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Oppenheimer High Yield Fund
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6803 South Tucson Way, Englewood, Colorado 80112
1-800-525-7048
Statement of Additional Information dated October 27, 1998,
Revised September 29, 1999
This Statement of Additional Information of Oppenheimer High Yield Fund is
not a Prospectus. This document contains additional information about the Fund
and supplements information in the Prospectus dated October 27, 1998. It should
be read together with the Prospectus, which may be obtained by writing to the
Fund's Transfer Agent, OppenheimerFunds Services, at P.O. Box 5270, Denver,
Colorado 80217 or by calling the Transfer Agent at the toll-free number shown
above.
Contents
About the Fund
Investment Objectives and Policies................................2
Investment Policies and Strategies............................2
Other Investment Techniques and Strategies....................7
Other Investment Restrictions................................20
How the Fund is Managed..........................................21
Organization and History.....................................21
Trustees and Officers of the Fund............................22
The Manager and Its Affiliates...............................27
Brokerage Policies of the Fund...................................29
Performance of the Fund..........................................30
Distribution and Service Plans...................................35
About Your Account
How To Buy Shares................................................38
How To Sell Shares...............................................46
How To Exchange Shares...........................................51
Dividends, Capital Gains and Taxes...............................53
Additional Information About the Fund............................55
Financial Information About the Fund
Independent Auditors' Report.....................................56
Financial Statements.............................................57
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ABOUT THE FUND
Investment Objectives and Policies
Investment Policies and Strategies. The investment objectives and policies of
the Fund are described in the Prospectus. Set forth below is supplemental
information about those policies and the types of securities in which the Fund
may invest, as well as the strategies the Fund may use to try to achieve its
objective. Certain capitalized terms used in this Statement of Additional
Information are defined in the Prospectus.
The Fund's investment adviser, OppenheimerFunds, Inc. (the "Manager"),
evaluates the investment merits of fixed-income securities primarily through the
exercise of its own investment analysis. This may include consideration of the
financial strength of the issuer, including its historical and current financial
condition, the trading activity in its securities, present and anticipated cash
flow, estimated current value of assets in relation to historical cost, the
issuer's experience and managerial expertise, responsiveness to changes in
interest rates and business conditions, debt maturity schedules, current and
future borrowing requirements, and any change in the financial condition of the
issuer and its continuing ability to meet its future obligations. The Manager
also may consider anticipated changes in business conditions, levels of interest
rates of bonds as contrasted with levels of cash dividends, industry and
regional prospects, the availability of new investment opportunities and the
general economic, legislative and monetary outlook for specific industries, the
nation and the world.
......|X| Investment Risks of Fixed-Income Securities. All fixed-income
securities are subject to two types of risk: credit risk and interest rate
risk (these are in addition to other investment risks that may affect a
particular security).
|_| Credit Risk. Credit risk relates to the ability of the issuer to meet
interest or principal payments or both as they become due. Generally, higher
yielding lower-grade bonds are subject to credit risk to a greater extent than
lower-yielding, investment grade bonds.
|_| Interest Rate Risk. Interest rate risk refers to the fluctuations in
value of fixed-income securities resulting solely from the inverse relationship
between price and yield of outstanding fixed-income securities. An increase in
prevailing interest rates will generally reduce the market value of
already-issued fixed income investments, and a decline in interest rates will
tend to increase their value. In addition, debt securities with longer
maturities, which tend to produce higher yields, are subject to potentially
greater capital appreciation and depreciation than obligations with shorter
maturities. Fluctuations in the market value of fixed-income securities after
the Fund buys them will not affect the interest payable on those securities, nor
the cash income from such securities. However, those price fluctuations will be
reflected in the valuations of the securities and therefore the Fund's net asset
values.
|X| Special Risks - High Yield Securities. As stated in the Prospectus,
the corporate debt securities in which the Fund will principally invest are
lower-rated debt securities, commonly known as "junk bonds." The Fund may invest
in securities rated as low as "C" by Moody's or "D" by S&P. The Manager will not
rely solely on the ratings assigned by rating services and may invest, without
limitation, in unrated securities which offer, in the opinion of the Manager,
comparable yields and risks as those rated securities in which the Fund may
invest.
<PAGE>
Risks of high yield securities may include: (i) limited liquidity and
secondary market support, (ii) substantial market price volatility resulting
from changes in prevailing interest rates, (iii) subordination to the prior
claims of banks and other senior lenders, (iv) the operation of mandatory
sinking fund or call/redemption provisions during periods of declining interest
rates that could cause the Fund to reinvest premature redemption proceeds only
in lower yielding portfolio securities, (v) the possibility that earnings of the
issuer may be insufficient to meet its debt service, and (vi) the issuer's low
creditworthiness and potential for insolvency during periods of rising interest
rates and economic downturn. As a result of the limited liquidity of high yield
securities, their prices have at times experienced significant and rapid decline
when a substantial number of holders decided to sell. A decline is also likely
in the high yield bond market during an economic downturn. An economic downturn
or an increase in interest rates could severely disrupt the market for high
yield bonds and adversely affect the value of outstanding bonds and the ability
of the issuers to repay principal and interest. In addition, there have been
several Congressional attempts to limit the use of tax and other advantages of
high yield bonds which, if enacted, could adversely affect the value of these
securities and the Fund's net asset value. For example, federally insured
savings and loan associations have been required to divest their investments in
high yield bonds.
|X| Warrants and Rights. Warrants and rights basically are options to
purchase equity securities at set prices valid for a specified period of time.
The price of warrants does not necessarily move in a manner parallel to the
prices of the underlying securities. Rights are similar to warrants but normally
have a short duration and are distributed directly by the issuer to its
shareholders. Warrants and rights have no voting rights, receive no dividends
and have no rights with respect to the assets of the issuer.
|X| Foreign Securities. Foreign securities include equity and debt
securities of companies organized under the laws of countries other than the
United States and debt securities of foreign governments that are traded on
foreign securities exchanges or in the foreign over-the-counter markets.
Securities of foreign issuers that are represented by American Depository
Receipts or that are listed on a U.S. securities exchange or traded in the U.S.
over-the-counter markets are not considered foreign securities for the purpose
of the Fund's investment allocations, because they are not subject to many of
the special considerations and risks, discussed below, that apply to foreign
securities traded and held abroad.
Because the Fund may purchase securities denominated in foreign
currencies, a change in the value of such foreign currency against the U.S.
dollar will result in a change in the amount of income the Fund has available
for distribution. Because a portion of the Fund's investment income may be
received in foreign currencies, the Fund will be required to compute its income
in U.S. dollars for distribution to shareholders, and therefore the Fund will
absorb the cost of currency fluctuations. After the Fund has distributed income,
subsequent foreign currency losses may result in the Fund's having distributed
more income in a particular fiscal period than was available from investment
income, which could result in a return of capital to shareholders.
<PAGE>
Investing in foreign securities offers the Fund potential benefits not
available from investing solely in securities of domestic issuers, including the
opportunity to invest in foreign issuers that appear to offer growth potential,
or in foreign countries with economic policies or business cycles different from
those of the U.S., or to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not move in a manner parallel to U.S.
markets. If the Fund's portfolio securities are held abroad, the countries in
which they may be held and the sub-custodians holding them must be approved by
the Fund's Board of Trustees where required under applicable rules of the
Securities and Exchange Commission.
|_| Brady Bonds. The Fund may invest in U.S. dollar-denominated,
collateralized Brady Bonds. These debt obligations of foreign entities may be
fixed-rate par bonds or floating rate discount bonds and are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations which have the same maturity as the Brady Bonds. 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 (these uncollateralized
amounts constitute the "residual risk"). In the event of default with respect to
collateralized Brady Bonds as a result of which the payment obligations of the
issuer are accelerated, the zero coupon Treasury securities held as collateral
for the payment of principal will not be distributed to investors nor will such
obligations be sold and the proceeds distributed. The collateral will be held by
the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In addition, in light of the residual risk
of Brady Bonds and, among other factors, the history of defaults with respect to
commercial bank loans to public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds are to be viewed as speculative.
|_| Risks of Foreign Investing. Investing in foreign securities involves
special additional risks and considerations not typically associated with
investing in securities of issuers traded in the U.S. These include: reduction
of income by foreign taxes; fluctuation in value of foreign portfolio
investments due to changes in currency rates and control regulations (e.g.,
currency blockage); transaction charges for currency exchange; lack of public
information about foreign issuers; lack of uniform accounting, auditing and
financial reporting standards comparable to those applicable to domestic
issuers; less volume on foreign exchanges than on U.S. exchanges; greater
volatility and less liquidity on foreign markets than in the U.S.; less
regulation of foreign issuers, stock exchanges and brokers than in the U.S.;
greater difficulties in commencing lawsuits; higher brokerage commission rates
than in the U.S.; increased risks of delays in settlement of portfolio
transactions or loss of certificates for portfolio securities; possibilities in
some countries of expropriation, confiscatory taxation, political, financial or
social instability or adverse diplomatic developments; and unfavorable
differences between the U.S. economy and foreign economies. In the past, U.S.
Government policies have discouraged certain investments abroad by U.S.
investors, through taxation or other restrictions, and it is possible that such
restrictions could be re-imposed.
<PAGE>
|_| Risks of Conversion to Euro. On January 1, 1999, eleven countries in
the European Monetary Union will adopt the euro as their official currency.
However, their current currencies (for example, the franc, the mark, and the
lire) will also continue in use until January 1, 2002. After that date, it is
expected that only the euro will be used in those countries. A common currency
is expected to confer some benefits in those markets, by consolidating the
government debt market for those countries and reducing some currency risks and
costs. But the conversion to the new currency will affect the Fund operationally
and also has potential risks, some of which are listed below. Among other
things, the conversion will affect:
o issuers in which the Fund invests, because of changes in the competitive
environment from a consolidated currency market and greater operational costs
from converting to the new currency. This might depress stock values. o vendors
the Fund depends on to carry out its business, such as its Custodian (which
holds the foreign securities the Fund buys), the Manager (which must price the
Fund's investments to deal with the conversion to the euro) and brokers, foreign
markets and securities depositories. If they are not prepared, there could be
delays in settlements and additional costs to the Fund. o exchange contracts and
derivatives that are outstanding during the transition to the euro. The lack of
currency rate calculations between the affected currencies and the need to
update the Fund's contracts could pose extra costs to the Fund.
The Manager is upgrading (at its expense) its computer and bookkeeping
systems to deal with the conversion. The Fund's Custodian has advised the
Manager of its plans to deal with the conversion, including how it will update
its record keeping systems and handle the redenomination of outstanding foreign
debt. The Fund's portfolio manager will also monitor the effects of the
conversion on the issuers in which the Fund invests. The possible effect of
these factors on the Fund's investments cannot be determined with certainty at
this time, but they may reduce the value of some of the Fund's holdings and
increase its operational costs.
|X| Asset-Backed Securities. The value of an asset-backed security is
affected by changes in the market's perception of the asset backing the
security, the creditworthiness of the servicing agent for the loan pool, the
originator of the loans, or the financial institution providing any credit
enhancement, and is also affected if a credit enhancement is exhausted. The
risks of investing in asset-backed securities derive from depending upon payment
of the underlying consumer loans by the individual borrowers. As a purchaser of
an asset-backed security, the Fund would generally have no recourse to the
entity that originated the loans in the event of default by a borrower. The
underlying loans are subject to prepayments which shorten the weighted average
life of asset-backed securities and may lower their return, in the same manner
as described below for prepayments of a pool of mortgage loans underlying
mortgage-backed securities.
|X| U.S. Government Securities. U.S. Government Securities are debt
obligations issued or guaranteed by the U.S. Government or one of its
agencies or instrumentalities.
|_| Mortgage-Backed Securities. These securities represent participation
interests in pools of residential mortgage loans which may or may not be
guaranteed by agencies or instrumentalities of the U.S. Government. Such
securities differ from conventional debt securities which provide for periodic
payment of interest in fixed amounts (usually semi-annually) with principal
payments at maturity or specified call dates. The mortgage-backed securities in
which the Fund may invest may be backed by the full faith and credit of the U.S.
Treasury (e.g. direct pass-through certificates of the Government National
Mortgage Association); some are supported by the right of the issuer to borrow
from the U.S. Government (e.g. obligations of the Federal Home Loan Bank); and
some are backed by only the credit of the issuer itself. Any such guarantees do
not extend to the value of or yield of the mortgage-backed securities themselves
or to the net asset value of the Fund's shares.
The yield on mortgage-backed securities is based on the average expected
life of the underlying pool of mortgage loans. The actual life of any particular
pool will be shortened by any unscheduled or early payments of principal and
interest. Principal prepayments generally result from the sale of the underlying
property or the refinancing or foreclosure of underlying mortgages. The
occurrence of prepayments is affected by a wide range of economic, demographic
and social factors and, accordingly, it is not possible to predict accurately
the average life of a particular pool. Yield on such pools is usually computed
by using the historical record of prepayments for that pool, or, in the case of
newly-issued mortgages, the prepayment history of similar pools. The actual
prepayment experience of a pool of mortgage loans may cause the yield realized
by the Fund on the security backed by the pool to differ from the yield
calculated on the basis of the expected average life of the pool.
Prepayments tend to increase during periods of falling interest rates,
while during periods of rising interest rates, prepayments will most likely
decline. When prevailing interest rates rise, the value of a pass-through
security may decrease as do the values of other debt securities, but, when
prevailing interest rates decline, the value of a pass-through security is not
likely to rise on a basis comparable with other debt securities, because of the
prepayment feature of pass-through securities. The Fund's reinvestment of
scheduled principal payments and unscheduled prepayments it receives may occur
at a time of higher or lower prevailing rates than the original investment, thus
affecting the yield of the Fund. Monthly interest payments received by the Fund
have a compounding effect which may increase the yield to shareholders more than
debt obligations that pay interest semi-annually. Due to those factors,
mortgage-backed securities may be less effective than Treasury bonds of similar
maturity at maintaining yields during periods of declining interest rates. The
Fund may purchase mortgage-backed securities at a premium or at a discount.
Accelerated prepayments adversely affect yields for pass-through securities
purchased at a premium (i.e. at a price in excess of principal amount) and may
involve additional risk of loss of principal because the premium may not have
been fully amortized at the time the obligation is repaid. The opposite is true
for pass-through securities purchased at a discount.
<PAGE>
|_| GNMA Certificates. Certificates of the Government National Mortgage
Association ("GNMA Certificates") are mortgage-backed securities which evidence
an undivided interest in a pool or pools of mortgages ("GNMA Certificates"). The
GNMA Certificates that the Fund may purchase are of the "modified pass-through"
type, which entitle the holder to receive timely payment of all interest and
principal payments due on the mortgage pool, net of fees paid to the "issuer"
and GNMA, regardless of whether the mortgagor actually makes the payments when
due.
The National Housing Act authorized the GNMA to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration (the "FHA") or guaranteed by the
Veterans Administration (the "VA"). The GNMA guarantee is backed by the full
faith and credit of the U.S. Government. The GNMA is also empowered to borrow
without limitation from the U.S. Treasury if necessary to make any payments
required under its guarantee.
The average life of a GNMA Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the GNMA guarantee, except to the extent that the Fund has
purchased the certificates at a premium in the secondary market.
|_| FNMA Securities. The Federal National Mortgage Association ("FNMA")
was established to create a secondary market in mortgages insured by the FHA.
FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates").
FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of interest and principal
on FNMA Certificates. The FNMA guarantee is not backed by the full faith and
credit of the U.S. Government.
|_| FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created to promote development of a nationwide secondary market for
conventional residential mortgages. FHLMC issues two types of mortgage
pass-through securities ("FHLMC Certificates"), mortgage participation
certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble
GNMA Certificates in that each PC represents a pro rata share of all interest
and principal payments made and owed on the underlying pool. FHLMC guarantees
timely monthly payment of interest on PCs and the ultimate payment of principal.
The FHLMC guarantee is not backed by the full faith and credit of the U.S.
Government.
GMCs also represent a pro rata interest in a pool of mortgages. However,
these instruments pay interest semi-annually and return principal once a year in
guaranteed minimum payments. The expected average life of these securities is
approximately ten years. The FHLMC guarantee is not backed by the full faith and
credit of the U.S. Government.
<PAGE>
|X| Participation Interests. The Fund may invest in participation
interests, subject to the limitation on its net assets that may be invested in
illiquid investments. These participation interests provide the Fund an
undivided interest in a loan made by the issuing bank in the proportion that the
Fund's participation interest bears to the total principal amount of the loan.
No more than 5% of the Fund's net assets can be invested in participation
interests of the same borrower. The Fund must look to the creditworthiness of
the borrowing corporation, which is obligated to make payments of principal and
interest on the loan. In the event the borrower fails to pay scheduled interest
or principal payments, the Fund would experience a reduction in its income and
might experience a decline in the net asset value of its shares. In the event of
a failure by the bank to perform its obligations in connection with the
participation agreement, the Fund might incur certain costs and delays in
realizing payment or may suffer a loss of principal and/or interest.
Other Investment Techniques and Strategies
|X| Loans of Portfolio Securities. The Fund may lend its portfolio
securities subject to the restrictions stated in the Prospectus. Under
applicable regulatory requirements (which are subject to change), the loan
collateral on each business day must at least equal the value of the loaned
securities and must consist of cash, bank letters of credit or securities of the
U.S. Government (or its agencies or instrumentalities). To be acceptable as
collateral, letters of credit must obligate a bank to pay amounts demanded by
the Fund if the demand meets the terms of the letter. Such terms and the issuing
bank must be satisfactory to the Fund. When it lends securities, the Fund
receives amounts equal to the dividends or interest on loaned securities and
also receives one or more of (a) negotiated loan fees, (b) interest on
securities used as collateral, and (c) interest on short-term debt securities
purchased with such loan collateral. Either type of interest may be shared with
the borrower. The Fund may also pay reasonable finder's, custodian and
administrative fees. In connection with securities lending, the Fund might
experience risks of delay in receiving additional collateral, or risks of delay
in recovery of securities, or loss of rights in the collateral should the
borrower fail financially. The terms of the Fund's loans must meet applicable
tests under the Internal Revenue Code and must permit the Fund to reacquire
loaned securities on five days' notice or in time to vote on any important
matter.
|X| When-Issued and Delayed Delivery Transactions. The Fund may purchase
securities on a "when-issued" basis, and may purchase or sell such securities on
a "delayed delivery" basis. Although the Fund will enter into such transactions
for the purpose of acquiring securities for its portfolio or for delivery
pursuant to options contracts it has entered into, the Fund may dispose of a
commitment prior to settlement. "When-issued" or "delayed delivery" refers to
securities whose terms and indenture are available and for which a market
exists, but which are not available for immediate delivery. When such
transactions are negotiated the price (which is generally expressed in yield
terms) is fixed at the time the commitment is made, but delivery and payment for
the securities take place at a later date. During the period between commitment
by the Fund and settlement (generally within two months but not to exceed 120
days), no payment is made for the securities purchased by the purchaser, and no
interest accrues to the purchaser from the transaction. Such securities are
subject to market fluctuation; the value at delivery may be less than the
purchase price. The Fund will segregate or identify with its Custodian, liquid
assets of any type, including equity and debt securities of any grade, at least
equal to the value of purchase commitments until payment is made.
