Oppenheimer Mortgage Income Fund
Prospectus dated January 24, 1995
Oppenheimer Mortgage Income Fund (the "Fund") is a mutual fund with the
investment objective of seeking high current income, preservation of
capital and maintenance of liquidity through investment in mortgage-backed
securities, whether or not issued or guaranteed by the U.S. Government,
its agencies or instrumentalities, and investment in income producing
securities not secured by mortgages on real estate, including asset-backed
securities. The securities the Fund invests in are described more
completely in "Investment Objective and Policies." That section of the
Prospectus also explains some of the risks of those investments.
The Fund offers two classes of shares: (1) Class A shares, which are
sold at a public offering price that includes a front-end sales charge,
and (2) Class B shares, which are sold without a front-end sales charge,
although you may pay a sales charge when you redeem your shares, depending
on how long you hold them. Class B shares are also subject to an annual
"asset-based sales charge." Each class of shares bears different
expenses. In deciding which class of shares to buy, you should consider
how much you plan to purchase, how long you plan to keep your shares, and
other factors discussed in "How to Buy Shares" starting on page 17.
This Prospectus explains concisely what you should know before
investing in the Fund. Please read this Prospectus carefully and keep it
for future reference. You can find more detailed information about the
Fund in the January 24, 1995 Statement of Additional Information. For a
free copy, call Oppenheimer Shareholder Services, the Fund's Transfer
Agent, at 1-800-525-7048, or write to the Transfer Agent at the address
on the back cover. The Statement of Additional Information has been filed
with the Securities and Exchange Commission and is incorporated into this
Prospectus by reference (which means that it is legally part of this
Prospectus).
Shares of the Fund are not deposits or obligations of any bank, are not
guaranteed by any bank, and are not insured by the F.D.I.C. or any other
agency, and involve investment risks, including the possible loss of the
principal amount invested.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE>
Contents
Page
About the Fund
Expenses
Overview of the Fund
Financial Highlights
Investment Objective and Policies
How the Fund is Managed
Performance of the Fund
About Your Account
How to Buy Shares
Class A Shares
Class B Shares
Special Investor Services
AccountLink
Automatic Withdrawal and Exchange Plans
Reinvestment Privilege
Retirement Plans
How to Sell Shares
By Mail
By Telephone
By Wire
By Checkwriting
How to Exchange Shares
Shareholder Account Rules and Policies
Dividends, Capital Gains and Taxes
<PAGE>
ABOUT THE FUND
Expenses
The Fund pays a variety of expenses directly for management of its
assets, administration, distribution of its shares and other services, and
those expenses are subtracted from the Fund's assets to calculate the
Fund's net asset value per share. All shareholders therefore pay those
expenses indirectly. Shareholders pay other expenses directly, such as
sales charges and account transaction charges. The following tables are
provided to help you understand your direct expenses of investing in the
Fund and your share of the Fund's business operating expenses that you
will bear indirectly. The numbers below are based on the Fund's expenses
during its last fiscal year ended September 30, 1994.
- Shareholder Transaction Expenses are charges you pay when you buy or
sell shares of the Fund. Please refer to "About Your Account," from pages
17 through 27, for an explanation of how and when these charges apply.
Class A Shares Class B Shares
Maximum Sales Charge on Purchases
(as a % of offering price) 4.75% None
Sales Charge on Reinvested Dividends None None
Deferred Sales Charge
(as a % of the lower of the original
purchase price or redemption proceeds) None(1) 5% in the first
year, declining to
1% in the sixth year
and eliminated
thereafter
Redemption Fee None (2) None (2)
Exchange Fee $5.00(3) $5.00(3)
(1) If you invest more than $1 million in Class A shares, you may have
to pay a sales charge of up to 1% if you sell your shares within 18
calendar months from the end of the calendar month during which you
purchased those shares. See "How to Buy Shares - Class A Shares,"
below.
(2) There is a $15 transaction fee for redemptions paid by Federal
Funds wire, but not for redemption proceeds wired by Automated
Clearing House ("ACH") funds or paid by check. See "How to Sell
Shares."
(3) Fee is waived for automated exchanges, as described in "How to
Exchange Shares."
- Annual Fund Operating Expenses are paid out of the Fund's assets
and represent the Fund's expenses in operating its business. For example,
the Fund pays management fees to its investment adviser, Oppenheimer
Management Corporation (which is referred to in this Prospectus as the
"Manager"). The rates of the Manager's fees are set forth in "How the
Fund is Managed," below. The Fund has other regular expenses for
services, such as transfer agent fees, custodial fees paid to the bank
that holds its portfolio securities, audit fees and legal expenses. Those
expenses are detailed in the Fund's Financial Statements in the Statement
of Additional Information.
The numbers in the table below are projections of the Fund's
business expenses based on the Fund's expenses in its last fiscal year.
These amounts are shown as a percentage of the average net assets of each
class of the Fund's shares for that year. The "Management Fees" shown in
the table below have been restated to reflect a voluntary reduction in the
Fund's management fees. The fee was reduced by .05% effective January 1,
1994, and by an additional .05% effective July 1, 1994. Without such a
reduction, the Fund's management fees would have been .75% and .75% for
Class A and Class B shares, respectively, and "Total Fund Operating
Expenses" would have been 1.27% and 1.98% for Class A and Class B shares,
respectively. See "How the Fund Is Managed" for additional information.
The 12b-1 Distribution Plan Fees for Class A shares are service fees. For
Class B shares the 12b-1 Distribution Plan Fees are service fees and
asset-based sales charges. The service fee for each class is a maximum
of 0.25% of average annual net assets of the class and the asset-based
sales charge for Class B shares is 0.75%. These plans are described in
greater detail in "How to Buy Shares."
The actual expenses for each class of shares in future years may be
more or less than the numbers in the table, depending on a number of
factors, including the actual value of the Fund's assets represented by
each class of shares.
Class A Shares Class B Shares
Management Fees (Restated) .70% .70%
12b-1 Distribution Plan Fees .25% 1.00%
Other Expenses .27% .23%
Total Fund Operating Expenses (Restated) 1.22% 1.93%
- Examples. To try to show the effect of these expenses on an
investment over time, we have created the hypothetical examples shown
below. Assume that you make a $1,000 investment in each class of shares
of the Fund, and the Fund's annual return is 5%, and that its operating
expenses for each class are the ones shown in the Annual Fund Operating
Expenses table above. If you were to redeem your shares at the end of
each period shown below, your investment would incur the following
expenses by the end of 1, 3, 5 and 10 years:
1 year 3 years 5 years 10 years*
Class A Shares $59 $84 $111 $188
Class B Shares $70 $91 $124 $190
If you did not redeem your investment, it would incur the following
expenses:
Class A Shares $59 $84 $111 $188
Class B Shares $20 $61 $104 $190
*The Class B expenses in years 7 through 10 are based on the Class A
expenses shown above, because the Fund automatically converts your Class
B shares into Class A shares after 6 years. Long term Class B
shareholders could pay the economic equivalent of more than the maximum
front-end sales charge allowed under applicable regulations, because of
the effect of the asset-based sales charge and contingent deferred sales
charge. The automatic conversion of Class B shares to Class A Shares is
designed to minimize the likelihood that this will occur. Please refer
to "How to Buy Shares - Class B Shares" for more information.
These examples show the effect of the current level of expenses on
an investment attaining a hypothetical return, but are not meant to state
or predict actual or expected expenses or investment returns of the Fund,
all of which will vary.
A Brief Overview of the Fund
Some of the important facts about the Fund are summarized below,
with references to the section of this Prospectus where more complete
information can be found. You should carefully read the entire Prospectus
before making a decision about investing. Keep the Prospectus for
reference after you invest, particularly for information about your
account, such as how to sell or exchange shares.
- What Is The Fund's Investment Objective? The Fund's investment
objective is to seek high current income, preservation of capital and
maintenance of liquidity.
- What Does the Fund Invest In? In seeking its objective, the Fund
primarily invests in mortgage-backed securities, whether or not issued by
the U.S. Government, its agencies or instrumentalities. The Fund can also
invest in income producing securities not secured by mortgages on real
estate, including asset-backed securities and participation interests and
government debt obligations. The Fund may also write covered calls and use
derivative investments to enhance income, and may use hedging instruments,
including derivative investments, to try to manage investment risks.
These investments are more fully explained in "Investment Objective and
Policies," starting on page 7.
- Who Manages the Fund? The Fund's investment adviser is
Oppenheimer Management Corporation, which (including a subsidiary) advises
investment company portfolios having over $28 billion in assets. The
Fund's portfolio manager, who is an officer of the Manager and primarily
responsible for the selection of the Fund's securities, is Eva Zeff. The
Manager is paid an advisory fee by the Fund, based on its assets. The
Fund's Board of Trustees, elected by shareholders, oversees the investment
adviser. Please refer to "How the Fund is Managed," starting on page 13
for more information about the Manager and its fees.
- How Risky is the Fund? All investments carry risks to some
degree. The Fund's investments in mortgage-backed securities and other
income producing securities are subject to changes in their value from a
number of factors such as changes in general bond market movements,
unscheduled or early payment of principal and interest on the underlying
mortgages, or changes in interest rates that can affect bond prices.
These changes affect the value of the Fund's investments and its price per
share. In the OppenheimerFunds spectrum, the Fund is generally more
conservative than aggressive growth funds, but more aggressive than money
market funds. While the Manager tries to reduce risks by diversifying
investments, by carefully researching securities before they are purchased
for the portfolio, and in some cases by using hedging techniques, there
is no guarantee of success in achieving the Fund's objective and your
shares may be worth more or less than their original cost when you redeem
them. Please refer to "Investment Objective and Policies" starting on
page 7 for a more complete discussion.
- How Can I Buy Shares? You can buy shares through your dealer or
financial institution, or you can purchase shares directly through the
Distributor by completing an Application or by using an Automatic
Investment Plan under AccountLink. Please refer to "How To Buy Shares"
on page 17 for more details.
- Will I Pay a Sales Charge to Buy Shares? The Fund has two
classes of shares. Class A shares are offered with a front-end sales
charge, starting at 4.75%, and reduced for larger purchases. Class B
shares are offered without a front-end sales charge, but may be subject
to a contingent deferred sales charge (starting at 5% and declining as
shares are held longer) if redeemed within 6 years of purchase. There is
also an annual asset-based sales charge on Class B shares. Please review
"How To Buy Shares" starting on page 17 for more details, including a
discussion about which class may be appropriate for you.
- How Can I Sell My Shares? Shares can be redeemed by mail or by
telephone call to the Transfer Agent on any business day, or through your
dealer or by writing a check against your Fund account, or by wire to a
previously designated bank account. Please refer to "How To Sell Shares"
on page 25.
