 31, 2006*           December 31, 2004
-----------------------   ----------------------   ----------------------------
Robert E.  Connor                 $4,050                     $151,286
John J.  Dalessandro II           $1,550                     $121,539
Hans W.  Kertess                  $2,050                     $131,705


----------
*    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 PA
     Closed-End Funds for which the particular Trustee serves.

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

                                      -52-



Codes of Ethics

     The Fund, the Manager, NFJ, NACM and PEA have each adopted separate codes
of ethics governing personal trading activities of, as applicable, all Trustees
and officers of the Fund, and directors, officers and employees of the Manager
and Sub-Advisers, 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 a Sub-Adviser,
as applicable. Such 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, NFJ, NACM and PEA 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 SUB-ADVISERS


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 is a wholly-owned indirect subsidiary of Allianz
Global Investors of America L.P. ("Allianz of America"). Allianz of America was
organized as a limited partnership under Delaware law in 1987. Allianz 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 the managing member, 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 Allianz 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 America"), 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 Allianz Dresdner Asset Management
Aktiengesellschaft, which is a wholly-owned subsidiary of Allianz AG. Allianz AG
indirectly holds a controlling interest in Allianz of America. Allianz AG is a

                                      -53-



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.
Allianz of America's address is 888 San Clemente Drive, Suite 100, Newport
Beach, California 92660.


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


     The Manager is located at 1345 Avenue of the Americas, New York, New York
10105. As of December 31, 2004, the Manager had approximately $37.5 billion in
assets under management. As of December 31, 2004, Allianz of America and its
subsidiaries, including NFJ, NACM and PEA, had approximately $564.8 billion in
assets under management.


     Allianz of America, Inc. ("AZOA") has entered into a put/call arrangement
for the possible disposition of Pacific Life's indirect interest in Allianz of
America. Pursuant to this agreement, in any month subsequent to March 2004,
Pacific Life and AZOA can put or call, respectively, all of the Class E Units.
The repurchase price for the remaining Class E Units is calculated based on the
financial performance of Pacific Investment Management Company over the
preceding four calendar quarters prior to repurchase, but the amount can
increase or decrease in value by a maximum of 2% per year from the per unit
amount as defined in the agreement, calculated as of December 31 of the
preceding calendar year.

     As of the date of this Statement of Additional Information, significant
institutional shareholders of Allianz AG currently include Munchener
Ruckversicherungs-Gesellschaft AG ("Munich Re"). Allianz AG in turn owns
Dresdner Bank AG. Munich Re, 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 and Dresdner Kleinwort Benson, may be considered
to be affiliated persons of the Manager, NFJ, NACM and PEA. (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. NFJ, NACM and PEA do 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 NFJ, NACM and PEA to serve as
the Fund's Sub-Advisers.

     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

                                      -54-



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 objectives, policies and
restrictions; provided that, so long as NFJ, NACM and PEA serve as the
Sub-Advisers 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 NFJ, NACM and PEA the investment
policies of the Fund.


     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, NFJ,
NACM and PEA, 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 .90% of the Fund's average weekly total managed assets for the services
and facilities it provides. "Total managed assets" means the total assets of the
Fund (including any borrowings that may be outstanding) minus accrued
liabilities (other than liabilities representing borrowings). 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.

Sub-Advisers


     NFJ, NACM and PEA each serve as sub-advisers for the Fund pursuant to
separate portfolio management agreements (the "Portfolio Management Agreements,"
and individually, a "Portfolio Management Agreement") between each Sub-Adviser
and the Manager. NFJ is responsible for managing the portfolio investments of
the Fund's Equity Component, NACM is

                                      -55-



responsible for managing the portfolio investments of the Fund's Convertible
Component and PEA is responsible for implementing the Fund's Index Option
Strategy. Under each Portfolio Management Agreement, subject always to the
control of the Trustees and the supervision of the Manager, the Sub-Adviser's
obligation is to furnish continuously an investment program with respect to its
component or strategy of the Fund, to make related investment decisions on
behalf of the Fund and to place all orders for the purchase and sale of
portfolio securities and/or other investments for the component or strategy.

     Under the Portfolio Management Agreement with NFJ, the Manager (and not the
Fund) has agreed to pay to NFJ a portfolio management fee, payable on a monthly
basis, at the annual rate of 0.25% of the average daily total managed assets
attributable to the Equity Component for the services it provides. Under the
Portfolio Management Agreement with NACM, the Manager (and not the Fund) has
agreed to pay to NACM a portfolio management fee, payable on a monthly basis, at
the annual rate of 0.40% of the average daily total managed assets attributable
to the Convertible Component for the services it provides. Under the Portfolio
Management Agreement with PEA, the Manager (and not the Fund) has agreed to pay
to PEA a portfolio management fee, payable on a monthly basis, at the annual
rate of 0.20% of the average daily total managed assets attributable to the
Equity Component for the services it provides.



     NFJ is an investment management firm organized as a limited partnership.
NFJ is the successor investment adviser to NFJ Investment Group Inc., which
commenced operations in 1989. NFJ has two partners: The Manager as the
supervisory partner and NFJ Management Inc. as the managing partner. Allianz of
America is the direct parent company of PA Services Holdings LLC, of which the
Manager is a wholly-owned subsidiary.



     NFJ provides investment management services to a number of institutional
accounts, including investment companies, employee benefit plans, college
endowment funds and foundations. As of December 31, 2004, NFJ had approximately
$9.3 billion in assets under management. NFJ is located at 2121 San Jacinto,
Suite 1840, Dallas, Texas 75201.


     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 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 Allianz 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, 2004, NACM had approximately $14.5 billion in
assets under management. NACM is located at 600 West Broadway, 30th Floor, San
Diego, California 92101.


     PEA, an indirect wholly-owned subsidiary of Allianz of America, provides
equity-related advisory services to mutual funds and institutional accounts. As
of February 15, 2005, PEA had approximately $3.1 billion in assets under
management. PEA is located at 1345 Avenue of the Americas, 50th Floor, New York,
New York 10105.

                                      -56-



Certain Terms of the Investment Management and Portfolio Management Agreements


     The Investment Management Agreement and the Portfolio Management Agreements
were each approved by the Trustees of the Fund (including all of the Trustees
who are not "interested persons" of the Manager or the Sub-Advisers). The
Investment Management Agreement and Portfolio Management Agreements 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, the applicable Sub-Adviser, 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. The Investment Management
Agreement and each of the Portfolio Management Agreements 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. Each Portfolio Management Agreement may be terminated on not less
than 60 days' notice by the Manager to the applicable Sub-Adviser or by the
Sub-Adviser to the Manager, or by the Fund at any time by notice to the Manager
and the applicable Sub-Adviser.

     The Investment Management Agreement and the Portfolio Management Agreements
each provide that the Manager or Sub-Adviser, 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 Agreements, the Trustees met with the relevant investment
advisory personnel from the Manager and the Sub-Advisers 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 the Sub-Advisers were appropriate to fulfill effectively the duties
of the Manager and Sub-Advisers on behalf of the Fund under the applicable
agreement. The Trustees also considered the business reputation of the Manager
and the Sub-Advisers, 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.


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

                                      -57-



     The Trustees considered the scope of the services provided by the Manager
and Sub-Advisers to the Fund under the Investment Management Agreement and
Portfolio Management Agreements, respectively, relative to services provided by
third parties to other mutual funds. The Trustees noted that the Manager's and
Sub-Advisers' standard of care was comparable to that found in most investment
company advisory agreements. See "--Certain Terms of the Investment Management
and Portfolio Management Agreements" above. The Trustees concluded that the
scope of the Manager's and the Sub-Advisers' 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 the Sub-Advisers to the Fund. The Trustees also evaluated the
procedures of the Manager and the Sub-Advisers designed to fulfill 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 the Sub-Advisers allocate trades among their various
investment advisory clients, the integrity of the systems in place to ensure
compliance with the foregoing and the record of the Sub-Advisers in these
matters. The Trustees also received information concerning standards of the
Manager and the Sub-Advisers with respect to the execution of portfolio
transactions. See "Portfolio Transactions" below.


Proxy Voting Policies


     The Fund and its Board of Trustees have delegated to the Manager, and the
Manager has in turn delegated to NFJ and NACM, responsibility for voting any
proxies relating to portfolio securities held in the particular Sub-Adviser's
Component in accordance with NFJ's and NACM's proxy voting policies and
procedures. Copies of the proxy voting policies and procedures to be followed by
NFJ and NACM on behalf of the Fund, including procedures to be used when a vote
presents a conflict of interest, are attached hereto as Appendix A ("Proxy
Voting Policies").


                             PORTFOLIO TRANSACTIONS

Investment Decisions and Portfolio Transactions


     Investment decisions for the Fund and for the other investment advisory
clients of the Manager and each Sub-Adviser 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 the
Sub-Advisers. 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 a
Sub-Adviser is considered at or about the same time, transactions in

                                      -58-



such securities will be allocated among the Fund and clients in a manner deemed
fair and reasonable by the Manager or a Sub-Adviser, as applicable. The Manager
or a Sub-Adviser 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 a
Sub-Adviser, as applicable, 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, each Sub-Adviser places all
orders for the purchase and sale of portfolio securities, options, futures
contracts and other instruments for the Component of the Fund managed by the
Sub-Adviser (or in the case of PEA, in implementing the Index Option Strategy)
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, each Sub-Adviser 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, if applicable, as described
below. In seeking the most favorable price and execution, each Sub-Adviser,
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 or instrument, 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, each Sub-Adviser 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, each Sub-Adviser will
seek the best price and execution of the Fund's orders. In doing so, the Fund
may pay higher commission rates than the lowest available when a Sub-Adviser
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.

                                      -59-



     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,
each Sub-Adviser may receive research services from many broker-dealers with
which the Sub-Adviser places the Fund's portfolio transactions. A Sub-Adviser
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 a Sub-Adviser 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 a
Sub-Adviser is reduced because the Sub-Adviser and its affiliates receive such
services.


     As permitted by Section 28(e) of the Securities Exchange Act of 1934, each
Sub-Adviser may cause the Fund to pay a broker-dealer which provides "brokerage
and research services" (as defined in such Act) to that Sub-Adviser 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 a Sub-Adviser, subject to certain
restrictions discussed above under "Investment Manager and
Sub-Advisers--Investment Manager."

     References to each Sub-Adviser in this section would apply equally to the
Manager if the Manager were to assume portfolio management responsibilities for
the Sub-Adviser and place orders for the purchase and sale of portfolio
investments.


                                  DISTRIBUTIONS


     Commencing with the Fund's first dividend, the Fund intends to make
quarterly cash distributions to Common Shareholders at a rate that reflects the
past and projected performance of the Fund. The Fund expects to receive
substantially all of its current income and gains from the following sources:
(i) capital gains (short-term and long-term) from net index option premiums and
the sale of portfolio securities; (ii) dividends received by the Fund that are
paid on the common stocks and other equity securities held in the Equity
Component; and (iii) interest income received by the Fund from the convertible
securities held in the Convertible Component. Distributions are likely to be
variable, and the Fund's distribution rate will depend on a number of factors,
including the net earnings on the Fund's portfolio investments and the rate at
which such net earnings change as a result of changes in the timing of and rates
at which the Fund receives income from the sources described above. The net
investment income of the Fund consists of all income (other than net short-term
and long-term capital gains) less all expenses of the Fund.

                                      -60-



     The Fund's quarterly distributions will be made from the Fund's net
investment income and net gains from index option premiums and the sale of
portfolio securities. The tax treatment and characterization of the Fund's
distributions may vary significantly from time to time because of the varied
nature of the Fund's investments. Pursuant to the requirements of the 1940 Act
and other applicable laws, a notice will accompany each quarterly distribution
with respect to the estimated source (as between net income and gains) of the
distribution made. (The Fund will indicate the proportion of its capital gains
distributions that constitute long-term and short-term gains annually.) The
ultimate tax characterization of the Fund's distributions made in a calendar or
fiscal year cannot finally be determined until after the end of the fiscal
year. As a result, there is a possibility that the Fund may make total
distributions during a calendar or fiscal year in an amount that exceeds the
Fund's net investment income and net realized capital gains for the relevant
fiscal year. For example, the Fund may distribute amounts early in the calendar
year that derive from short-term capital gains, but incur net short-term capital
losses later in the year, thereby offsetting short-term capital gains out of
which distributions have already been made by the Fund. In such a situation, the
amount by which the Fund's total distributions exceed net investment income and
net realized capital gains would generally be treated as a tax-free return of
capital up to the amount of your tax basis in your shares, with any amounts
exceeding such basis treated as gain from the sale of shares.

     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 all of its net investment income and net short-term capital
gains. In addition, at least annually, the Fund intends to distribute net
realized long-term capital gains not previously distributed, if any. The 1940
Act currently limits the number of times the Fund may distribute long-term
capital gains in any tax year, which may increase the variability of the Fund's
distributions and result in certain dividends being comprised more heavily of
long-term capital gains eligible for favorable income tax rates. During periods
in which the Index Option Strategy does not generate sufficient option premiums
or results in net losses, a substantial portion of the Fund's dividends may be
comprised of capital gains from the sale of equity securities held in the Equity
Component, which would involve transaction costs borne by the Fund and may also
result in realization of taxable short-term capital gains taxed at ordinary
income tax rates (particularly during the initial year of the Fund's
operations).

     To permit the Fund to maintain a more stable quarterly 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 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.