<PAGE>
The Fund will engage in when-issued transactions in order to secure what
is considered to be an advantageous price and yield at the time of entering into
the obligation. When the Fund engages in when-issued or delayed delivery
transactions, it relies on the buyer or seller, as the case may be, to
consummate the transaction. Failure to do so may result in the Fund losing the
opportunity to obtain a price and yield considered to be advantageous. If the
Fund chooses to (i) dispose of the right to acquire a when-issued security prior
to its acquisition or (ii) dispose of its right to deliver or receive against a
forward commitment, it may incur a gain or loss. At the time the Fund makes a
commitment to purchase or sell a security on a when-issued or forward commitment
basis, it records the transaction and reflects the value of the security
purchased, or if a sale, the proceeds to be received in determining its net
asset value.
To the extent the Fund engages in when-issued and delayed delivery
transactions, it will do so for the purpose of acquiring or selling securities
consistent with its investment objective and policies and not for the purposes
of investment leverage. However, the Fund may sell when-issued securities and
forward commitments prior to settlement date. In addition, changes in interest
rates in a direction other than that expected by the Manager before settlement
will affect the value of such securities and may cause a loss to the Fund.
When-issued transactions and forward commitments allow the Fund a
technique to use against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling prices, the Fund might
sell securities in its portfolio on a forward commitment basis to attempt to
limit its exposure to anticipated falling prices. In periods of falling interest
rates and rising prices, the Fund might sell portfolio securities and purchase
the same or similar securities on a when-issued or forward commitment basis,
thereby obtaining the benefit of currently higher cash yields.
|X| Mortgage-Backed Security Rolls. The Fund may enter into "forward roll"
transactions with respect to mortgage-backed securities in which it can invest.
In a forward roll transaction, which is considered to be a borrowing by the
Fund, the Fund will sell a mortgage security to selected banks or other entities
and simultaneously agree to repurchase a similar security (same type, coupon and
maturity) from the institution at a specified later date at an agreed upon
price. The mortgage securities that are repurchased will bear the same interest
rate as those sold, but generally will be collateralized by different pools of
mortgages with different prepayment histories than those sold. Risks of
mortgage-backed security rolls include: (i) the risk of prepayment prior to
maturity, (ii) the risk that the Fund may not be entitled to receive interest
and principal payments on the securities sold and that the proceeds of the sale
may have to be invested in money market instruments (typically repurchase
agreements) maturing not later than the expiration of the roll, and (iii) the
risk that the market value of the securities sold by the Fund may decline below
the price at which the Fund is obligated to purchase the securities. The Fund
will enter into only "covered" rolls. Upon entering into a mortgage-backed
security roll, the Fund will be required to identify or segregate liquid assets
of any type including equity and debt securities with its Custodian in an amount
equal to its obligation under the roll.
|X| Repurchase Agreements. The Fund may acquire securities subject to
repurchase agreements for liquidity purposes to meet anticipated redemptions, or
pending the investment of the proceeds from sales of Fund shares, or pending the
settlement of purchases of portfolio securities.
<PAGE>
In a repurchase transaction, the Fund purchases a security from, and
simultaneously resells it to, an approved vendor (a U.S. commercial bank or the
U.S. branch of a foreign bank having total domestic assets of at least $1
billion or a broker-dealer with a net worth of at least $50 million and which
has been designated a primary dealer in government securities) which must meet
credit requirements set by the Fund's Board of Trustees from time to time for
delivery on an agreed-on future date. The resale price exceeds the purchase
price by an amount that reflects an agreed-upon interest rate effective for the
period during which the repurchase agreement is in effect. The majority of these
transactions run from day to day, and delivery pursuant to the resale typically
will occur within one to five days of the purchase. Repurchase agreements are
considered "loans" under the Investment Company Act, collateralized by the
underlying security. The Fund's repurchase agreements require that at all times
while the repurchase agreement is in effect, the collateral's value must equal
or exceed the repurchase price to fully collateralize the repayment obligation.
Additionally, the Manager will impose creditworthiness requirements to confirm
that the vendor is financially sound and will continuously monitor the
collateral's value.
|X| Restricted and Illiquid Securities. To enable the Fund to sell
restricted securities not registered under the Securities Act of 1933, the Fund
may have to cause those securities to be registered. The expenses of
registration of restricted securities may be negotiated by the Fund with the
issuer at the time such securities are purchased by the Fund, if such
registration is required before such securities may be sold publicly. When
registration must be arranged because the Fund wishes to sell the security, a
considerable period may elapse between the time the decision is made to sell the
securities and the time the Fund would be permitted to sell them. The Fund would
bear the risks of any downward price fluctuation during that period. The Fund
may also acquire, through private placements, securities having contractual
restrictions on their resale, which might limit the Fund's ability to dispose of
such securities and might lower the amount realizable upon the sale of such
securities.
The Fund has percentage limitations that apply to purchases of restricted
securities, as stated in the Prospectus. Those percentage restrictions do not
limit purchases of restricted securities that are eligible for sale to qualified
institutional purchasers pursuant to Rule 144A under the Securities Act of 1933,
provided that those securities have been determined to be liquid by the Board of
Trustees of the Fund or by the Manager under Board-approved guidelines. Those
guidelines take into account the trading activity for such securities and the
availability of reliable pricing information, among other factors. If there is a
lack of trading interest in a particular Rule 144A security, the Fund's holding
of that security may be deemed to be illiquid.
|X| Hedging. When hedging to attempt to protect against declines in the
market value of the Fund's portfolio, to permit the Fund to retain unrealized
gains in the value of portfolio securities which have appreciated, or to
facilitate selling securities for investment reasons, the Fund may: (i) sell
Interest Rate Futures or Financial Futures ("Futures"), (ii) buy puts on
securities indices or on securities, or (iii) write covered calls on securities
or on Futures. When hedging to permit the Fund to establish a position in the
debt securities market as a temporary substitute for purchasing particular debt
securities (which the Fund will normally purchase, and then terminate that
hedging position), the Fund may: (i) buy Futures, or (ii) buy calls on Futures,
securities indices or on securities. When hedging to protect against declines in
the dollar value of a foreign currency-denominated security, the Fund may: (a)
purchase puts on that foreign currency, (b) write calls on that currency or (c)
enter into forward currency contracts. Additionally, the Fund may write covered
call options and put options to attempt to increase the Fund's income.
<PAGE>
When the Fund writes an over-the-counter ("OTC") option, it will enter
into an arrangement with a primary U.S. Government securities dealer, which
would establish a formula price at which the Fund would have the absolute right
to repurchase that OTC option. This formula price would generally be based on a
multiple of the premium received for the option, plus the amount by which the
option is "in-the-money," that is, exercisable below (for a put) or above (for a
call) the market price of the underlying security. For any OTC option the Fund
writes, it will treat as illiquid (for purposes of the limit on its assets that
may be invested in illiquid securities) the amount of assets used to cover OTC
options it has written, equal to the formula price for the repurchase of the OTC
option less the amount by which the OTC option is "in-the-money" unless subject
to a buy-back agreement with the executing broker. The Fund will also treat as
illiquid any OTC options held by it. The Securities and Exchange Commission is
evaluating whether OTC options should be considered liquid securities, and the
procedure described above could be affected by the outcome of that evaluation.
The Fund's strategy of hedging with Futures and options on Futures will be
incidental to the Fund's investment activities in the underlying cash market. In
the future, the Fund may employ hedging instruments and strategies that are not
presently contemplated but which may be developed, to the extent such investment
methods are consistent with the Fund's investment objective, and are legally
permissible and disclosed in the Prospectus. Additional Information about the
Hedging Instruments the Fund may use is provided below.
|_| Futures. The Fund may buy and sell Interest Rate Futures and Financial
Futures. Interest Rate Futures obligate one party to deliver and the other to
take a specific debt security at a specified price on a specified date. No
monetary amount is paid or received by the Fund on the purchase or sale of an
Interest Rate Future. The obligation underlying the Interest Rate Futures may be
satisfied by actual delivery of the security or by entering into an offsetting
contract.
Upon entering into a Futures transaction, the Fund will be required to
deposit an initial margin payment in cash or U.S. Treasury bills with the
futures commission merchant (the "futures broker"). The initial margin will be
deposited with the Fund's Custodian in an account registered in the futures
broker's name; however, the futures broker can gain access to that account only
under specified conditions. As the Future is marked to market to reflect changes
in its market value, subsequent margin payments, called variation margin, will
be paid to or by the futures broker on a daily basis.
At any time prior to expiration of the Future, the Fund may elect to close
out its position by taking an opposite position, at which time a final
determination of variation margin is made and additional cash is required to be
paid by or released to the Fund. At that time the Fund will realize a gain or a
loss. Although Interest Rate Futures, by their terms, call for settlement by
delivery or acquisition of debt securities, in most cases the obligation is
fulfilled by entering into an offsetting position. All futures transactions are
effected through a clearinghouse associated with the exchange on which the
contracts are traded.
<PAGE>
Financial Futures are futures contracts, on a financial index composed of
several underlying securities. Financial Futures are similar to Interest Rate
Futures except that settlement is made in cash instead of actual delivery, and
net gain or loss on options on Financial Futures depends on price movements of
the securities included in the index. The strategies which the Fund employs
regarding Financial Futures are similar to those described above with regard to
Interest Rate Futures.
|_| Forward Contracts. The Fund may enter into foreign currency exchange
contracts ("Forward Contracts"), which obligate the seller to deliver and the
purchaser to take a specific amount of foreign currency at a specific future
date for a fixed price. A Forward Contract involves bilateral obligations of one
party to purchase, and another party to sell, a specific currency at a future
date (which may be any fixed number of days from the date of the contract agreed
upon by the parties), at a price set at the time the contract is entered into.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. The Fund
may enter into a Forward Contract in order to "lock in" the U.S. dollar price of
a security denominated in a foreign currency which it has purchased or sold but
which has not yet settled, or to protect against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and a foreign
currency. There is a risk that use of Forward Contracts may reduce the gain that
would otherwise result from a change in the relationship between the U.S. dollar
and a foreign currency. Forward contracts include standardized foreign currency
futures contracts which are traded on exchanges and are subject to procedures
and regulations applicable to other futures.
The Fund may also enter into a forward contract to sell a foreign currency
other than that in which the underlying security is denominated. This may be
done in the expectation that there is a greater correlation between the foreign
currency of the forward contract and the foreign currency of the underlying
investment than between the U.S. dollar and the foreign currency of the
underlying investment or, as a tactical allocation to take advantage of
differences in foreign interest rates. This technique is referred to as "cross
hedging." Cross hedges may be established with the U.S. dollar as the base
currency or with another currency correlated with the U.S. dollar as the base.
The success of cross hedging is dependent on many factors, including the
ability of the Manager to correctly identify and monitor the correlation between
foreign currencies, the U.S. dollar and other base currencies correlated with
the U.S. dollar. To the extent that these correlations are not identical, the
Fund may experience losses or gains on both the underlying security and the
cross currency hedge.
The Fund may use Forward Contracts to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. In addition, although
Forward Contracts limit the risk of loss due to a decline in the value of the
hedged currencies, at the same time they limit any potential gain that might
result should the value of the currencies increase.
<PAGE>
There is no limitation as to the percentage of the Fund's assets that may
be committed to foreign currency exchange contracts. The Fund does not enter
into such forward contracts or maintain a net exposure in such contracts to the
extent that the Fund would be obligated to deliver an amount of foreign currency
in excess of the value of the Fund's assets denominated in that currency, or
enter into a "cross hedge," unless it is denominated in a currency or currencies
that the Manager believes will have price movements that tend to correlate
closely with the currency in which the investment being hedged is denominated.
See "Tax Aspects of Covered Calls and Hedging Instruments" below for a
discussion of the tax treatment of foreign currency exchange contracts.
The Fund may enter into Forward Contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates receipt of dividend payments in a foreign currency, the Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment by entering into a Forward Contract, for a fixed
amount of U.S. dollars per unit of foreign currency, for the purchase or sale of
the amount of foreign currency involved in the underlying transaction
("transaction hedge"). The Fund will thereby be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received. The Fund may also use cross hedges to effect
a transaction hedge.
The Fund may also use Forward Contracts to lock in the U.S. dollar value
of portfolio positions ("position hedge"). In a position hedge, for example,
when the Fund believes that a foreign currency may suffer a substantial decline
against the U.S. dollar, it may enter into a Forward Contract to sell an amount
of that foreign currency approximating the value of some or all of the Fund's
portfolio securities denominated in such foreign currency for a fixed U.S.
dollar amount. Conversely, if the Fund believes that the U.S. dollar may suffer
a substantial decline against a foreign currency, it may enter into a Forward
Contract to buy that foreign currency for a fixed U.S. dollar amount.
Additionally, the Fund may use a cross hedge to effect a position hedge.
The Fund's Custodian will place cash not available for investment or U.S.
Government securities or other liquid high-quality debt securities in a separate
account of the Fund having a value equal to the aggregate amount of the Fund's
commitments under forward contracts to cover its short positions. If the value
of the securities placed in a separate account declines, additional cash or
securities will be placed in the account on a daily basis so that the value of
the account will equal the amount of the Fund's commitments with respect to such
contracts. As an alternative to maintaining all or part of the separate account,
the Fund may purchase a call option permitting the Fund to purchase the amount
of foreign currency being hedged by a forward sale contract at a price no higher
than the forward contract price or the Fund may purchase a put option permitting
the Fund to sell the amount of foreign currency subject to a forward purchase
contract at a price as high or higher than the forward contract price.
Unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such contracts.
<PAGE>
The precise matching of the Forward Contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward Contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transactions costs. The Fund may enter into Forward
Contracts or maintain a net exposure on such contracts only if: (1) the
consummation of the contracts would not obligate the Fund to deliver or accept
delivery of an amount of foreign currency in excess of the value of the Fund's
portfolio securities or other assets denominated in that currency, or (2) the
Fund maintains cash, U.S. Government securities or liquid high-grade debt
securities in a segregated account in an amount not less than the value of the
Fund's total assets committed to the consummation of the contract.
At or before the maturity of a Forward Contract requiring the Fund to sell
a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, the Fund may
close out a Forward Contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize a
gain or loss as a result of entering into such an offsetting Forward Contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved differed on the execution dates of the first contract and
offsetting contract.
The cost to the Fund of engaging in Forward Contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because Forward Contracts are usually entered
into on a principal basis, no fees or commissions are involved. Because such
contracts are not traded on an exchange, the Fund must evaluate the credit and
performance risk of each particular counterparty under a Forward Contract.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Foreign exchange
dealers do not charge a fee for conversion, but they do seek to realize a profit
based on the difference between the prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
<PAGE>
|_| Writing Call Options. The Fund may write (i.e. sell) call options
("calls") on equity and debt securities that are traded on U.S. and foreign
securities exchanges and over-the-counter markets, to enhance income through the
receipt of premiums from expired calls and any net profits from closing purchase
transactions. After any such sale up to 100% of the Fund's total assets may be
subject to calls. All such calls written by the Fund must be "covered" while the
call is outstanding (i.e. the Fund must own the securities subject to the call
or other securities acceptable for applicable escrow requirements). Calls on
Futures (discussed below) must be covered by the underlying Futures Contract,
deliverable securities or by liquid assets segregated to satisfy the Futures
contract. When the Fund writes a call on a security it receives a premium and
agrees to sell the callable investment to a purchaser of a corresponding call on
the same security during the call period at a fixed exercise price (which may
differ from the market price of the underlying security), regardless of market
price changes during the call period. The Fund has retained the risk of loss
should the price of the underlying security decline during the call period,
which may be offset to some extent by the premium.
To terminate its obligation on a call it has written, the Fund may
purchase a corresponding call in a "closing purchase transaction." A profit or
loss will be realized, depending upon whether the net of the amount of the
option transaction costs and the premium received on the call written was more
or less than the price of the call subsequently purchased. A profit may also be
realized if the call lapses unexercised, because the Fund retains the underlying
investment and the premium received. Any such profits are considered short-term
capital gains for Federal income tax purposes, and when distributed by the Fund
are taxable as ordinary income. If the Fund could not effect a closing purchase
transaction due to lack of a market, it would have to hold the callable
investments until the call lapsed or was exercised.
The Fund may also write calls on Futures contracts it owns, provided that
at the time the call is written, the Fund covers the call by securities or other
liquid assets the Fund owns and segregates to enable it to satisfy its
obligations if the call is exercised. The Fund will segregate additional liquid
assets if the value of the escrowed assets drops below 100% of the current value
of the Future. In no circumstances would an exercise notice require the Fund to
deliver a futures contract; it would simply put the Fund in a short futures
position, which is permitted by the Fund's hedging policies.
|_| Writing Put Options. The Fund may write put options on equity and debt
securities or Futures but only if such puts are covered by segregated liquid
assets. The Fund will not write puts if, as a result, more than 50% of the
Fund's net assets would be required to be segregated to cover such put
obligations. In writing puts, there is the risk that the Fund may be required to
buy the underlying security at a disadvantageous price. A put option on
securities gives the purchaser the right to sell, and the writer the obligation
to buy, the underlying investment at the exercise price during the option
period. Writing a put covered by segregated liquid assets equal to the exercise
price of the put has the same economic effect to the Fund as writing a covered
call. The premium the Fund receives from writing a put option represents a
profit, as long as the price of the underlying investment remains above the
exercise price. However, the Fund has also assumed the obligation during the
option period to buy the underlying investment from the buyer of the put at the
exercise price, even though the value of the investment may fall below the
exercise price. If the put lapses unexercised, the Fund (as the writer of the
put) realizes a gain in the amount of the premium. If the put is exercised, the
Fund must fulfill its obligation to purchase the underlying investment at the
exercise price, which will usually exceed the market value of the investment at
that time. In that case, the Fund may incur a loss, equal to the sum of the
current market value of the underlying investments any transaction costs
incurred minus the sum of the exercise price and the premium received.