- How Has the Fund Performed? The Fund measures its performance
by quoting its "standardized" yield, total return, and average annual
total return which measure historical performance. The yield and returns
of the fund can be compared to the yields and returns (over similar
periods) of other funds. Of course, other funds may have different
objectives, investments, and levels of risk. The Fund's performance can
also be compared to broad market indices, which we have done on page 16.
Please remember that past performance does not guarantee future results.
<PAGE>
Financial Highlights
The table on this page presents selected financial information about
the Fund, including per share data and expense ratios and other data based
on the Fund's average net assets. This information has been audited by
KPMG Peat Marwick LLP, the Fund's independent auditors, whose report on
the Fund's financial statements for the fiscal year ended September 30,
1994 is included in the Statement of Additional Information.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
YEAR ENDED
SEPTEMBER 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(2)
========================================================
========================================================
====
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
PER SHARE OPERATING DATA:
Net asset value, beginning
of period $14.20 $14.14 $13.70 $13.18 $13.24 $13.41 $13.14 $14.39 $14.29
Income (loss) from
investment operations:
Net investment income .94 .92 .97 1.11 1.22 1.23 1.33 1.29 .07
Net realized and
unrealized gain
(loss) on investments (1.04) .07 .45 .52 (.05) (.20) .21 (1.16) .03
------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations (.10) .99 1.42 1.63 1.17 1.03 1.54 .13 .10
- --------------------------------------------------------------------------------------------------------------------
Dividends and distributions
to shareholders:
Dividends from net
investment income (.95) (.93) (.98) (1.11) (1.23) (1.20) (1.27) (1.38) --
Dividends in excess of net
investment income (.01) -- -- -- -- -- -- -- --
Tax return of capital
distribution (.04) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions to
shareholders (1.00) (.93) (.98) (1.11) (1.23) (1.20) (1.27) (1.38) --
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end
of period $13.10 $14.20 $14.14 $13.70 $13.18 $13.24 $13.41 $13.14 $14.39
====== ====== ====== ====== ====== ======
====== ====== ======
========================================================
========================================================
====
TOTAL RETURN, AT NET ASSET
VALUE(3) (.80)% 7.29% 10.69% 12.85% 9.21% 8.12% 12.09% .87% .70%
========================================================
========================================================
====
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) $78,602 $93,893 $99,579 $91,052 $67,234 $55,483 $59,835 $55,085 $2,746
- --------------------------------------------------------------------------------------------------------------------
Average net assets
(in thousands) $85,181 $96,817 $97,712 $80,208 $60,699 $57,162 $58,892 $45,099 $2,135
- --------------------------------------------------------------------------------------------------------------------
Number of shares
outstanding
at end of period
(in thousands) 5,999 6,610 7,042 6,648 5,102 4,191 4,462 4,191 191
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net
assets:
Net investment income 7.21% 6.49% 6.92% 8.22% 9.12% 9.24% 8.93% 9.81%
11.16%(4)
Expenses 1.22% 1.39% 1.40% 1.29% 1.22% 1.38% 1.12% .26% --%(4)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(5) 78.4% 142.7% 144.6% 103.7% 47.9% 82.2% 96.0% 184.4% 0.0%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------
YEAR ENDED
SEPTEMBER 30,
1994 1993(1)
================================================
<S> <C> <C>
PER SHARE OPERATING DATA:
Net asset value, beginning
of period $14.21 $14.14
- ------------------------------------------------
Income (loss) from
investment operations:
Net investment income .90 .28
Net realized and
unrealized gain
(loss) on investments (1.12) .11
------ ------
Total income (loss) from
investment operations (.22) .39
- ------------------------------------------------
Dividends and distributions
to shareholders:
Dividends from net
investment income (.84) (.32)
Dividends in excess of net
investment income (.01) --
Tax return of capital
distribution (.04) --
------ ------
Total dividends and
distributions to
shareholders (.89) (.32)
- ------------------------------------------------
Net asset value, end
of period $13.10 $14.21
====== ======
================================================
TOTAL RETURN, AT NET ASSET
VALUE(3) (1.62)% 2.96%
================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) $2,721 $1,176
- ------------------------------------------------
Average net assets
(in thousands) $1,951 $463
- ------------------------------------------------
Number of shares
outstanding
at end of period
(in thousands) 208 83
- ------------------------------------------------
Ratios to average net
assets:
Net investment income 6.60% 5.29%(4)
Expenses 1.93% 2.53%(4)
- ------------------------------------------------
Portfolio turnover rate(5) 78.4% 142.7%(4)
</TABLE>
(1) For the period from May 17, 1993 (inception of offering) to September
30,1993.
(2) For the period from September 11, 1986 (commencement of operations)
to September 30, 1986.
(3) Assumes a hypothetical initial investment on the business day before
the first day of the fiscal period, with all dividends and distributions
reinvested in additional shares on the reinvestment date, and redemption
at the net asset value calculated on the last business day of the fiscal
period. Sales charges are not reflected in the total returns.
(4) Annualized.
(5) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at
the time of acquisition of one year or less are excluded from the
calculation. Purchases and sales of investment securities (excluding
short-term securities) for the year ended September 30, 1994 were
$70,145,100 and $74,034,285, respectively.
<PAGE>
Investment Objective and Policies
Objective. The Fund invests its assets to seek high current income,
preservation of capital and maintenance of liquidity.
Investment Policies and Strategies. The Fund seeks its objective by
investing primarily in mortgage-related securities. These mortgage-
related securities may or may not be issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The Fund may also invest
in securities not secured by mortgages on real estate, including asset-
backed securities, participation interests, and government debt
obligations. The Fund is neither insured nor guaranteed by the U.S.
Government, its agencies or instrumentalities, and its net asset value may
fluctuate in light of changing market conditions.
Under normal market conditions (when the Manager believes that the
securities market is not in a volatile or unstable period) the Fund will
invest at least 65% of its total assets in mortgage-related securities,
including whole loans and participation mortgages, and securities
collateralized by mortgages on real estate. Mortgage-backed securities
for purposes of the 65% limitation will include privately issued or
guaranteed (and non-guaranteed) mortgage pass-through securities and
participation interests, including multi-class pass-through securities,
private label collateralized mortgage obligations ("CMO's"), and private-
label derivative mortgage-backed securities.
The Fund may invest up to 35% of its total assets in income
producing securities not secured by mortgages on real estate, including
asset-backed securities, and participation interests and government debt
obligations.
While it is not a fundamental policy of the Fund, the Fund expects
that it will invest no more than 35% of its total assets in debt
securities rated below "BBB" by Standard & Poor's Corporation ("Standard
& Poor's") or below "Baa" by Moody's Investors Service, Inc. ("Moody's")
or, if unrated, determined by the Fund's investment adviser, Oppenheimer
Management Corporation (the "Manager"), to be of comparable quality to
debt securities rated below "BBB" by Standard & Poor's or below "Baa" by
Moody's. Debt securities rated "BBB"/"Baa" or better are referred to as
"investment grade."
The Fund may try to hedge against losses in the value of its
portfolio of securities by using hedging strategies and derivative
investments described below. The Fund's portfolio manager may employ
special investment techniques in selecting securities for the Fund. These
are also described below. Additional information may be found about them
under the same headings in the Statement of Additional Information.
- Can the Fund's Investment Objective and Policies Change? The
Fund has an investment objective, described above, as well as investment
policies it follows to try to achieve its objective. Additionally, the
Fund uses certain investment techniques and strategies in carrying out
those investment policies. The Fund's investment policies and techniques
are not "fundamental" unless this Prospectus or the Statement of
Additional Information says that a particular policy is "fundamental."
The Fund's investment objective is a fundamental policy.
The Fund's Board of Trustees may change non-fundamental policies
without shareholder approval, although significant changes will be
described in amendments to this Prospectus. Fundamental policies are those
that cannot be changed without the approval of a "majority" of the Fund's
outstanding voting shares. The term "majority" is defined in the
Investment Company Act to be a particular percentage of outstanding voting
shares (and this term is explained in the Statement of Additional
Information).
- Interest Rate Risks. In addition to credit risks, described
below, debt securities are subject to changes in their value due to
changes in prevailing interest rates. When prevailing interest rates
fall, the value of already-issued debt securities generally rise. When
interest rates rise, the value of already-issued debt securities generally
decline. The magnitude of these fluctuations will often be greater for
longer-term debt securities than shorter-term debt securities. Changes
in the value of securities held by the Fund mean that the Fund's share
prices can go up or down when interest rates change because of the effect
of the change on the value of the Fund's portfolio of debt securities.
- Special Risks of Lower-Rated Securities. High yield, lower-grade
securities, whether rated or unrated, often have speculative
characteristics. Lower-grade securities have special risks that make them
riskier investments than investment grade securities. They may be subject
to greater market fluctuations and risk of loss of income and principal
than lower yielding, investment grade securities. There may be less of
a market for them and therefore they may be harder to sell at an
acceptable price. There is a relatively greater possibility that the
issuer's earnings may be insufficient to make the payments of interest due
on the bonds. The issuer's low creditworthiness may increase the
potential for its insolvency.
These risks mean that the Fund may not achieve the expected income
from lower-grade securities, and that the Fund's net asset value per share
may be affected by declines in value of these securities. However, the
Fund's limitations on investments in these types of securities may reduce
some of the risk, as will the Fund's policy of diversifying its
investments. The Fund is not obligated to dispose of a bond subsequently
downgraded below investment grade. However, if as a result of subsequent
downgrades more than 35% of the Fund's total assets were invested in non-
investment grade debt securities, the Fund would consider whether,
consistent with its investment objective, certain of such investments
should be sold.
- Mortgage-Backed Securities and CMOs. Mortgage-backed securities
are issued by lenders such as mortgage bankers, commercial banks, and
savings and loan associations. 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. Mortgage-backed securities provide monthly payments
which are, in effect, a "pass-through" of the monthly interest and
principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans. Principal prepayments result from
the sale of the underlying property or the refinancing or foreclosure of
underlying mortgages.
The effective maturity of a mortgage-backed security may be
shortened by unscheduled or early payment of principal and interest on the
underlying mortgages, which may affect their effective yield. The
principal returned may be invested in instruments having a higher or lower
yield than the prepaid instruments. Such securities therefore may be less
effective as a means of "locking in" attractive long-term interest rates
and may have less potential for appreciation during periods of declining
interest rates than conventional bonds with comparable similar maturities
during periods of declining interest rates. If the Fund buys mortgage-
backed securities at a premium, prepayments of principal and foreclosures
of mortgages may result in some loss of the Fund's principal investment
to the extent of the premium paid. As mentioned above, the value of
mortgage-backed securities will tend to rise when interest rates fall and
to fall when interest rates rise. The magnitude of those fluctuations
generally will be greater when the average maturity of the Fund's
portfolio securities is longer. Their value may also be affected by
changes in the market's perception of the creditworthiness of the entity
issuing or guaranteeing them or by changes in government regulations and
tax policies. Due to these factors, the Fund's share value and yield are
not guaranteed and will fluctuate, and there can be no assurance that the
Fund's objective will be achieved.