     Your initial distribution is expected to be declared approximately 75 days,
and paid approximately 120 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

                                      -61-



"Distributions" and "Dividend Reinvestment Plan." Although it does not now
intend to do so, the Board of Trustees may change the Fund's distribution 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 net
short- and long-term capital gains and historical and projected net investment
income and net short- and long-term capital gains.


                              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 of the Fund have equal rights as to the payment of dividends
and the distribution of assets upon liquidation of the Fund. The 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.

     The Fund will apply for the listing of the Common Shares 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.


     Shares of closed-end investment companies may frequently trade on an
exchange at prices lower than net asset value, although they have during some
periods traded at prices equal to or higher 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. Although it has no present
intention to do so, net asset value will be reduced immediately following the
offering of Common Shares after payment of the sales load and organization and
offering expenses. Net asset value fluctuations are expected to be greater if
the Fund has 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 "Leverage
and Borrowings" and "Description of Shares--Common Shares."

                                      -62-



         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

                                      -63-



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.

     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 objectives 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.

                                      -64-



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.

            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 factors relating to the Fund such as dividend levels and stability
(which will in turn be affected by dividend and interest payments by the Fund's
portfolio holdings, the timing and success of the Fund's Index Option Strategy,
regulations affecting the timing and character of Fund distributions, Fund
expenses and other factors), portfolio credit quality, liquidity, call
protection, market supply and demand, and similar factors relating to the Fund's
portfolio holdings. 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, 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.


     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 1934 Act, 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
(if any) 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

                                      -65-



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 in
order to authorize a conversion.

     If the Fund converted to an open-end company, 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 Common 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 Common Shares
trading at a price equal to their net asset value. Nevertheless, the fact that
the Fund's Common Shares may be the subject of repurchase or tender offers at or
below 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.

     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, and 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 Common 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.

                                   TAX MATTERS

     Taxation of the Fund. The Fund intends to elect to be treated and 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:

                                      -66-



               (a) derive at least 90% of its gross income for each taxable year
          from dividends, interest, payments with respect to certain securities
          loans, and gains from the sale of or other disposition 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 investment company taxable income (as that term is
          defined in the Code without regard to the deduction for dividends
          paid--generally taxable ordinary income and the excess, if any, of net
          short-term capital gains over net long-term capital losses) and net
          tax-exempt interest income, 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 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.

     In general, for purposes of the 90% gross income requirement described in
paragraph (a) above, income derived from a partnership will be treated as
qualifying income only to the extent such income is attributable to items of
income of the partnership which would be qualifying income if realized by the
regulated investment company. However, 100% of the net income derived from an
interest in a "qualified publicly traded partnership" (defined as a partnership
(i) interests in which are traded on an established securities market or readily
tradable on a secondary market or the substantial equivalent thereof and (ii)
that derives less than 90% of its income from the qualifying income described in
paragraph (a) above) will be treated as qualifying income. In addition, although
in general the passive loss rules of the Code do not apply to regulated
investment companies, such rules do apply to a regulated investment company with
respect to items attributable to an interest in a qualified publicly traded
partnership. Finally, for purposes of paragraph (c) above, the term "outstanding
voting securities of such issuer" will include the equity securities of a
qualified publicly traded partnership, and no more than 25% of the value of a
regulated investment company's total assets may be invested in securities of one
or more qualified publicly traded partnerships.


     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).

                                      -67-



     If the Fund were to fail 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. Some portions of such distributions may be eligible for the dividends
received deduction in the case of corporate shareholders and reduced rates of
taxation on qualified dividend income in the case of individuals. 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 (the excess, if any, of net long-term
capital gains over net short-term capital losses). 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. Although the
Fund may generate tax-exempt income, it does not expect to satisfy the criteria
necessary to pass through the tax-free nature of the income to its shareholders.

     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 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 nondeductible
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. For federal income tax purposes, distributions of
investment income are generally taxable as ordinary income to the extent of the
Fund's current and accumulated

                                      -68-



earnings and profits. Taxes on distributions of capital gains are determined by
how long the Fund owned (and is treated for federal income tax purposes as
having owned) the investments that generated them, rather than how long a
shareholder has owned his or her shares. Distributions of net capital 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 ("Capital Gain
Dividends") will be taxable as long-term capital gains. Distributions from
capital gains are generally made after applying any available capital loss
carryovers. Capital losses may be carried forward to each of the eight taxable
years succeeding the loss year. Distributions of gains from the sale of
investments that the Fund owned for one year or less will be taxable as ordinary
income.



     For taxable years beginning on or before December 31, 2008, "qualified
dividend income" received by an individual will be taxed at the rates applicable
to long- term capital gain. In order for some portion of the dividends received
by a Fund shareholder to be qualified dividend income, the Fund must meet
holding period and other requirements with respect to some portion of the
dividend- paying stocks in its portfolio and the shareholder must meet holding
period and other requirements with respect to the Fund's shares. A dividend will
not be treated as qualified dividend income (at either the Fund or shareholder
level) (1) if the dividend is received with respect to any share of stock held
for fewer than 61 days during the 121-day period beginning on the date which is
60 days before the date on which such share becomes ex-dividend with respect to
such dividend (or, in the case of certain preferred stock, 91 days during the
181-day period beginning 90 days before such date), (2) to the extent that the
recipient is under an obligation (whether pursuant to a short sale or otherwise)
to make related payments with respect to positions in substantially similar or
related property, (3) if the recipient elects to have the dividend income
treated as investment interest, or (4) if the dividend is received from a
foreign corporation that is (a) not eligible for the benefits of a comprehensive
income tax treaty with the United States (with the exception of dividends paid
on stock of such a foreign corporation readily tradable on an established
securities market in the United States) or (b) treated as a passive foreign
investment company. In general, distributions of investment income designated by
the Fund as derived from qualified dividend income will be treated as qualified
dividend income by a shareholder taxed as an individual provided the shareholder
meets the holding period and other requirements described above with respect to
the Fund's shares. NFJ will select and hold (subject to the straddle rules
described below under "Options, Futures, Forward Contracts and Swap Agreements")
stocks in an attempt to maximize the potential for qualified dividend income
with respect to the Equity Component. Fund dividends representing distributions
of interest income and short-term capital gains cannot be designated as
qualified dividend income and will not qualify for the reduced rates. Because
income from debt securities is ineligible for such treatment, the Convertible
Component will generally produce income that will not be considered qualified
dividend income. In addition, because qualified dividend income includes only
income (and not gains) the Fund's gains from index options premiums and all
gains from sales of portfolio securities held for a year or less will not
qualify for such treatment. (A portion of the Fund's gains from index option
premiums and gains from sales of portfolio securities held for over a year will
be taxable at reduced rates as long-term capital gains, however.) In light of
this, the Fund expects that a substantial portion of Fund distributions will not
consist of qualified dividend income.

     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

                                      -69-



shareholder paid). Distributions are taxable whether shareholders receive them
in cash or reinvest them in additional shares through the Dividend Reinvestment
Plan. 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. Any gain resulting from the
sale or exchange of Fund shares generally will be taxable as capital gains.

     The long-term capital gain rates applicable to most individual shareholders
will be 15% (with lower rates applying to taxpayers in the 10% and 15% ordinary
income tax brackets) for taxable years beginning on or before December 31, 2008.

     Dividends of net investment income designated by the Fund and 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 181-day
period beginning 91 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.

     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
(including earnings and profits arising from tax-exempt income) 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. Although the
Fund may generate tax-exempt income, it does not expect to satisfy the criteria
necessary to pass through the tax-free nature of the income to its shareholders.

     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.

                                      -70-



     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 one year. 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. Shareholders who tender all Common
Shares 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 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. 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.


     Options, Futures, Forward Contracts and Swap Agreements. The Fund's
transactions in options, futures contracts, hedging transactions, forward
contracts, swap agreements, straddles and foreign currencies 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. The Fund will monitor its transactions, will make appropriate
tax elections and will make appropriate entries in its books and records in
order to mitigate the effect of these rules.


     Call option premiums received by the Fund on many equity index call options
will be subject to mark-to-market treatment and gains will be recognized based
on the fair market value on October 31 and at the end of the Fund's taxable year
(January 31) (or if the option is disposed of, upon disposition). Under this
system, 60% of the gains or losses from such equity index call options will be
treated as long-term capital gains or losses and 40% will be treated as short-
term gains or losses. Such short-term gains will be subject to ordinary income
tax rates to the extent not offset by short-term capital losses. Other call
option premiums received by the Fund will be recognized upon exercise, lapse or
other disposition of the option and will be treated by the Fund as short-term
capital gain or loss, unless the option is actually exercised (i.e., does not
lapse and is not cancelled pursuant to a closing transaction) after the Fund has
met the one-year holding period for the underlying stock; consequently,
distributions of such premiums will generally be taxable to the shareholders as
ordinary income.

                                      -71-



     Call options that are considered "covered" for federal income tax purposes
-- that is, options on indexes that include stocks that significantly overlap
with the stocks owned by the Fund and that are considered to substantially
diminish the Fund's risk of loss in either position under IRS regulations -- and
other devices used by the Fund may be subject to the loss-deferral and holding
period adjustment provisions of the federal income tax straddle rules. In
general, such covered call options that are out-of-the-money constitute
"qualified covered call options" and are generally excepted from the straddle
rules. For qualified covered call options, however, the holding period for the
offsetting property is calculated without regard to the time when the options
are outstanding. Consequently, gains that would otherwise constitute long-term
capital gains may be treated as short-term, and distributions that would
otherwise constitute "qualified dividend income" may not satisfy the holding
period requirements and therefore may be taxed as ordinary gain.

     The call options that are covered by shares but do not constitute
"qualified covered call options" (as defined in section 1092 of the Code), puts
purchased for stocks that the Fund owns and other devices employed by the Fund
that substantially diminish its risk of loss in offsetting positions in
"substantially similar or related property" (also as defined therein) are
treated as straddles. The straddle rules require that certain losses be
deferred. In addition, the holding period for positions considered part of a
straddle will generally not begin until after the offsetting position is no
longer outstanding. These rules could therefore affect the amount, timing and
character of distributions to shareholders.

     Certain of the Fund's hedging activities (including its transactions, if
any, in foreign currencies or foreign currency-denominated instruments) 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 described under "--Return of Capital
Distributions." 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.


     Original Issue Discount and Payment-in-Kind Securities. 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 (and all zero-coupon debt
obligations acquired by the Fund will 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 taxable income
(and required to be distributed) 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. Increases in the principal amount of an inflation indexed bond
will be treated as OID. 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 in the
secondary market may be treated as having market discount. Generally, any gain
recognized on the disposition of, and any partial

                                      -72-



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 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.

     Interest paid on debt obligations owned by the Fund, 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, possibly affecting the cash
flow of the issuer.

                                      -73-



     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. Dividends paid by REITs generally will not be
eligible to be treated as "qualified dividend income."

     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 (discussed below). 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 directly in residual interests
in REMICs or to invest in REITs in which a substantial portion of the assets
will consist of residual interests in REMICs.




     Foreign Currency Transactions. Gains or losses attributable to foreign
currency contracts or fluctuations in exchange rates that occur between the time
a Fund accrues income or expenses denominated in a foreign currency and the time
the Fund actually collects such income or pays such expenses are treated as
ordinary income or loss for tax purposes. The portion of any gain or loss on the
disposition of a debt security denominated in a foreign currency that is
attributable to fluctuations in the value of the foreign currency during the
holding period of the debt security will likewise be treated as ordinary income
or loss for tax purposes. This may produce a difference between the Fund's book
income and its taxable income, possibly accelerating distributions or converting
distributions of book income and gains to returns of capital for book purposes.

     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. As the Fund many not pass through its foreign taxes to
shareholders, shareholders generally will not be entitled to claim a credit or
deduction with respect to foreign taxes.

                                      -74-



     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. Dividends paid by PFICs
will not be eligible to be treated as "qualified dividend income."

     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. In general, dividends (other than Capital Gain
Dividends) paid by the Fund to a shareholder that is not a "U.S. person" within
the meaning of the Code (a "foreign person") are subject to withholding of U.S.
federal income tax at a rate of 30% (or lower applicable treaty rate) 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,
effective for taxable years of the Fund before January 1, 2008, the Fund will
not be required to withhold any amounts with respect to (i) properly-designated
distributions (other than distributions to a foreign person (w) that has not
provided a satisfactory statement that the beneficial owner is not a U.S.
person, (x) to the extent that the dividend is attributable to certain interest
on an obligation if the foreign person is the issuer or is a 10% shareholder of
the issuer, (y) that is within certain foreign countries that have inadequate
information exchange with the United States, or (z) to the extent the dividend
is attributable to interest paid by a person that is a related person of the
foreign person and the foreign person is a controlled foreign corporation) from
U.S. source interest income that would not be subject to U.S. federal income tax
if earned directly by an individual foreign person, and (ii) properly-designated
distributions (other than distributions to an individual foreign person who is
present in the United States for a period or periods aggregating 183 days or
more during the year of the distribution) of net short-term capital gains in
excess of net long-term capital losses. In addition, as indicated below, 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

                                      -75-



or business in the United States, the dividend will be subject to U.S. federal
net income taxation at regular income tax rates.