<PAGE>
When writing put options on securities, to secure its obligation to pay
for the underlying security, the Fund will deposit in escrow liquid assets with
a value equal to or greater than the exercise price of the put option. The Fund
therefore forgoes the opportunity of investing the segregated assets or writing
calls against those assets. As long as the obligation of the Fund as the put
writer continues, it may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the Fund to take delivery of the
underlying security against payment of the exercise price. The Fund has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the termination of
its obligation as the writer of the put. This obligation terminates upon
expiration of the put, or such earlier time at which the Fund effects a closing
purchase transaction by purchasing a put of the same series as that previously
sold. Once the Fund has been assigned an exercise notice, it is thereafter not
allowed to effect a closing purchase transaction.
The Fund may effect a closing purchase transaction to realize a profit on
an outstanding put option it has written or to prevent an underlying security
from being put. Furthermore, effecting such a closing purchase transaction will
permit the Fund to write another put option to the extent that the exercise
price thereof is secured by the deposited assets, or to utilize the proceeds
from the sale of such assets for other investments by the Fund. The Fund will
realize a profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from writing the option.
As above for writing covered calls, any and all such profits described herein
from writing puts are considered short-term gains for Federal tax purposes, and
when distributed by the Fund, are taxable as ordinary income.
|_| Purchasing Calls and Puts. The Fund may purchase calls on equity or
debt securities, indices, foreign currencies and Futures that are traded on U.S.
and foreign securities exchanges and the U.S. over-the-counter markets, in order
to protect against the possibility that the Fund's portfolio will not fully
participate in an anticipated rise in value of the long-term debt securities
market. When the Fund purchases a call (other than in a closing purchase
transaction), it pays a premium and, except as to calls on indices or Futures,
has the right to buy the underlying investment from a seller of a corresponding
call on the same investment during the call period at a fixed exercise price.
When the Fund purchases a call on an index or Future, it pays a premium, but
settlement is in cash rather than by delivery of the underlying investment to
the Fund. In purchasing a call, the Fund benefits only if the call is sold at a
profit or if, during the call period, the market price of the underlying
investment is above the sum of the call price plus the transaction costs and the
premium paid and the call is exercised. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose its premium payment and the right to purchase the
underlying investment.
<PAGE>
The Fund may purchase put options ("puts") which relate to equity or debt
securities (whether or not it holds such securities in its portfolio), indices,
foreign currencies or Futures. When the Fund purchases a put, it pays a premium
and, except as to puts on indices, has the right to sell the underlying
investment to a seller of a corresponding put on the same investment during the
put period at a fixed exercise price. Buying a put on an investment the Fund
owns enables the Fund to protect itself during the put period against a decline
in the value of the underlying investment below the exercise price by selling
such underlying investment at the exercise price to a seller of a corresponding
put. If the market price of the underlying investment is equal to or above the
exercise price and as a result the put is not exercised or resold, the put will
become worthless at its expiration date, and the Fund will lose its premium
payment and the right to sell the underlying investment. The put may, however,
be sold prior to expiration (whether or not at a profit.)
Buying a put on an investment it does not own, either a put on an index or
a put on a Future not held by the Fund, permits the Fund either to resell the
put or buy the underlying investment and sell it at the exercise price. The
resale price of the put will vary inversely with the price of the underlying
investment. If the market price of the underlying investment is above the
exercise price and as a result the put is not exercised, the put will become
worthless on its expiration date. In the event of a decline in the stock market,
the Fund could exercise or sell the put at a profit to attempt to offset some or
all of its loss on its portfolio securities. When the Fund purchases a put on an
index, or on a Future not held by it, the put protects the Fund to the extent
that the index or Future moves in a similar pattern to the securities held. In
the case of a put on an index or Future, settlement is in cash rather than by
delivery by the Fund of the underlying investment.
Puts and calls on broadly-based indices or Futures are similar to puts and
calls on securities or futures contracts except that all settlements are in cash
and gain or loss depends on changes in the index in question (and thus on price
movements in the stock market generally) rather than on price movements in
individual securities or futures contracts. When the Fund buys a call on an
index or Future, it pays a premium. During the call period, upon exercise of a
call by the Fund, a seller of a corresponding call on the same investment will
pay the Fund an amount of cash to settle the call if the closing level of the
index or Future upon which the call is based is greater than the exercise price
of the call. That cash payment is equal to the difference between the closing
price of the index and the exercise price of the call times a specified multiple
(the "multiplier") which determines the total dollar value for each point of
difference. When the Fund buys a put on an index or Future, it pays a premium
and has the right during the put period to require a seller of a corresponding
put, upon the Fund's exercise of its put, to deliver to the Fund an amount of
cash to settle the put if the closing level of the index or Future upon which
the put is based is less than the exercise price of the put. That cash payment
is determined by the multiplier, in the same manner as described above as to
calls.
<PAGE>
An option position may be closed out only on a market which provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. The Fund's
option activities may affect its turnover rate and brokerage commissions. The
exercise by the Fund of puts on securities will cause the sale of related
investments, increasing portfolio turnover. Although such exercise is within the
Fund's control, holding a put might cause the Fund to sell the related
investments for reasons which would not exist in the absence of the put. The
Fund may pay a brokerage commission each time it buys a put or call, sells a
call, or buys or sells an underlying investment in connection with the exercise
of a put or call. Such commissions may be higher than those which would apply to
direct purchases or sales of such underlying investments. Premiums paid for
options are small in relation to the market value of the related investments,
and consequently, put and call options offer large amounts of leverage. The
leverage offered by trading in options could result in the Fund's net asset
value being more sensitive to changes in the value of the underlying
investments.
|_| Options on Foreign Currencies. The Fund intends to write and purchase
calls on foreign currencies. The Fund may purchase and write puts and calls on
foreign currencies that are traded on a securities or commodities exchange or
quoted by major recognized dealers in such options, for the purpose of
protecting against declines in the dollar value of foreign securities and
against increases in the dollar cost of foreign securities to be acquired. If a
rise is anticipated in the dollar value of a foreign currency in which
securities to be acquired are denominated, the increased cost of such securities
may be partially offset by purchasing calls or writing puts on that foreign
currency. If a decline in the dollar value of a foreign currency is anticipated,
the decline in value of portfolio securities denominated in that currency may be
partially offset by writing calls or purchasing puts on that foreign currency.
However, in the event of currency rate fluctuations adverse to the Fund's
position, it would lose the premium it paid and transactions costs. A call
written on a foreign currency by the Fund is covered if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call may be written by the Fund on a foreign currency to provide a hedge against
a decline due to an expected adverse change in the exchange rate in the U.S.
dollar value of a security which the Fund owns or has the right to acquire and
which is denominated in a currency other than that underlying the option. This
is a crosshedging strategy. In such circumstances, the Fund collateralizes the
option by maintaining in a segregated account with the Fund's custodian, cash or
U.S. Government Securities in an amount not less than the value of the
underlying foreign currency in U.S. dollars marked-to-market daily.
|_| Interest Rate Swap Transactions. Swap agreements entail both interest
rate risk and credit risk. There is a risk that, based on movements of interest
rates in the future, the payments made by the Fund under a swap agreement will
have been greater than those received by it. Credit risk arises from the
possibility that the counterparty will default. If the counterparty to an
interest rate swap defaults, the Fund's loss will consist of the net amount of
contractual interest payments that the Fund has not yet received. The Manager
will monitor the creditworthiness of counterparties to the Fund's interest rate
swap transactions on an ongoing basis. The Fund will enter into swap
transactions with appropriate counterparties pursuant to master netting
agreements. A master netting agreement provides that all swaps done between the
Fund and that counterparty under the master agreement shall be regarded as parts
of an integral agreement. If on any date amounts are payable in the same
currency in respect of one or more swap transactions, the net amount payable on
that date in that currency shall be paid. In addition, the master netting
agreement may provide that if one party defaults generally or on one swap, the
counterparty may terminate the swaps with that party. Under such agreements, if
there is a default resulting in a loss to one party, the measure of that party's
damages is calculated by reference to the average cost of a replacement swap
with respect to each swap (i.e., the mark-to-market value at the time of the
termination of each swap). The gains and losses on all swaps are then netted,
and the result is the counterparty's gain or loss on termination. The
termination of all swaps and the netting of gains and losses on termination is
generally referred to as "aggregation." The value of securities subject to
interest rate swaps will not exceed 25% of the Fund's total assets.
<PAGE>
|_| Regulatory Aspects of Hedging Instruments. The Fund is required to
operate within certain guidelines and restrictions with respect to its use of
futures and options thereon as established by the Commodity Futures Trading
Commission ("CFTC"). In particular, the Fund is exempted from registration with
the CFTC as a "commodity pool operator" if the Fund complies with the
requirements of Rule 4.5 adopted by the CFTC. The Rule does not limit the
percentage of the Fund's assets that may be used for Futures margin and related
option premiums for a bona fide hedging position. However, under the Rule the
Fund must limit its aggregate initial futures margin and related option premiums
to no more than 5% of the Fund's net assets for hedging strategies that are not
considered bona fide hedging strategies under the Rule. Under the Rule, the Fund
must also use short futures and Futures options solely for bonafide hedging
purposes within the meaning and intent of the applicable provisions of the
Commodity Exchange Act.
Transactions in options by the Fund are subject to limitations established
by each of the exchanges governing the maximum number of options which may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
different exchanges or through one or more brokers. Thus, the number of options
which the Fund may write or hold may be affected by options written or held by
other entities, including other investment companies having the same advisor as
the Fund or having an affiliated investment adviser. Position limits also apply
to Futures. An exchange may order the liquidation of positions found to be in
violation of those limits and may impose certain other sanctions. Due to
requirements under the Investment Company Act, when the Fund purchases a Future,
the Fund will identify as segregated on its records liquid assets of any type,
including equity and debt securities of any grade in an amount equal to the
market value of the securities underlying such Future, less the margin deposit
applicable to it.
|_| Tax Aspects of Hedging Instruments and Covered Calls. The Fund intends
to qualify as a "regulated investment company" under the Internal Revenue Code
(althrough it reserves the right not to qualify). That qualification enables the
Fund to "pass through" its income and realized capital gains to shareholders
without the Fund having to pay taxes on them. This avoids a "double tax" on that
income and capital gains, since shareholders normally will be taxed on the
dividends and capital gains they receive from the Fund (unless the fund's shares
are held in a retirement account or the shareholder is otherwise exempt from
tax).
Certain foreign currency exchange contracts ("Forward Contracts") in which
the Fund may invest are treated as "section 1256 contracts." Gains or losses
relating to section 1256 contracts generally are characterized under the
Internal Revenue Code as 60% long-term and 40% short-term capital gains or
losses. However, foreign currency gains or losses arising from certain section
1256 contracts (including Forward Contracts) generally are treated as ordinary
income or loss. In addition, section 1256 contracts held by the Fund at the end
of each taxable year are "marked-to-market" with the result that unrealized
gains or losses are treated as though they were realized. These contracts also
may be marked-to-market for purposes of the excise tax applicable to investment
company distributions and for other purposes under rules prescribed pursuant to
the Internal Revenue Code. An election can be made by the Fund to exempt these
transactions from this marked-to-market treatment.
<PAGE>
Certain Forward Contracts entered into by the Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character and timing of gains (or losses) realized by the Fund on straddle
positions. Generally, a loss sustained on the disposition of a position(s)
making up a straddle is allowed only to the extent such loss exceeds any
unrecognized gain in the offsetting positions making up the straddle. Disallowed
loss is generally allowed at the point where there is no unrecognized gain in
the offsetting positions making up the straddle, or the offsetting position is
disposed of.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of foreign currency forward contracts, gains
or losses attributable to fluctuations in the value of a foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. Currency gains and losses
are offset against market gains and losses before determining a net "Section
988" gain or loss under the Internal Revenue Code, which may increase or
decrease the amount of the Fund's investment company income available for
distribution to its shareholders.
|_| Risks of Hedging With Options and Futures. An option position may be
closed out only on a market that provides secondary trading for options of the
same series, and there is no assurance that a liquid secondary market will exist
for any particular option. In addition to the risks associated with hedging that
are discussed in the Prospectus and above, there is a risk in using short
hedging by selling Futures to attempt to protect against declines in the value
of the Fund's portfolio securities (due to an increase in interest rates) that
the prices of such Futures will correlate imperfectly with the behavior of the
cash (i.e., market value) prices of the Fund's portfolio securities. The
ordinary spreads between prices in the cash and futures markets are subject to
distortions due to differences in the natures of those markets. First, all
participants in the futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures markets depend on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures markets could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the futures markets may
cause temporary price distortions.
<PAGE>
The risk of imperfect correlation increases as the composition of the
Fund's portfolio diverges from the securities included in the applicable index.
To compensate for the imperfect correlation of movements in the price of the
debt securities being hedged and movements in the price of the Hedging
Instruments, the Fund may use hedging instruments in a greater dollar amount
than the dollar amount of debt securities being hedged if the historical
volatility of the prices of the debt securities being hedged is more than the
historical volatility of the applicable index. It is also possible that if the
Fund has used hedging instruments in a short hedge, the market may advance and
the value of the debt securities held in the Fund's portfolio may decline. If
that occurred, the Fund would lose money on the hedging instruments and also
experience a decline in value in its portfolio securities. However, while this
could occur for a very brief period or to a very small degree, over time the
value of a diversified portfolio of equity securities will tend to move in the
same direction as the indices upon which the hedging instruments are based.
If the Fund uses Hedging Instruments to establish a position in the debt
securities markets as a temporary substitute for the purchase of individual debt
securities (long hedging) by buying Futures and/or calls on such Futures or on
debt securities, it is possible that the market may decline; if the Fund then
concludes not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Fund will realize a
loss on the Hedging Instruments that is not offset by a reduction in the price
of the debt securities purchased.
Other Investment Restrictions
The Fund's most significant investment restrictions are set forth in the
Prospectus. There are additional investment restrictions that the Fund must
follow that are also fundamental policies. Fundamental policies and the Fund's
investment objectives cannot be changed without the vote of a "majority" of the
Fund's outstanding voting securities. Under the Investment Company Act, such a
"majority" vote is defined as the vote of the holders of the lesser of (1) 67%
or more of the shares present or represented by proxy at a shareholder meeting,
if the holders of more than 50% of the outstanding shares are present, or (2)
more than 50% of the outstanding shares.
Under these additional restrictions, the Fund cannot:
|_| invest in real estate, or commodities or commodity contracts; however,
the Fund may invest in debt securities secured by real estate or interests
therein or issued by companies, including real estate investment trusts, which
invest in real estate or interests therein, and the Fund may buy and sell any of
the Hedging Instruments which it may use, whether or not such Hedging Instrument
is considered to be a commodity or a commodity contract;
|_| buy securities on margin or engage in short sales, except that the
Fund may make margin deposits in connection with any of the Hedging Instruments
which it may use;
|_| pledge, hypothecate, mortgage or otherwise encumber its assets;
however, escrow or other collateral arrangements in connection with Hedging
Instruments are not prohibited hereby; |_| underwrite securities issued by other
persons except to the extent that, in connection with the disposition of its
portfolio investments, it may be deemed to be an underwriter under Federal
securities laws;
|_| buy and retain securities of any issuer if those officers, Trustees or
Directors of the Fund or the Manager who beneficially own more than 0.5% of the
securities of such issuer together own more than 5% of the securities of such
issuer;
|_| invest in mineral-related programs or leases;
|_| buy the securities of any company for the purpose of exercising
management control; or
|_| buy securities of other investment companies, except in connection
with a merger, consolidation, reorganization or acquisition of assets.
<PAGE>
|_| issue "senior securities", but this does not prohibit it from
borrowing money or entering into margin, collateral or escrow arrangements, in
each case as permitted by its other investment policies.
How the Fund Is Managed
Organization and History. As a Massachusetts business trust, the Fund is not
required to hold, and does not plan to hold, regular annual meetings of
shareholders. The Fund will hold meetings when required to do so by the
Investment Company Act or other applicable law, or when a shareholder meeting is
called by the Trustees or upon proper request of the shareholders. Shareholders
have the right, upon the declaration in writing or vote of two-thirds of the
outstanding shares of the Fund, to remove a Trustee. The Trustees will call a
meeting of shareholders to vote on the removal of a Trustee upon the written
request of the record holders of 10% of its outstanding shares. In addition, if
the Trustees receive a request from at least 10 shareholders (who have been
shareholders for at least six months) holding shares of the Fund valued at
$25,000 or more or holding at least 1% of the Fund's outstanding shares,
whichever is less, stating that they wish to communicate with other shareholders
to request a meeting to remove a Trustee, the Trustees will then either make the
Fund's shareholder list available to the applicants or mail their communication
to all other shareholders at the applicants' expense, or the Trustees may take
such other action as set forth under Section 16(c) of the Investment Company
Act.
The Fund's Declaration of Trust contains an express disclaimer of
shareholder or Trustee liability for the Fund's obligations, and provides for
indemnification and reimbursement of expenses out of its property for any
shareholder held personally liable for its obligations. The Declaration of Trust
also provides that the Fund shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Fund and satisfy
any judgment thereon. Thus, while Massachusetts law permits a shareholder of a
business trust (such as the Fund) to be held personally liable as a "partner"
under certain circumstances, the risk of a Fund shareholder incurring financial
loss on account of shareholder liability is limited to the relatively remote
circumstances in which the Fund would be unable to meet its obligations
described above. Any person doing business with the Trust, and any shareholder
of the Trust, agrees under the Trust's Declaration of Trust to look solely to
the assets of the Trust for satisfaction of any claim or demand which may arise
out of any dealings with the Trust, and the Trustees shall have no personal
liability to any such person, to the extent permitted by law.
<PAGE>
Trustees and Officers of the Fund. The Fund's Trustees and officers and their
principal occupations and business affiliations and occupations during the past
five years are listed below. All of the Trustees are also trustees, directors or
managing general partners of Oppenheimer Real Asset Fund, Oppenheimer Total
Return Fund, Inc., Oppenheimer Equity Income Fund, Oppenheimer Cash Reserves,
Oppenheimer Strategic Income Fund, Centennial America Fund, L.P., The New York
Tax Exempt Income Fund, Inc., Oppenheimer Variable Account Funds, Oppenheimer
Champion Income Fund, Oppenheimer International Bond Fund, Oppenheimer Main
Street Funds, Inc., Oppenheimer Integrity Funds, Oppenheimer Limited-Term
Government Fund, Oppenheimer Municipal Fund, Panorama Series Fund, Inc.,
Centennial Money Market Trust, Centennial Government Trust, Centennial New York
Tax Exempt Trust, Centennial California Tax Exempt Trust, Inc. and Centennial
Tax Exempt Trust (all of the foregoing funds are collectively referred to as the
"Denver-based Oppenheimer funds") except for (i) Mr. Fossel who is not a Trustee
of Centennial New York Tax Exempt Trust nor a Managing General Partner of
Centennial America Fund, L.P., (ii) Ms. Macaskill and Mr. Bowen who are
notTrustees or Directors of Oppenheimer Integrity Funds, Panorama Series Fund,
Inc., Oppenheimer Strategic Income Fund and Oppenheimer Variable Account Funds
and Centennial New York Tax-Exempt Fund; nor are they Managing General Partners
of Centennial America Fund, L.P. Messrs. Bishop, Bowen, Donohue, Farrar and Zack
hold similar positions as officers of all such funds. As of October 1, 1998, the
Trustees and officers of the Fund as a group owned less than 1% of its
outstanding shares, not including shares held of record by an employee benefit
plan for employeesof the Manager (for which two of the officers listed below,
Ms. Macaskill and Mr. Donohue, are trustees) other than the shares beneficially
owned under that plan by the officers of the Fund listed below.