Private-label pass-through securities may be structured similarly
to mortgage-backed securities guaranteed by the Government National
Mortgage Association ("GNMA"), popularly known as "Ginnie Mae's", which
are direct obligations of the U.S. Government, or to those which are
guaranteed as to timely or ultimate collection of interest and principal
by the Federal National Mortgage Association, a federally-chartered and
privately-owned corporation ("FNMA"), or by the Federal Home Loan Mortgage
Corporation, a corporate instrumentality of the United States ("FHLMC").
Alternatively, private-label CMO's may be issued by a single purpose
corporation or other entity with no or limited assets beyond the mortgage
pool itself. Such bonds generally are secured by an assignment to a
trustee (under the indenture pursuant to which the bonds are issued) of
collateral consisting of a pool of mortgages. Derivative or stripped
CMO's are structured so that classes of varying maturities may be secured
by the same pool of mortgages, the payments on which are used to pay
interest on each class and to retire successive maturities (known as
"tranches") in sequence. The principal value of certain CMO tranches may
be more volatile than other types of mortgage-related securities, because
of the possibility that the principal value of the CMO may be prepaid
earlier than the maturity of the CMO as a result of prepayments of the
underlying mortgage loans by the borrowers.
Private-label mortgage-backed securities bear a degree of credit
risk, as they are primarily dependent for the timing and certainty of
payment upon the attributes of the mortgages in the pool and any
additional credit support offered by the issuer or third parties. To
compensate for such credit risk they generally offer higher yields than
comparable mortgage-backed securities. If the borrower of any of the
underlying mortgages has difficulty making scheduled interest or principal
payments because of the failure to receive underlying payments or
otherwise, the Fund could experience a reduction in its income and might
experience a decline in the net asset value of its shares.
As privately issued pass-through type mortgage-backed securities are
not guaranteed by a government associated entity such as the GNMA, FNMA
or FHLMC, they are commonly offered with certain types of credit
enhancements. Credit support may be external or internal. External
credit support includes corporate guarantees, pool insurance, bond
insurance and letters of credit. External credit support will generally
guarantee payment of all losses up to a certain dollar amount or
percentage of the pool. Internal credit support includes any equity
investment in the issuer not subject to claims of other creditors and any
subordinated classes of the mortgage pools. The subordinated class may
often absorb all losses before the senior class is at risk. The
subordinated class would generally carry a lower rating and offer a higher
yield than the senior class. The Fund may invest in subordinated classes
rather than senior classes and may invest in securities without credit
support or enhancement.
The Fund may invest in CMOs that are "stripped"; that is, the
security is divided into two parts, one which receives some or all of the
principal payments and the other which receives some or all of the
interest. Stripped securities that receive interest only are subject to
increased volatility in price due to interest rate changes, and have the
additional risk that if the principal underlying the CMO is prepaid, which
is more likely to happen if interest rates fall, the Fund will lose the
anticipated cash flow from the interest on the mortgages that were
prepaid. See "Mortgage-Backed Securities" in the Statement of Additional
Information for more details.
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 pass-
through securities may decrease, as do the value of other debt securities,
but when prevailing interest rates decline, the values of pass-through
securities may not be as likely to rise to the same degree as the values
of other debt securities because of the pre-payment feature of pass-
through securities.
- Asset-Backed Securities. Asset-backed securities are fractional
interests in pools of consumer loans and other trade receivables, similar
to mortgage-backed securities described above. They are issued by trusts
and special purpose corporations. They are backed by a pool of assets,
such as credit card or auto loan receivables, which are the obligations
of a number of different parties. The income from the underlying pool is
passed through to holders, such as the Fund. These securities are
frequently supported by a credit enhancement, such as a letter of credit,
a guarantee or a preference right. However, the extent of the credit
enhancement may be different for different securities and generally
applies to only a fraction of the security's value. These securities
present special risks. For example, in the case of credit card
receivables, the issuer of the security may have no security interest in
the related collateral.
- Whole Loan and Participation Mortgages. Unlike mortgage-backed
securities, whole loan and participation mortgages generally are not
backed by any government guarantee or private credit enhancement.
Therefore the adequacy of the underlying collateral as to the value and
the priority of the lien as against third party claimants is of greater
importance. Neither the Fund nor the Manager expects to participate in
the negotiation of the terms of the mortgage with any borrower and,
consequently, the Fund is dependent upon third parties to create valid,
enforceable loans and mortgages and to establish and maintain the
anticipated priority and perfection of the applicable security interests.
- Participation Interests. The Fund may acquire participation
interests in loans that are made to U.S. or foreign companies (the
"borrower"). They may be interests in, or assignments of, the loan, and
are acquired from the banks or brokers that have made the loan or are
members of the lending syndicate. No more than 5% of the Fund's net
assets can be invested in participation interests of the same issues. The
Manager has set certain creditworthiness standards for issuers of loan
participations, and monitors their creditworthiness. The value of loan
participation interest primarily depends upon the creditworthiness of the
borrower, and its ability to pay interest and principal. Borrowers may
have difficulty making payments. If a borrower fails to make scheduled
interest or principal payments, the Fund could experience a decline in the
net asset value of its shares. Some borrowers may have senior securities
rated as low as "C" by Moody's or "D" by Standard & Poor's, but may be
deemed acceptable credit risks.The Fund's investments in whole loan and
participation mortgages, participation interests and stripped mortgage-
backed securities are subject to the Fund's limitation on investment in
illiquid securities. See "Illiquid and Restricted Securities."
- General. Investments such as whole loan and participation
mortgages and certain derivative mortgage-backed securities often have
original issue discount or market discount for Federal income tax
purposes, and are purchased at a discount. Each year, the Fund would be
required to accrue with respect to such securities a portion of the
original issue discount or the market discount, which is considered
investment company taxable income in that year under the Internal Revenue
Code of 1986, as amended (the "Internal Revenue Code"), even though there
has been no corresponding distribution of cash to the Fund. In order for
the Fund to satisfy income distribution requirements each year under the
Internal Revenue Code, the Fund might be forced to liquidate a portion of
its portfolio when it would otherwise not do so.
- Portfolio Turnover. Securities may be purchased or sold without
regard to the length of time they have been held, to attempt to take
advantage of short-term differentials in yields, with the objective of
seeking income while conserving capital. While short-term trading
increases portfolio turnover, the Fund incurs little or no brokerage
costs. If the Fund derives 30% or more of its gross income from the sale
of securities held less than three months, the Fund may fail to qualify
under the Internal Revenue Code as a regulated investment company and
would lose certain beneficial tax treatment of its income (see "Dividends,
Capital Gains and Taxes").
Other Investment Techniques and Strategies. The Fund may use the
following special investment methods when their use appears appropriate
to the Manager. Since certain of these investment methods are
speculative, they may subject an investment in the Fund to relatively
greater risks and costs than would be the case with an investment in a
fund that does not use such methods.
- Repurchase Agreements. The Fund may enter into repurchase
agreements. In a repurchase transaction, the Fund buys a security and
simultaneously sells it to the vendor for delivery at a future date.
Repurchase agreements must be fully collateralized. However, if the
vendor of the securities fails to pay the resale price on the delivery
date, the Fund may incur costs in disposing of the collateral and may
experience losses if there is any delay in its ability to do so. The Fund
will not enter into a repurchase agreement that causes more than 10% of
the Fund's net assets to be subject to repurchase agreements having a
maturity beyond seven days. There is no limit on the amount of the Fund's
net assets that may be subject to repurchase agreements of seven days or
less.
- "When-Issued" and Delayed Delivery Transactions. The Fund may
purchase securities on a "when-issued" basis, and may purchase or sell
securities on a "delayed delivery" basis. These terms refer to securities
that have been created and for which a market exists, but which are not
available for immediate delivery. There may be a risk of loss to the Fund
if the value of the security declines prior to the settlement date.
Although the Fund is subject to the risk of adverse market fluctuation
during the period, the Manager does not believe that the Fund's net asset
value or income will be significantly adversely affected by its purchase
of mortgage-backed securities on a "when-issued" or "delayed delivery"
basis.
- Loans of Portfolio Securities. To attempt to increase its
income, the Fund may lend its portfolio securities (other than in
repurchase transactions) to qualified borrowers, dealers and other
financial institutions. These loans are limited to not more than 25% of
the Fund's net assets and are subject to other conditions described in the
Statement of Additional Information. The Fund presently does not intend
to lend its portfolio securities, but if it does, the value of securities
loaned is not expected to exceed 5% of the value of its total assets.
- Hedging. As described below, the Fund may purchase and sell
certain kinds of futures contracts, put and call options, and options on
futures or enter into interest rate swap agreements. These are all
referred to as "hedging instruments." The Fund does not use hedging
instruments for speculative purposes, and has limits on the use of them,
described below. The hedging instruments the Fund may use are described
below and in greater detail in "Other Investment Techniques and
Strategies" in the Statement of Additional Information.
The Fund may buy and sell options, and futures for a number of
purposes. It may do so to try to manage its exposure to the possibility
that the prices of its portfolio securities may decline, or to establish
a position in the securities market as a temporary substitute for
purchasing individual securities. It may do so to try to manage its
exposure to changing interest rates. Some of these strategies, such as
selling futures, buying puts and writing covered calls, hedge the Fund's
portfolio against price fluctuations.
Other hedging strategies, such as buying futures and call options,
tend to increase the Fund's exposure to the securities market. Writing
covered call options may also provide income to the Fund for liquidity
purposes or to raise cash to distribute to shareholders.
Futures. The Fund may buy and sell futures contracts that relate to
interest rates (these are referred to as Interest Rate Futures). This
type of Future is described in "Hedging With Options and Futures
Contracts" in the Statement of Additional Information.
Put and Call Options. The Fund may buy and sell certain kinds of put
options (puts) and call options (calls).
The Fund may buy calls only on debt securities, and Interest Rate
Futures, or to terminate its obligation on a call the Fund previously
wrote. The Fund may write (that is, sell) covered call options. When the
Fund writes a call, it receives cash (called a premium). The call gives
the buyer the ability to buy the investment on which the call was written
from the Fund at the call price during the period in which the call may
be exercised. If the value of the investment does not rise above the call
price, it is likely that the call will lapse without being exercised,
while the Fund keeps the cash premium (and the investment). The Fund may
write calls on up to 100% of its total assets under certain conditions
described below. The Fund may write calls in the "over-the-counter"
market on debt securities on up to 10% of its total investments.