     The 2004 Act modifies the tax treatment of distributions from the Fund that
are paid to a foreign person and are attributable to gain from "U.S. real
property interests" ("USRPIs"), which the Code defines to include direct
holdings of U.S. real property and interests (other than solely as a creditor)
in "U.S. real property holding corporations" such as REITs. The Code deems any
corporation that holds (or held during the previous five-year period) USRPIs
with a fair market value equal to 50% or more of the fair market value of the
corporation's U.S. and foreign real property assets and other assets used or
held for use in a trade or business to be a U.S. real property holding
corporation; however, if any class of stock of a corporation is traded on an
established securities market, stock of such class shall be treated as a USRPI
only in the case of a person who holds more than 5% of such class of stock at
any time during the previous five-year period. In respect of dividends paid or
deemed paid on or before December 31, 2007, distributions to foreign persons
attributable to gains from the sale or exchange of USRPIs will give rise to an
obligation for those foreign persons to file a U.S. tax return and pay tax, and
may well be subject to withholding under future regulations.

     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 shares of the Fund
or on Capital Gain Dividends unless (i) such gain or Capital Gain Dividend is
effectively connected with the conduct of a trade or business carried on by such
holder within the United States, (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 or Capital Gain Dividend and certain
other conditions are met, or (iii) the shares constitute USRPIs or the Capital
Gain Dividends are paid or deemed paid on or before December 31, 2007 and are
attributable to gains from the sale or exchange of USRPIs. Before January 1,
2008, if the Fund is a U.S. real property holding corporation (as described
above) the Fund's shares will nevertheless not constitute USRPIs if the Fund is
a "domestically controlled qualified investment entity," which is defined to
include a regulated investment company that, at all times during the shorter of
the 5-year period ending on the date of the disposition or the period during
which the regulated investment company was in existence, had less than 50
percent in value of its stock held directly or indirectly by foreign persons.

     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 distributions and redemption
proceeds 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 28% for amounts paid through December 31, 2010. The backup withholding
tax rate will be 31% for amounts paid after December 31, 2010.

     In order for a foreign investor to qualify for exemption from the backup
withholding tax rates under income tax treaties, the foreign investor must
comply with special certification and

                                      -76-



filing requirements. Foreign investors in the Fund should consult their tax
advisers in this regard. Backup withholding is not an additional tax. Any
amounts withheld may be credited against the shareholder's U.S. federal income
tax liability, provided the appropriate information is furnished to the Internal
Revenue Service.

     Tax Shelter Reporting Regulations. Under Treasury regulations, if a
shareholder recognizes a loss with respect to Common Share of $2 million or more
for an individual shareholder or $10 million or more for a corporate
shareholder, the shareholder will likely have to 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. The
fact that a loss is reportable under these regulations does not affect the legal
determination of whether the taxpayer's treatment of the loss is proper.
Shareholders should consult their tax advisers to determine the applicability of
these regulations in light of their individual circumstances.

     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.





            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.

                                      -77-



     PFPC Inc., P.O. Box 43027, Providence, RI 02940-3027, 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.


                 INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


     PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, New York
10017, serves as the independent registered public accounting firm 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 LLP, One International Place, Boston, Massachusetts 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 (the
"Registration Statement"), 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 are parts of but 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.

                                      -78-



             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholder and Board of Trustees of
NFJ Dividend, Interest & Premium Strategy Fund

In our opinion, the accompanying statement of net assets presents fairly, in all
material respects, the financial position of NFJ Dividend, Interest & Premium
Strategy Fund (the "Fund") at February 15, 2005 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 the standards
of the Public Company Accounting Oversight Board (United States). Those
standards 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
February 16, 2005

                                      -79-



                              FINANCIAL STATEMENTS

                 NFJ Dividend, Interest & Premium Strategy Fund

                            Statement of Net Assets
                               February 15, 2005

Assets:
   Cash                                                                 $100,012
                                                                        --------
      Net Assets                                                         100,012
                                                                        --------
Net Assets (4,189 shares of $0.00001 par value shares of
   beneficial interest issued and outstanding; unlimited
   shares authorized)                                                   $100,012
                                                                        ========
Net asset value per share                                               $ 23.875
                                                                        ========

Notes to Statement of Net Assets:

1. Organization

NFJ Dividend, Interest & Premium Strategy Fund (the "Fund") was organized as a
Massachusetts business trust on August 20, 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 Global
Investors of America, L.P. ("Allianz Global") of 4,189 shares of beneficial
interest at an aggregate purchase price of $100,012. PA Fund Management LLC (the
"Investment Manager") serves as the Fund's investment manager, and is an
indirect, wholly-owned subsidiary of Allianz Global and an indirect,
majority-owned subsidiary of Allianz AG, a publicly traded German insurance and
financial services company. The Investment Manager has agreed to pay the Fund's
organizational expenses of approximately $20,000 as well as the amount by which
the Fund's offering costs (other than the sales load, but inclusive of the
reimbursement of underwriter expenses of $.005 per share) exceeds $0.05 per
common share issued. The Fund's offering costs are estimated to be $1,250,000
assuming 32,000,000 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
differ significantly from 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

                                      -80-



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 any 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. Subject to the supervision of the Fund's Board of
Trustees, the Investment Manager is responsible for managing, either directly or
through others selected by it, the Fund's investment activities, business
affairs, and other administrative matters. Pursuant to the Agreement, the
Investment Manager receives an annual fee, payable monthly, at the annual rate
of 0.90% of the Fund's average daily total managed assets. Total managed assets
refers to the total assets of the Fund (including assets attributable to any
borrowings that may be outstanding) minus accrued liabilities (other than
liabilities representing borrowings). The Investment Manager has retained its
affiliates, NFJ Investment Group L.P. ("NFJ"), Nicholas-Applegate Capital
Management LLC ("NACM") and PEA Capital LLC ("PEA"), to manage the Fund's
portfolio investments. The Investment Manager (not the Fund) will pay a portion
of the fees it receives as Investment Manager to NFJ, pursuant to a portfolio
management agreement, at the annual rate of 0.25% of the average daily total
managed assets attributable to the Fund's investments in dividend paying common
stocks (the "Equity Component") The Investment Manager (not the Fund) will pay a
portion of the fees it receives as Investment Manager to NACM, pursuant to a
portfolio management agreement, at the annual rate of 0.40% of the average daily
total managed assets attributable to the Fund's investments in income-producing
convertible securities (the "Convertible Component"). The Investment Manager
(not the Fund) will pay a portion of the fees it receives as Investment Manager
to PEA, pursuant to a portfolio management agreement, at the annual rate of
0.20% of the average daily total managed assets attributable to the Fund's
investments in the Equity Component.

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.

                                      -81-




                                   Appendix A

                              Proxy Voting Policies


Allianz Dresdner Asset Management of America

Proxy Voting Policy and Procedures

Version 1.0 - Effective May 1, 2003


                                       A-1




Allianz Dresdner Asset Management of America

ADAM Proxy Voting Policy and Procedures

General Policy

Allianz Dresdner Asset Management of America L.P. and its subsidiaries
(collectively, "ADAM Advisers") vote proxies as part of its authority to manage,
acquire, and dispose of account assets, unless the client has explicitly
reserved the authority for itself. When voting proxies, ADAM Advisers' primary
objective is to make voting decisions solely in the best interests of its
clients. ADAM Advisers will act in a manner that it deems prudent and diligent
and which is intended to enhance the economic value of the underlying portfolio
securities held in its clients' accounts.

This policy sets forth the general standards for proxy voting whereby an ADAM
Adviser has authority to vote its client's proxies with respect to portfolio
securities held in the accounts of its clients for whom it provides
discretionary investment management services.

The general policy contains the following standards that must be established by
each ADAM Adviser:

     .    Exercising responsibility for voting decisions

     .    Obligation to vote must be clearly established based on written
          guidelines

     .    Resolving conflicts of interest

     .    Making appropriate disclosures to clients

     .    Creating and maintaining appropriate records

     .    Providing clients access to voting records

     .    Outsourcing the proxy voting administrative process

Responsibility for Voting Decisions

Chief Investment Officer

Exercise of shareholder voting rights is an investment decision. Accordingly, it
is the responsibility of the Chief Investment Officer of the ADAM Adviser to
ensure that voting decisions are organized and conducted in accordance with
portfolio objectives, and any applicable legal requirements and client
expectations, if any. In order to ensure that this obligation is carried out,
the Chief Investment Officer of each ADAM Adviser (or line of business, if
appropriate) shall designate an employee or a committee to be responsible for
all aspects of the exercise of shareholder rights (the "Proxy Committee").


                                       A-2




Proxy Committee

The Proxy Committee shall be governed by this policy and will perform the
following duties:

     .    Execute or engage a third party service provider to vote proxies in
          accordance with the Company's guidelines;

     .    Document, in the form of a report, the resolution of any conflicts of
          interest between the OE and its clients, and provide or make
          available, adequate documentation to support that conflicts were
          resolved in a fair, equitable and consistent manner that is in the
          interest of clients;

     .    Approve and monitor the outsourcing of voting obligations to
          third-parties; and

     .    Oversee the maintenance of records regarding voting decisions in
          accordance with the standards set forth by this policy.

The Proxy Committee shall review, at least annually, all applicable processes
and procedures, voting practices, the adequacy of records and the use of third
party services.

Obligation to Vote Must be Clearly Established

When an investment management or client relationship is established, the
obligation of the ADAM Adviser to vote may be inherent in the relationship or,
in some cases, implied as a matter of law. In some situations, the client may
prefer to vote (or direct the voting) for portfolio securities.

ADAM Adviser's obligation with respect to voting rights should be explicitly
identified in each client Investment Advisory Agreement. A specific clause in
the agreement should explain the rights of each party as well as identify if any
Proxy Voting Service is used.

Voting Proxies

Written Voting Guidelines

Each ADAM Adviser must establish general voting guidelines for recurring
proposals ("Voting Guidelines"). (See Appendix No. 3 for reference.)

Flexibility

The Voting Guidelines should address routine as well as significant matters
commonly encountered. The Voting Guidelines should permit voting decisions to be
made flexibly while taking into account all relevant facts and circumstances.

Cost-Benefit Analysis Involving Voting Proxies

An ADAM Adviser shall review various criteria to determine whether the costs
associated with voting the proxy exceeds the expected benefit to its clients and
may conduct a cost-benefit analysis in determining whether it is in the best
economic interest to vote client


                                       A-3




proxies. Given the outcome of the cost-benefit analysis, an ADAM Adviser
may refrain from voting a proxy on behalf of its clients' accounts.

In addition, an ADAM Adviser may refrain from voting a proxy due to logistical
considerations that may have a detrimental effect on the ADAM Advisers' ability
to vote such a proxy. These issues may include, but are not limited to: 1) proxy
statements and ballots being written in a foreign language, 2) untimely notice
of a shareholder meeting, 3) requirements to vote proxies in person, 4)
restrictions on foreigner's ability to exercise votes, 5) restrictions on the
sale of securities for a period of time in proximity to the shareholder meeting,
or 6) requirements to provide local agents with power of attorney to facilitate
the voting instructions. Such proxies are voted on a best-efforts basis.

Resolving Conflicts of Interest

An ADAM Adviser may have conflicts that can affect how it votes its clients'
proxies. For example, the ADAM Adviser may manage a pension plan whose
management is sponsoring a proxy proposal. An ADAM Adviser may also be faced
with clients having conflicting views on the appropriate manner of exercising
shareholder voting rights in general or in specific situations. Accordingly, the
ADAM Adviser may reach different voting decisions for different clients.
Regardless, votes shall only be cast in the best interests of the client
affected by the shareholder right. For this reason, ADAM Advisers shall not vote
shares held in one client's account in a manner designed to benefit or
accommodate any other client.

In order to ensure that all material conflicts of interest are addressed
appropriately while carrying out its obligation to vote proxies, the Chief
Investment Officer of each ADAM Adviser shall designate an employee or a proxy
committee to be responsible for addressing how the ADAM Adviser resolves such
material conflicts of interest with its clients.

Making Appropriate Disclosures to Clients

ADAM Advisers shall provide clients with a summary of this policy in the form of
a general Proxy Voting Policy Statement (See Appendix No. 1). The delivery of
this statement can be made in Part II of Form ADV or under separate cover. In
the initial year of adoption of this policy, a letter should accompany Form ADV
that advises clients of the new disclosure. (See Appendix No. 2 for a sample
letter).

Creating and Maintaining Appropriate Records

Recordkeeping Requirements

In keeping with applicable law/1/, ADAM Advisers' recordkeeping requirements are
as follows:

     .    Copies of the ADAM Advisers Proxy Voting Policy and Procedures;


----------


/1/ SEC rule 206(4)-6 [17CFR 275.206(4)-6] and amendments to rule 204-2 [17 CFR
275.204-2] under the Investment Advisers Act of 1940 [15 U.S.C. 80b] ("Advisers
Act" or "Act")



                                       A-4




     .    Copies or records of each proxy statement received with respect to
          clients' securities for whom an ADAM Adviser exercises voting
          authority; Records of votes cast on behalf of clients;

     .    Records of each vote cast as well as certain records pertaining to the
          ADAM Adviser's decision on the vote;

     .    Records of written client request for proxy voting information;

Records of written responses from the ADAM Adviser to either written or oral
client request;

Retention of Records

Records are kept for at least six years following the date that the vote was
cast. An ADAM Adviser may maintain the records electronically. Third party
service providers may be used to maintain proxy statements and proxy votes.