William L. Armstrong, Trustee(1); Age: 62
11 Carriage Lane, Littleton, Colorado 80121
Chairman of the following private mortgage banking companies: Cherry Creek
Mortgage Company, Centennial State Mortgage Company, The El Paso Mortgage
Company, Transland Financial Services, Inc., and Ambassador Media Corporation;
Chairman of the following private companies: Frontier Real Estate, Inc.
(residential real estate brokerage), Frontier Title (title insurance agency) and
Great Frontier Insurance (insurance agency); Director of the following public
companies: International Family Entertainment (television channel), Storage
Technology Corporation (computer equipment company), Helmerich & Payne, Inc.
(oil and gas drilling/production company), UNUMProvident (insurance company) and
Natec Resources, Inc. (air pollution control equipment and services company).
Robert G. Avis, Trustee(2); Age 67
One North Jefferson Ave., St. Louis, Missouri 63103
Vice Chairman of A.G. Edwards & Sons, Inc. (a broker-dealer) and A.G.
Edwards, Inc. (its parent holding company); Chairman of A.G.E. Asset
Management and A.G. Edwards Trust Company (its affiliated investment adviser
and trust company, respectively).
William A. Baker, Trustee; Age 83
197 Desert Lakes Drive, Palm Springs, California 92264
Management Consultant.
George C. Bowen(2) (3), Vice President, Treasurer, Assistant Secretary and
Trustee; Age: 62 6803 South Tuscon Way, Englewood, Colorado 80112 Senior Vice
President (since September, 1987) and Treasurer (since March, 1985) of the
Manager; Vice President (since June, 1983) of OppenheimerFunds Distributor, Inc.
(the "Distributor"); Vice President (since October, 1989) and Treasurer (since
April, 1986) of HarbourView; Senior Vice President (since February, 1992),
Treasurer (since July, 1991) and a director (since December, 1991) of Centennial
Asset Management Corporation ("Centennial"); President, Treasurer and a director
of Centennial Capital Corporation (Since June, 1989); Vice President and
Treasurer (since August, 1978) and Secretary (since April, 1981) of Shareholder
Services, Inc. ("SSI"); Vice President, Treasurer and Secretary of Shareholder
Financial Services, Inc. ("SFSI") (since November, 1989), Assistant Treasurer or
Oppenheimer Acquisition Corp. ("OAC") (since March, 1998); Treasurer of
Oppenheimer Partnership Holdings, Inc. (since November, 1989); Vice President
and Treasurer of Oppenheimer Real Asset Management, Inc. (since July, 1996);
Chief Executive Officer, Treasurer; Treasurer of OFIL and Oppenheimer Millenium
Funds plc (since October, 1997); an officer of other Oppenheimer funds; formerly
Treasurer of OAC (June 1990 - March 1998).
Jon S. Fossel, Trustee (4); Age 56
P.O. Box 44, Mead Street, Waccabuc, New York 10597
Formerly Chairman and a director of the Manager, President and a Director of
OAC, the Manager's parent holding company, SSI and SFSI, transfer agent
subsidiaries of the Manager.
Sam Freedman, Trustee; Age: 57
4975 Lakeshore Drive, Littleton, Colorado 80123
Formerly Chairman and Chief Executive Officer of OppenheimerFunds Services,
Chairman, Chief Executive Officer and a director of SSI, Chairman, Chief
Executive Officer and director of SFSI, Vice President and director of OAC and a
director of the Manager.
Raymond J. Kalinowski, Trustee; Age 69
44 Portland Drive, St. Louis, Missouri 63131
Director of Wave Technologies International Inc. (a computer products
training company).
C. Howard Kast, Trustee; Age 76
2552 East Alameda, Denver, Colorado 80209
Formerly Managing Partner of Deloitte, Haskins & Sells (an accounting firm).
Robert M. Kirchner, Trustee; Age 76
7500 E. Arapahoe Road, Englewood, Colorado 80112
President of The Kirchner Company (management consultants).
Bridget A. Macaskill, President and Trustee(2) (5); Age: 50 President (since
June, 1991), Chief Executive Officer (since September, 1995) and a Director
(since December, 1994) of the Manager; President and Director (since June, 1991)
of HarbourView Asset Management Corporation ("HarbourView"), a subsidiary of the
Manager; Chairman and a director of SSI (since August, 1994) and SFSI (since
September, 1995); President (since September, 1995) and a director (since
October, 1990) of OAC; President (since September, 1995) and a Director (since
November, 1989) of Oppenheimer Partnership Holdings, Inc., a holding company
subsidiary of the Manager; a director (since July, 1996) of Oppenheimer Real
Asset Management, Inc.; President and a Director (since October, 1997) of
OppenheimerFunds International Ltd; and offshore fund manager subsidiary of the
Manager ("OFIL"); Chairman, President and a director (since October, 1997) of
OppenheimerFunds Millennium Funds, plc; President and a Director of other
Oppenheimer Funds; Member, Board of Governors, NASD, Inc. a Director of
Hillsdown Holdings plc (a U.K. food company); formerly an Executive Vice
President of the Manager and a Director of NASDQ Stock Market, Inc.
Ned M. Steel, Trustee; Age 82
3416 South Race Street, Englewood, Colorado 80110
Chartered Property and Casualty Underwriter; Director of Visiting Nurse
Corporation of Colorado.
James C. Swain, Chairman, Chief Executive Officer and Trustee (1); Age 63 6803
South Tucson Way, Englewood, Colorado 80112 Vice Chairman of the Manager (since
September, 1998); formerly President and Director of Centennial Asset Management
Corporation, an investment adviser subsidiary of the Manager ("Centennial");
formerly Chairman of the Board of SSI.
David P. Negri, Vice President and Portfolio Manager; Age: 45
Two World Trade Center, 34th Floor, New York, New York 10048-0203
Senior Vice President of the Manager (since June 1989); an officer of other
Oppenheimer funds.
Thomas P. Reedy, Vice President and Portfolio Manager; Age: 37 Two World Trade
Center, 34th Floor, New York, New York 10048-0203 Vice President of the Manager
(since June 1993); an officer of other Oppenheimer funds; formerly a Securities
Analyst for the Manager.
Andrew J. Donohue, Vice President and Secretary; Age 48
Two World Trade Center, New York, New York 10048
Executive Vice President (since January, 1993), General Counsel (since October,
1991) and a Director (since September, 1995) of the Manager; executive Vice
President and General Counsel (since September, 1993) and Director (since
January, 1992) of the Distributor, Executive Vice President, Genral Counsel and
a Director of Harbourview, SSI, SFSI and Oppenheimer Partnership Holdings, Inc.
(since September, 1995) of Centennial; and a Director of Oppenheimer Real Asset
Management, Inc. (since July, 1996); General Councel (since May, 1996) and
Secretary (since April, 1997) of OAC; Vice President and a Director of OFIL and
Oppenheimer Mllennium Funds plc (since October, 1997); an officer of other
Oppenheimer funds.
Robert J. Bishop, Assistant Treasurer; Age 39
6803 South Tucson Way, Englewood, Colorado 80112
Vice President of the Manager/Mutual Fund Accounting (since May, 1996); an
officer of other Oppenheimer funds; formerly an Assistant Vice President of the
Manager/Mutual Fund Accounting (april, 1994-May, 1996)and a Fund
Controller for the Manager.
Scott Farrar, Assistant Treasurer; Age 33
6803 South Tucson Way, Englewood, Colorado 80112
Vice President of the Manager/Mutual Fund Accounting (since May, 1996);
Assistant Vice President of Oppneheimer Millennium Funds plc (since October,
1997); an officer of other Oppenheimer funds; formerly an Assistant Vice
President of the Manager/Mutual Fund Accounting (april, 1994-May, 1996), and a
Fund Controller for the Manager.
Robert G. Zack, Assistant Secretary; Age 50
Two World Trade Center, New York, New York 10048-0203
Senior Vice President (since may, 1985) and Associate General Counsel (since
May, 1981) of the Manager, Assistant Secretary of SSI (since May, 1985) and SFSI
(since November, 1989); Assistant Secretary of OFIL and Oppenheimer Millennium
Funds plc (since October, 1997); an officer of other Oppenheimer funds.
- --------------------
(1) Not a trustee of Centennial Tax Exempt Trust, Centennial New York Tax
Exempt Trust, Centennial Money Market Trust, Centennial Government Trust,
Centennial California Tax Exempt Trust, Oppenheimer Cash Reserves and
Oppenheimer Champion Income Fund; not a director of Oppenheimer Main Street
Funds, Inc.; not a Managing General Partner of Centennial America Fund, L.P.
(2)A Trustee who is an "interested person" as defined in the Investment Company
Act.
(3)Not a Trustee of Oppenheimer Strategic Income Fund, Oppenheimer Variable
Account Funds, Oppenheimer Integrity Funds, Centennial New York Tax-Exempt
Trust, or a Director of Panorama Series Fund, Inc., or a Managing General
Partner of Centennial America Fund, L.P.
(4)Not a Trustee of Centennial New York Tax-Exempt Trust nor a Managing General
Partner of Centennial America Fund, L.P.
(5)Not a Trustee of Oppenheimer Strategic Income Fund, Oppenheimer Variable
Account Funds, Oppenheimer Integrity Funds, or a Director of Panorama Series
Fund, Inc.
|X| Remuneration of Trustees. The officers of the Fund and two Trustees
of the Fund (Ms. Macaskill and Mr. Swain) who are affiliated with the Manager
receives no salary or fee from the Fund. The remaining Trustees of the Fund
received the compensation shown below. The compensation from the Fund was paid
during its fiscal year ended June 30, 1998. The compensation from all of the
Denver-based Oppenheimer funds includes the Fund and is compensation received as
a director, trustee, managing general partner or member of a committee of the
Board during calendar year 1997. Mr. Bowen did not receive any fess salary or
compensation from the Fund during the calendar year ended December 31, 1997.
Total Compensation
- -------------------------------------------------------------------------------
Aggregate From All
Compensation Denver-based
Name and Position from Fund Oppenheimer funds1
Robert G. Avis $7,421 $63,501
Trustee
William A. Baker $9,057 $77,502
Audit and Review Committee
Ex-officio Member2 and Trustee
Charles Conrad, Jr. $8,415 $72,000
Trustee3
Jon S. Fossel $7,395 $63,277
Trustee
Sam Freedman $7,772 $66,501
Audit and Review Committee
Member2 and Trustee
Raymond J. Kalinowski $8,363 $71,561
Audit and Review Committee
Member2 and Trustee
C. Howard Kast $8,941 $76,503
Audit and Review Committee
Chairman2 and Trustee
Robert M. Kirchner $8,415 $72,000
Trustee3
Ned M. Steel $7,421 $63,501
Trustee
- -----------------------
(1) For the 1997 calendar year. (2) Committee positions effective July 1, 1997.
(3) Prior to July 1, 1997, Messrs. Conrad and Kirchner were also members of the
Audit and Review Committee.
Deferred Compensation Plan. The Board of Trustees has adopted a Deferred
Compensation Plan for disinterested Trustees that enables them to elect to defer
receipt of all or a portion of the annual fees they are entitled to receive from
the Fund. None of the Trustees have elected to participate in this plan at this
time. Under the Plan, the compensation deferred by a Trustee is periodically
adjusted as though an equivalent amount had been invested in shares of one or
more Oppenheimer funds selected by the Trustee. The amount paid to the Trustee
under the Plan will be determined based upon the performance of the selected
funds. Deferral of Trustee's fees under the Plan will not materially affect the
Fund's assets, liabilities or net income per share. The Plan will not obligate
the Fund to retain the services of any Trustee or to pay any particular level of
compensation to any Trustee. Pursuant to an Order issued by the Securities and
Exchange Commission, the Fund may invest in the funds selected by the Trustee
under the plan for the limited purpose of determining the value of the Trustee's
deferred fee account.
|X| Major Shareholders. As of October 1, 1998 no person owned of record or
was known by the Fund to own beneficially 5% or more of the Fund as a whole or
the Fund's outstanding Class A, Class B, Class C or Class Y shares except:
Merrill Lynch Pierce Fenner & Smith, 4800 Deer Lake Drive, E., Floor 3,
Attention: Fund Admin.# 98BJ2, Jacksonville, Florida 32246, who owned
2,891,723.225 Class B shares (representing approximately 7.58%) of the Fund's
outstanding Class B shares; and Merrill Lynch Pierce Fenner & Smith, 4800 Deer
Lake Drive, E., Floor 3, Attention: Fund Admin.# 97HW2, Jacksonville, Florida
32246, who owned 910,332.253 Class C shares (representing approximately 17.33%)
of the Fund's outstanding Class C shares. No one was known by the Fund to own
more than 5% of the Fund's outstanding Class A or Class Y shares on that date.
The Portfolio Manager of the Fund is Ralph W. Stellmacher, who is
principally responsible for the day-to-day management of the Fund's portfolio.
Mr. Stellmacher's background is described in the Prospectus under "Portfolio
Manager." Other members of the Manager's fixed income portfolio department
provide the portfolio manager with support in managing the Fund's portfolio.
<PAGE>
The Manager and Its Affiliates. The Manager is wholly-owned by Oppenheimer
Acquisition Corp. ("OAC"), a holding company controlled by Massachusetts
Mutual Life Insurance Company. OAC is also owned in part by certain of the
Manager's directors and officers, some of whom may also serve as officers of
the Fund, and two of whom (Ms. Macaskill and Mr. Swain) serve as Trustees of
the Fund.
The Manager and the Fund have a Code of Ethics. It is designed to detect
and prevent improper personal trading by certain employees, including portfolio
managers, that would compete with or take advantage of the Fund's portfolio
transactions. Compliance with the Code of Ethics is carefully monitored and
strictly enforced by the Manager.
|X| The Investment Advisory Agreement. The Investment Advisory Agreement
(the "Advisory Agreement") between the Manager and the Fund requires the
Manager, at its expense, to provide the Fund with adequate office space,
facilities and equipment, and to provide and supervise the activities of all
administrative and clerical personnel required to provide effective corporate
administration for the Fund, including the compilation and maintenance of
records with respect to its operations, the preparation and filing of specified
reports, and composition of proxy materials and registration statements for
continuous public sale of shares of the Fund.
Expenses not expressly assumed by the Manager under the Advisory Agreement
or by the Distributor under the General Distributors Agreement are paid by the
Fund. The advisory agreement lists examples of expenses paid by the Fund, the
major categories of which relate to interest, taxes, brokerage commissions, fees
to certain Trustees, legal and audit expenses, custodian and transfer agent
expenses, share issuance costs, certain printing and registration costs and
non-recurring expenses, including litigation costs. For the Fund's fiscal years
ended June 30, 1996, 1997 and 1998, the management fees paid by the Fund to the
Manager were, $8,502,884, $9,226,623 and $10,551,830, respectively.
The Advisory Agreement contains no expense limitation. However, because of
state regulations limiting fund expenses that previously applied, the Manager
had voluntarily undertaken that the Fund's total expenses in any fiscal year
(including the investment advisory fee but excluding taxes, interest, brokerage
commissions, distribution plan payments and any extraordinary nonrecurring
expenses, including litigation costs) would not exceed the most stringent state
regulatory limitation applicable to the Fund. Due to changes in federal
securities laws, such state regulations no longer apply and the Manager's
undertaking is therefore inapplicable and has been withdrawn. During the Fund's
last fiscal year, the Fund's expenses did not exceed the most stringent state
regulatory limit and the voluntary undertaking was not invoked.
<PAGE>
The Advisory Agreement provides that in the absence of willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
reckless disregard for its obligations and duties under the advisory agreement,
the Manager is not liable for any loss resulting from a good faith error or
omission on its part with respect to any of its duties thereunder. The Advisory
Agreement permits the Manager to act as investment adviser for any other person,
firm or corporation and to use the name "Oppenheimer" in connection with other
investment companies for which it may act as investment adviser or general
distributor. If the Manager shall no longer act as investment adviser to the
Fund, the right of the Fund to use the name "Oppenheimer" as part of its name
may be withdrawn. The Advisory Agreement is subject to annual approval by the
Board of Trustees, who may terminate the Advisory Agreement on sixty-day's
notice approved by a majority if the Trustees.
|X| The Distributor. Under its General Distributor's Agreement with the
Fund, the Distributor acts as the Fund's principal underwriter in the continuous
public offering of the Fund's Class A, Class B, Class C and Class Y shares but
is not obligated to sell a specific number of shares. Expenses normally
attributable to sales (other than those paid under the Distribution and Service
Plans, including advertising and the cost of printing and mailing prospectuses,
other than those furnished to existing shareholders) are borne by the
Distributor. During the Fund's fiscal years ended June 30, 1996, 1997 and 1998,
the aggregate amount of sales charges on sales of the Fund's Class A shares were
$2,823,797, $2,724,041 and $3,002,481, respectively, of which the Distributor
and an affiliated broker-dealer retained in the aggregate $688,648, $719,342 and
$771,821 in those respective years. The contingent deferred sales charges
collected by the Distributor on the redemption of Class B shares for the fiscal
years ended June 30, 1996, 1997 and 1998 totaled $765,717, $975,794 and
$1,047,304, respectively. The contingent deferred sales charges collected on the
Fund's Class C shares for the fiscal period November 1, 1995 through June 30,
1996 and the fiscal years ended June 30, 1997 and 1998 totaled $733, $18,172 and
$40,452, respectively, all of which the Distributor retained. For additional
information about distribution of the Fund's shares and the expenses connected
with such activities, please refer to "Distribution and Service Plans," below.
|X| The Transfer Agent. OppenheimerFunds Services, the Fund's Transfer
Agent, an operating division of the Manager which is the Fund's transfer agent
is responsible for maintaining the Fund's shareholder registry and shareholder
accounting records, and for shareholder servicing and administrative functions.