The Fund may purchase put options. Buying a put on an investment
gives the Fund the right to sell the investment at a set price to a seller
of a put on that investment. The Fund can buy only those puts that relate
to (1) debt securities (whether or not it holds such securities in its
portfolio ) or (2) Interest Rate Futures. The Fund may sell puts on debt
securities covered by segregated liquid assets and may sell a put that it
previously purchased.
The Fund may buy and sell puts and calls on if certain conditions
are met: (1) Calls the Fund buys or sells must be listed on a securities
or commodities exchange, or quoted on the Automated Quotation System of
the National Association of Securities Dealers, Inc. (NASDAQ) or, in the
use of debt securities, traded in the over-the-counter market; (2) each
call the Fund writes must be "covered" while it is outstanding: that
means the Fund must own the investment on which the call was written or
it must own other securities that are acceptable for the escrow
arrangements required for calls; (3) the Fund may write calls on Futures
contracts it owns, but these calls must be covered by securities or other
liquid assets the Fund owns and segregates to enable it to satisfy its
obligations if the call is exercised; (4) not more than 50% of the Fund's
assets may be subject to puts; and (5) a call or put option may not be
purchased if the value of all of the Fund's put and call options would
exceed 5% of the Fund's total assets.
Interest Rate Swaps. In an interest rate swap, the Fund and another
party exchange their right to receive or their obligation to pay interest
on a security. For example, they may swap a right to receive floating
rate payments for fixed rate payments. The Fund enters into swaps only
on securities it owns. The Fund may not enter into swaps with respect to
more than 25% of its total assets. Also, the Fund will segregate liquid
assets (such as cash or U.S. Government securities) to cover any amounts
it could owe under swaps that exceed the amounts it is entitled to
receive, and it will adjust that amount daily, as needed.
Hedging instruments can be volatile investments and may involve
special risks. The use of hedging instruments requires special skills and
knowledge of investment techniques that are different than those required
for normal portfolio management. If the Manager uses a hedging instrument
at the wrong time or judges market conditions incorrectly, hedging
strategies may reduce the Fund's return. The Fund could also experience
losses if the prices of its futures and options positions were not
correlated with its other investments or if it could not close out a
position because of an illiquid market for the future or option.
Options trading involves the payment of premiums and has special tax
effects on the Fund. There are also special risks in particular hedging
strategies. There are certain risks in writing calls. If a covered call
written by the Fund on an investment has increased in value, the Fund will
be required to sell the investment at the call price and will not be able
to realize any profit if the investment has increased in value above the
call price. In addition, the Fund could experience capital losses that
might cause previously distributed short-term capital gains to be re-
characterized as non-taxable return of capital to shareholders. In
writing puts, there is the risk that the Fund may be required to buy the
underlying security at a disadvantageous price. The principal risks
relating to the use of Futures are: (a) possible imperfect correlation
between the prices of the Futures and the market value of the debt
securities in the Fund's portfolio; (b) possible lack of a liquid
secondary market for closing out a Futures position; (c) the need for
additional skills and techniques beyond those required for normal
portfolio management; and (d) losses on Futures resulting from market
movements not anticipated by the Manager. Interest rate swaps are subject
to credit risks (if the other party fails to meet its obligations) and
also to interest rate risks. The Fund could be obligated to pay more
under its swap agreements than it receives under them, as a result of
interest rate changes. These risks are described in greater detail in the
Statement of Additional Information.
- Illiquid and Restricted Securities. Under the policies and
procedures established by the Fund's Board of Trustees, the Manager
determines the liquidity of certain of the Fund's investments. Investments
may be illiquid because of the absence of an active trading market, making
it difficult to value them or dispose of them promptly at an acceptable
price. A restricted security is one that has a contractual restriction on
its resale or which cannot be sold publicly until it is registered under
the Securities Act of 1933. The Fund will not invest more than 10% of its
net assets in illiquid or restricted securities. The Fund's percentage
limitation on these investments does not apply to certain restricted
securities that are eligible for resale to qualified institutional
purchasers.
- Derivative Investments. The Fund can invest in a number of
different kinds of "derivative investments." The Fund may use some types
of derivatives for hedging purposes, and may invest in others because they
offer the potential for increased income and principal value. In general,
a "derivative investment" is a specially-designed investment whose
performance is linked to the performance of another investment or
security, such as an option or future. In the broadest sense, derivative
investments include exchange-traded options and futures contracts (please
refer to "Writing Covered Calls" and "Hedging with Options and Futures
Contracts").
One risk of investing in derivative investments is that the company
issuing the instrument might not pay the amount due on the maturity of the
instrument. There is also the risk that the underlying investment or
security might not perform the way the Manager expected it to perform.
The performance of derivative investments may also be influenced by
interest rate changes in the U.S. and abroad. All of these risks can mean
that the Fund will realize less income than expected from its investments,
or that it can lose part of the value of its investments, which will
affect the Fund's share price. Certain derivative investments held by the
Fund may trade in the over-the-counter markets and may be illiquid. If
that is the case, the Fund's investment in them will be limited, as
discussed in "Illiquid and Restricted Securities".
Other Investment Restrictions. The Fund has certain investment
restrictions that are fundamental policies. Under these fundamental
policies, the Fund cannot do any of the following: (1) invest in
securities (except those of the U.S. Government or any of its agencies or
instrumentalities) of any issuer if immediately thereafter, either (a)
more than 5% of the Fund's total assets would be invested in securities
of that issuer, or (b) the Fund would then own more than 10% of that
issuer's voting securities; (2) make loans, except through the purchase
of portfolio securities subject to repurchase agreements or as described
above under "Loans of Portfolio Securities"; (3) borrow money in excess
of 10% of the value of its total assets (and then only as a temporary
measure for emergency purposes) or make any investment at a time during
which such borrowing exceeds 5% of the value of its assets; (4) pledge,
mortgage or hypothecate any of its assets to secure a debt; such
prohibition does not bar the Fund from escrow arrangements for options
trading or collateral or margin arrangements in connection with hedging
instruments approved by the Board; (5) invest more than 10% of its assets
in securities subject to repurchase agreements maturing in more than seven
days, securities which are restricted as to resale, illiquid securities
(those not readily convertible to cash) and securities for which market
quotations are not readily available; or (6) concentrate investments to
the extent of 25% of its assets in any industry; there is no limitation
on obligations issued by the U.S. Government and its agencies or
instrumentalities.
All of the percentage limitations described above and elsewhere in
this Prospectus apply only at the time the Fund purchases a security, and
the Fund need not dispose of a security merely because the size of the
Fund's assets has changed or the security has increased in value relative
to the size of the Fund. There are other fundamental policies discussed
in the Statement of Additional Information.
How the Fund is Managed
Organization and History. The Fund was organized in 1986 as a
Massachusetts business trust. The Fund is an open-end, diversified
management investment company, with an unlimited number of authorized
shares of beneficial interest.
The Fund is governed by a Board of Trustees, which is responsible
under Massachusetts law for protecting the interests of shareholders. The
Trustees meet periodically throughout the year to oversee the Fund's
activities, review its performance, and review the actions of the Manager.
"Trustees and Officers of the Fund" in the Statement of Additional
Information names the Trustees and provides more information about them
and the officers of the Fund. Although the Fund is not required by law
to hold annual meetings, it may hold shareholder meetings from time to
time on important matters, and shareholders have the right to call a
meeting to remove a Trustee or to take other action described in the
Fund's Declaration of Trust.
The Board of Trustees has the power, without shareholder approval,
to divide unissued shares of the Fund into two or more classes. The Board
has done so, and the Fund currently has two classes of shares, Class A and
Class B. Each class has its own dividends and distributions and pays
certain expenses which may be different for the different classes. Each
class may have a different net asset value. Each share has one vote at
shareholder meetings, with fractional shares voting proportionally. Only
shares of a particular class vote together on matters that affect that
class alone. Shares are freely transferrable.
The Manager and Its Affiliates. The Fund is managed by the Manager,
Oppenheimer Management Corporation, which is responsible for selecting the
Fund's investments and handles its day-to-day business. The Manager
carries out its duties, subject to the policies established by the Board
of Trustees, under an Investment Advisory Agreement which states the
Manager's responsibilities. The Agreement sets forth the fees paid by the
Fund to the Manager and describes the expenses that the Fund is
responsible to pay to conduct its business.
The Manager has operated as an investment adviser since 1959. The
Manager and its affiliates currently manage investment companies,
including other OppenheimerFunds, with assets of more than $29 billion as
of December 31, 1994, and with more than 1.8 million shareholder accounts.
The Manager is owned by Oppenheimer Acquisition Corp., a holding company
that is owned in part by senior officers of the Manager and controlled by
Massachusetts Mutual Life Insurance Company, a mutual life insurance
company.
- Portfolio Manager. The Portfolio Manager of the Fund is Eva A.
Zeff. She is an Assistant Vice President of the Manager. She has been the
person principally responsible for the day-to-day management of the Fund's
portfolio since April 1992. During the past five years, Ms. Zeff has also
served as an officer and portfolio manager for other OppenheimerFunds,
prior to which she was a Securities Analyst for the Manager and an
Assistant Portfolio Manager for National Securities and Research Corp.,
an investment adviser.
- Fees and Expenses. Under the Investment Advisory Agreement, the
Fund pays the Manager the following annual fees, which decline on
additional assets as the Fund grows: 0.75% of the first $200 million of
aggregate net assets, 0.70% of the next $200 million, 0.65% of the next
$400 million, and 0.60% of net assets in excess of $800 million. The
Manager has voluntarily reduced the management fee by reducing the rate
at each breakpoint by 0.10%. The Fund's management fee for its last
fiscal year was 0.70% of average annual net assets for both its Class A
and Class B shares, which may be higher than the rate paid by some other
mutual funds.
The Fund pays expenses related to its daily operations, such as
custodian fees, Trustees' fees, transfer agency fees, legal and auditing
costs. Those expenses are paid out of the Fund's assets and are not paid
directly by shareholders. However, those expenses reduce the net asset
value of shares, and therefore are indirectly borne by shareholders
through their investment. More information about the investment advisory
agreement and the other expenses paid by the Fund is contained in the
Statement of Additional Information.
There is also information about the Fund's brokerage policies and
practices in "Brokerage Policies of the Fund" in the Statement of
Additional Information. That section discusses how brokers and dealers are
selected for the Fund's portfolio transactions. When deciding which
brokers to use, the Manager is permitted by the investment advisory
agreement to consider whether brokers have sold shares of the Fund or any
other funds for which the Manager serves as investment adviser.
- The Distributor. The Fund's shares are sold through dealers and
brokers that have a sales agreement with Oppenheimer Funds Distributor,
Inc., a subsidiary of the Manager that acts as the Fund's Distributor.