Providing Clients Access to Voting Records

Access by Clients

Generally, clients of an ADAM Adviser have the right, and shall be afforded the
opportunity, to have access to records of voting actions taken with respect to
securities held in their respective account or strategy.

Shareholders and unit-holders of commingled funds managed by an ADAM Adviser
shall have such access to voting records pursuant to the governing documents of
the commingled fund.

Access by Third Parties

Voting actions are confidential and may not be disclosed to any third party
except as may be required by law or explicitly authorized by the client.

Outsourcing The Proxy Voting Process

To assist in the proxy voting process, an ADAM Adviser may retain an independent
third party service provider to assist in providing in-depth research, analysis
and voting recommendations on corporate governance issues and corporate actions
as well as assist in the administrative process. The services provided to an
ADAM Adviser should offer a variety of fiduciary-level, proxy-related services
to assist in its handling of proxy voting responsibilities and corporate
governance-related efforts.


                                       A-5




                                 Appendix No. 1

                           Part II Form ADV Disclosure

General Proxy Voting Policy

                       (the "Company") typically votes proxies as part of its
----------------------
discretionary authority to manage accounts, unless the client has explicitly
reserved the authority for itself. When voting proxies, the Company's primary
objective is to make voting decisions solely in the best economic interests of
its clients. The Company will act in a manner that it deems prudent and diligent
and which is intended to enhance the economic value of the underlying portfolio
securities held in its clients' accounts.

The Company has adopted written Proxy Policy Guidelines and Procedures (the
"Proxy Guidelines") that are reasonably designed to ensure that the Company is
voting in the best interest of its clients. The Proxy Guidelines reflect the
Company's general voting positions on specific corporate governance issues and
corporate actions. Some issues may require a case by case analysis prior to
voting and may result in a vote being cast that will deviate from the Proxy
Guideline. Upon receipt of a client's written request, the Company may also vote
proxies for that client's account in a particular manner that may differ from
the Proxy Guideline. Deviation from the Proxy Guidelines will be documented and
maintained in accordance with Rule 204-2 under the Investment Advisers Act of
1940.

In accordance with the Proxy Guidelines, the Company may review additional
criteria associated with voting proxies and evaluate the expected benefit to its
clients when making an overall determination on how or whether to vote the
proxy. The Company may vote proxies individually for an account or aggregate and
record votes across a group of accounts, strategy or product. In addition, the
Company may refrain from voting a proxy on behalf of its clients' accounts due
to de-minimis holdings, impact on the portfolio, items relating to foreign
issuers, timing issues related to the opening/closing of accounts and
contractual arrangements with clients and/or their authorized delegate. For
example, the Company may refrain from voting a proxy of a foreign issuer due to
logistical considerations that may have a detrimental effect on the Company's
ability to vote the proxy. These issues may include, but are not limited to: (i)
proxy statements and ballots being written in a foreign language, (ii) untimely
notice of a shareholder meeting, (iii) requirements to vote proxies in person,
(iv) restrictions on foreigner's ability to exercise votes, (v) restrictions on
the sale of securities for a period of time in proximity to the shareholder
meeting, or (vi) requirements to provide local agents with power of attorney to
facilitate the voting instructions. Such proxies are voted on a best-efforts
basis.

To assist in the proxy voting process, the Company may retain an independent
third party service provider to assist in providing research, analysis and
voting recommendations on corporate governance issues and corporate actions as
well as assist in the administrative process. The services provided offer a
variety of proxy-related services to assist in the Company's handling of proxy
voting responsibilities.


                                       A-6




Conflicts of Interest

The Company may have conflicts of interest that can affect how it votes its
clients' proxies. For example, the Company or an affiliate may manage a pension
plan whose management is sponsoring a proxy proposal. The Proxy Guidelines are
designed to prevent material conflicts of interest from affecting the manner in
which the Company votes its clients' proxies. In order to ensure that all
material conflicts of interest are addressed appropriately while carrying out
its obligation to vote proxies, the Chief Investment Officer of the Company may
designate an employee or a proxy committee to be responsible for addressing how
the Company resolves such material conflicts of interest with its clients.

To obtain a copy of the Policy Guidelines or to obtain information on how your
account's securities were voted, please contact your account representative.


                                       A-7




                                 Appendix No. 2
            Sample letter to accompany Proxy Voting Policy Statement

Insert: Date

Insert. Client name and address

Reference: Proxy Voting Policy and Procedure

Dear Client:

On January 31, 2003 the SEC adopted a new rule 206(4)-6, "Proxy Voting" under
the Investment Advisers Act of 1940 ("the Act"). The new rule is designed to
prevent material conflicts of interest from affecting the manner in which
advisers vote its clients' proxies. The new rule requires SEC-registered
investment advisers that have authority to vote clients' proxies to adopt
written policies and procedures reasonably designed to ensure that the adviser
votes proxies in the best interest of its clients, including procedures to
address any material conflict that may arise between the interest of the adviser
and its clients. The adviser must describe these policies and procedures to
clients upon their request, and disclose to clients how they obtain information
from the adviser about how the adviser has voted their proxies.

In keeping with the disclosure requirements of the new SEC rule we are enclosing
a copy of the Company's most recent Form ADV Part II, which includes a
description of the Company's Proxy Voting procedures in the form of a General
Proxy Voting Policy Statement.

Should you have any questions, please do not hesitate to contact me at insert
phone #.

Sincerely,


                                       A-8




                                 Appendix No. 3
                             Proxy Voting Guidelines

The following are the general Proxy Voting Guidelines of ADAM Advisers. Each
ADAM Adviser has developed guidelines that address the consistent method in
which they vote Proposals to address the specific requirements of their client
base; therefore not all ADAM Advisers will vote all Proposals in same manner.

Table of Contents

Proposal
No.        Description                                                   Pg. No.
--------------------------------------------------------------------------------
Management Proposals

Auditor Related.............................................................5
101.       Ratification of Auditors
102.       Independence of Auditors
103.       Auditor Indemnification

Board of Directors..........................................................5
201.       Election of Board of Directors
202.       Board Independence
203.       Changes in Board Size
204.       Cumulative Voting
205.       Director Duties and Stakeholder Laws
206.       Director Indemnification and Liability Protection
207.       Key Committee Structure

Compensation Related........................................................6
301.       Employee Stock Ownership Plans (ESOP)
302.       Executive/Director/Outside Director Stock Option Plans
303.       401k Employee Benefit Plans
304.       Golden Parachutes
305.       Director Fees
306.       Pension Fund Credits

Capital Structure...........................................................7
401.       Authorization of Additional Common Stock
402.       Authorization of Additional Preferred Stock
403.       Issuance of Additional Debt
404.       Reduction of Shares
405.       Share Repurchase Programs
406.       Preemptive Rights
407.       Adjustments to Par Value of Common Stock
408.       Debt Restructurings


                                       A-9




Proxy Voting Guidelines
Table of Contents (Continued)

Proposal
No.        Description                                                   Pg. No.
--------------------------------------------------------------------------------
Management Proposals

Corporate Transactions.......................................................8
501.       Mergers and Acquisitions
502.       Asset Sales
503.       Changing Corporate Name
504.       Corporate Restructurings
505.       Liquidations
506.       Spin-Offs

Anti-Takeover Defenses and Related Proposals.................................9
601.       Greenmail
602.       Poison Pills
603.       Supermajority Shareholder Vote Requirements
604.       Classified Boards
605.       Fair Price Provisions
606.       Unequal Voting Rights
607.       Reincorporation/Exemption from Takeover Laws

Other.......................................................................10
701.       Annual Meetings
702.       Confidential Voting, Independent Tabulations and Inspections
703.       Disgorgement Provisions
704.       Mutual Fund Issues
705.       Share-Blocking
706.       Shares Out on Loan


                                      A-10




Proxy Voting Guidelines
Table of Contents (Continued)

Proposal
No.        Description                                                   Pg. No.
--------------------------------------------------------------------------------
Shareholder Proposals

Auditor Related.............................................................12
SP-101.    Ratification of Auditors
SP-102.    Audit Firm Rotation
SP-103.    Independence of Auditors

Board of Directors..........................................................12
SP-201.    Minimum Director Stock Ownership
SP-202.    Board Independence
SP-203.    Age Limits
SP-204.    Cumulative Voting
SP-205.    Director Duties and Stakeholder Laws
SP-206.    Director Attendance at Annual Meetings
SP-207.    Key Committee Composition
SP-208.    Limit Director Tenure

Compensation Related........................................................13
SP-301.    Holding Periods
SP-302.    Future Stock Option Awards
SP-303.    Accounting Treatment of Stock Option Awards
SP-304.    Golden Parachutes
SP-305.    Limits on Executive and Director Compensation
SP-306.    Requests for Additional Disclosure of Executive Compensation
SP-307.    Reports on Executive Retirement Benefits

Capital Structure...........................................................13
SP-401.    Preemptive Rights
SP-402.    Authorization of Blank Check Preferred Stock

Corporate Transactions......................................................14
SP-501.    Rights of Appraisal

Anti-Takeover Defenses and Related Proposals................................14
SP-601.    Greenmail
SP-602.    Poison Pills
SP-603.    Supermajority Shareholder Vote Requirements
SP-604.    Classified Boards
SP-605.    Fair Price Provisions
SP-606.    Equal Access
SP-607.    Reincorporation/Exemption from Takeover Laws


                                      A-11




Proxy Voting Guidelines
Table of Contents (Continued)

Proposal
No.        Description                                                   Pg. No.
--------------------------------------------------------------------------------
Shareholder Proposals

Proxy Contest Defenses......................................................14
SP-701.    Shareholders' Right to Call Special Meetings
SP-702.    Shareholder Action by Written Consent
SP-703.    Shareholders' Ability to Remove or Elect Directors

Social and Environmental Issues.............................................15
SP-801.    Environmental Issues / CERES Principles
SP-802.    Northern Ireland (MacBride Principles)
SP-803.    South Africa (Statement of Principles)
SP-804.    Other Political/Social/Special Interest Issues

Other.......................................................................15
SP-901.    Annual Meetings
SP-902.    Confidential Voting, Independent Tabulations and Inspections
SP-903.    Abstention Votes
SP-904.    Existing Dual Class Companies
SP-905.    Special Reports/Additional Disclosure
SP-906.    Lack of Information
SP-907.    Shareholder Advisory Committee


                                      A-12




I.   Guidelines for Voting on Management Proposals

Allianz Dresdner Asset Management of America ("ADAM"), its affiliates and
subsidiaries will generally vote on management proposals as follows:

AUDITOR RELATED
--------------------------------------------------------------------------------

101. Ratification of Auditors: The Company will generally vote for management
proposals to ratify the selection of auditors unless:

     .    The audit firm is not independent in fact or appearance;
     .    The audit firm has rendered an opinion that is publicly known to not
          be an indication of the company's true financial position; or
     .    There are significant doubts that have been publicly raised regarding
          the audit firm's integrity or objectivity.

102. Independence of Auditors: The Company will generally vote against auditors
and withhold votes from audit committee members if non-audit fees exceed audit
fees, audit-related fees, and tax fees combined. The Company will follow the SEC
disclosure categories in applying the above formula.

103. Auditor Indemnification: The Company will generally vote against management
proposals to indemnify the auditors.

BOARD OF DIRECTORS
--------------------------------------------------------------------------------

201. Election of Board of Directors: The Company will generally vote with
management for the routine election of directors unless:

     a.   There are clear concerns due to the company having displayed a record
          of poor performance;

     b.   The board fails to meet minimum corporate governance standards (e.g.,
          performance-based executive compensation, board independence, takeover
          activity); or

     c.   Criminal activity by the board or a particular board nominee.

202. Board Independence: The Company will generally vote for management
proposals that require the board of directors to be comprised of a majority of
independent or unaffiliated directors.

203. Changes in Board Size: The Company will generally vote for management
proposals that seek to fix board size and will generally vote against management
proposals that give management the ability to change the size of the board
without shareholder approval.

i. Cumulative Voting: The Company will generally vote for management proposals
to eliminate cumulative voting and will generally vote against management
proposals to introduce cumulative voting.


                                      A-13




ii. Director Duties and Stakeholder Laws: The Company will generally vote
against management proposals to allow the board of directors to consider the
interests of stakeholders (constituencies other than shareholders), unless such
proposals are considered in the context of the company's commitment to
shareholders.

iii. Director Indemnification and Liability Protection: The Company will
generally vote in favor of management proposals to limit Directors' liability
and to broaden their indemnification.

The Company will generally vote against management proposals that would broaden
the Directors' indemnification that would cover acts of absolute negligence or
proposals that would cover expenses for monetary damages of directors and
officers that violate the standard-duty of care.

207. Key Committee Structure: The Company will generally vote for management
proposals that require all members of the compensation and nominating committees
to be comprised of independent or unaffiliated directors.

COMPENSATION RELATED
--------------------------------------------------------------------------------

301. Employee Stock Ownership Plans (ESOP): The Company will generally vote for
management proposals to establish ESOPs or increase authorized shares for
existing ESOP's provided that the following criteria are met:

     a.   The grants are part of a broad-based employee plan, including all
          non-executive employees;

     b.   The plan does not permit a discount greater than 15%.