Brokerage Policies of the Fund
Brokerage Provisions of the Investment Advisory Agreement. One of the duties of
the Manager under the Advisory Agreement is to arrange the portfolio
transactions for the Fund. In doing so, the Manager is authorized by the
Advisory Agreement to employ such broker-dealers, including "affiliated"
brokers, as that term is defined in the Investment Company Act, as may, in its
best judgment based on all relevant factors, implement the policy of the Fund to
obtain, at reasonable expense, the "best execution" (prompt and reliable
execution at the most favorable price obtainable) of such transactions. The
Manager need not seek competitive commission bidding or base its selection on
"posted" rates, but is expected to be aware of the current rates of eligible
brokers and to minimize the commissions paid to the extent consistent with the
provisions of the Advisory Agreement and the interests and policies of the Fund
as established by its Board of Trustees. Purchases of securities from
underwriters include a commission or concession paid by the issuer to the
underwriter, and purchases from dealers include a between the bid and asked
price.
<PAGE>
Under the Advisory Agreement, the Manager is authorized to select brokers
and dealers that provide brokerage and/or research services for the Fund and/or
the other accounts over which the Manager or its affiliates have investment
discretion. The commissions paid to such brokers may be higher than another
qualified broker would have charged if a good faith determination is made by the
Manager that the commission is fair and reasonable in relation to the services
provided. Most purchases made by the Fund are principal transactions at net
prices, and the Fund incurs little or no brokerage costs.
Description of Brokerage Practices Followed by the Manager. Subject to the
provisions of the Advisory Agreement and the procedures and rules described
above, allocations of brokerage generally are made by the Manager's portfolio
traders upon recommendations from the Manager's portfolio managers. In certain
instances, portfolio managers may directly place trades and allocate brokerage,
also subject to the provisions of the advisory agreement and the procedures and
rules described above. In either case, brokerage is allocated under the
supervision of the Manager's executive officers. Transactions in securities,
other than those for which an exchange is the primary market, are generally done
with principals or market makers. Brokerage commissions are paid primarily for
effecting transactions in listed securities or for certain fixed-income agency
trades in the secondary market, and are otherwise paid only if it appears likely
that a better price or execution can be obtained. When the Fund engages in an
option transaction, ordinarily the same broker will be used for the purchase or
sale of the option and any transaction in the securities to which the option
relates. When possible, concurrent orders to purchase or sell the same security
by more than one of the accounts managed by the Manager or its affiliates are
combined. The transactions effected pursuant to such combined orders are
averaged as to price and allocated in accordance with the purchase or sale
orders actually placed for each account.
Most purchases of money market instruments and debt obligations are
principal transactions at net prices. Instead of using a broker for those
transactions, the Fund normally deals directly with the selling or purchasing
principal or market maker unless it determines that a better price or exectuion
can be obtained by using a broker. Purchases of these securities from
underwriters include a commission or concession paid by the issuer to the
underwriter. Most purchases from dealers include a spread between the bid and
asked prices. The Fund seeks to obtain prompt execution of these orders at the
most favorable net price.
The research services provided by a particular broker may be useful only
to one or more of the advisory accounts of the Manager and its affiliates, and
investment research received for the commissions of those other accounts may be
useful both to the Fund and one or more of such other accounts. Such research,
which may be supplied by a third party at the instance of a broker, includes
information and analyses on particular companies and industries as well as
market or economic trends and portfolio strategy, receipt of market quotations
for portfolio evaluations, information systems, computer hardware and similar
products and services. If a research service also assists the Manager in a
non-research capacity (such as bookkeeping or other administrative functions),
then only the percentage or component that provides assistance to the Manager in
the investment decision-making process may be paid in commission dollars. The
Board of Trustees has permitted the Manager to use concessions on fixed-price
offerings to obtain research, in the same manner as is permitted for agency
transactions. The Board has also permitted the Manager to use stated commissions
on secondary fixed-income agency trades to obtain research where the broker has
represented to the Manager that: (i) the trade is not from or for the broker's
own inventory, (ii) the trade was executed by the broker on an agency basis at
the stated commission, and (iii) the trade is not a riskless principal
transaction.
The research services provided by brokers broadens the scope and
supplement the research activities of the Manager, by making available
additional views for consideration and comparisons, and by enabling the Manager
to obtain market information for the valuation of securities held in the Fund's
portfolio or being considered for purchase. The Manager provides information as
to the commissions paid to brokers furnishing such services, together with the
Manager's representation that the amount # of such commissions was reasonably
related to the value or benefit of such services.
<PAGE>
During the Fund's fiscal years ended June 30, 1996, 1997 and 1998, total
brokerage commissions paid by the Fund (not including any spreads or concessions
on principal transactions on a net trade basis) amounted to $37,308, $141,722
and $131,140, respectively. During the fiscal year ended June 30, 1998, $6,463
was paid to brokers as commissions in return for research services; the
aggregate dollar amount of these transactions was $1,883,291. The transactions
giving rise to those commissions were allocated in accordance with the Manager's
internal allocation procedures.
Performance of the Fund
Yield and Total Return Information. As described in the Prospectus, from time to
time the "standardized yield," "dividend yield," "total return" "average annual
total return," "cumulative total return," "total return at net asset value" and
"cumulative total return at net asset value" of an investment in a class of
shares of the Fund may be advertised. An explanation of how yields and total
returns are calculated for each class and the components of those calculations
is set forth below.
The Fund's advertisements of its performance data must, under applicable
rules of the Securities and Exchange Commission, include the average annual
total returns for each advertised class of shares of the Fund for the 1, 5, and
10-year periods (or the life of the class, if less) ending as of the most
recently-ended calendar quarter prior to the publication of the advertisement.
This enables an investor to compare the Fund's performance to the performance of
other funds for the same periods. However, a number of factors should be
considered before using such information as a basis for comparison with other
investments. An investment in the Fund is not insured; its returns and share
prices are not guaranteed and normally will fluctuate on a daily basis. When
redeemed, an investor's shares may be worth more or less than their original
cost. Returns for any given past period are not a prediction or representation
by the Fund of future returns. The returns of Class A, Class B, Class C and
Class Y shares of the Fund are affected by portfolio quality, the type of
investments the Fund holds and its operating expenses allocated to a particular
class.
|X| Yields
|_| Standardized Yield. The standardized yield (referred to as "yield") is
shown for a class of shares for a stated 30-day period. It is not based on
actual distributions paid by the Fund to shareholders in the 30-day period, but
is a hypothetical yield based upon the net investment income from the Fund's
portfolio investments for that period. It may therefore differ from the
"dividend yield" for the same class of shares, described below. It is calculated
using the following formula set forth in rules adopted by the Securities and
Exchange Commission designed to assure uniformity in the way that all funds
calculate their yields:
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The symbols above represent the following factors:
a = dividends and interest earned during the 30-day
period.
b = expenses accrued for the period (net of any expense reimbursements).
c = the average daily number of shares of that class outstanding during
the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of the class on the last day of
the period, using the current maximum sales charge rate adjusted for
undistributed net investment income.
The standardized yield of a class of shares for a 30-day period may differ
from the yield for other periods. The SEC formula assumes that the standardized
yield for a 30-day period occurs at a constant rate for a six-month period and
is annualized at the end of the six-month period. Additionally, because each
class of shares is subject to different expenses, it is likely that the
standardized yields of the Fund's classes of shares will differ for any 30-day
period. For the 30-day period ended June 30, 1998, the standardized yields for
the Fund's classes of shares were as follows:
Without Deducting Sales Charge With Sales Charge Deducted
Class A: 8.10% 8.52%
Class B: 7.71% N/A
Class C: 7.71% N/A
Class Y: 8.68% N/A
|_| Dividend Yield. The Fund may quote a "dividend yield" for each class
of its shares. Dividend yield is based on the dividends paid on shares of a
class during the actual dividend period from net investment income during a
stated period. To calculate dividend yield, the dividends of a class declared
during a stated 30-day period are added together and the sum is multiplied by 12
(to annualize the yield) and divided by the maximum offering price on the last
day of the dividend period. The formula is shown below:
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The maximum offering price for Class A shares includes the current maximum
initial sales charge. The maximum offering price for Class B shares and Class C
shares is the net asset value per share, without considering the effect of
contingent deferred sales charges. The Class A dividend yield may also be quoted
without deducting the maximum initial sales charge.
The dividend yields for the 30-day dividend period ended June 30, 1998
were as follows:
Without Deducting Sales Charge With Sales Charge Deducted
Class A: 8.63% 8.22%
Class B: 7.91% N/A
Class C: 7.86% N/A
Class Y: 8.95% N/A
|X| Total Return Information
|_| Average Annual Total Returns. The "average annual total return" of
each class is an average annual compounded rate of return for each year in a
specified number of years. It is the rate of return based on the change in value
of a hypothetical initial investment of $1,000 ("P" in the formula below) held
for a number of years ("n") to achieve an Ending Redeemable Value ("ERV") of
that investment, according to the following formula:
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|_| Cumulative Total Returns. The "cumulative total return" calculation
measures the change in value of a hypothetical investment of $1,000 over an
entire period of years. Its calculation uses some of the same factors as average
annual total return, but it does not average the rate of return on an annual
basis. Cumulative total return is determined as follows:
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In calculating total returns for Class A shares, the current maximum sales
charge of 4.75% (as a percentage of the offering price) is deducted from the
initial investment ("P") (unless the return is shown at net asset value, as
described below). For Class B shares, payment of contingent deferred sales
charge of 5.0% for the first year, 4.0% for the second year, 3.0% for the third
and fourth year, 2.0% in the fifth year, 1.0% in the sixth year and none
thereafter is applied, as described in the Prospectus. For Class C shares, the
payment of the 1% contingent deferred sales charge for the first 12 months is
applied, as described in the prospectus. Class Y shares are not subject to a
sales charge. Total returns also assume that all dividends and capital gains
distributions during the period are reinvested to buy additional shares at net
asset value per share, and that the investment is redeemed at the end of the
period.
The average annual total returns on an investment in Class A shares of the
Fund for the one, five and ten year periods ended June 30, 1998 were 7.01%,
9.10% and 10.16%, respectively. During a portion of the periods for which total
returns are shown for Class A shares, the Fund's maximum initial sales charge
rate was higher; as a result, performance returns on actual investments during
those periods may be lower than the results shown. The average annual total
returns on an investment in Class B shares of the Fund for the one and five-year
period ended June 30, 1998 and for the period from May 3, 1993 (inception of the
Class) through June 30, 1998 were 6.50%, 9.00%, and 9.59%, respectively. The
average annual total returns on an investment in Class C shares of the Fund for
the one-year period ended June 30, 1998 and for the period from November 1, 1995
to June 30, 1998 were 10.42% and 11.69%, respectively.
<PAGE>
The cumulative total return on Class A shares for the ten year period
ended June 30, 1998 was 163.22%. The cumulative total return on Class B shares
for the period from May 3, 1993 (inception of the Class) through June 30, 1998
was 60.37%. The cumulative total return on Class C shares for the period from
November 1, 1995 (inception of the class) to June 30, 1998 was 34.24%. The
cumulative total return on Class Y shares for the period from October 15, 1997
(inception of the Class) to June 30, 1998 was 5.81%.
|X| Total Returns at Net Asset Value. From time to time the Fund may also
quote an average annual total return at net asset value or a cumulative total
return at net asset value for Class A, Class B, Class C or Class Y shares. Each
is based on the difference in net asset value per share at the beginning and the
end of the period for a hypothetical investment in that class of shares (without
considering front-end or contingent deferred sales charges) and takes into
consideration the reinvestment of dividends and capital gains distributions.
The average annual total returns at net asset value for the one, five and
ten-year periods ended June 30, 1998 for Class A shares were 12.34%, 10.17% and
10.70%, respectively. The cumulative total return at net asset value of the
Fund's Class A shares for the ten-year period ended June 30, 1998 was 176.35%.
The average annual total returns at net asset value for Class B shares for the
one-year period and the five-year period ended June 30, 1998 and for the period
from May 3, 1993 (inception of the class) through June 30, 1998 were 11.50%,
9.28% and 9.72%, respectively. For Class B shares, the cumulative total return
at net asset value for the period from May 3, 1993 through June 30, 1998 were
61.37%. The average annual total returns at net asset value for Class C shares
for the fiscal year ended June 30, 1998 and for the period from November 1, 1995
to June 30, 1998 were 11.42% and 11.69%, respectively. For Class C shares, the
cumulative total return at net asset value for the period from November 1, 1995
through June 30, 1998 was 34.24%. The cumulative total return at net asset value
for the period October 15, 1997 to June 30, 1998 for Class Y shares was 5.81%.
Total return information may be useful to investors in reviewing the
performance of the Fund's Class A, Class B, Class C or Class Y shares. However,
when comparing total return of an investment in Class A, Class B or Class C
Shares if the Fund, a number if factors should be considered before using such
information as a basis for comparison with other investments.
Other Performance Comparisons. From time to time the Fund may publish the
ranking of its Class A, Class B, Class C or Class Y shares by Lipper Analytical
Services, Inc. ("Lipper"), a widely recognized independent mutual fund
monitoring service. Lipper monitors the performance of regulated investment
companies, including the Fund, and ranks their performance for various periods
based on categories relating to investment objectives. The performance of the
Fund's classes are ranked against (i) all other funds (excluding money market
funds), (ii) all other high current yield fixed income funds and (iii) all other
such funds in a specific size category. The Lipper performance rankings are
based on total returns that include the reinvestment of capital gain
distributions and income dividends but do not take sales charges or taxes into
consideration.
From time to time, the Fund may include in its advertisements and sales
literature performance information about the Fund cited in other newspapers and
periodicals, such as The New York Times, which may include performance
quotations from other sources including Lipper.
<PAGE>
From time to time the Fund may publish the star ranking of the performance
of its Class A, Class B, Class C or Class Y shares by Morningstar, Inc., an
independent mutual fund monitoring service. Morningstar ranks mutual funds in
broad investment categories: domestic stock funds, international stock funds,
taxable bond funds and municipal bond funds, based on risk-adjusted total
investment return. The Fund is ranked among the taxable bond funds. Investment
return measures a fund's or class's one, three, five and ten-year average annual
total returns (depending on the inception of the fund a class) in excess of
90-day U.S. Treasury bill returns after considering the fund's sales charges and
expenses. Risk measures a fund's or class's performance below 90-day U.S.
Treasury bill returns. Risk and investment return are combined to produce star
rankings reflecting performance relative to the average fund in a fund's
category. Five stars is the "highest" ranking (top 10%), four stars is "above
average" (next 22.5%), three stars is "average" (next 35%), two stars is "below
average" (next 22.5%) and one star is "lowest" (bottom 10%). The current star
ranking is the fund's or class's 3-year ranking or its combined 3- and 5-year
ranking (weighted 60%/40% respectively, or its combined 3-, 5- and 10-year
ranking (weighted 40%, 30% and 30%, respectively), depending on the inception of
the fund or class. Rankings are subject to change monthly.
The Fund may also compare its performance to that of other funds in its
Morningstar Category. In addition to its star ranking, Morningstar also
categorizes and compares a fund's 3-year performance based on Morningstar's
classification of the fund's investments and investment style, rather than how a
fund defines its investment objective. Morningstar's four broad categories
(domestic equity, international equity, municipal bond and taxable bond) are
each further subdivided into categories based on types of investments and
investment styles. Those comparisons by Morningstar are based on the same risk
and return measurements as its star rankings but do not consider the effect of
sales charges.
The total return on an investment in the Fund's Class A, Class B, Class C
or Class Y shares may be compared with performance for the same period of the
Merrill Lynch High Yield Bond Master Index as described in the Prospectus. The
Index includes a factor for the investment of interest but does not reflect
expenses or taxes.
The performance of the Fund's Class A, Class B, Class C or Class Y shares
may also be compared in publications to (i) the performance of various market
indices or to other investments for which reliable performance data is
available, and (ii) to averages, performance rankings or other benchmark
prepared by recognized mutual fund statistical services.
Total return information may be useful to investors in reviewing the
performance of the Fund's Class A, Class B, Class C or Class Y shares. However,
when comparing total return of an investment in Class A, Class B, Class C and
Class Y shares of the Fund, a number of factors should be considered before
using such information as a basis for comparison with other investments. For
example, investors may also wish to compare the Fund's Class A, Class B, Class C
or Class Y shares return to the returns on fixed income investments available
from banks and thrift institutions, such as certificates of deposit, ordinary
interest-paying checking and savings accounts, and other forms of fixed or
variable time deposits, and various other instruments such as Treasury bills.
However, the Fund's returns and share price are not guaranteed or insured by the
FDIC or any other agency and will fluctuate daily, while bank depository
obligations may be insured by the FDIC and may provide fixed rates of return,
and Treasury bills are guaranteed as to principal and interest by the U.S.
government.
<PAGE>
From time to time, the Fund's Manager may publish rankings or ratings of
the Manager (or Transfer Agent) or the investor services provided by them to
shareholders of the Oppenheimer funds, other than performance rankings of the
Oppenheimer funds themselves. Those ratings or rankings of shareholder/investor
services by third parties may compare the OppenheimerFunds' services to those of
other mutual fund families selected by the rating or ranking services and may be
based upon the opinions of the rating or ranking service itself, based on its
research or judgment, or based upon surveys of investors, brokers, shareholders
or others.
Distribution and Service Plans
The Fund has adopted a Service Plan for Class A shares and Distribution
and Service Plans for Class B and Class C shares of the Fund under Rule 12b-1 of
the Investment Company Act pursuant to which the Fund makes payments to the
Distributor in connection with the distribution and/or servicing of the shares
of that class, as described in the Prospectus. No such Plan has been adopted for
Class Y shares. Each Plan has been approved by a vote of (i) the Board of
Trustees of the Fund, including a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on that Plan, and (ii) the
holders of a "majority" (as defined in the Investment Company Act) of the shares
of each class. For the Distribution and Service Plan for Class B and Class C
shares, the vote was cast by the Manager as the sole initial holder of Class B
and Class C shares of the Fund.
In addition, under the Plans the Manager and the Distributor, in their
sole discretion, from time to time may use their own resources (which, in the
case of the Manager, may include profits from the advisory fee it receives from
the Fund) at no cost to the Fund to make payments to brokers, dealers or other
financial institutions (each is referred to as a "Recipient" under the Plans)
for distribution and administrative services they perform. The Distributor and
the Manager may, in their sole discretion, increase or decrease the amount of
payments they make from their own resources to Recipients.
Unless terminated as described below, each Plan continues in effect from
year to year but only as long as its continuance is specifically approved at
least annually by the Fund's Board of Trustees and its Independent Trustees by a
vote cast in person at a meeting called for the purpose of voting on such
continuance. A Plan may be terminated at any time by the vote of a majority of
the Independent Trustees or by the vote of the holders of a "majority" (as
defined in the Investment Company Act) of the outstanding shares of that class.