The Distributor also distributes the shares of other mutual funds managed
by the Manager (the "OppenheimerFunds") and is sub-distributor for funds
managed by a subsidiary of the Manager.
- The Transfer Agent. The Fund's transfer agent is Oppenheimer
Shareholder Services, a division of the Manager, which acts as the
shareholder servicing agent for the Fund and the other OppenheimerFunds
on an "at-cost" basis. Shareholders should direct inquiries about their
accounts to the Transfer Agent at the address and toll-free number shown
below in this Prospectus and on the back cover.
Performance of the Fund
Explanation of Performance Terminology. The Fund uses the terms
"standardized yield," "total return" and "average annual total return" to
illustrate its performance. The performance of each class of shares is
shown separately, because the performance of each class will usually be
different as a result of the different kinds of expenses each class bears.
This performance information may be useful to help you see how well your
investment has done and to compare it to other funds or market indices,
as we have done below.
It is important to understand that the Fund's yields and total
returns represent past performance and should not be considered to be
predictions of future returns or performance. This performance data is
described below, but more detailed information about how total returns are
calculated is contained in the Statement of Additional Information, which
also contains information about other ways to measure and compare the
Fund's performance. The Fund's investment performance will vary over time,
depending on market conditions, the composition of the portfolio, expenses
and which class of shares you purchase.
- Yield. Each Class of shares calculates its yield by dividing the
annualized net investment income per share on the portfolio during a
30-day period by the maximum offering price on the last day of the period.
The yield of each Class will differ because of the different expenses of
each Class of shares. The yield data represents a hypothetical investment
return on the portfolio, and does not measure an investment return based
on dividends actually paid to shareholders. To show that return, a
dividend yield may be calculated. Dividend yield is calculated by
dividing the dividends of a Class derived from net investment income
during a stated period by the maximum offering price on the last day of
the period. Yields and dividend yields for Class A shares reflect the
deduction of the maximum initial sales charge, but may also be shown based
on the Fund's net asset value per share. Yields and dividend yields for
Class B shares do not reflect the deduction of the contingent deferred
sales charge.
- Total Returns. There are different types of total returns used
to measure the Fund's performance. Total return is the change in value
of a hypothetical investment in the Fund over a given period, assuming
that all dividends and capital gains distributions are reinvested in
additional shares. The cumulative total return measures the change in
value over the entire period (for example, ten years). An average annual
total return shows the average rate of return for each year in a period
that would produce the cumulative total return over the entire period.
However, average annual total returns do not show the Fund's actual year-
by-year performance.
When total returns are quoted for Class A shares, they reflect the
payment of the current maximum initial sales charge. When total returns
are shown for Class B shares, they reflect the effect of the contingent
deferred sales charge that applies to the period for which total return
is shown. Total returns may also be quoted "at net asset value," without
considering the effect of the sales charge, and those returns would be
reduced if sales charges were deducted.
How Has the Fund Performed? Below is a discussion by the Manager of the
Fund's performance during its last fiscal year ended September 30, 1994,
followed by a graphical comparison of the Fund's performance to an
appropriate broad-based market index.
- Management's Discussion of Performance. During the past fiscal
year, the Fund's performance was affected by the Federal Reserve's
aggressive moves to raise short-term interest rates. As interest rates
rose, the bond markets declined. The impact on the Fund, however, was
tempered by two factors. First, as interest rates rose, mortgage
prepayments slowed substantially, causing the values of mortgage-backed
securities to stabilize. Second, the Manager emphasized investment in
private label mortgage-backed issues. These securities provide high
yields and are less sensitive to changing interest rates than other types
of mortgage-backed securities. Finally, the Manager decreased the Fund's
"duration", a technical measure of sensitivity to interest rate changes,
which helped limit the impact of higher rates on the Fund.
- Comparing the Fund's Performance to the Market. The chart below
shows the performance of a hypothetical $10,000 investment in each Class
of shares of the Fund held until September 30, 1994. In the case of Class
A shares, performance is measured since the commencement of the Fund's
operations on September 11, 1986, and in the case of Class B shares, since
the public offering of the Class on May 17, 1993. In both cases, all
dividends and capital gains distributions were reinvested in additional
shares. The graph reflects the deduction of the 4.75% current maximum
initial sales charge on Class A shares and the maximum 5% contingent
deferred sales charge on Class B shares.
The Fund's performance is compared to the performance of The Lehman
Aggregate Bond Index and the Lehman Mortgage-Backed Securities Index. The
Lehman Aggregate Bond Index is an unmanaged index of investment grade bond
issues and mortgage-backed securities, and is widely regarded as a measure
of the performance of the general fixed-rate investment grade debt market.
The Lehman Mortgage-Backed Securities Index is an unmanaged index of
fixed-rate securities backed by mortgage pools of the GNMA, FHLMC and a
FNMA and is widely recognized as a measure of the performance of the
mortgage-backed securities market, the market in which the Fund
principally invests. Each index includes a factor for the reinvestment
of interest but does not reflect expenses or taxes. The Fund's return
reflects the deduction of the current maximum sales charge of 4.75% and
includes reinvestment of all dividends and capital gains distributions,
but does not consider taxes.
<PAGE>
Oppenheimer Mortgage Income Fund
Comparison of Change in Value
of a $10,000 Hypothetical Investment to The
Lehman Aggregate Bond Index and
The Lehman Mortgage-Backed Securities Index
(Graph)
Past performance is not predictive of future performance.
Average Annual Total Returns Cumulative Total Return
of the Fund at 9/30/94 of the Fund at 9/30/94
A Shares 1-Year 5-Year Life B Shares 1 Year Life :
(5.51)% 6.70% 6.83% (6.23)% (1.77)%
_____________________
ABOUT YOUR ACCOUNT
How to Buy Shares
Classes of Shares. The Fund offers investors two different classes of
shares. The different classes of shares represent investments in the same
portfolio of securities but are subject to different expenses and will
likely have different share prices.
- Class A Shares. If you buy Class A shares, you pay an initial
sales charge (on investments up to $1 million). If you purchase Class A
shares as part of an investment of at least $1 million in shares of one
or more OppenheimerFunds, you will not pay an initial sales charge but if
you sell any of those shares within 18 months after your purchase, you may
pay a contingent deferred sales charge, which will vary depending on the
amount you invested. Sales charges are described below.
- Class B Shares. If you buy Class B shares, you pay no sales
charge at the time of purchase, but if you sell your shares within six
years, you will normally pay a contingent deferred sales charge that
varies depending on how long you own your shares. It is described below.
Which Class of Shares Should You Choose? Once you decide that the Fund
is an appropriate investment for you, the decision as to which class of
shares is better suited to your needs depends on a number of factors which
you should discuss with your financial advisor. The Fund's operating
costs that apply to a class of shares and the effect of the different
types of sales charges on your investment will vary your investment
results over time. The most important factors are how much you plan to
invest, how long you plan to hold your investment, and whether you
anticipate exchanging your shares for shares of other OppenheimerFunds
(not all of which currently offer Class B shares). If your goals and
objectives change over time and you plan to purchase additional shares,
you should re-evaluate those factors to see if you should consider another
class of shares.
In the following discussion, to help provide you and your financial
advisor with a framework in which to choose a class, we have made some
assumptions using a hypothetical investment in the Fund. We used the
sales charge rates that apply to Class A and B, considering the effect of
the annual asset-based sales charge on Class B expenses (which, like all
expenses, will affect your investment return). For the sake of
comparison, we have assumed that there is a 10% rate of appreciation in
the investment each year. Of course, the actual performance of your
investment cannot be predicted and will vary, based on the Fund's actual
investment returns and the operating expenses borne by each class of
shares, and which class you invest in. The factors discussed below are
not intended to be investment advice or recommendations, because each
investor's financial considerations are different.
- How Long Do You Expect to Hold Your Investment? The Fund is
designed for long-term investment. While future financial needs cannot
be predicted with certainty, knowing how long you expect to hold your
investment will assist you in selecting the appropriate class of shares.
The effect of the sales charge over time, using our assumptions, will
generally depend on the amount invested. Because of the effect of class-
based expenses, your choice will also depend on how much you invest.
- How Much Do You Plan to Invest? If you plan to invest a
substantial amount over the long term, the reduced sales charges available
for larger purchases of Class A shares may offset the effect of paying an
initial sales charge on your investment (which reduces the amount of your
investment dollars used to buy shares for your account), compared to the
effect over time of higher expenses on Class B, for which no initial sales
charge is paid. Additionally, dividends payable to Class B shareholders
will be reduced by the additional expenses borne solely by Class B, such
as the asset-based sales charge described below.
In general, if you plan to invest less than $100,000, Class B shares
may be more advantageous than Class A shares, using the assumptions in our
hypothetical example. However, if you plan to invest more than $100,000
(not only in the Fund, but possibly in other OppenheimerFunds as well),
then Class A shares generally will be more advantageous than Class B,
because of the effect of the reduction of initial sales charges on larger
purchases of Class A shares (described in "Reduced Sales Charges for Class
A Share Purchases," below). That is also the case because the annual
asset-based sales charge on Class B shares will have a greater impact on
larger investments than the initial sales charge on Class A shares because
of the reductions of initial sales charge available for larger purchases.
For investors who invest $1 million or more, in most cases Class A
shares will be the most advantageous choice, no matter how long you intend
to hold your shares. For that reason, the Distributor normally will not
accept purchase orders of $1 million or more of Class B shares from a
single investor.
Of course, these examples are based on approximations of the effect
of current sales charges and expenses on a hypothetical investment over
time, using the assumptions stated above. Therefore, these examples
should not be relied on as rigid guidelines.
- Are There Differences in Account Features That Matter to You?
Because some account features may not be available to Class B shareholders
(such as Checkwriting), or other features (such as Automatic Withdrawal
Plans) might not be advisable (because of the effect of the contingent
deferred sales charge) in non-retirement accounts for Class B
shareholders, you should carefully review how you plan to use your
investment account before deciding which class of shares to buy. Also,
because not all OppenheimerFunds currently offer Class B shares, and
because exchanges are permitted only to the same class of shares in other
OppenheimerFunds, you should consider how important the exchange privilege
is likely to be for you.
- How Does It Affect Payments to My Broker? A salesperson, such
as a broker, or any other person who is entitled to receive compensation
for selling Fund shares may receive different compensation for selling one
class than another class. It is important that investors understand that
the purpose of the Class B contingent deferred sales charge and asset-
based sales charge is the same as the purpose of the front-end sales
charge on sales of Class A shares, that is, to compensate the Distributor
for commissions it pays to dealers and financial institutions for selling
shares.