302. Executive/Director/Outside Director Stock Option Plans: The Company will
evaluate management stock option plan proposals on a case-by-case basis. When
reviewing such compensation plans, the Company will generally consider the
following criteria:

     a.   That the dilution of existing shares is no more than 5%;

     b.   That the stock option plan is incentive-based;

     c.   That the stock option plan does not allow for discounted stock
          options;

     d.   For mature companies, that the stock option plan does not constitute
          more than 5% of the outstanding shares at the time of approval;

     e.   For growth companies, that the stock option plan does not constitute
          more than 10% of the outstanding shares at the time of approval.

303. 401k Employee Benefit Plans: The Company will generally vote for management
proposals to implement a 401(k) savings plan for its employees.

304. Golden Parachutes: The Company will generally vote for management proposals
that require shareholder approval of golden parachutes and will vote for
management proposals to limit golden parachutes.


                                      A-14




305. Director Fees: The Company will generally vote for management proposals to
award directors fees unless the amounts are excessive relative to similar
industries and country.

306. Pension Fund Credits: The Company will generally vote against management
proposals that include pension fund credits in earnings when determining
executive compensation.

CAPITAL STRUCTURE
--------------------------------------------------------------------------------

401. Authorization of Additional Common Stock: The Company will generally vote
for management proposals to increase the authorization of common stock if a
clear and legitimate business purpose is stated and the increase in
authorization does not exceed 100% of shares currently authorized. The Company
will generally vote against management proposals to increase the authorized
common stock if it will carry preemptive rights or supervoting rights.

The Company will generally vote for management proposals to increase common
share authorization for a stock split as long as authorized shares following the
split do not exceed 100 percent of existing authorized shares.

402. Authorization of Additional Preferred Stock: The Company will generally
vote for management proposals to create a new class of preferred stock or for
proposals to allow for the issuance of additional shares of preferred stock
unless:

     a.   The proposal is for the issuance of blank check preferred stock;

     b.   The issuance of preferred stock is greater than 50% of current issued
          capital;

     c.   The newly created preferred stock would have unspecified rights, i.e.
          voting, conversion, dividend distribution rights;

     d.   The additional preferred shares will not be used as part of a takeover
          defense.

403. Issuance of Additional Debt: The Company will generally vote for management
proposals to issue additional debt provided that the company's debt-to-equity
ratio is between zero and one hundred percent.

The Company will evaluate proposals on a case-by-case basis where the
debt-to-equity ratio is greater than one hundred percent and will use
comparisons to similar industry standards.

404. Reduction of Shares: The Company will generally vote for management
proposals to reduce the number of authorized shares of common or preferred
stock, or to eliminate classes of preferred stocks, provided that such proposals
offer a clear and legitimate business purpose.

The Company will generally vote for management proposals to implement a reverse
stock split provided that management proportionately reduces the authorized
shares that are in the corporate charter or if the resulting increase of common
stock does not exceed 100% of the currently authorized common stock.

405. Share Repurchase Programs: The Company will generally vote for management
proposals to institute open-market share repurchase plans in which all
shareholders may participate on equal terms.


                                      A-15




406. Preemptive Rights: The Company will generally vote for management proposals
to eliminate preemptive rights.

407. Adjustments to Par Value of Common Stock: The Company will generally vote
for management proposals to reduce the par value of common stock.

408. Debt Restructurings: The Company will evaluate debt restructuring
management proposals (involving additional common and/or preferred share
issuances) on a case-by-case basis. The Company will generally consider the
following criteria:

     a.   Reasonableness of the dilution;

     b.   The impact that the restructuring and determining if it will be
          beneficial to existing shareholders;

     c.   The threat of bankruptcy.

CORPORATE TRANSACTIONS
--------------------------------------------------------------------------------

501. Mergers and Acquisitions: The Company will evaluate merger and acquisition
management proposals on a case-by-case basis. The Company will generally
consider the following factors:

     a.   Anticipated financial and operating benefits;

     b.   Offer price (cost vs. premium);

     c.   Prospects of the combined companies;

     d.   How the deal was negotiated;

     e.   Changes in corporate governance and their impact on shareholder
          rights;

     f.   Corporate restructuring;

     g.   Spin-offs;

     h.   Asset sales;

     i.   Liquidations;

     j.   Rights of appraisal.

502. Asset Sales: The Company will evaluate asset sale management proposals on a
case-by-case basis by generally assessing the impact on the balance
sheet/working capital and value received for the asset.

503. Changing Corporate Name: The Company will generally vote for management
proposals regarding corporate name changes.

504. Corporate Restructurings: The Company will evaluate corporate restructuring
management proposals on a case-by-case basis which would include minority
squeeze outs, leveraged buyouts, spin-offs, liquidations, and asset sales.

505. Liquidations: The Company will evaluate liquidation proposals by management
on a case-by-case basis and will review management's efforts to pursue other
alternatives, appraisal value of assets, and the compensation plan for
executives managing the liquidation.


                                      A-16




506. Spin-Offs: The Company will evaluate spin-off proposals on a case-by-case
basis depending on the tax and regulatory advantages, planned use of sale
proceeds, market focus, and managerial incentives.

ANTI-TAKEOVER DEFENSES AND RELATED PROPOSALS
--------------------------------------------------------------------------------

601. Greenmail: The Company will generally vote for management proposals to
prohibit payment of greenmail, defined as the practice of repurchasing shares
from a bidder at an above-market price in exchange for the bidder's agreement
not to acquire the target company. The Company will generally vote against
management proposals to adopt anti-takeover greenmail provisions.

602. Poison Pills: A poison pill is a strategic move by a takeover-target to
make its stock less attractive. A target company with a "pill" (also known as a
shareholder rights plan) usually distributes warrants or purchase rights that
become exercisable when a triggering event occurs.

The Company will evaluate poison pill management proposals on a case-by-case
basis by considering the following factors:

          a.   Best interest of the existing shareholders;

          b.   The current salaries of the target companies' officers;

          c.   Repurchase price for the shares by the target company;

          d.   Amount of cash invested in target company;

          e.   Percentage of ownership by target company management;

          f.   Perks for target company senior management;

          g.   Attitude toward tax deferral benefiting target company
               management;

          h.   Target company's employee expenses.

The Company will generally vote for management proposals to require shareholder
ratification of poison pills or that request the board of directors to redeem
poison pills.

603. Supermajority Shareholder Vote Requirements: The Company will generally
vote for management proposals to modify or rescind existing supermajority vote
requirements to amend the charters or bylaws as well as approve mergers,
acquisitions or other business combinations and will generally vote against
management proposals to require a supermajority vote on such matters.

604. Classified Boards: The Company will generally vote for management proposals
to eliminate a classified board of directors and will generally vote against
management proposals to classify the board.

605. Fair Price Provisions: The Company will generally vote for management
proposals to adopt or amend fair price provisions provided that the proposal
does not include a shareholder vote requirement that exceeds the majority of
disinterested shares.

606. Unequal Voting Rights: The Company will generally vote against management
proposals for dual class exchange offers and dual class recapitalizations.


                                      A-17




607. Reincorporation/Exemption from Takeover Laws: The Company will generally
vote for management proposals to opt out of state/country takeover laws and
generally vote against management proposals to reincorporate into a state which
has more stringent anti-takeover and related provisions.

The Company will evaluate reincorporation management proposals on a case-by-case
basis that would require offshore companies to reincorporate in the United
States.

OTHER
--------------------------------------------------------------------------------

701. Annual Meetings: The Company will generally vote for management proposals
that relate to the conduct of the annual meeting except those proposals which
relate to the "transaction of such other business which may come before the
meeting".

702. Confidential Voting, Independent Tabulations and Inspections: The Company
will generally vote for management proposals to adopt confidential voting, use
independent tabulators, and use independent election inspectors. The Company
will generally vote against management proposals to repeal such provisions.

703. Disgorgement Provisions: Disgorgement provisions stipulate that an acquirer
pay back profits from the sale of stock purchased two years prior to achieving
control status. The Company will evaluate proposals to opt out of such
provisions on a case-by-case basis.

704. Mutual Fund Issues: The Company will evaluate the following mutual fund
issues on a case-by-case basis:

          a.   Approve the merger of the funds;

          b.   Approve investment advisory agreement;

          c.   Change in fundamental investment policy;

          d.   Approve/amend sub-advisory agreement;

          e.   Approve conversion from closed-end to open-end fund.

705. Share-Blocking: The Company will generally not vote proxies in countries
where there is "share-blocking."

706. Shares Out on Loan: Proxies are not available to be voted when shares are
out on loan through client securities lending programs with their custodians.


                                      A-18




Asset Management Allianz Dresdner Asset Management of America ("ADAM"), its
affiliates, and subsidiaries will generally vote on shareholder proposals as
follows:

AUDITOR RELATED
--------------------------------------------------------------------------------

SP-101.   Ratification of Auditors: The Company will generally vote for
          shareholder proposals to require shareholder ratification of auditors.

SP-102.   Audit Firm Rotation: The Company will generally vote against
          shareholder proposals asking for audit firm rotation.

SP-103.   Independence of Auditors: The Company will generally vote against
          shareholder proposals with respect to prohibiting auditors from
          engaging in non-audit services.

BOARD OF DIRECTORS
--------------------------------------------------------------------------------

SP-201.   Minimum Director Stock Ownership: The Company will generally vote
          against shareholder proposals requiring directors to own a certain
          number of shares in order to qualify as a director or to remain on the
          board.

SP-202.   Board Independence: The Company will generally vote for shareholder
          proposals that require the board of directors to be comprised of a
          majority of independent or unaffiliated directors.

SP-203.   Age Limits: The Company will generally vote against shareholder
          proposals to impose a mandatory retirement age for directors.

SP-204.   Cumulative Voting: The Company will generally vote for shareholder
          proposals to eliminate cumulative voting and will generally vote
          against shareholder proposals to introduce cumulative voting.

SP-205.   Director Duties and Stakeholder Laws: The Company will generally vote
          against shareholder proposals to allow the board of directors to
          consider the interests of stakeholders (constituencies other than
          shareholders), unless such proposals are considered in the context of
          the company's commitment to shareholders.

SP-206.   Director Attendance at Annual Meetings: The Company will generally
          vote against shareholder proposals for mandatory director attendance
          at the annual shareholder meeting.

SP-207.   Key Committee Composition: The Company will generally vote for
          shareholder proposals that require all members of the compensation and
          nominating committees be comprised of independent or unaffiliated
          directors.


                                      A-19




SP-208.   Limit Director Tenure: The Company will generally vote against
          shareholder proposals to limit the tenure of outside directors.

COMPENSATION RELATED
--------------------------------------------------------------------------------

SP-301.   Holding Periods: The Company will generally vote against shareholder
          proposals that require companies to adopt full tenure stock holding
          periods for executives.

SP-302.   Future Stock Option Awards: The Company will generally vote against
          shareholder proposals to ban future stock option grants to executives.

SP-303.   Accounting Treatment of Stock Option Awards: The Company will
          generally vote against shareholder proposals requesting that stock
          options be expensed.

SP-304.   Golden Parachutes: The Company will generally vote for shareholder
          proposals to require shareholder approval of golden parachutes and
          will vote against shareholder proposals that would set limits on
          golden parachutes.

SP-305.   Limits on Executive and Director Compensation: The Company will
          generally vote against shareholder proposals to limit executive and
          director compensation.

SP-306.   Requests for Additional Disclosure of Executive Compensation: The
          Company will generally vote against shareholder proposals that require
          additional disclosure for executive and director compensation above
          and beyond the disclosure required by the Securities and Exchange
          Commission ("SEC") regulations.

SP-307.   Reports on Executive Retirement Benefits (deferred compensation,
          split-dollar life insurance, SERPs, and pension benefits): The Company
          will generally vote for shareholder proposals that require companies
          to report on their executive retirement benefits provided that any
          cost with such reporting is within reason.

CAPITAL STRUCTURE
--------------------------------------------------------------------------------

SP-401.   Preemptive Rights: The Company will generally vote against shareholder
          proposals that seek preemptive rights.

SP-402.   Authorization of Blank Check Preferred Stock: The Company will
          generally vote for shareholder proposals that require shareholder
          approval prior to the issuance of blank check preferred stock.


                                      A-20




CORPORATE TRANSACTIONS
--------------------------------------------------------------------------------

SP-501.   Rights of Appraisal: The Company will generally vote against
          shareholder proposals to provide rights of appraisal to dissenting
          shareholders.

ANTI-TAKEOVER DEFENSES AND RELATED PROPOSALS
--------------------------------------------------------------------------------

SP-601.   Greenmail: The Company will generally vote for shareholder proposals
          to prohibit payment of greenmail.

SP-602.   Poison Pills: The Company will generally vote for shareholder
          proposals to require shareholder ratification of poison pills. The
          Company will generally vote on a case-by-case basis on shareholder
          proposals that request the board of directors to redeem poison pill
          provisions.

SP-603.   Supermajority Shareholder Vote Requirements: The Company will
          generally vote for shareholder proposals to modify or rescind existing
          supermajority vote requirements to amend the charters or bylaws as
          well as approve mergers, acquisitions, and other business
          combinations.

SP-604.   Classified Boards: The Company will generally vote for shareholder
          proposals to repeal classified boards and elect all directors annually
          and will vote against shareholder proposals to classify the board.

SP-605.   Fair Price Provisions: The Company will generally vote for shareholder
          proposals to adopt or lower the shareholder vote requirements with
          respect to existing fair price provisions.

SP-606.   Equal Access: The Company will generally vote for shareholder
          proposals to allow shareholders equal access to management's proxy
          material so they can evaluate and propose voting recommendations on
          proxy proposals and director nominees.