None of the Plans may be amended to increase materially the amount of payments
to be made unless such amendment is approved by shareholders of the class
affected by the amendment. In addition, because Class B shares of the Fund
automatically convert into Class A shares after six years, the Fund is required
by a Securities and Exchange Commission rule to obtain the approval of Class B
as well as Class A shareholders for a proposed amendment to the Class A Plan
that would materially increase the amount to be paid by Class A shareholders
under that Class A Plan. Such approval must be by a "majority" of the Class A
and Class B shares (as defined in the Investment Company Act), voting separately
by Class. All material amendments must be approved by the Board and the
Independent Trustees.
<PAGE>
While the Plans are in effect, the Treasurer of the Fund shall provide
separate written reports to the Fund's Board of Trustees at least quarterly
stating generally the amounts of all payments made pursuant to each Plan and the
purpose for which the payments were made. The Class A and Class B reports
include the identity of each Recipient that received any such payment. Those
reports, including the allocations on which they are based, will be subject to
the review and approval of the Independent Trustees in the exercise of their
fiduciary duty. Each Plan further provides that while it is in effect, the
selection or replacement and nomination of those Trustees of the Fund who are
not "interested persons" of the Fund is committed to the discretion of the
Independent Trustees. This does not prevent the involvement of others in such
selection and nomination if the final decision as to any such selection or
nomination is approved by a majority of the Independent Trustees.
Under the Plans, no payment will be made to any Recipient in any quarter
if the aggregate net asset value of all Fund shares, held by the Recipient for
itself and its customers, did not exceed a minimum amount, if any, that may be
determined from time to time by a majority of the Fund's Independent Trustees.
The Board of Trustees has set the fee at the maximum rate and set no minimum
amount.
For the fiscal year ended June 30, 1998, payments under the Class A Plan
totaled $2,557,141, all of which was paid by the Distributor to Recipients,
including $47,665 paid to MML Investor Services, Inc. ("MMLISI"), an affiliate
of the Distributor. Payments made under the Class B Plan during that fiscal
period totaled $4,641,344, of which $3,815,695 was retained by the Distributor
and $9,654 was paid to MMLISI. Payments made under the Class C Plan during that
period totaled $479,818, of which $319,384 was retained by the Distributor and
$1,436 was paid to MMLISI.
Any unreimbursed expenses incurred by the Distributor with respect to
Class A shares for any fiscal year may not be recovered in subsequent fiscal
years. Payments received by the Distributor under the Plan for Class A shares
will not be used to pay any interest expense, carrying charge, or other
financial costs, or allocation of overhead by the Distributor.
The Class B and Class C Plans allow the service fee payment to be paid by
the Distributor to Recipients in advance for the first year such shares are
outstanding, and thereafter on a quarterly basis, as described in the
Prospectus. The advance payment is based on the net asset value of the shares
sold. An exchange of shares does not entitle the Recipient to an advance service
fee payment. In the event Class B or Class C shares are redeemed during the
first year such shares are outstanding, the Recipient will be obligated to repay
a pro rata portion of such advance payment to the Distributor.
Although the Class B and the Class C Plans permit the Distributor to
retain both the asset-based sales charges and the service fees on Class B and
Class C shares, or to pay Recipients the service fee on a quarterly basis,
without payment in advance, the Distributor presently intends to pay the service
fee to Recipients in the manner described above. If a dealer has a special
arrangement with the Distributor, the Distributor will pay the asset-based sales
charge and service fee on Class B and C shares to the dealer quarterly in lieu
of paying the sales commission and service fee advance at the time of purchase.
A minimum holding period may be established from time to time under the Class B
and Class C Plans by the Board. The Board has set no minimum holding period. All
payments under the Class B and Class C Plans are subject to the limitations
imposed by the Conduct Rules of the National Association of Securities Dealers,
Inc. on payments of asset-based sales charges and service fees. The Distributor
anticipates that it will take a number of years for it to recoup (from the
Fund's payments to the Distributor under the Class B Plan and recoveries of the
contingent deferred sales charge) the sales commissions paid to authorized
brokers or dealers for selling Class B shares.
Asset-based sales charge payments are designed to permit an investor to
purchase shares of the Fund without the assessment of a front-end sales load and
at the same time permit the Distributor to compensate brokers and dealers in
connection with the sale of Class B and Class C shares of the Fund. Such
payments are made in recognition that the Distributor (i) pays sales commissions
to authorized brokers and dealers at the time of sale as described in the
Prospectus, (ii) may finance such commissions and/or the advance of the service
fee payment to Recipients under those Plans, (iii) employs personnel to support
distribution of shares, and (iv) may bear the costs of sales literature,
advertising and prospectuses (other than those furnished to current
shareholders) and state "blue sky" registration fees.
The Class B and Class Plans allow for the carry-forward of distribution
expenses, to be recovered from asset-based sales charges in subsequent fiscal
periods, as above and described in the Prospectus. The Class C Plan provides for
the Distributor to be compensated at a flat rate, whether the Distributor's
distribution expenses are more or less than the amount paid by the Fund during
that period.
ABOUT YOUR ACCOUNT
How To Buy Shares
Alternative Sales Arrangements - Class A, Class B and Class C Shares. The
availability of three classes of shares permits an investor to choose the method
of purchasing shares that is more beneficial to the investor depending on the
amount of the purchase, the length of time the investor expects to hold shares
and other relevant circumstances. Investors should understand that the purpose
and function of the deferred sales charge and asset-based sales charge with
respect to Class B and Class C shares are the same as those of the initial sales
charge with respect to Class A shares. Any salesperson or other person entitled
to receive compensation for selling Fund shares may receive different
compensation with respect to one class of shares than the other. The Distributor
will not normally accept (i) any order for $500,000 or more of Class B shares or
(ii) any order for $1 million or more of Class C shares on behalf of a single
investor (not including dealer "street name" or omnibus accounts) because
generally it will be more advantageous for that investor to purchase Class A
shares of the Fund instead. A fourth class of shares may be purchased only by
certain institutional investors at net asset value per share (the "Class Y
shares").
The four classes of shares each represent an interest in the same
portfolio investments of the Fund. However, each class has different shareholder
privileges and features. The net income attributable to Class B and Class C
shares and the dividends payable on such Class B and Class C shares will be
reduced by additional expenses borne solely by that class, including the
asset-based sales charge to which Class B and Class C shares are subject.
<PAGE>
The conversion of Class B shares to Class A shares after six years is
subject to the continuing availability of a private letter ruling from the
Internal Revenue Service, or an opinion of counsel or tax adviser, to the effect
that the conversion of Class B shares does not constitute a taxable event for
the holder under Federal income tax law. If such a revenue ruling or opinion is
no longer available, the automatic conversion feature may be suspended, in which
event no further conversions of Class B shares would occur while such suspension
remained in effect. Although Class B shares could then be exchanged for Class A
shares on the basis of relative net asset value of the two classes, without the
imposition of a sales charge or fee, such exchange could constitute a taxable
event for the holder, and absent such exchange, Class B shares might continue to
be subject to the asset-based sales charge for longer than six years.
The methodology for calculating the net asset value, dividends and
distributions of the Fund's Class A, Class B, Class C and Class Y shares
recognizes two types of expenses. General expenses that do not pertain
specifically to any class are allocated pro rata to the shares of each class,
based on the percentage of the net assets of such class to the Fund's total net
assets, and then equally to each outstanding share within a given class. Such
general expenses include (i) management fees, (ii) legal, bookkeeping and audit
fees, (iii) printing and mailing costs of shareholder reports, Prospectuses,
Statements of Additional Information and other materials for current
shareholders, (iv) fees to unaffiliated Trustees, (v) custodian expenses, (vi)
share issuance costs, (vii) organization and start-up costs, (viii) interest,
taxes and brokerage commissions, and (ix) non-recurring expenses, such as
litigation costs. Other expenses that are directly attributable to a class are
allocated equally to each outstanding share within that class. Such expenses
include (a) Distribution and/or Service Plan fees, (b) transfer and shareholder
servicing agent fees and expenses, (c) registration fees and (d) shareholder
meeting expenses, to the extent that such expenses pertain to a specific class
rather than to the Fund as a whole.
Determination of Net Asset Value Per Share. The net asset values per share for
Class A, Class B, Class C, and Class Y shares of the Fund are determined as of
the close of business of The New York Stock Exchange (the "NYSE") on each day
that the NYSE is open, by dividing the Fund's net assets attributable to a class
by the number of shares of that class that are outstanding. The NYSE normally
closes at 4:00 P.M., but may close earlier on some other days (for example, in
case of weather emergencies or days falling before a holiday). The NYSE's most
recent annual announcement (which is subject to change) states that it will
close on New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day. It may also close on other days. The Fund may invest a portion of
its assets in foreign securities primarily listed on foreign exchanges which may
trade on Saturdays or customary U.S. business holidays on which the NYSE is
closed. Because the Fund's price and net asset value will not be calculated on
those days, the Fund's net asset values per share may be significantly affected
on such days when shareholders may not purchase or redeem shares.
The Funds Board of Trustees has established procedures for the valuation
of the Fund's securities, generally as follows:
(i) equity securities traded on a U.S. securities exchange or on the
Automated Quotation System ("NASDAQ") of the Nasdaq Stock Market, Inc.
for which last sale information is regularly reported are valued at the
last reported sale price on the principal exchange for such security or
NASDAQ that day (the "Valuation Date") or, in the absence of sales that
day, at the last reported sale price preceding the Valuation Date if it
is within the spread of the closing "bid" and "asked" prices on the
Valuation Date or, if not, the closing "bid" price on the Valuation
Date;
(ii) equity securities traded on a foreign securities exchange are
valued generally at the last sales price available to the pricing
service approved by the Fund's Board of Trustees or to the Manager as
reported by the principal exchange on which the security is traded at
its last trading session on or immediately preceding the Valuation Date,
or, if unavailable, at the mean between "bid" and "asked" prices
obtained from the principal exchange or two active market makers in the
security on the basis of reasonable inquiry;
(iii) a non-money market fund will value (x) debt instruments that
had a maturity of more than 397 days when issued, (y) debt instruments
that had a maturity of 397 days or less when issued and have a remaining
maturity in excess of 60 days, and (z) non-money market type debt
instruments that had a maturity of 397 days or less when issued and have
a remaining maturity of sixty days or less, at the mean between "bid"
and "asked" prices determined by a pricing service approved by the
Fund's Board of Trustees or, if unavailable, obtained by the Manager
from two active market makers in the security on the basis of reasonable
inquiry;
(iv) money market-type debt securities held by a non-money market
fund that had a maturity of less than 397 days when issued and have a
remaining maturity of 60 days or less, and debt instruments held by a
money market fund that have a remaining maturity of 397 days or less,
shall be valued at cost, adjusted for amortization of premiums and
accretion of discount; and
(v) securities (including restricted securities) not having
readily-available market quotations are valued at fair value determined
under the Board's procedures.
If the Manager is unable to locate two active market makers willing to
give quotes (see (ii) and (iii) above), the security may be priced at the mean
between the "bid" and "asked" prices provided by a single active market maker
(which in certain cases may be the "bid" price if no "asked" price is available)
provided that the Manager is satisfied that the firm rendering the quotes is
reliable and that the quotes reflect the current market value.
The Manager may use pricing services approved by the Board of Trustees
to price U.S. Government securities, corporate debt securities or
mortgage-backed securities for which last sale information is not generally
available. The pricing service, when valuing such securities, may use "matrix"
comparisons to the prices for comparable instruments on the basis of quality,
yield, maturity and other special factors involved. The Manager will monitor the
accuracy of the pricing services, which may include comparing prices used for
portfolio evaluation to actual sales prices of selected securities.
Trading in securities on European and Asian exchanges and
over-the-counter markets is normally completed before the close of the New York
Stock Exchange. Events affecting the values of foreign securities traded in
securities markets that occur between the time their prices are determined and
the close of the New York Stock Exchange will not be reflected in the Fund's
calculation of net asset value unless the Board of Trustees or the Manager,
under procedures established by the Board of Trustees, determines that the
particular event is likely to effect a material change in the value of such
security. Foreign currency, including forward contracts, will be valued at the
closing price in the London foreign exchange market that day as provided by a
reliable bank, dealer or pricing service. The values of securities denominated
in foreign currency will be converted to U.S. dollars at the closing price in
the London foreign exchange market that day as provided by a reliable bank,
dealer or pricing service.
Puts, calls and futures are valued at the last sales price on the
principal exchange on which they are traded or on NASDAQ, as applicable, as
determined by a pricing service approved by the Board of Trustees or by the
Manager. If there were no sales that day, value shall be the last sale price on
the preceding trading day if it is within the spread of the closing "bid" and
"ask" prices on the principal exchange or on NASDAQ on the valuation date, or,
if not, value shall be the closing "bid" price on the principal exchange or on
NASDAQ on the valuation date. If the put, call or future is not traded on an
exchange or on NASDAQ, it shall be valued at the mean between "bid" and "ask"
prices obtained by the Manager from two active market makers. If the Manager is
unable to locate two active market makers willing to give quotes, the security
may be priced at the mean between the "bid" and "asked" prices provided by a
single active market maker (which in certain cases may be the "bid" price if no
"asked" price is available) provided that the Manager is satisfied that the firm
rendering the quotes is reliable and that the quotes reflect the current market
value.
When the Fund writes an option, an amount equal to the premium received by
the Fund is included in the Fund's Statement of Assets and Liabilities as an
asset, and an equivalent deferred credit is included in the liability section.
The deferred credit is adjusted ("marked-to-market") to reflect the current
market value of the option. In determining the Fund's gain on investments, if a
call written by the Fund is exercised, the proceeds are increased by the premium
received. If a call or put written by the Fund expires, the Fund has a gain in
the amount of the premium; if the Fund enters into a closing purchase
transaction, it will have a gain or loss depending on whether the premium was
more or less than the cost of the closing transaction. If the Fund exercises a
put it holds, the amount the Fund receives on its sale of the underlying
investment is reduced by the amount of premium paid by the Fund.
AccountLink. When shares are purchased through AccountLink, each purchase must
be at least $25.00. Shares will be purchased on the regular business day the
Distributor is instructed to initiate the Automated Clearing House ("ACH")
transfer to buy shares. Dividends will begin to accrue on shares purchased by
the proceeds of ACH transfers on the business day the Fund receives Federal
Funds for the purchase through the ACH system before the close of The New York
Stock Exchange. The Exchange normally closes at 4:00 P.M., but may close earlier
on certain days. If Federal Funds are received on a business day after the close
of the Exchange, the shares will be purchased and dividends will begin to accrue
on the next regular business day. The proceeds of ACH transfers are normally
received by the Fund 3 days after the transfers are initiated. The Distributor
and the Fund are not responsible for any delays in purchasing shares resulting
from delays in ACH transmissions.
Reduced Sales Charges. As discussed in the Prospectus, a reduced sales charge
rate may be obtained for Class A shares under Right of Accumulation and Letters
of Intent because of the economies of sales efforts and reduction in expenses
realized by the Distributor, dealers and brokers making such sales. No sales
charge is imposed in certain other circumstances described in the Prospectus
because the Distributor or dealer or broker incurs little or no selling
expenses. The term "immediate family" refers to one's spouse, children,
grandchildren, grandparents, parents, parents-in-law, brothers and sisters,
sons- and daughters-in-law, aunts, uncles, nieces, nephews, a sibling's spouse
and a spouse's siblings. Relations by virtue of a remarriage (step-children,
step-parents, etc.) are included.
|X| The Oppenheimer Funds. The Oppenheimer funds are those mutual
funds for which the Distributor acts as the distributor or the
sub-distributor and include the following:
Limited Term New York Municipal Fund Oppenheimer Convertible Securities
Fund Oppenheimer California Municipal Fund Oppenheimer Capital
Appreciation Fund Oppenheimer Champion Income Fund Oppenheimer Developing
Markets Fund Oppenheimer Discovery Fund Oppenheimer Enterprise Fund
Oppenheimer Equity Income Fund Oppenheimer Global Fund Oppenheimer Global
Growth & Income Fund Oppenheimer Gold & Special Minerals Fund Oppenheimer
Growth Fund Oppenheimer High Yield Fund Oppenheimer Integrity Funds
Oppenheimer International Bond Fund Oppenheimer International Growth Fund
Oppenheimer International Small Company Fund Oppenheimer Limited-Term
Government Fund Oppenheimer Main Street Funds, Inc. Oppenheimer
Multi-Sector Income Trust Oppenheimer Multiple Strategies Fund Oppenheimer
Municipal Fund Oppenheimer Multi-State Municipal Trust Oppenheimer
Municipal Bond Fund Oppenheimer New York Municipal Fund Oppenheimer Quest
Capital Value Fund, Inc. Oppenheimer Quest for Value Funds Oppenheimer
Quest Global Value Fund, Inc. Oppenheimer Quest Value Fund, Inc.
Oppenheimer Real Asset Fund Oppenheimer Series Fund, Inc. Oppenheimer
Strategic Income Fund Oppenheimer Total Return Fund, Inc.
<PAGE>
Oppenheimer U.S. Government Trust
Oppenheimer Variable Account Funds
Oppenheimer World Bond Fund
Panorama Series Funds, Inc.
Rochester Fund Municipals
The New York Tax Exempt Income Fund, Inc.
The following "Money Market Funds":
Centennial America Fund, L.P. Centennial California Tax Exempt Trust
Centennial Government Trust Centennial Money Market Trust Centennial New
York Tax Exempt Trust Centennial Tax Exempt Trust Oppenheimer Cash
Reserves Oppenheimer Money Market Fund, Inc.
There is an initial sales charge on the purchase of Class A shares of each
of the Oppenheimer funds except money market funds (under certain circumstances
described herein, redemption proceeds of money market fund shares may be subject
to a contingent deferred sales charge).
|X| Letters of Intent. A Letter of Intent ("Letter") is an investor's
statement in writing to the Distributor of the intention to purchase Class A
shares or Class A and Class B shares of the Fund (and other Oppenheimer funds)
during a 13-month period (the "Letter of Intent period"), which may, at the
investor's request, include purchases made up to 90 days prior to the date of
the Letter. The Letter states the investor's intention to make the aggregate
amount of purchases of shares, which when added to the investor's holdings of
shares of those funds, will equal or exceed the amount specified in the Letter.
Purchases made by reinvestment of dividends or distributions of capital gains
and purchases made at net asset value without sales charge do not count toward
satisfying the amount of the Letter. A Letter enables an investor to count the
Class A and Class B shares purchased under the Letter to obtain the reduced
sales charge rate on purchases of Class A shares of the Fund (and other
Oppenheimer funds) that applies under the Right of Accumulation to current
purchases of Class A shares. Each purchase of Class A shares under the Letter
will be made at the public offering price (including the sales charge) that
applies to a single lump-sum purchase of shares in the amount intended to be
purchased under the Letter.