How Much Must You Invest? You can open a Fund account with a minimum
initial investment of $1,000 and make additional investments at any time
with as little as $25. There are reduced minimum investments under special
investment plans:
With Asset Builder Plans, Automatic Exchange Plans, 403(b)(7)
custodial plans and military allotment plans, you can make initial and
subsequent investments of as little as $25; and subsequent purchases of
at least $25 can be made by telephone through AccountLink.
Under pension and profit-sharing plans and Individual Retirement
Accounts (IRAs), you can make an initial investment of as little as $250
(if your IRA is established under an Asset Builder Plan, the $25 minimum
applies), and subsequent investments may be as little as $25.
There is no minimum investment requirement if you are buying
shares by reinvesting dividends from the Fund or other OppenheimerFunds
(a list of them appears in the Statement of Additional Information, or you
can ask your dealer or call the Transfer Agent), or by reinvesting
distributions from unit investment trusts that have made arrangements with
the Distributor.
- How Are Shares Purchased? You can buy shares several ways --
through any dealer, broker or financial institution that has a sales
agreement with the Distributor, or directly through the Distributor, or
automatically through an Asset Builder Plan under the OppenheimerFunds
AccountLink service. When you buy shares, be sure to specify Class A or
Class B shares. If you do not choose, your investment will be made in
Class A shares.
- Buying Shares Through Your Dealer. Your dealer will place your
order with the Distributor on your behalf.
- Buying Shares Through the Distributor. Complete an
OppenheimerFunds New Account Application and return it with a check
payable to "Oppenheimer Funds Distributor, Inc." Mail it to P.O. Box 5270,
Denver, Colorado 80217. If you don't list a dealer on the application,
the Distributor will act as your agent in buying the shares. However, we
recommend that you discuss your investment first with a financial advisor,
to be sure it is appropriate for you.
- Payment by Federal Funds Wire. Shares may be purchased by
Federal Funds wire. The minimum investment is $2,500. You must first
call the Distributor's Wire Department at 1-800-525-7041 to notify the
Distributor of the wire, and to receive further instructions.
- Buying Shares Through OppenheimerFunds AccountLink. You can use
AccountLink to link your Fund account with an account at a U.S. bank or
other financial institution that is an Automated Clearing House (ACH)
member. You can then transmit funds electronically to purchase shares,
to send redemption proceeds, and to transmit dividends and distributions.
Shares are purchased for your account on AccountLink on the regular
business day the Distributor is instructed by you to initiate the ACH
transfer to buy shares. Dividends will begin to accrue on such shares on
the day the Fund receives Federal Funds for such purchase through the ACH
system before the close of The New York Stock Exchange which is normally
three days after the ACH transfer is initiated. If such Federal Funds are
received after that time, dividends will begin to accrue on the next
business day after such Federal Funds are received. You can provide those
instructions automatically, under an Asset Builder Plan, described below,
or by telephone instructions using OppenheimerFunds PhoneLink, also
described below. You should request AccountLink privileges on the
application or dealer settlement instructions used to establish your
account. Please refer to "AccountLink" below for more details.
- Asset Builder Plans. You may purchase shares of the Fund (and up
to four other OppenheimerFunds) automatically each month from your account
at a bank or other financial institution under an Asset Builder Plan with
AccountLink. Details are on the Application and in the Statement of
Additional Information.
- At What Price Are Shares Sold? Shares are sold at the public
offering price based on the net asset value (and any initial sales charge
that applies) that is next determined after the Distributor receives the
purchase order in Denver. In most cases, to enable you to receive that
day's offering price, the Distributor must receive your order by the time
of day The New York Stock Exchange closes, which is normally 4:00 P.M.,
New York time, but may be earlier on some days (all references to time in
this Prospectus mean "New York time"). The net asset value of each class
of shares is determined as of that time on each day The New York Stock
Exchange is open (which is a "regular business day").
If you buy shares through a dealer, the dealer must receive your
order by the close of The New York Stock Exchange, on a regular business
day and transmit it to the Distributor so that it is received before the
Distributor's close of business that day, which is normally 5:00 P.M. The
Distributor may reject any purchase order for the Fund's shares, in its
sole discretion.
Class A Shares. Class A shares are sold at their offering price, which
is normally net asset value plus an initial sales charge. However, in
some cases, described below, purchases are not subject to an initial sales
charge, and the offering price will be the net asset value. In some cases,
reduced sales charges may be available, as described below. Out of the
amount you invest, the Fund receives the net asset value to invest for
your account. The sales charge varies depending on the amount of your
purchase. A portion of the sales charge may be retained by the
Distributor and allocated to your dealer as commission. The current sales
charge rates and commissions paid to dealers and brokers
are as follows:
<PAGE>
Front-End Sales Charge Commission as
As a Percentage of: Percentage of
Amount of Purchase Offering Price Amount Invested Offering Price
_______________________________________________________________________
Less than $50,000 4.75% 4.98% 4.00%
$50,000 or more but
less than $100,000 4.50% 4.71% 3.75%
$100,000 or more but
less than $250,000 3.50% 3.63% 2.75%
$250,000 or more but
less than $500,000 2.50% 2.56% 2.00%
$500,000 or more but
less than $1 million 2.00% 2.04% 1.60%
The Distributor reserves the right to reallow the entire commission to
dealers. If that occurs, the dealer may be considered an "underwriter"
under Federal securities laws.
- Class A Contingent Deferred Sales Charge. There is no initial
sales charge on purchases of Class A shares of any one or more
OppenheimerFunds aggregating $1 million or more. However, the Distributor
pays dealers of record commissions on such purchases in an amount equal
to the sum of 1.0% of the first $2.5 million, plus 0.50% of the next $2.5
million, plus 0.25% of share purchases over $5 million. That commission
will be paid only on the amount of those purchases in excess of $1 million
that were not previously subject to a front-end sales charge and dealer
commission.
If you redeem any of those shares within 18 months of the end of the
calendar month of their purchase, a contingent deferred sales charge
(called the "Class A contingent deferred sales charge") will be deducted
from the redemption proceeds. That sales charge will be equal to 1.0% of
the aggregate net asset value of either (1) the redeemed shares (not
including shares purchased by reinvestment of dividends or capital gain
distributions) or (2) the original cost of the shares, whichever is less.
However, the Class A contingent deferred sales charge will not exceed the
aggregate amount of the commissions the Distributor paid to your dealer
on all Class A shares of all OppenheimerFunds you purchased subject to
the Class A contingent deferred sales charge.
In determining whether a contingent deferred sales charge is
payable, the Fund will first redeem shares that are not subject to the
sales charge, including shares purchased by reinvestment of dividends and
capital gains, and then will redeem other shares in the order that you
purchased them. The Class A contingent deferred sales charge is waived
in certain cases described in "Waivers of Class A Sales Charges" below.
No Class A contingent deferred sales charge is charged on exchanges
of shares under the Fund's Exchange Privilege (described below). However,
if the shares acquired by exchange are redeemed within 18 months of the
end of the calendar month of the purchase of the exchanged shares, the
sales charge will apply.
- Special Arrangements With Dealers. The Distributor may advance
up to 13 months' commissions to dealers that have established special
arrangements with the Distributor for Asset Builder Plans for their
clients. Dealers whose sales of Class A shares of OppenheimerFunds (other
than money market funds) under OppenheimerFunds-sponsored 403(b)(7)
custodial plans exceed $5 million per year (calculated per quarter), will
receive monthly one-half of the Distributor's retained commissions on
those sales, and if those sales exceed $10 million per year, those dealers
will receive the Distributor's entire retained commission on those sales.
Reduced Sales Charges for Class A Share Purchases. You may be eligible
to buy Class A shares at reduced sales charge rates in one or more of the
following ways:
- Right of Accumulation. To qualify for the lower sales charge
rates that apply to larger purchases of Class A shares, you and your
spouse can add together Class A shares you purchase for your individual
accounts, or jointly, or on behalf of your children who are minors, under
trust or custodial accounts. A fiduciary can count all shares purchased
for a trust, estate or other fiduciary account (including one or more
employee benefit plans of the same employer) that has multiple accounts.
Additionally, you can add together current purchases of Class A
shares of the Fund and other OppenheimerFunds. You can also include Class
A shares of OppenheimerFunds you previously purchased subject to a sales
charge, provided that you still hold your investment in one of the
OppenheimerFunds. The value of those shares will be based on the greater
of the amount you paid for the shares or their current value (at offering
price). The OppenheimerFunds are listed in "Reduced Sales Charges" in the
Statement of Additional Information, or a list can be obtained from the
Transfer Agent. The reduced sales charge will apply only to current
purchases and must be requested when you buy your shares.
- Letter of Intent. Under a Letter of Intent, you may purchase
Class A shares of the Fund and other OppenheimerFunds during a 13-month
period at the reduced sales charge rate that applies to the total amount
of the intended purchases. This can include purchases made up to 90 days
before the date of the Letter. More information is contained in the
Application and in "Reduced Sales Charges" in the Statement of Additional
Information.
- Waivers of Class A Sales Charges. No sales charge is imposed on
sales of Class A shares to the following investors: (1) the Manager or its
affiliates; (2) present or former officers, directors, trustees and
employees (and their "immediate families" as defined in "Reduced Sales
Charges" in the Statement of Additional Information) of the Fund, the
Manager and its affiliates, and retirement plans established by them for
their employees; (3) registered management investment companies, or
separate accounts of insurance companies having an agreement with the
Manager or the Distributor for that purpose; (4) dealers or brokers that
have a sales agreement with the Distributor, if they purchase shares for
their own accounts or for retirement plans for their employees; (5)
employees and registered representatives (and their spouses) of dealers
or brokers described above or financial institutions that have entered
into sales arrangements with such dealers or brokers (and are identified
to the Distributor) or with the Distributor; the purchaser must certify
to the Distributor at the time of purchase that the purchase is for the
purchaser's own account (or for the benefit of such employee's spouse or
minor children); (6) dealers, brokers or registered investment advisers
that have entered into an agreement with the Distributor providing
specifically for the use of shares of the Fund in particular investment
products made available to their clients; and (7) dealers, brokers or
registered investment advisers that have entered into an agreement with
the Distributor to sell shares of defined contribution employee retirement
plans for which the dealer, broker or investment adviser provides
administration services.
Additionally, no sales charge is imposed on shares that are (a)
issued in plans of reorganization, such as mergers, asset acquisitions and
exchange offers, to which the Fund is a party, or (b) purchased by the
reinvestment of loan repayments by a participant in a retirement plan for
which the Manager or its affiliates acts as sponsor, (c) purchased by the
reinvestment of dividends or other distributions reinvested from the Fund
or other OppenheimerFunds (other than Oppenheimer Cash Reserves) or unit
investment trusts for which reinvestment arrangements have been made with
the Distributor, or (d) purchased and paid for with the redemption
proceeds of shares of a mutual fund other than a money market fund or
another fund managed by the Manager or any of its affiliates (this waiver
must be requested when you or your dealer places the order for your
shares, and the Distributor may require evidence of qualification for this
waiver). There is a further discussion of this policy in "Reduced Sales
Charges" in the Statement of Additional Information.