SP-607.   Reincorporation/Exemption from Takeover Laws: The Company will
          generally vote for shareholder proposals to opt out of state/country
          takeover laws and will generally vote on a case-by-case basis for
          shareholder proposals to reincorporate in another country or state.

PROXY CONTEST DEFENSES
--------------------------------------------------------------------------------

SP-701.   Shareholders' Right to Call Special Meetings: The Company will
          generally vote against shareholder proposals to grant shareholders'
          the ability to call special meetings.


                                      A-21




SP-702.   Shareholder Action by Written Consent: The Company will generally vote
          against shareholder proposals to permit shareholders to take action by
          written consent.

SP-703.   Shareholders' Ability to Remove or Elect Directors: The Company will
          generally vote against shareholder proposals to restore shareholder
          ability to remove directors with or without cause. The Company will
          generally vote against shareholder proposals that permit shareholders
          to elect directors to fill board vacancies.

SOCIAL AND ENVIRONMENTAL ISSUES
--------------------------------------------------------------------------------

SP-801.   Environmental Issues / CERES Principles: The Company will generally
          vote against shareholder proposals that request issuers to file the
          CERES principles.

SP-802.   Northern Ireland (MacBride Principles): The Company will generally
          vote against shareholder proposals that are aimed at anti-Catholic
          discrimination within Northern Ireland as outlined in the MacBride
          Principles.

SP-803.   South Africa (Statement of Principles): The Company will generally
          vote against shareholder proposals that pertain to promoting the
          welfare of black employees within companies that operate in South
          Africa.

SP-804.   Other Political/Social/Special Interest Issues: The Company will
          generally vote against shareholder proposals on restrictions that
          relate to social, political, or special interest issues (examples:
          nuclear power, Mexico, animal testing, tobacco industry, or equal
          employment opportunities) that may effect the operations and
          competitiveness of the issuer or which may have a significant
          financial impact to the shareholders.

OTHER
--------------------------------------------------------------------------------

SP-901.   Annual Meetings: The Company will generally vote against shareholder
          proposals to change the time or place of annual meetings.

SP-902.   Confidential Voting, Independent Tabulations and Inspections: The
          Company will generally vote for shareholder proposals to adopt
          confidential voting, use independent tabulators, and use independent
          election inspectors. The Company will vote against shareholder
          proposals to repeal such provisions.

SP-903.   Abstention Votes: The Company will generally vote for shareholder
          proposals recommending that votes to "abstain" not be considered votes
          "cast" at an annual or special meeting unless required by state law.

SP-904.   Existing Dual Class Companies: The Company will generally vote against
          shareholder proposals asking for a report to shareholders on the
          financial impact of


                                      A-22




          its dual class voting structure and will vote for shareholder
          proposals to submit a dual class voting structure to a shareholder
          vote.

SP-905.   Special Reports/Additional Disclosure: The Company will generally vote
          against shareholder proposals that require disclosure reports on the
          impact of certain issues to the overall business if the issuer and the
          shareholders.

SP-906.   Lack of Information: The Company generally will vote against proposals
          if there is a lack of information to make an informed voting decision.

SP-907.   Shareholder Advisory Committee: The Company will generally vote
          against shareholder proposals to establish shareholder advisory
          committees.


                                     A-23




                           HOW THE FUNDS VOTE PROXIES

The Funds' Investment Adviser votes proxies on behalf of the Funds pursuant to
written Proxy Policy Guidelines and Procedures ("Proxy Guidelines") adopted by
the Funds. A summary of the Proxy Guidelines is provided below. To obtain
information on how your Fund's securities were voted, please contact your
account representative at 1-800-551-8043.

--------------------------------------------------------------------------------
                      NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
                              Proxy Voting Summary
--------------------------------------------------------------------------------

                                 Revised 11/9/04


Nicholas-Applegate Capital Management takes seriously the responsibility of
voting proxies on behalf of our clients. Our policies and procedures are
designed to meet all applicable fiduciary standards and to protect the rights
and enhance the economic welfare of those to whom we owe a fiduciary duty.


A Proxy Committee, including executive, investment, sales, marketing, compliance
and operations personnel, is responsible for establishing our policies and
procedures. The Committee reviews these policies and procedures on a regular
basis and makes such changes as it believes are necessary. Our guidelines and
voting actions are to a large extent aligned with the voting recommendations of
Glass Lewis, a third-party proxy voting service to which we subscribe.

We review all proxies for which we have voting responsibility, and vote all
proxies according to our written guidelines, taking into account Glass Lewis
recommendations and/or investment team input. Our guidelines address such
general areas as elections of directors and auditors, corporate defenses,
corporate governance, mergers and acquisitions, corporate restructuring, state
of incorporation, proxy contest issues, executive compensation, employee
considerations and social issue proposals.


The guidelines contained herein reflect our normal voting position on certain
issues, and will not apply in every situation. The guidelines are intended to
generally cover both U.S. and international proxy voting, although due to
country differences and requirements, international proxy voting may differ
depending on individual facts and circumstances. Some issues require a
case-by-case analysis prior to voting and, in those situations, input from our
investment team will normally be solicited. Even when our guidelines specify how
we normally vote on particular issues, we may change the vote if it is
reasonably determined to be in our clients best interest. In addition, on client
request, we may vote proxies for that client in a particular manner overall,
such as union or labor sensitive.


                                      A-24




To ensure that voting responsibilities are met, the Committee has established
operational procedures to have client proxies reconciled against client
holdings. The procedures are also intended to ensure that proxies are voted
consistent with voting guidelines, that the best proxy analysis is used for each
issue, and all votes are recorded and justified. Any variance from stated policy
is carefully noted, including the reason for the variance.


The proxy voting and record keeping are provided through a third party vendor,
Investor Responsibility Research ("IRRC"). We maintain proxy voting records for
all accounts and make these records available to clients at their request.

                                      A-25




--------------------------------------------------------------------------------
                      NICHOLAS-APPLEGATE CAPITAL MANAGEMENT
                             Proxy Voting Guidelines
--------------------------------------------------------------------------------

                                 Revised 11/9/04


--------------------------------------------------------------------------------
I    External Auditor
--------------------------------------------------------------------------------

A.   Auditors

Vote for proposals to ratify auditors, unless there is a reason to believe the
auditing firm has a financial interest in or association with the company and
is, therefore, not independent; or there is reason to believe the auditor has
rendered an opinion that is neither accurate nor indicative of the company's
financial position.


Additionally, we may vote against ratification of auditors:

     .    When audit fees added to audit-related fees total less than the tax
          fees and/or less than other non-audit fees.

     .    If there have been any recent restatements or late filings by the
          company where the auditors bears some responsibility for the
          restatement or late filing (e.g. a restatement due to a reporting
          error).

     .    When the auditor performs tax shelter work or work for a contingent
          type fee including a fee based on a percentage of economic benefit to
          the company.

     .    When audit fees are excessively low, ezpecially when compared with
          other companies in the same industry.

     .    When the company has aggressive accounting policies.


--------------------------------------------------------------------------------
II   Board of Directors
--------------------------------------------------------------------------------

A.   Director Nominees


     Votes on director nominees are normally voted in accordance with Glass
     Lewis analysis and recommendation on each individual proposal. Evaluations
     are based on the following criteria (and any others that may be deemed
     relevant by Glass Lewis or Nicholas-Applegate):


          .    Long term corporate performance record based on increases in
               shareholder wealth, earnings, financial strength
          .    Executive Compensation
          .    Director Compensation
          .    Corporate Governance Provisions and Takeover Activity
          .    Criminal Activity
          .    Investment in the Company
          .    Interlocking Directorships
          .    Inside, Outside, and Independent Directors
          .    Board Composition
          .    Number of Other Board Seats
          .    Any problems or issues that arose on Other Board assignments
          .    Support of majority-supported shareholder proposals.


                                      A-26




B.   Director Indemnification and Liability Protection


     1.   Proposals concerning director and officer indemnification and
          liability protection are normally voted in accordance with Glass Lewis
          analysis and recommendation on each individual proposal.


     2.   Vote against proposals to limit or eliminate entirely the liability
          for monetary damages of directors and officers for violating the duty
          of care.

     3.   Vote against indemnification proposals that would expand coverage
          beyond just legal expenses to acts like negligence, that are more
          serious violations of fiduciary obligation than mere carelessness.

     4.   Vote for only those proposals providing such expanded coverage on
          cases when a director's or officer's legal defense was unsuccessful
          if: (i) the director was found to have acted in good faith and in a
          manner that he reasonably believed was in the best interest of the
          company, and (ii) if only the director's legal expenses would be
          covered.

C.   Director Duties and Stakeholder Laws

     Vote against management or shareholder proposals to allow the board of
     directors to consider the interests of "stakeholders" or "non-shareholder
     constituents," unless these proposals make it clear that these interests
     are to be considered in the context of the prevailing commitment to
     shareholders.

D.   Director Nominations


     Vote in accordacne with Glass Lewis shareholder proposals asking that
     management allow large shareholders equal access to management's proxy to
     discuss and evaluate management's director nominees, and/or to nominate and
     discuss shareholder nominees to the board.


E.   Inside Versus Independent Directors


     1.   Shareholder proposals asking that boards be comprised of a majority of
          independent directors are normally voted in accordance with Glass
          Lewis analysis and recommendation on each individual proposal.


     2.   Vote for shareholder proposals asking that board audit, compensation
          and/or nominating committees be comprised exclusively of independent
          directors.


                                      A-27




F.   Stock Ownership Requirements


     Vote in accordance with Glass Lewis shareholder proposals requiring
     directors to own a minimum amount of company stock in order to qualify as a
     director, or to remain on the board.


G.   Term of Office

     Vote against proposals to limit the tenure of outside directors.

--------------------------------------------------------------------------------
III  Proxy Contests and Corporate Defenses
--------------------------------------------------------------------------------

A.   Proxy Contests for Board Seats


     All votes in a contested election of directors are normally voted in
     accordance with Glass Lewis analysis and recommendation on each individual
     proposal.


B.   Classified Boards

     1.   Vote against proposals to classify the board.

     2.   Vote for proposals to repeal a classified board, and to elect all
          directors annually.

C.   Cumulative Voting

     1.   Vote for proposals to permit cumulative voting in the election of
          directors.

     2.   Vote against proposals to eliminate cumulative voting in the election
          of directors.

D.   Director Nominations

     Vote against management proposals to limit shareholders' ability to
     nominate directors.

E.   Shareholders' Right to Call Special Meetings

     1.   Vote against management proposals to restrict or prohibit
          shareholders' ability to call special meetings.

     2.   Vote for shareholder proposals that remove restrictions on the right
          of shareholders to act independently of management.

F.   Shareholder Action by Written Consent

     1.   Vote against management proposals to restrict or prohibit
          shareholders' ability to take action by written consent.


                                      A-28




     2.   Vote for shareholder proposals to allow or make easier shareholder
          action by written consent.

G.   Size of the Board

     1.   Vote for proposals that seek to fix the size of the Board.

     2.   Vote against management proposals that give management the ability to
          alter the size of the Board without shareholder approval.

H.   Shareholders' Ability to Remove Directors

     1.   Vote against proposals that state directors may be removed only for
          cause.

     2.   Vote for proposals to restore shareholder ability to remove directors
          with or without cause.

     3.   Vote against proposals that provide that only continuing directors may
          elect replacements to fill board vacancies.

     4.   Vote for proposals that permit shareholders to elect directors to fill
          board vacancies.

--------------------------------------------------------------------------------
IV   Tender Offers and Corporate Defenses
--------------------------------------------------------------------------------

A.   Fair Price Provisions


     1.   Vote in accordance with Glass Lewis analysis and recommendation on
          management proposals to adopt a fair price provision, as long as the
          shareholder vote requirement imbedded in the provision is no more than
          a majority of the disinterested shares.

     2.   Vote in accordance with Glass Lewis analysis and recommendation
          on shareholder proposals to lower the shareholder vote requirements
          imbedded in existing fair price provisions.


B.   Greenmail

     1.   Vote for proposals to adopt anti-greenmail charter or bylaw amendments
          or otherwise restrict a company's ability to make greenmail payments.


                                      A-29





     2.   Vote in accordance with Glass Lewis analysis and recommendation on
          each individual proposal regarding anti-greenmail proposals when they
          are bundled with other charter or bylaw amendments.


     3.   Vote on a case-by-case basis regarding restructuring plans that
          involve the payment of pale greenmail.

C.   Poison Pills

     1.   Vote for shareholder proposals asking that a company submit its poison
          pill for shareholder ratification.


     2.   Shareholder proposals to redeem a company's poison pill are normally
          voted in accordance with Glass Lewis analysis and recommendation on
          each individual proposal.

     3.   Management proposals to ratify a poison pill are normally voted in
          accordance with Glass Lewis analysis and recommendation on each
          individual proposal.


D.   Stakeholder Provisions

     Vote against management proposals allowing the board to consider
     stakeholders' (outside constituencies') interests when faced with a tender
     offer.

E.   Super-majority Vote Requirement to Approve Mergers

     1.   Vote for shareholder proposals to lower super-majority vote
          requirements for mergers and other business combinations.

     2.   Vote against management proposals to require a super-majority
          shareholders' vote to approve mergers and other significant business
          combinations.

F.   Super-majority Shareholder Vote Requirements to Amend Charter or Bylaws

     1.   Vote for shareholder proposals to lower super-majority vote
          requirements to amend any bylaw or charter provision.