<PAGE>
In submitting a Letter, the investor makes no commitment to purchase
shares, but if the investor's purchases of shares within the Letter of Intent
period, when added to the value (at offering price) of the investor's holdings
of shares on the last day of that period, do not equal or exceed the intended
purchase amount, the investor agrees to pay the additional amount of sales
charge applicable to such purchases, as set forth in "Terms of Escrow," below
(as those terms may be amended from time to time). The investor agrees that
shares equal in value to 5% of the intended purchase amount will be held in
escrow by the Transfer Agent subject to the Terms of Escrow. Also, the investor
agrees to be bound by the terms of the Prospectus, this Statement of Additional
Information and the Application used for such Letter of Intent, and if such
terms are amended, as they may be from time to time by the Fund, that those
amendments will apply automatically to existing Letters of Intent.
For purchases of shares of the Fund and other Oppenheimer funds by
OppenheimerFunds prototype 401(k) plans under a Letter of Intent, the Transfer
Agent will not hold shares in escrow. If the intended purchase amount under the
Letter entered into by an OppenheimerFunds prototype 401(k) plan is not
purchased by the plan by the end of the Letter of Intent period, there will be
no adjustment of commissions paid to the broker-dealer or financial institution
of record for accounts held in the name of that plan.
If the total eligible purchases made during the Letter of Intent period do
not equal or exceed the intended purchase amount, the commissions previously
paid to the dealer of record for the account and the amount of sales charge
retained by the Distributor will be adjusted to the rates applicable to actual
total purchases. If total eligible purchases during the Letter of Intent period
exceed the intended purchase amount and exceed the amount needed to qualify for
the next sales charge rate reduction set forth in the applicable prospectus, the
sales charges paid will be adjusted to the lower rate, but only if and when the
dealer returns to the Distributor the excess of the amount of commissions
allowed or paid to the dealer over the amount of commissions that apply to the
actual amount of purchases. The excess commissions returned to the Distributor
will be used to purchase additional shares for the investor's account at the net
asset value per share in effect on the date of such purchase, promptly after the
Distributor's receipt thereof.
In determining the total amount of purchases made under a Letter, shares
redeemed by the investor prior to the termination of the Letter of Intent period
will be deducted. It is the responsibility of the dealer of record and/or the
investor to advise the Distributor about the Letter in placing any purchase
orders for the investor during the Letter of Intent period. All of such
purchases must be made through the Distributor.
|_| Terms of Escrow That Apply to Letters of Intent.
(1) Out of the initial purchase (or subsequent purchases if necessary)
made pursuant to a Letter, shares of the Fund equal in value up to 5% of the
intended purchase amount specified in the Letter shall be held in escrow by the
Transfer Agent. For example, if the intended purchase amount is $50,000, the
escrow shall be shares valued in the amount of $2,500 (computed at the public
offering price adjusted for a $50,000 purchase). Any dividends and capital gains
distributions on the escrowed shares will be credited to the investor's account.
(2) If the intended purchase amount specified under the Letter is
completed within the thirteen-month Letter of Intent period, the escrowed shares
will be promptly released to the investor.
<PAGE>
(3) If, at the end of the thirteen-month Letter of Intent period the
total purchases pursuant to the Letter are less than the intended purchase
amount specified in the Letter, the investor must remit to the Distributor an
amount equal to the difference between the dollar amount of sales charges
actually paid and the amount of sales charges which would have been paid if the
total amount purchased had been made at a single time. Such sales charge
adjustment will apply to any shares redeemed prior to the completion of the
Letter. If such difference in sales charges is not paid within twenty days after
a request from the Distributor or the dealer, the Distributor will, within sixty
days of the expiration of the Letter, redeem the number of escrowed shares
necessary to realize such difference in sales charges. Full and fractional
shares remaining after such redemption will be released from escrow. If a
request is received to redeem escrowed shares prior to the payment of such
additional sales charge, the sales charge will be withheld from the redemption
proceeds.
(4) By signing the Letter, the investor irrevocably constitutes and
appoints the Transfer Agent as attorney-in-fact to surrender for redemption any
or all escrowed shares.
(5) The shares eligible for purchase under the Letter (or the holding of
which may be counted toward completion of a Letter) include (a) Class A shares
sold with a front-end sales charge or subject to a Class A contingent deferred
sales charge, (b) Class B shares of other Oppenheimer funds acquired subject to
a contingent deferred sales charge, and (c) Class A or Class B shares acquired
in exchange for either (i) Class A shares of one of the other Oppenheimer funds
that were acquired subject to a Class A initial or contingent deferred sales
charge or (ii) Class B shares of one of the other Oppenheimer funds that were
acquired subject to a contingent deferred sales charge.
(6) Shares held in escrow hereunder will automatically be exchanged for
shares of another fund to which an exchange is requested, as described in the
section of the Prospectus entitled "How to Exchange Shares," and the escrow will
be transferred to that other fund.
Asset Builder Plans. To establish an Asset Builder Plan from a bank account, a
check (minimum $25) for the initial purchase must accompany the application.
Shares purchased by Asset Builder Plan payments from bank accounts are subject
to the redemption restrictions for recent purchases described in "How To Sell
Shares," in the Prospectus. Asset Builder Plans also enable shareholders of
Oppenheimer Cash Reserves to use those accounts for monthly automatic purchases
of shares of up to four other Oppenheimer funds. If you make payments from your
bank account to purchase shares of the Fund, your bank account will be
automatically debited normally four to five business days prior to the
investment dates selected in the Account Application. Neither the Distributor,
the Transfer Agent nor the Fund shall be responsible for any delays in
purchasing shares resulting from delays in ACH transmission.
There is a front-end sales charge on the purchase of certain Oppenheimer
funds, or a contingent deferred sales charge may apply to shares purchased by
Asset Builder payments. An application should be obtained from the Distributor,
completed and returned, and a prospectus of the selected fund(s) should be
obtained from the Distributor or your financial advisor before initiating Asset
Builder payments. The amount of the Asset Builder investment may be changed or
the automatic investments may be terminated at any time by writing to the
Transfer Agent. A reasonable period (approximately 15 days) is required after
the Transfer Agent's receipt of such instructions to implement them. The Fund
reserves the right to amend, suspend, or discontinue offering such plans at any
time without prior notice.
<PAGE>
55
Cancellation of Purchase Orders. Cancellation of purchase orders for the Fund's
shares (for example, when a purchase check is returned to the Fund unpaid)
causes a loss to be incurred when the net asset value of the Fund's shares on
the cancellation date is less than on the purchase date. That loss is equal to
the amount of the decline in the net asset value per share multiplied by the
number of shares in the purchase order. The investor is responsible for that
loss. If the investor fails to compensate the Fund for the loss, the Distributor
will do so. The Fund may reimburse the Distributor for that amount by redeeming
shares from any account registered in that investor's name, or the Fund or the
Distributor may seek other redress.
Retirement Plans. In describing certain types of employee benefit plans that may
purchase Class A shares without being subject to the Class A contingent deferred
sales charge, the term Aemployee benefit plan@ means any plan or arrangement,
whether or not Aqualified@ under the Internal Revenue Code, including, medical
savings accounts, payroll deduction plans or similar plans in which Class A
shares are purchased by a fiduciary or other person for the account of
participants who are employees of a single employer or of affiliated employers,
if the Fund account is registered in the name of the fiduciary or other person
for the benefit of participants in the plan.
<PAGE>
The term "group retirement plan" means any qualified or non-qualified
retirement plan (including 457 plans, SEPs, SARSEPs, 403(b) plans other than
public school 403(b) plans, and SIMPLE plans) for employees of a corporation or
a sole proprietorship, members and employees of a partnership or association or
other organized group of persons (the members of which may include other
groups), if the group or association has made special arrangements with the
Distributor and all members of the group or association participating in or who
are eligible to participate in the plan(s) purchase Class A shares of the Fund
through a single investment dealer, broker, or other financial institution
designated by the group. "Group retirement plan" also includes qualified
retirement plans and non-qualified deferred compensation plans and IRAs that
purchase Class A shares of the Fund through a single investment dealer, broker,
or other financial institution, if that broker-dealer has made special
arrangements with the Distributor enabling those plans to purchase Class A
shares of the Fund at net asset value but subject to a contingent deferred sales
charge.
In addition to the discussion in the Prospectus relating to the ability of
Retirement Plans to purchase Class A shares at net asset value in certain
circumstances, there is no initial sales charge on purchases of Class A shares
of any one or more of the Oppenheimer funds by a Retirement Plan in the
following cases:
(i) the record keeping for the Retirement Plan is performed on a daily
valuation basis by Merrill Lynch Pierce Fenner & Smith, Inc. ("Merrill Lynch")
and, on the date the plan sponsor signs the Merrill Lynch record keeping service
agreement, the Retirement Plan has $3 million or more in assets invested in
mutual funds other than those advised or managed by Merrill Lynch Asset
Management, L.P. ("MLAM") that are made available pursuant to a Service
Agreement between Merrill Lynch and the mutual fund's principal underwriter or
distributor and in funds advised or managed by MLAM (collectively, the
"Applicable Investments"); or
(ii) the record keeping for the Retirement Plan is performed on a daily
valuation basis by an independent record keeper whose services are provided
under a contract or arrangement between the Retirement Plan and Merrill Lynch.
On the date the plan sponsor signs the Merrill Lynch record keeping service
agreement, the Plan must have $3 million or more is assets, excluding assets
held in Money Market Funds, invested in Applicable Investments; or
(iii) the Plan has 500 or more eligible employees, as determined by the
Merrill Lynch plan conversion manager on the date the plan sponsor signs the
Merrill Lynch record keeping service agreement.
If a Retirement Plan's records are maintained on a daily valuation basis
by Merrill Lynch or an independent record keeper under a contract or alliance
arrangement with Merrill Lynch, and if on the date the plan sponsor signs the
Merrill Lynch record keeping service agreement the Retirement Plan has less the
$3 million in assets, excluding Money Market Funds, invested in Applicable
Investments, then the Retirement Plan may purchase only Class B shares of one or
more of the Oppenheimer funds. Otherwise, the Retirement Plan will be permitted
to purchase Class A shares of one or more of the Oppenheimer funds. Any of those
Retirement Plans that currently invest in Class B shares of the Fund will have
their Class B shares converted to Class A shares of the Fund once the Plan's
Applicable Investments have reached $5 million.
Any redemptions of shares of the Fund held by Retirement Plans whose
records are maintained on a daily valuation basis by Merrill Lynch or an
independent record keeper under a contract with Merrill Lynch that are currently
invested in Class B shares of the Fund shall not be subject to the Class B
contingent deferred sales charge.
How to Sell Shares
Information on how to sell shares of the Fund is stated in the Prospectus.
The information below supplements the terms and conditions for redemptions set
forth in the Prospectus.
|X| Checkwriting. When a check is presented to the Bank for clearance, the
Bank will ask the Fund to redeem a sufficient number of full and fractional
shares in the shareholder's account to cover the amount of the check. This
enables the shareholder to continue receiving dividends on those shares until
the check is presented to the Fund. Checks may not be presented for payment at
the offices of the Bank or the Fund's Custodian. This limitation does not affect
the use of checks for the payment of bills or to obtain cash at other banks. The
Fund reserves the right to amend, suspend or discontinue offering checkwriting
privileges at any time without prior notice.
By choosing the Checkwriting privilege, whether you do so by signing the
Account Application or by completing a Checkwriting card, the individuals
signing (1) represent that they are either the registered owner(s) of the shares
of the Fund, or are an officer, general partner, trustee or other fiduciary or
agent, as applicable, duly authorized to act on behalf of such registered
owner(s); (2) authorize the Fund, its Transfer Agent and any bank through which
the Fund's drafts ("checks") are payable (the "Bank"), to pay all checks drawn
on the Fund account of such person(s) and to effect a redemption of sufficient
shares in that account to cover payment of such checks; (3) specifically
acknowledge(s) that if you choose to permit a single signature on checks drawn
against joint accounts, or accounts for corporations, partnerships, trusts or
other entities, the signature of any one signatory on a check will be sufficient
to authorize payment of that check and redemption from an account even if that
account is registered in the names of more than one person or even if more than
one authorized signature appears on the Checkwriting card or the Application, as
applicable; and (4) understand(s) that the Checkwriting privilege may be
terminated or amended at any time by the Fund and/or the Bank and neither shall
incur any liability for such amendment or termination or for effecting
redemptions to pay checks reasonably believed to be genuine, or for returning or
not paying checks which have not been accepted for any reason.
<PAGE>
|X| Payments "In Kind." The Prospectus states that payment for shares
tendered for redemption is ordinarily made in cash. However, the Board of
Trustees of the Fund may determine that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment of a
redemption order wholly or partly in cash. In that case the Fund may pay the
redemption proceeds in whole or in part by a distribution "in kind" of
securities from the portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the Securities and Exchange Commission. The Fund has elected
to be governed by Rule 18f-1 under the Investment Company Act, pursuant to which
the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net assets of the Fund during any 90-day period for any
one shareholder. If shares are redeemed in kind, the redeeming shareholder might
incur brokerage or other costs in selling the securities for cash. The method of
valuing securities used to make redemptions in kind will be the same as the
method the Fund uses to value its portfolio securities described above under
"Determination of Net Asset Values Per Share" and that valuation will be made as
of the time the redemption price is determined.
|X| Involuntary Redemptions. The Fund's Board of Trustees has the right to
cause the involuntary redemption of the shares held in any account if the
aggregate net asset value of those shares is less than $200 or such lesser
amount as the Board may fix. The Board of Trustees will not cause the
involuntary redemption of shares in an account if the aggregate net asset value
of the shares has fallen below the stated minimum solely as a result of market
fluctuations. Should the Board elect to exercise this right, it may also fix, in
accordance with the Investment Company Act, the requirements for any notice to
be given to the shareholders in question (not less than 30 days), or the Board
may set requirements for the Shareholder to increase the investment, and set
other terms and conditions so that the shares would not be involuntarily
redeemed.
Reinvestment Privilege. Within six months of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (i) Class A shares that you
purchase subject to an initial sales charge or Class A contingent deferred sales
charge, when you redeemed them or (ii) Class B shares that were subject to the
Class B contingent deferred sales charge when you redeemed them, without slaes
charges. This privilege does not apply to Class C shares or Class Y shares. The
reinvestment may be made without sales charge only in Class A shares of the Fund
or any of the other Oppenheimer funds into which shares of the Fund are
exchangeable as described in "How to Exchange Shares" below, at the net asset
value next computed after the Transfer Agent receives the reinvestment order.
The shareholder must ask the Distributor for that privilege at the time of
reinvestment. Any capital gain that was realized when the shares were redeemed
is taxable, and reinvestment will not alter any capital gains tax payable on
that gain. If there has been a capital loss on the redemption, some or all of
the loss may not be tax deductible, depending on the timing and amount of the
reinvestment. Under the Internal Revenue Code, if the redemption proceeds of
Fund shares on which a sales charge was paid are reinvested in shares of the
Fund or another of the Oppenheimer funds within 90 days of payment of the sales
charge, the shareholder's basis in the shares of the Fund that were redeemed may
not include the amount of the sales charge paid. That would reduce the loss or
increase the gain recognized from the redemption. However, in that case the
sales charge would be added to the basis of the shares acquired by the
reinvestment of the redemption proceeds. The Fund may amend, suspend or cease
offering this reinvestment privilege at any time as to shares redeemed after the
date of such amendment, suspension or cessation.
<PAGE>
Transfers of Shares. Shares are not subject to the payment of a contingent
deferred sales charge of any class at the time of transfer to the name of
another person or entity (whether the transfer occurs by absolute assignment,
gift or bequest, not involving, directly or indirectly, a public sale). The
transferred shares will remain subject to the contingent deferred sales charge,
calculated as if the transferee shareholder had acquired the transferred shares
in the same manner and at the same time as the transferring shareholder. If less
than all shares held in an account are transferred, and some but not all shares
in the account would be subject to a contingent deferred sales charge if
redeemed at the time of transfer, the priorities described in the Prospectus
under "How to Buy Shares" for the imposition of the Class B or Class C
contingent deferred sales charge will be followed in determining the order in
which shares are transferred.
Distributions From Retirement Plans. Requests for distributions from
OppenheimerFunds-sponsored IRAs, 403(b)(7) custodial plans, 401(k) plans, or
pension or profit-sharing plans should be addressed to "Trustee,
OppenheimerFunds Retirement Plans," c/o the Transfer Agent at its address listed
in "How To Sell Shares" in the Prospectus or on the back cover of the Statement
of Additional Information. The request must: (i) state the reason for the
distribution; (ii) state the owner's awareness of tax penalties if the
distribution is premature; and (iii) conform to the requirements of the plan and
the Fund's other redemption requirements. Participants (other than self-employed
persons maintaining a plan account in their own name) in OppenheimerFunds-
sponsored prototype pension, profit-sharing or 401(k) plans may not directly
redeem or exchange shares held for their account under those plans. The employer
or plan administrator must sign the request. Distributions from pension plans or
401(k) profit sharing plans are subject to special requirements under the
Internal Revenue Code and certain documents (available from the Transfer Agent)
must be completed before the distribution may be made. Distributions from
retirement plans are subject to withholding requirements under the Internal
Revenue Code, and IRS Form W-4P (available from the Transfer Agent) must be
submitted to the Transfer Agent with the distribution request, or the
distribution may be delayed. Unless the shareholder has provided the Transfer
Agent with a certified tax identification number, the Internal Revenue Code
requires that tax be withheld from any distribution even if the shareholder
elects not to have tax withheld. The Fund, the Manager, the Distributor, the
Trustee and the Transfer Agent assume no responsibility to determine whether a
distribution satisfies the conditions of applicable tax laws and will not be
responsible for any tax penalties assessed in connection with a distribution.
Special Arrangements for Repurchase of Shares from Dealers and Brokers. The
Distributor is the Fund's agent to repurchase its shares from authorized dealers
or brokers on behalf of their customers. The shareholder should contact the
broker or dealer to arrange this type of redemption. The repurchase price per
share will be the net asset value next computed after the Distributor receives
the order placed by the dealer or broker, except that if the Distributor
receives a repurchase order from a dealer or broker after the close of The New
York Stock Exchange on a regular business day, it will be processed at that
day's net asset value if the order was received by the dealer or broker from its
customers prior to the time the Exchange closes (normally, that is 4:00 P.M.,
but may be earlier on some days) and the order was transmitted to and received
by the Distributor prior to its close of business that day (normally 5:00 P.M.).