The contingent deferred sales charge does not apply to purchases of
Class A shares at net asset value described above and is also waived if
shares are redeemed in the following cases: (1) retirement distributions
or loans to participants or beneficiaries from qualified retirement plans,
deferred compensation plans or other employee benefit plans ("Retirement
Plans"), (2) returns of excess contributions made to Retirement Plans, (3)
Automatic Withdrawal Plan payments that are limited to no more than 12%
of the original account value annually, (4) involuntary redemptions of
shares by operation of law or under the procedures set forth in the Fund's
Declaration of Trust or adopted by the Board of Trustees, and (5) if, at
the time an order is placed for Class A shares that would otherwise be
subject to the Class A contingent deferred sales charge, the dealer in
writing agrees to accept the dealer's portion of the commission payable
on the sale in installments of 1/18th of the commission per month (with
no further commission payable if the shares are redeemed within 18 months
of purchase).
- Service Plan for Class A Shares. The Fund has adopted a Service
Plan for Class A shares to reimburse the Distributor for a portion of its
costs incurred in connection with the personal service and maintenance of
accounts that hold Class A shares. Reimbursement is made quarterly at an
annual rate that may not exceed 0.25% of the average annual net assets of
Class A shares of the Fund. The Distributor uses all of those fees to
compensate dealers, brokers, banks and other financial institutions
quarterly for providing personal service and maintenance of accounts of
their customers that hold Class A shares and to reimburse itself (if the
Fund's Board of Trustees authorizes such reimbursements, which it has not
yet done) for its other expenditures under the Plan.
Services to be provided include, among others, answering customer
inquiries about the Fund, assisting in establishing and maintaining
accounts in the Fund, making the Fund's investment plans available and
providing other services at the request of the Fund or the Distributor.
Payments are made by the Distributor quarterly at an annual rate not to
exceed 0.25% of the average annual net assets of Class A shares held in
accounts of the dealer or its customers.
The Class A Plan has the effect of increasing annual expenses of
Class A shares of the Fund by up to 0.25% of the class's average annual
net assets from what the expenses would otherwise be.
Class B Shares. Class B shares are sold at net asset value per share
without an initial sales charge. However, if Class B shares are redeemed
within 6 years of their purchase, a contingent deferred sales charge will
be deducted from the redemption proceeds. That sales charge will not
apply to shares purchased by the reinvestment of dividends or capital
gains distributions. The charge will be assessed on the lesser of the net
asset value of the shares at the time of redemption or the original
purchase price. The contingent deferred sales charge is not imposed on the
amount of your account value represented by the increase in net asset
value over the initial purchase price (including increases due to the
reinvestment of dividends and capital gains distributions). The Class B
contingent deferred sales charge is paid to the Distributor to reimburse
its expenses of providing distribution-related services to the Fund in
connection with the sale of Class B shares.
To determine whether the contingent deferred sales charge applies
to a redemption, the Fund redeems shares in the following order: (1)
shares acquired by reinvestment of dividends and capital gains
distributions, (2) shares held for over 6 years, and (3) shares held the
longest during the 6-year period.
The amount of the contingent deferred sales charge will depend on
the number of years since you invested and the dollar amount being
redeemed, according to the following schedule:
Contingent Deferred Sales Charge
Years Since Beginning of Month In on Redemptions in that Year
Which Purchase Order Was Accepted (As % of Amount Subject to Charge)
0 - 1 5.0%
1 - 2 4.0%
2 - 3 3.0%
3 - 4 3.0%
4 - 5 2.0%
5 - 6 1.0%
6 and following None
In the table, a "year" is a 12-month period. All purchases are
considered to have been made on the first regular business day of the
month in which the purchase was made.
- Waivers of Class B Sales Charge. The Class B contingent deferred
sales charge will be waived if the shareholder requests it for any of the
following redemptions: (1) distributions to participants or beneficiaries
from Retirement Plans, if the distributions are made (a) under an
Automatic Withdrawal Plan after the participant reaches age 59-1/2, as
long as the payments are no more than 10% of the account value annually
(measured from the date the Transfer Agent receives the request), or (b)
following the death or disability (as defined in the Internal Revenue
Code) of the participant or beneficiary; (2) redemptions from accounts
other than Retirement Plans following the death or disability of the
shareholder (the death or disability must have occurred after the account
was established, and for disability you must provide evidence of a
determination of disability by the Social Security Administration), (3)
returns of excess contributions to Retirement Plans, and (4) distributions
from IRAs (including SEP-IRAs and SAR/SEP accounts) before the participant
is age 591/2, and distributions from 403(b)(7) custodial plans or pension
or profit sharing plans before the participant is age 591/2 but only after
the participant has separated from service, if the distributions are made
in substantially equal periodic payments over the life (or life
expectancy) of the participant or the joint lives (or joint life and last
survivor expectancy) of the participant and the participant's designated
beneficiary (and the distributions must comply with other requirements for
such distributions under the Internal Revenue Code and may not exceed 10%
of the account value annually, measured from the date the Transfer Agent
receives the request).
The contingent deferred sales charge is also waived on Class B
shares in the following cases: (i) shares sold to the Manager or its
affiliates; (ii) shares sold to registered management investment companies
or separate accounts of insurance companies having an agreement with the
Manager or the Distributor for that purpose; (iii) shares issued in plans
of reorganization to which the Fund is a party; and (iv) shares redeemed
in involuntary redemptions as described below. Further details about this
policy are contained in "Reduced Sales Charges" in the Statement of
Additional Information.
- Automatic Conversion of Class B Shares. 72 months after you
purchase Class B shares, those shares will automatically convert to Class
A shares. This conversion feature relieves Class B shareholders of the
asset-based sales charge that applies to Class B shares under the Class
B Distribution and Service Plan, described below. The conversion is based
on the relative net asset value of the two classes, and no sales load or
other charge is imposed. When Class B shares convert, any other Class B
shares that were acquired by the reinvestment of dividends and
distributions on the converted shares will also convert to Class A shares.
The conversion feature is subject to the continued availability of a tax
ruling described in "Alternative Sales Arrangements - Class A and Class
B Shares" in the Statement of Additional Information.
- Distribution and Service Plan for Class B Shares. The Fund has
adopted a Distribution and Service Plan for Class B shares to compensate
the Distributor for its services and costs in distributing Class B shares
and servicing accounts. Under the Plan, the Fund pays the Distributor an
annual "asset-based sales charge" of 0.75% per year on Class B shares that
are outstanding for 6 years or less. The Distributor also receives a
service fee of 0.25% per year. Both fees are computed on the average
annual net assets of Class B shares, determined as of the close of each
regular business day. The asset-based sales charge allows investors to buy
Class B shares without a front-end sales charge while allowing the
Distributor to compensate dealers that sell Class B shares.
The Distributor uses the service fee to compensate dealers for
providing personal services for accounts that hold Class B shares. Those
services are similar to those provided under the Class A Service Plan,
described above. The asset-based sales charge and service fees increase
Class B expenses by up to 1.00% of average net assets per year.
The Distributor pays the 0.25% service fee to dealers in advance for
the first year after Class B shares have been sold by the dealer. After
the shares have been held for a year, the Distributor pays the fee on a
quarterly basis. The Distributor pays sales commissions of 3.75% of the
purchase price to dealers from its own resources at the time of sale. The
Distributor retains the asset-based sales charge to recoup the sales
commissions it pays, the advances of service fee payments it makes, and
its financing costs.
The Distributor's actual expenses in selling Class B shares may be
more than the payments it receives from contingent deferred sales charges
collected on redeemed shares and from the Fund under the Distribution and
Service Plan for Class B shares. Therefore, those expenses may be carried
over and paid in future years. At September 30, 1994, the end of the Plan
year, the Distributor had incurred unreimbursed expenses under the Plan
of $136,845 (equal to 5.03% of the Fund's net assets represented by Class
B shares on that date), which have been carried over into the present Plan
year. If the Plan is terminated by the Fund, the Board of Trustees may
allow the Fund to continue payments of the asset-based sales charge to the
Distributor for expenses it incurred before the Plan was terminated.
Special Investor Services
AccountLink. OppenheimerFunds AccountLink links your Fund account to your
account at your bank or other financial institution to enable you to send
money electronically between those accounts to perform a number of types
of account transactions. These include purchases of shares by telephone
(either through a service representative or by PhoneLink, described
below), automatic investments under Asset Builder Plans, and sending
dividends and distributions or Automatic Withdrawal Plan payments directly
to your bank account. Please refer to the Application for details or call
the Transfer Agent for more information.
AccountLink privileges must be requested on the Application you use
to buy shares, or on your dealer's settlement instructions if you buy your
shares through your dealer. After your account is established, you can
request AccountLink privileges by sending signature-guaranteed
instructions to the Transfer Agent. AccountLink privileges will apply to
each shareholder listed in the registration on your account as well as to
your dealer representative of record unless and until the Transfer Agent
receives written instructions terminating or changing those privileges.
After you establish AccountLink for your account, any change of bank
account information must be made by signature-guaranteed instructions to
the Transfer Agent signed by all shareholders who own the account.
- Using AccountLink to Buy Shares. Purchases may be made by
telephone only after your account has been established. To purchase shares
in amounts up to $250,000 through a telephone representative, call the
Distributor at 1-800-852-8457. The purchase payment will be debited from
your bank account.
- PhoneLink. PhoneLink is the OppenheimerFunds automated telephone
system that enables shareholders to perform a number of account
transactions automatically using a touch-tone phone. PhoneLink may be used
on already-established Fund accounts after you obtain a Personal
Identification Number (PIN), by calling the special PhoneLink number: 1-
800-533-3310.
- Purchasing Shares. You may purchase shares in amounts up to
$100,000 by phone, by calling 1-800-533-3310. You must have established
AccountLink privileges to link your bank account with the Fund, to pay for
these purchases.
- Exchanging Shares. With the OppenheimerFunds Exchange Privilege,
described below, you can exchange shares automatically by phone from your
Fund account to another OppenheimerFunds account you have already
established by calling the special PhoneLink number. Please refer to "How
to Exchange Shares," below, for details.
- Selling Shares. You can redeem shares by telephone automatically
by calling the PhoneLink number and the Fund will send the proceeds
directly to your AccountLink bank account. Please refer to "How to Sell
Shares," below, for details.