     2.   Vote against management proposals to require a super-majority vote to
          amend any bylaw or charter provision.


                                      A-30




G.   Unequal Voting Rights


     Vote in accordance with Glass Lewis analysis and recommendation on
     proposals for dual class exchange offers and dual class recapitalizations.


H.   Existing Dual Class Companies


     1.   Vote in accordance with Glass Lewis analysis and recommendation on
          shareholder proposals asking that a company report to shareholders on
          the financial impact of its dual class voting structure.


     2.   Vote for shareholder proposals asking that a company submit its dual
          class voting structure for shareholder ratification.

I.   White Squire Placements

     Vote for shareholder proposals to require approval of blank check preferred
     stock issues for other than general corporation purposes. (e.g. raising
     capital or making acquisitions in the normal course of business).

--------------------------------------------------------------------------------
V    Miscellaneous Corporate Governance Provisions
--------------------------------------------------------------------------------

A.   Abstention Votes

     Vote for shareholder proposals recommending that votes to "abstain" not be
     considered votes "cast" at an annual or special meeting, unless that
     consideration is required by state law.

B.   Annual Meetings

     1.   Vote against management proposals asking for authority to vote at the
          meeting for "other matters".

     2.   Vote against shareholder proposals to rotate the time or place of
          annual meetings.

C.   Confidential Voting and Independent Tabulation and Inspections

     Vote for proposals to adopt a policy that comprises both confidential
     voting and the use of independent vote tabulators of elections.


                                      A-31




D.   Equal Access

     Vote for shareholder proposals to allow significant company shareholders
     equal access to management's proxy material in order to evaluate and
     propose voting recommendations on proxy proposals and director nominees,
     and/or to nominate their own candidates to the board.

E.   Bundled Proposals


     Bundled or "conditioned" proxy proposals are normally voted in accordance
     with Glass Lewis analysis and recommendation on each individual proposal.
     (e.g., management proposals to provide shareholders a special dividend that
     are bundled with other charter or bylaw changes).


F.   Shareholder Advisory Committee


     1.   Shareholder proposals to establish shareholder advisory committees are
          normally voted in accordance with Glass Lewis analysis and
          recommendation on each individual proposal.

     2.   Decisions on whether or not to join a shareholder advisory committee
          are normally voted in accordance with Glass Lewis analysis and
          recommendation on each individual proposal.


G.   Disclosure Proposals


     Shareholder proposals requesting fuller disclosure of company policies,
plans or business practices are normally voted in accordance with Glass Lewis
analysis and recommendation on each individual proposal.


H.   Conflict of Interest

     When facing conflicts between our interests and the interests of our
clients, Nicholas-Applegate will always act in the best interests of its
clients. In proxy voting matters, conflicts of interest can arise in many ways.
For example, a proxy issue could arise for one of our public clients that we
also own in one or more client accounts. Or, a potential client battling a
contentious shareholder proposal may ask for our vote in exchange for granting
us an investment mandate. In these cases and other potential conflict scenarios,
Nicholas-Applegate must exercise caution to ensure our clients' interests are
not compromised.

     We believe a reasonable process to screen for potential conflicts that
     could influence our proxy voting is as follows:

          (i)  identify any situation where we do not intend to vote in
               accordance with our normal policy on any issue;


                                      A-32




          (ii) determine who is directing (portfolio manager, client, etc) us to
               vote contrary to our normal policy;
          (iii) review and analyze for potential conflict issues (e.g., may
               require PM to disclose any relationship with the issuer via a
               written questionnaire);
          (iv) Proxy Committee to review request to vote contrary to policy, and
               potential conflict if any, prior to voting, and will make final
               decision.

          (v)  pursuant to the request of the Board of Trustees of the
               Nicholas-Applegate Institutional Funds, NACM will report to the
               Board any conflict of interest matter and how the Committee
               resolved it.

     The Proxy Committee will be responsible for implementing and following the
     above process, and has the flexibility to use its reasonable judgment in
     determining which steps are necessary under each set of circumstances.


                                      A-33




--------------------------------------------------------------------------------
VI   Capital Structure
--------------------------------------------------------------------------------

A.   Common Stock Authorization


     1.   Proposals to increase the number of shares of common stock the board
          isauthorized to issue are normally voted in accordance with Glass
          Lewis analysis and recommendation on each individual proposal.

     2.   Proposals to increase the number of shares of common stock authorized
          for issue are normally voted in accordance with Glass Lewis analysis
          and recommendation on each individual proposal.

     3.   Vote in accordance with Glass Lewis analysis and recommendation on
          proposed common share authorizations that increase existing
          authorization by more than 100 percent unless a clear need for the
          excess shares is presented by the company.


B.   Stock Distributions: Splits and Dividends

     Vote for management proposals to increase common share authorization for a
     stock split, provided that the increase in authorized shares following the
     split is not greater than 100 percent of existing authorized shares.

C.   Reverse Stock Splits

     Vote for management proposals to implement a reverse stock split that also
     reduce the number of authorized common shares to a level that does not
     represent an increase of more than 100 percent of existing authorized
     common shares.

D.   Blank Check Preferred Stock

     1.   Vote against management proposals authorizing the creation of new
          classes of preferred stock which have unspecified rights including
          voting, conversion or dividend distribution rights.


     2.   Management proposals to increase the number of authorized blank check
          preferred shares are normally voted in accordance with Glass Lewis
          analysis and recommendation on each individual proposal.


     3.   Vote for shareholder proposals asking that any placement of blank
          check preferred stock be first approved by shareholders, unless the
          placement is for ordinary business purposes.

     4.   Vote for proposals to create "blank check" preferred stock in cases
          when the company expressly states that the stock will not be used as a
          takeover defense or carry superior voting rights.


                                      A-34




E.   Adjustments to Par Value of Common Stock

     Vote for management proposals to reduce the par value of common stock.

F.   Preemptive Rights


     Proposals to provide shareholders with preemptive rights are normally voted
     in accordance with Glass Lewis analysis and recommendation on each
     individual proposal.


G.   Debt Restructuring


     Proposals to increase common and/or preferred shares and to issue shares as
     part of a debt restructuring plan are normally voted in accordance with
     Glass Lewis analysis and recommendation on each individual proposal.


H.   Share Repurchase Programs

     Vote for management proposals to institute open-market share repurchase
     plans in which all shareholders may participate on equal terms.

--------------------------------------------------------------------------------
VII  Executive Compensation/Employee Consideration
--------------------------------------------------------------------------------

A.   Incentive Plans


     All proposals on incentive compensation plans (including option plans) for
     executives and directors are normally voted in accordance with Glass Lewis
     analysis and recommendation on each individual proposal. The evaluation is
     based on the following criteria (and any other that may be deemed relevant
     by ISS or Nicholas-Applegate):


          .    Necessity
          .    Reasonableness Test
          .    Participation
          .    Dilution
          .    Shares Available
          .    Exercise and Payment Terms
          .    Change-in-Control Provisions
          .    Types of Awards
          .    Company specific dilution cap calculated
          .    Present Value of all incentives, derivative awards, cash/bonus
               compensation
          .    Shareholder wealth transfer (dollar amount of shareholders'
               equity paid it's executives)


                                      A-35





          .    Voting power dilution - Potential percent reduction in relative
               voting power
          .    Criteria for awarding grants
          .    The pace of grants
          .    The value of grants per employee compared with the Company's
               peers.
          .    Allowance for repricing of options.
          .    Past granting patterns.
          .    Process for determining pay levels


B.   Shareholder Proposals to Limit Executive and Director Compensation


     1.   Generally, vote in accordance with Glass Lewis analysis and
          recommendation on shareholder proposals that seek additional
          disclosure of executive and director compensation information.

     2.   All other shareholder proposals that seek to limit executive and
          director compensation are normally voted in accordance with Glass
          Lewis analysis and recommendation on each individual proposal.


C.   Golden Parachutes

     1.   Vote for shareholder proposals to have golden and tin parachutes
          submitted for shareholder ratification.


     2.   Proposals to ratify or cancel golden or tin parachutes are normally
          voted in accordance with Glass Lewis analysis and recommendation on
          each individual proposal.


D.   Employee Stock Ownership Plans (ESOP)


     1.   Vote in accordance with Glass Lewis analysis and recommendation on
          proposals requesting shareholder approval to implement Employee Stock
          Ownership Plans, or increase authorized shares for existing Employee
          Stock Ownership Plans except when the number of shares allocated to
          the ESOP is excessive (i.e. greater than 5% of outstanding shares).

     2.   Votes directly pertaining to the approval of an ESOP or a leveraged
          ESOP are normally voted in accordance with Glass Lewis analysis and
          recommendation on each individual proposal. Our evaluation is based on
          the following criteria (and any other that may be deemed relevant):


          .    Reasonableness Test
          .    Participation
          .    Administration
          .    Shares Available
          .    Exercise and Payment Terms
          .    Change-in-Control Provisions
          .    Types of Awards
          .    Dilution

E.   401(k) Employee Benefit Plans


     Vote in accordance with Glass Lewis analysis and recommendation on
     proposals to implement a 401(k) savings plan for employees.

                                      A-36




F.   Discounted Options/Restricted Stock


     Vote in accordance with Glass Lewis analysis and recommendation on
     discounted options and restricted stock without performance criteria
     (except restricted stock in U.S.-style stock option plans, which are
     normally voted in accordance with Glass Lewis analysis and recommendation
     on each individual proposal.)


G.   Pension Fund Credits

     Vote for proposals that exclude pension fund credits from earnings when
     calculating executive compensation. In addition, vote against proposals
     that include pension fund credits in earnings when calculating executive
     compensation.

--------------------------------------------------------------------------------
VIII State of Incorporation
--------------------------------------------------------------------------------

A.   Re-Incorporation Proposals


     Proposals to change a corporation's state of incorporation are normally
     voted in accordance with Glass Lewis analysis and recommendation on each
     individual proposal.


B.   State Takeover Statutes


     Proposals to opt in or opt out of state takeover statutes are normally
     voted in accordance with Glass Lewis analysis and recommendation on each
     individual proposal.


C.   State Fair Price Provisions


     Proposals to opt out of S.F.P's are normally voted in accordance with Glass
     Lewis analysis and recommendation on each individual proposal.


D.   Stakeholder Laws

     Vote for proposals to opt out of stakeholder laws (allowing directors to
     weigh the interest of constituencies other than shareholders in the process
     of corporate decision making).

E.   Disgorgement Provisions


     Proposals to opt out of disgorgement provisions are normally voted in
     accordance with Glass Lewis analysis and recommendation on each individual
     proposal.

                                      A-37




--------------------------------------------------------------------------------
IX   Mergers and Corporate Restructurings
--------------------------------------------------------------------------------

A.   Mergers and Acquisitions


     Votes on mergers and acquisitions are normally voted in accordance with
     Glass Lewis analysis and recommendation on each individual proposal. The
     voting decision depends on a number of factors, including:


          .    Anticipated financial and operating benefits
          .    Offer price (cost vs. premium)
          .    Prospects of the combined companies
          .    How the deal was negotiated
          .    Changes in corporate governance and their impact on shareholder
               rights
          .    Other pertinent factors discussed below.

B.   Corporate Restructurings


     Votes on corporate restructuring proposals, including minority squeezeouts,
     leveraged buyouts, spin-offs, liquidations and asset sales, are normally
     voted in accordance with Glass Lewis analysis and recommendation on each
     individual proposal.


C.   Spin-Offs


     Votes on spin-offs are normally voted in accordance with Glass Lewis
     analysis and recommendation on each individual proposal, considering


          .    The tax and regulatory advantages
          .    Planned use of the sale proceeds
          .    Market focus
          .    Managerial incentives.

D.   Asset Sales


     Votes on asset sales are normally voted in accordance with Glass Lewis
     analysis and recommendation on each individual proposal, considering


          .    The impact on the balance sheet/working capital
          .    The value received for the asset
          .    The potential elimination of diseconomies.


                                      A-38




E.   Liquidations


     Votes on liquidations normally voted in accordance with Glass Lewis
     analysis and recommendation on each individual proposal, after reviewing


          .    Management's efforts to pursue other alternatives
          .    The appraisal value of the assets
          .    The compensation plan for executives managing the liquidation.

F.   Rights of Appraisal

     Vote for shareholder proposals to provide rights of appraisal to dissenting
     shareholders.

G.   Changing Corporate Name

     Vote for changing the corporate name.

--------------------------------------------------------------------------------
X    Social Issues Proposals
--------------------------------------------------------------------------------

A.   Social Issues Proposals


     Vote in accordance with Glass Lewis analysis and recommendation on each
     individual proposal, which is based on expected effect on shareholder
     value, and then voted accordingly.


--------------------------------------------------------------------------------
XI   Proxies Not Voted
--------------------------------------------------------------------------------

A.   Shares Out on Loan

     Proxies are not available to be voted when shares are out on loan through
     client securities lending programs with their custodians.

B.   Share-Blocking

     Proxies are not voted for countries with "share-blocking", generally,
     voting would restrict ability to sell shares. A list of countries with
     "share-blocking" is available upon request.

C.   Other

     There may be circumstances, such as costs or other factors, where
     Nicholas-Applegate would in its reasonable discretion refrain from voting
     proxy shares.