Ordinarily, for accounts redeemed by a broker-dealer under this procedure,
payment will be made within three business days after the shares have been
redeemed upon the Distributor's receipt of the required redemption documents, in
proper form with the signature(s) of the registered owners guaranteed on the
redemption document as described in the Prospectus.
<PAGE>
Automatic Withdrawal and Exchange Plans. Investors owning shares of the Fund
valued at $5,000 or more can authorize the Transfer Agent to redeem shares
(minimum $50) automatically on a monthly, quarterly, semi-annual or annual basis
under an Automatic Withdrawal Plan. Shares will be redeemed three business days
prior to the date requested by the shareholder for receipt of the payment.
Automatic withdrawals of up to $1,500 per month may be requested by telephone if
payments are to be made by check payable to all shareholders of record and sent
to the address of record for the account (and if the address has not been
changed within the prior 30 days). Required minimum distributions from
OppenheimerFunds-sponsored retirement plans may not be arranged on this basis.
Payments are normally made by check, but shareholders having AccountLink
privileges (see "How To Buy Shares") may arrange to have Automatic Withdrawal
Plan payments transferred to the bank account designated on the OppenheimerFunds
New Account Application or signature-guaranteed instructions. Shares are
normally redeemed pursuant to an Automatic Withdrawal Plan three business days
before the date you select in the Account Application. If a contingent deferred
sales charge applies to the redemption, the amount of the check or payment will
be reduced accordingly. The Fund cannot guarantee receipt of a payment on the
date requested and reserves the right to amend, suspend or discontinue offering
such plans at any time without prior notice. Because of the sales charge
assessed on Class A share purchases, shareholders should not make regular
additional Class A share purchases while participating in an Automatic
Withdrawal Plan. Class B and Class C shareholders should not establish
withdrawal plans, because of the imposition of the contingent deferred sales
charge on such withdrawals (except where the contingent deferred sales charge is
waived as described in the Prospectus under "Waivers of Class B and Class C
Contingent Deferred Sales Charge".
By requesting an Automatic Withdrawal or Exchange Plan, the shareholder
agrees to the terms and conditions applicable to such plans, as stated below as
well as the Prospectus. These provisions may be amended from time to time by the
Fund and/or the Distributor. When adopted, such amendments will automatically
apply to existing Plans.
|X| Automatic Exchange Plans. Shareholders can authorize the Transfer
Agent (on the OppenheimerFunds Application or signature-guaranteed instructions)
to exchange a pre-determined amount of shares of the Fund for shares (of the
same class) of other Oppenheimer funds automatically on a monthly, quarterly,
semi-annual or annual basis under an Automatic Exchange Plan. The minimum amount
that may be exchanged to each other fund account is $25. Exchanges made under
these plans are subject to the restrictions that apply to exchanges as set forth
in "How to Exchange Shares" in the Prospectus and below in this Statement of
Additional Information.
|X| Automatic Withdrawal Plans. Fund shares will be redeemed as necessary
to meet withdrawal payments. Shares acquired without a sales charge will be
redeemed first and shares acquired with reinvested dividends and capital gains
distributions will be redeemed next, followed by shares acquired with a sales
charge, to the extent necessary to make withdrawal payments. Depending upon the
amount withdrawn, the investor's principal may be depleted. Payments made under
such plans should not be considered as a yield or income on your investment.
<PAGE>
The Transfer Agent will administer the investor's Automatic Withdrawal
Plan (the "Plan") as agent for the investor (the "Planholder") who executed the
Plan authorization and application submitted to the Transfer Agent. Neither the
Fund nor the Transfer Agent shall incur any liability to the Planholder for any
action taken or omitted by the Transfer Agent in good faith to administer the
Plan. Certificates will not be issued for shares of the Fund purchased for and
held under the Plan, but the Transfer Agent will credit all such shares to the
account of the Planholder on the records of the Fund. Any share certificates
held by a Planholder may be surrendered unendorsed to the Transfer Agent with
the Plan application so that the shares represented by the certificate may be
held under the Plan.
For accounts subject to Automatic Withdrawal Plans, distributions of
capital gains must be reinvested in shares of the Fund, which will be done at
net asset value without a sales charge. Dividends on shares held in the account
may be paid in cash or reinvested.
Redemptions of shares needed to make withdrawal payments will be made at
the net asset value per share determined on the redemption date. Checks or
AccountLink payments of the proceeds of Plan withdrawals will normally be
transmitted three business days prior to the date selected for receipt of the
payment (receipt of payment on the date selected cannot be guaranteed),
according to the choice specified in writing by the Planholder.
The amount and the interval of disbursement payments and the address to
which checks are to be mailed or AccountLink payments are to be sent may be
changed at any time by the Planholder by writing to the Transfer Agent. The
Planholder should allow at least two weeks' time in mailing such notification
for the requested change to be put in effect. The Planholder may, at any time,
instruct the Transfer Agent by written notice (in proper form in accordance with
the requirements of the then-current Prospectus of the Fund) to redeem all, or
any part of, the shares held under the Plan. In that case, the Transfer Agent
will redeem the number of shares requested at the net asset value per share in
effect in accordance with the Fund's usual redemption procedures and will mail a
check for the proceeds to the Planholder.
The Plan may be terminated at any time by the Planholder by writing to the
Transfer Agent. A Plan may also be terminated at any time by the Transfer Agent
upon receiving directions to that effect from the Fund. The Transfer Agent will
also terminate a Plan upon receipt of evidence satisfactory to it of the death
or legal incapacity of the Planholder. Upon termination of a Plan by the
Transfer Agent or the Fund, shares that have not been redeemed from the account
will be held in uncertificated form in the name of the Planholder, and the
account will continue as a dividend reinvestment, uncertificated account unless
and until proper instructions are received from the Planholder or his or her
executor or guardian, or other authorized person.
To use Class A shares held under the Plan as collateral for a debt, the
Planholder may request issuance of a portion of the shares in certificated form.
Share certificates are not issued for Class B, Class C, or Class Y shares. Upon
written request from the Planholder, the Transfer Agent will determine the
number of shares for which a certificate may be issued without causing the
withdrawal checks to stop because of exhaustion of uncertificated shares needed
to continue payments. However, should such uncertificated shares become
exhausted, Plan withdrawals will terminate.
If the Transfer Agent ceases to act as transfer agent for the Fund, the
Planholder will be deemed to have appointed any successor transfer agent to act
as agent in administering the Plan.
<PAGE>
How To Exchange Shares
As stated in the Prospectus, shares of a particular class of Oppenheimer
funds having more than one class of shares may be exchanged only for shares of
the same class of other Oppenheimer funds. Shares of the Oppenheimer funds that
have a single class without a class designation are deemed "Class A" shares for
this purpose. All of the Oppenheimer funds offer Class A, B and C shares except
Oppenheimer Money Market Fund, Inc., Centennial Money Market Trust, Centennial
Tax-Exempt Trust, Centennial Government Trust, Centennial New York Tax-Exempt
Trust, Centennial California Tax-Exempt Trust, and Centennial America Fund,
L.P., which only offer Class A shares and Oppenheimer Main Street California
Municipal Fund which only offers Class A and Class B shares, (Class B and Class
C shares of Oppenheimer Cash Reserves are generally available only by exchange
from the same class of shares of other Oppenheimer funds or through
OppenheimerFunds sponsored 401(k) plans). A current list showing which funds
offer which class can be obtained by calling the Distributor at 1-800-525-7048.
For accounts established on or before March 8, 1996 holding Class M shares
of Oppenheimer Convertible Securities Fund, Class M shares can be exchanged only
for Class A shares of other Oppenheimer funds. Exchanges to Class M shares of
Oppenheimer Convertible Securities Fund are permitted from Class A shares of
Oppenheimer Money Market Fund, Inc. or Oppenheimer Cash Reserves that were
acquired by exchange from Class M shares. Otherwise no exchanges of any class of
any Oppenheimer fund into Class M shares are permitted.
Class A shares of Oppenheimer funds may be exchanged at net asset value
for shares of any Money Market Fund. Shares of any Money Market Fund purchased
without a sales charge may be exchanged for shares of Oppenheimer funds offered
with a sales charge upon payment of the sales charge (or, if applicable, may be
used to purchase shares of Oppenheimer funds subject to a contingent deferred
sales charge). However, shares of Oppenheimer Money Market Fund, Inc. purchased
with the redemption proceeds of shares of other mutual funds (other than funds
managed by the Manager or its subsidiaries) redeemed within the 12 months prior
to that purchase may subsequently be exchanged for shares of other Oppenheimer
funds without being subject to an initial or contingent deferred sales charge,
whichever is applicable. To qualify for that privilege, the investor or the
investor's dealer must notify the Distributor of eligibility for this privilege
at the time the shares of Oppenheimer Money Market Fund, Inc. are purchased,
and, if requested, must supply proof of entitlement to this privilege.
<PAGE>
Shares of this Fund acquired by reinvestment of dividends or distributions
from any of the other Oppenheimer funds or from any unit investment trust for
which reinvestment arrangements have been made with the Distributor may be
exchanged at net asset value for shares of any of the Oppenheimer funds. No
contingent deferred sales charge is imposed on exchanges of shares of any class
purchased subject to a contingent deferred sales charge. However, if you redeem
Class A shares of the Fund that were acquired by exchange of Class A shares of
other Oppenheimer funds purchased subject to a Class A contingent deferred sales
charge within 18 months of the end of the calendar month of the initial purchase
of the exchanged Class A shares, the Class A contingent deferred sales charge is
imposed on the redeemed shares (see "Class A Contingent Deferred Sales Charge"
in the Prospectus). (A different holding period may apply to shares purchased
prior to June 1, 1998.) The Class B contingent deferred sales charge is imposed
on Class B shares acquired by exchange if they are redeemed within six years of
the initial purchase of the exchanged Class B shares. The Class C contingent
deferred sales charge is imposed on Class C shares acquired by exchange if they
are redeemed within 12 months of the initial purchase of the exchanged Class C
shares.
When Class B or Class C shares are redeemed to effect an exchange, the
priorities described in "How To Buy Shares" in the Prospectus for the imposition
of the Class B or the Class C contingent deferred sales charge will be followed
in determining the order in which the shares are exchanged. Shareholders should
take into account the effect of any exchange on the applicability and rate of
any contingent deferred sales charge that might be imposed in the subsequent
redemption of remaining shares. Shareholders owning shares of more than one
class must specify whether they intend to exchange Class A, Class B or Class C
shares.
The Fund reserves the right to reject telephone or written exchange
requests submitted in bulk by anyone on behalf of more than one account. The
Fund may accept requests for exchanges of up to 50 accounts per day from
representatives of authorized dealers that qualify for this privilege. In
connection with any exchange request, the number of shares exchanged may be less
than the number requested if the exchange or the number requested would include
shares subject to a restriction cited in the Prospectus or this Statement of
Additional Information or would include shares covered by a share certificate
that is not tendered with the request. In those cases, only the shares available
for exchange without restriction will be exchanged.
When exchanging shares by telephone, a shareholder must either have an
existing account in, or open an account in, and obtain an acknowledge receipt of
a prospectus of, the fund to which the exchange is to be made. For full or
partial exchanges of an account made by telephone, any special account features
such as Asset Builder Plans, Automatic Withdrawal Plans and retirement plan
contributions will be switched to the new account unless the Transfer Agent is
instructed otherwise. If all telephone lines are busy (which might occur, for
example, during periods of substantial market fluctuations), shareholders might
not be able to request exchanges by telephone and would have to submit written
exchange requests.
Shares to be exchanged are redeemed on the regular business day the
Transfer Agent receives an exchange request in proper form (the "Redemption
Date"). Normally, shares of the fund to be acquired are purchased on the
Redemption Date, but such purchases may be delayed by either fund up to five
business days if it determines that it would be disadvantaged by an immediate
transfer of the redemption proceeds. The Fund reserves the right, in its
discretion, to refuse any exchange request that may disadvantage it (for
example, if the receipt of multiple exchange requests from a dealer might
require the disposition of portfolio securities at a time or at a price that
might be disadvantageous to the Fund).
<PAGE>
The different Oppenheimer funds available for exchange have different
investment objectives, policies and risks, and a shareholder should assure that
the Fund selected is appropriate for his or her investment and should be aware
of the tax consequences of an exchange. For federal income tax purposes, an
exchange transaction is treated as a redemption of shares of one fund and a
purchase of shares of another. "Reinvestment Privilege," above, discusses some
of the tax consequences of reinvestment of redemption proceeds in such cases.
The Fund, the Distributor, and the Transfer Agent are unable to provide
investment, tax or legal advice to a shareholder in connection with an exchange
request or any other investment transaction.
Dividends, Capital Gains and Taxes
Dividends and Distributions. Dividends will be payable on shares held of record
at the time of the previous determination of net asset value or as otherwise
described in "How to Buy Shares." Daily dividends on newly purchased shares will
not be declared or paid on newly purchased shares until such time as Federal
Funds (funds credited to a member bank's account at the Federal Reserve Bank)
are available from the purchase payment for such shares. Normally, purchase
checks received from investors are converted to Federal Funds on the next
business day. Dividends will be declared on shares repurchased by a dealer or
broker for four business days following the trade date (i.e., to and including
the day prior to settlement of the repurchase). If all shares in an account are
redeemed, all dividends accrued on shares of the same class in the account will
be paid together with the redemtion proceeds.
Dividends, distributions and the proceeds of the redemption of Fund shares
represented by checks returned to the Transfer Agent by the Postal Service as
undeliverable will be invested in shares of Oppenheimer Money Market Fund, Inc.,
as promptly as possible after the return of such checks to the Transfer Agent,
in order to enable the investor to earn a return on otherwise idle funds.
Tax Status of the Fund's Dividends and Distributions. The Federal tax treatment
of the Fund's dividends and capital gains distributions is explained in the
Prospectus under the caption "Dividends, Capital Gains and Taxes." Special
provisions of the Internal Revenue Code govern the eligibility of the Fund's
dividends for the dividends-received deduction for corporate shareholders.
Long-term capital gains distributions are not eligible for the deduction. In
addition, the amount of dividends paid by the Fund which may qualify for the
deduction is limited to the aggregate amount of qualifying dividends which the
Fund derives from its portfolio investments that the Fund has held for a minimum
period, usually 46 days. A corporate shareholder will not be eligible for the
deduction on dividends paid on shares held by the shareholder for 45 days or
less. To the extent that the Fund derives a substantial portion of its gross
income from option premiums, interest income or short-term gains from the sale
of securities or dividends from foreign corporations, its dividends will not
qualify for the deduction.
<PAGE>
The amount of a class's distributions may vary from time to time depending
on market conditions, the composition of the Fund's portfolio, and expenses
borne by the Fund or borne separately by a class, as described in "Alternative
Sales Arrangements -- Class A, Class B and Class C," above. Dividends are
calculated in the same manner, at the same time and on the same day for shares
of each class. However, dividends on Class B and Class C shares are expected to
be lower as a result of the asset-based sales charge on Class B and Class C
shares, and Class B and Class C dividends will also differ in amount as a
consequence of any difference in net asset value between Class A, Class B and
Class C shares.
Under the Internal Revenue Code, by December 31 each year, the Fund must
distribute 98% of its taxable investment income earned from January 1 through
December 31 of that year and 98% of its capital gains realized in the period
from November 1 of the prior year through October 31 of the current year, or
else the Fund must pay an excise tax on the amounts not distributed. While it is
presently anticipated that the Fund will meet those requirements, the Fund's
Board of Trustees and the Manager might determine in a particular year that it
would be in the best interest of shareholders for the Fund not to make such
distributions at the required levels and to pay the excise tax on the
undistributed amounts. That would reduce the amount of income or capital gains
available for distribution to shareholders.
If the Fund qualifies as a "regulated investment company" under the
Internal Revenue Code, it will not be liable for Federal income taxes on amounts
paid by it as dividends and distributions. The Fund qualified as a regulated
investment company in its last fiscal year, and intends to qualify in future
years, but reserves the right not to qualify. The Internal Revenue Code contains
a number of complex tests relating to qualification which the Fund might not
meet in any particular year. If it did not so qualify, the Fund would be treated
for tax purposes as an ordinary corporation and receive no tax deduction for
payments made to shareholders.
If prior distributions must be re-characterized at the end of the fiscal
year as a result of the effect of the Fund=s investment policies, shareholders
may have a non-taxable return of capital, which will be identified in notices of
shareholders. There is no fixed dividend rate and there can be no assurance as
to the payment of any dividends or the realization of any capital gains.
Dividend Reinvestment in Another Fund. Shareholders of the Fund may elect to
reinvest all dividends and/or capital gains distributions in shares of the same
class of any of the other Oppenheimer funds listed in "Reduced Sales Charges,"
above, at net asset value without sales charge. To elect this option, the
shareholder must notify the Transfer Agent in writing and either must have an
existing account in the fund selected for reinvestment or must obtain a
prospectus for that fund and an application from the Distributor to establish an
account. The investment will be made at the net asset value per share in effect
at the close of business on the payable date of the dividend or distribution.
Dividends and/or distributions from shares of other Oppenheimer funds may be
invested in shares of this Fund on the same basis.
Additional Information About the Fund
The Custodian. The Bank of New York is the Custodian of the Fund's assets. The
Custodian's responsibilities include safeguarding and controlling the Fund's
portfolio securities, and handling the delivery of such securities to and from
the Fund. The Manager has represented to the Fund that the banking relationships
between the Manager and the Custodian have been and will continue to be
unrelated to and unaffected by the relationship between the Fund and the
Custodian. It will be the practice of the Fund to deal with the Custodian in a
manner uninfluenced by any banking relationship the Custodian may have with the
Manager and its affiliates. The Fund's cash balances with the Custodian in
excess of $100,000 are not protected by Federal deposit insurance. Those
uninsured balances at times may be substantial.
Independent Auditors. The independent auditors of the Fund audit the Manager's
and the Fund's financial statements and perform other related audit services.
They also act as auditors for the Manager and certain other funds advised by the
Manager and its affiliates.
<PAGE>
Investment Advisor
OppenheimerFunds, Inc.
Two World Trade Center
New York, New York 10048
Distributor
OppenheimerFunds Distributor, Inc.
Two World Trade Center
New York, New York 10048
Transfer and Shareholder Servicing Agent
OppenheimerFunds Services
P.O. Box 5270
Denver, Colorado 80217
1-800-525-7048
Custodian of Portfolio Securities
The Bank of New York
One Wall Street
New York, New York 10015
Independent Auditors
Deloitte & Touche LLP
555 Seventeenth Street
Denver, Colorado 80202
Legal Counsel
Myer, Swanson, Adams & Wolf, P.C.
1600 Broadway
Denver, Colorado 80202
PX280.999