                                      A-39




                           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 August 20, 2003.(1)


a.2   Second Amended and Restated Declaration of Trust dated December 16,
      2004.(2)

a.3   Fourth Amended and Restated Declaration of Trust, dated January 24, 2005.
      (3)


a.4   Fifth Amended and Restated Declaration of Trust, dated February 9, 2005.
      (4)


b.1   Bylaws of Registrant dated August 20, 2003.(1)


b.2   Amended and Restated Bylaws of Registrant dated as of February 9, 2005.
      (4)


c.    None.


d.1   Article III (Shares) and Article V (Shareholders' Voting Powers and
      Meetings) of the Agreement and Declaration of Trust.(1)

d.2   Article 10 (Shareholders' Voting Powers and Meetings) of the Bylaws of
      Registrant.(1)



d.3   Form of Share Certificate of the Common Shares.(4)

e.    Terms and Conditions of Dividend Reinvestment Plan.(4)


f.    None.


g.1   Investment Management Agreement between Registrant and PA Fund Management
      LLC.(4)

g.2   Portfolio Management Agreement between PA Fund Management LLC and NFJ
      Investment Group L.P.(4)

g.3   Portfolio Management Agreement between PA Fund Management LLC and
      Nicholas-Applegate Capital Management LLC.(4)

g.4   Portfolio Management Agreement between PA Fund Management LLC and PEA
      Capital LLC.(4)

h.1   Form of Underwriting Agreement, filed herewith.

h.2   Form of Master Selected Dealer Agreement.(4)

h.3   Form of Master Agreement Among Underwriters.(4)

h.4  Form of Structuring Fee Agreement between PA Fund Management LLC and
     Citigroup Global Markets Inc.(4)

h.5  Form of Additional Compensation Agreement between PA Fund Management LLC
     and UBS Securities LLC.(4)

h.6  Form of Additional Compensation Agreement between PA Fund Management LLC
     and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
     Incorporated, filed herewith.


i.    None.


j.1   Form of Custodian Agreement between Registrant and Brown Brothers Harriman
      & Co.(4)

j.2   Form of Accounting Agency Agreement between Registrant and Brown Brothers
      Harriman & Co.(4)

k.1   Form of Transfer Agency Services Agreement between Registrant and
      PFPC Inc.(4)


                                       C-1




k.2    Form of Organizational and Offering Expenses Reimbursement Agreement
       between Registrant and PA Fund Management LLC.(4)

l.     Opinion and consent of Ropes & Gray LLP, filed herewith.


m.     None.


n.     Consent of Registrant's Independent Registered Public Accounting Firm.(4)


o.     None.


p.     Subscription Agreement of Allianz Global Investors of America L.P.
       dated February 15, 2005.(4)


q.     None.


r.1    Code of Ethics of Registrant dated January 7, 2005.(4)

r.2    Code of Ethics of PA Fund Management LLC, NFJ Investment Group L.P. and
       PEA Capital LLC.(4)

r.3    Code of Ethics of Nicholas-Applegate Capital Management LLC.(4)


s.1    Power of Attorney for Mr. Connor.(3)

s.2    Power of Attorney for Mr. Kertess.(3)

s.3    Power of Attorney for Mr. Dalessandro.(3)

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




        (1)  Incorporated by reference to the Registrant's Initial Registration
             Statement on Form N-2, File No. 333-108137, filed on August 21,
             2003.


        (2)  Incorporated by referance to the Registrant's Pre-Effective
             Amendment No.2 to the Fund's Registration Statement, File No.
             333-108137, filed on December 20, 2004.


        (3)  Incorporated by reference to the Registrant's Pre-Effective
             Amendment No.3 to the Fund's Registration Statement, File No.
             333-108137, filed on January 26, 2005.


        (4)  Incorporated by reference to the Registrant's Pre-Effective
             Amendment No.4 to the Fund's Registration Statement, File No.
             333-108137, filed on February 18, 2005.


                                      C-2



Item 25: Marketing Arrangements

         To be filed by amendment.


Item 26: Other Expenses of Issuance and Distribution



         Securities and Exchange Commission Fees                 $  323,675
         National Association of Securities Dealers, Inc. Fees   $   30,500
         Printing and engraving expenses                         $  425,000
         Legal fees                                              $  450,000
         New York Stock Exchange listing fees                    $   40,000
         Underwriter Reimbursement                               $  550,000
         Accounting expenses                                     $   18,000
         Transfer Agent fees                                     $    3,000
         Marketing expenses                                      $  150,000
         Miscellaneous expenses                                  $    9,825
                                                                 ----------
         Total                                                   $2,000,000



         * Estimated Expenses. Expenses may be reduced pursuant to an expected
           contractual arrangement of PA Fund Management LLC to pay (i) the
           amount by which the Fund's offering costs (other than the sales load
           but inclusive of the reimbursement of underwriter expenses of $.005
           per share) exceed $0.05 per share.


Item 27: Persons Controlled by or under Common Control with Registrant

      Not applicable.

Item 28: Number of Holders of Securities

      At February 18, 2005

                                              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 Agreement and Declaration of Trust, which is incorporated by
reference herein.

     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
Agreement and Declaration of Trust, its 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 PA Fund Management LLC, the Registrant's
investment manager, and PEA Capital LLC, NFJ Investment Group L.P. and
Nicholas-Applegate Capital Management LLC., the Registrant's portfolio managers,
are set forth under the captions "Investment Manager" and "Portfolio Managers"
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 PA Fund
Management LLC and PEA Capital LLC, NFJ Investment Group L.P. and
Nicholas-Applegate Capital Management LLC.

                             PA Fund Management LLC
                           1345 Avenue of the Americas
                               New York, NY 10105



Name                     Position with Advisor                      Other Connections
----------------         ----------------------------------         --------------------------------------------
                                                              
Larry Altadonna          Senior Vice President                      Vice President, OpCap Advisors LLC

Andrew Bocko             Senior Vice President                      Senior Vice President, Allianz Global
                         and Director of IT                         Investors U.S. Equities LLC, Allianz
                                                                    Global Investors of America L.P.

Cindy Columbo            Vice President

Derek Hayes              Senior Vice President

Steve Jobe               Senior Vice President

Alan Kwan                Vice President

John C. Maney            Executive Vice President and Chief         Executive Vice President and
                         Financial Officer                          Chief Financial Officer,
                                                                    Allianz Global Investors of
                                                                    America L.P., Chief Financial
                                                                    Officer, Allianz Global
                                                                    Investors 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, PA
                                                                    Managed Accounts LLC, PA CD
                                                                    Distributors LLC, PEA Capital
                                                                    LLC, PA Advertising Agency
                                                                    Inc., PA Distributors LLC,
                                                                    Allianz Private Client Services
                                                                    LLC, and StocksPLUS Management Inc.

Andrew Meyers            Managing Director and Chief Operating
                         Officer

Vinh T. Nguyen           Senior Vice President and Controller       Senior Vice President and
                                                                    Controller, Allianz Global
                                                                    Investors of America L.P.,
                                                                    Allianz Global Investors 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, PA Managed
                                                                    Accounts LLC, PA CD Distributors
                                                                    LLC, PEA Capital LLC, PEA
                                                                    Partners LLC, PA Advertising
                                                                    Agency Inc., PA Distributors LLC,
                                                                    Allianz Private Client Services LLC,
                                                                    and StocksPLUS Management Inc.






Name                     Position with Advisor                      Other Connections
----------------         ----------------------------------         --------------------------------------------
                                                              
Francis C. Poli          Executive Vice President,                  Chief Legal and Compliance Officer, Allianz
                         Director of Compliance, Chief              Global Investors of America L.P., Allianz
                         Legal Officer and Assistant                Global Investors U.S. Equities LLC, Allianz
                         Secretary                                  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, PA Retail Holdings
                                                                    LLC, PA Managed Accounts LLC, PA CD
                                                                    Distributors LLC, PEA Capital Advisors LLC

Bob Rokose               Vice President and
                         Assistant Controller

Jennifer L. Ryan         Senior Vice President

Newton B. Schott, Jr.    Managing Director, General                 Vice President, PA Managed Accounts LLC,
                         Counsel and Secretary                      Executive Vice President, Chief Legal
                                                                    Officer and Secretary, PA Advertising Agency
                                                                    Inc., Managing Director, Executive Vice
                                                                    President, General Counsel and Secretary, PA
                                                                    Distributors LLC

Brian S. Shlissel        Executive Vice President                   Executive Vice President and Treasurer,
                                                                    OpCap Advisors LLC

Stewart A. Smith         Vice President and Assistant               Secretary, PA Fund Management LLC, Allianz
                         Secretary                                  Global Investors of America L.P., Allianz
                                                                    Global Investors U.S. Equities LLC, Allianz
                                                                    Hedge Fund Partners L.P., Allianz Private
                                                                    Client Services LLC, Cadence Capital
                                                                    Management LLC, NFJ Investment Group L.P.,
                                                                    PA Retail Holdings LLC, PA Managed Accounts
                                                                    LLC, PA CD Distributors LLC and PEA Capital
                                                                    LLC, Assistant Secretary, Oppenheimer
                                                                    Capital LLC, OpCap Advisors and OCC
                                                                    Distributors LLC

James G. Ward            Executive Vice President and               Executive Vice President, Allianz Global
                         Director of Human Resources                Investors of America L.P., Director of Human
                                                                    Resources, Allianz Global Investors U.S.
                                                                    Equities LLC, PA Distributors LLC


                                       C-4



                            NFJ Investment Group L.P.
                          2121 San Jacinto, Suite 1840
                               Dallas, Texas 75201



Name                        Position with Advisor                Other Affiliations
---------------------       -----------------------------        ------------------------------------
                                                           
Benno J. Fischer            Managing Director                    Director, Managing Director,
                                                                 Co-Chairman, NFJ Management Inc.

John L. Johnson             Managing Director                    Director, Managing Director,
                                                                 Co-Chairman, NFJ Management Inc.

Jack C. Najork              Managing Director                    Director, Managing Director,
                                                                 Co-Chairman, NFJ Management Inc.

John C. Maney               Chief Financial Officer              See PA Fund Management LLC

Vinh T. Nguyen              Controller                           See PA Fund Management LLC

Stewart A. Smith            Secretary                            See PA Fund Management LLC


                    Nicholas-Applegate Capital Management LLC
                                600 West Broadway
                               San Diego, CA 92101



Name                        Position with Advisor                Other Affiliations
---------------------       -----------------------------        ------------------------------------
                                                           
Charles H. Field            General Counsel and
                            Chief of Compliance

Peter J. Johnson            Senior Vice President
                            and Director of Institutional
                            Sales

C. William Maher            Managing Director and Chief          Chief Financial Officer and
                            Financial Officer                    Treasurer, Nicholas-Applegate
                                                                 Securities; Treasurer,
                                                                 Nicholas-Applegate Institutional
                                                                 Funds

Eric S. Sagerman            Managing Director, Head
                            of Global Marketing and
                            Executive Committee

Horacio Valeiras,           Chief Investment Officer
CFA

Marna Whittington           Managing Director, President
                            and Executive Committee


                                 PEA Capital LLC
                     1345 Avenue of the Americas, 50th Floor
                               New York, NY 10105




Name                        Position with Advisor                Other Affiliations
---------------------       -----------------------------        ------------------------------------
                                                           
Bruce Koepfgen              Chief Executive Officer              Chief Executive Officer, Oppenheimer
                                                                 Capital LLC

Taegan D. Goddard           Managing Director and
                            Chief Operating Officer

John C. Maney               Chief Financial Officer              See PA Fund Management LLC and NFJ
                                                                 Investment Group L.P.

Francis C. Poli             Executive Vice President,            See PA Fund Management LLC
                            Chief Legal Officer and
                            Assistant Secretary

Anne-Marie Pitale           Vice President, Director
                            of Compliance

Vinh T. Nguyen              Vice President and Controller        See PA Fund Management LLC and NFJ
                                                                 Investment Group L.P.

Stewart A. Smith            Vice President and Secretary         See PA Fund Management LLC and NFJ
                                                                 Investment Group L.P.

Dennis P. McKechnie         Managing Director

Jeffrey D. Parker           Managing Director

John E. Cashwell, Jr.       Senior Vice President

James P. Leavy              Senior Vice President



                                       C-5



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, MA 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 NFJ Dividend, Interest &
Premium Strategy 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-6



                                   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 23rd day
of February, 2005.

                                  NFJ Dividend, Interest & Premium Strategy 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          President, Chief Executive      February 23, 2005
----------------------------   Officer
Brian S. Shlissel


Robert E. Connor *             Trustee                         February 23, 2005
----------------------------
Robert E. Connor


John J. Dalessandro II *       Trustee                         February 23, 2005
----------------------------
John J. Dalessandro II


Hans W. Kertess *              Trustee                         February 23, 2005
----------------------------
Hans W. Kertess


/s/ Lawrence G. Altadonna      Treasurer, Principal Financial  February 23, 2005
----------------------------   and Accounting Officer
Lawrence G. Altadonna


                                  *By: /s/ Brian S. Shlissel
                                       -----------------------------------------
                                       Brian S. Shlissel
                                       Attorney-In-Fact

                                       Date: February 23, 2005



                                INDEX OF EXHIBITS

Exhibit   Exhibit Name
-------   ------------

h.1       Form of Underwriting Agreement.

h.6       Form of Additional Compensation Agreement between PA Fund Management
          LLC and Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
          Incorporated.

1.        Opinion and consent of Ropes & Gray LLP.