Automatic Withdrawal and Exchange Plans. The Fund has several plans that
enable you to sell shares automatically or exchange them to another
OppenheimerFunds account on a regular basis:
- Automatic Withdrawal Plans. If your Fund account is worth $5,000
or more, you can establish an Automatic Withdrawal Plan to receive
payments of at least $50 on a monthly, quarterly, semi-annual or annual
basis. The checks may be sent to you or sent automatically to your bank
account on AccountLink. You may even set up certain types of withdrawals
of up to $1,500 per month by telephone. You should consult the
Application and Statement of Additional Information for more details.
- Automatic Exchange Plans. You can authorize the Transfer Agent
automatically to exchange an amount you establish in advance for shares
of up to five other OppenheimerFunds on a monthly, quarterly, semi-annual
or annual basis under an Automatic Exchange Plan. The minimum purchase
for each OppenheimerFunds account is $25. These exchanges are subject to
the terms of the Exchange Privilege, described below.
Reinvestment Privilege. If you redeem some or all of your Fund shares,
you have up to 6 months to reinvest all or part of the redemption proceeds
in Class A shares of the Fund or other OppenheimerFunds without paying a
sales charge. This privilege applies to Fund shares that you purchased
with an initial sales charge. It also applies to shares on which you paid
a contingent deferred sales charge when you redeemed them. You must be
sure to ask the Distributor for this privilege when you send your payment.
Please consult the Statement of Additional Information for more details.
Retirement Plans. Fund shares are available as an investment for your
retirement plans. If you participate in a plan sponsored by your employer,
the plan trustee or administrator must make the purchase of shares for
your retirement plan account. The Distributor offers a number of different
retirement plans that can be used by individuals and employers:
- Individual Retirement Accounts including rollover IRAs, for
individuals and their spouses
- 403(b)(7) Custodial Plans for employees of eligible tax-exempt
organizations, such as schools, hospitals and charitable organizations
- SEP-IRAs (Simplified Employee Pension Plans) for small
business owners or people with income from self-employment, including
SAR/SEP-IRAs
- Pension and Profit-Sharing Plans for self-employed persons and
other employers
Please call the Distributor for the OppenheimerFunds plan documents,
which contain important information and applications.
<PAGE>
How to Sell Shares
You can arrange to take money out of your account on any regular
business day by selling (redeeming) some or all of your shares. Your
shares will be sold at the next net asset value calculated after your
order is received and accepted by the Transfer Agent. The Fund offers you
a number of ways to sell your shares: in writing, by using the Fund's
checkwriting privilege, by wire or by telephone. You can also set up
Automatic Withdrawal Plans to redeem shares on a regular basis, as
described above. If you have questions about any of these procedures, and
especially if you are redeeming shares in a special situation, such as due
to the death of the owner, or from a retirement plan, please call the
Transfer Agent first, at 1-800-525-7048, for assistance.
- Retirement Accounts. To sell shares in an OppenheimerFunds
retirement account in your name, call the Transfer Agent for a
distribution request form. There are special income tax withholding
requirements for distributions from retirement plans and you must submit
a withholding form with your request to avoid delay. If your retirement
plan account is held for you by your employer, you must arrange for the
distribution request to be sent by the plan administrator or trustee.
There are additional details in the Statement of Additional Information.
- Certain Requests Require a Signature Guarantee. To protect you
and the Fund from fraud, certain redemption requests must be in writing
and must include a signature guarantee in the following situations (there
may be other situations also requiring a signature guarantee):
- You wish to redeem more than $50,000 worth of shares and receive
a check
- A redemption check is not payable to all shareholders listed
on the account statement
- A redemption check is not sent to the address of record on
your statement
- Shares are being transferred to a Fund account with a
different owner or name
- Shares are redeemed by someone other than the owners (such as
an Executor)
- Where Can I Have My Signature Guaranteed? The Transfer Agent
will accept a guarantee of your signature by a number of financial
institutions, including: a U.S. bank, trust company, credit union or
savings association, or by a foreign bank that has a U.S. correspondent
bank, or by a U.S. registered dealer or broker in securities, municipal
securities or government securities, or by a U.S. national securities
exchange, a registered securities association or a clearing agency. If you
are signing on behalf of a corporation, partnership or other business, or
as a fiduciary, you must also include your title in the signature.
Selling Shares by Mail. Write a "letter of instructions" that includes:
- Your name
- The Fund's name
- Your Fund account number (from your statement)
- The dollar amount or number of shares to be redeemed
- Any special payment instructions
- Any share certificates for the shares you are selling, and
- Any special requirements or documents requested by the
Transfer Agent to assure proper authorization of the person
asking to sell shares.
Use the following address for requests by mail:
Send courier or Express Mail requests to:
Oppenheimer Shareholder Services Oppenheimer Shareholder Services
P.O. Box 5270, Denver, Colorado 80217 10200 E. Girard Avenue, Building D
Denver, Colorado 80231
Selling Shares by Telephone. You and your dealer representative of record
may also sell your shares by telephone. To receive the redemption price
on a regular business day, your call must be received by the Transfer
Agent by the close of The New York Stock Exchange that day, which is
normally 4:00 P.M., but may be earlier on some days. You may not redeem
shares held in an OppenheimerFunds retirement plan or under a share
certificate by telephone.
- To redeem shares through a service representative, call 1-800-
852-8457
- To redeem shares automatically on PhoneLink, call 1-800-533-3310
Whichever method you use, you may have a check sent to the address
on the account statement, or, if you have linked your Fund account to your
bank account on AccountLink, you may have the proceeds wired to that bank
account.
- Telephone Redemptions Paid by Check. Up to $50,000 may be
redeemed by telephone, once in any 7-day period. The check must be
payable to all owners of record of the shares and must be sent to the
address on the account statement. This service is not available within
30 days of changing the address on an account.
- Telephone Redemptions Through AccountLink. There are no dollar
limits on telephone redemption proceeds sent to a bank account designated
when you establish AccountLink. Normally the ACH wire to your bank is
initiated on the business day after the redemption. You do not receive
dividends on the proceeds of the shares you redeemed while they are
waiting to be wired.
Selling Shares Through Your Dealer. The Distributor has made arrangements
to repurchase Fund shares from dealers and brokers on behalf of their
customers. Brokers or dealers may charge for that service. Please refer
to "Special Arrangements for Repurchase of Shares from Dealers and
Brokers" in the Statement of Additional Information for more details.
Selling Shares by Wire. You may request that redemption proceeds of
$2,500 or more be wired to a previously designated account at a commercial
bank that is a member of the Federal Reserve wire system. The wire will
normally be transmitted on the next bank business day after the redemption
of shares. To place a wire redemption request, call the Transfer Agent
at 1-800-525-7048. There is a $15 fee for each wire.
Checkwriting. To be able to write checks against your Fund account, you
may request that privilege on your account Application or you can contact
the Transfer Agent for signature cards, which must be signed (with a
signature guarantee) by all owners of the account and returned to the
Transfer Agent so that checks can be sent to you to use. Shareholders with
joint accounts can elect in writing to have checks paid over the signature
of one owner.
- Checks can be written to the order of whomever you wish, but may
not be cashed at the Fund's bank or custodian.
- Checkwriting privileges are not available for accounts holding
Class B shares or Class A shares that are subject to a contingent deferred
sales charge.
- Checks must be written for at least $100.
- Checks cannot be paid if they are written for more than your
account value.
Remember: your shares fluctuate in value and you should not write
a check close to the total account value.
- You may not write a check that would require the Fund to redeem
shares that were purchased by check or Asset Builder Plan payments within
the prior 10 days.
- Don't use your checks if you changed your Fund account number.
The Fund will charge a $10 fee for any check that is not paid
because (1) the owners of the account told the Fund not to pay the check,
or (2) the check was for more than the account balance, or (3) the check
did not have the proper signatures, or (4) the check was written for less
than $100.
How to Exchange Shares
Shares of the Fund may be exchanged for shares of certain
OppenheimerFunds at net asset value per share at the time of exchange,
without sales charge. A $5 service fee will be deducted from the fund
account you are exchanging into to help defray administrative costs. That
charge is waived for automated exchanges made by brokers on Fund/SERV and
for automated exchanges between already established accounts on PhoneLink
described below. To exchange shares, you must meet several conditions:
- Shares of the fund selected for exchange must be available for
sale in your state of residence
- The prospectuses of this Fund and the fund whose shares you want
to buy must offer the exchange privilege
- You must hold the shares you buy when you establish your account
for at least 7 days before you can exchange them; after the account is
open 7 days, you can exchange shares every regular business day
- You must meet the minimum purchase requirements for the fund you
purchase by exchange
- Before exchanging into a fund, you should obtain and read its
prospectus
Shares of a particular class may be exchanged only for shares of the
same class in the other OppenheimerFunds. For example, you can exchange
Class A shares of this Fund only for Class A shares of another fund. At
present, not all of the OppenheimerFunds offer the same classes of shares.
If a fund has only one class of shares that does not have a class
designation, they are "Class A" shares for exchange purposes. Certain
OppenheimerFunds offer Class A shares and Class B or Class C shares, and
a list can be obtained by calling the Distributor at 1-800-525-7048. In
some cases, sales charges may be imposed on exchange transactions. Please
refer to "How to Exchange Shares" in the Statement of Additional
Information for more details.
Exchanges may be requested in writing or by telephone:
- Written Exchange Requests. Submit an OppenheimerFunds Exchange
Request form, signed by all owners of the account. Send it to the
Transfer Agent at the addresses listed in "How to Sell Shares."
- Telephone Exchange Requests. Telephone exchange requests may be
made either by calling a service representative at 1-800-852-8457 or by
using PhoneLink for automated exchanges, by calling 1-800-533-3310.
Telephone exchanges may be made only between accounts that are registered
with the same name(s) and address. Shares held under certificates may not
be exchanged by telephone.
You can find a list of OppenheimerFunds currently available for
exchanges in the Statement of Additional Information or obtain one by
calling a service representative at 1-800-525-7048. Exchanges of shares
involve a redemption of the shares of the fund you own and a purchase of
shares of the other fund.
There are certain exchange policies you should be aware of:
- Shares are normally redeemed from one fund and purchased from the
other fund in the exchange transaction on the same regular business day
on which the Transfer Agent receives an exchange request that is in proper
form by the close of The New York Stock Exchange that day, which is
normally 4:00 P.M. but may be earlier on some days. However, either fund
may delay the purchase of shares of the fund you are exchanging into if
it determines it would be disadvantaged by a same-day transfer of the
proceeds to buy shares. For example, the receipt of multiple exchange
requests from a dealer in a "market-timing" strategy might require the
disposition of portfolio securities at a time or price disadvantageous to
the Fund.
- Because excessive trading can hurt fund performance and harm
shareholders, the Fund reserves the right to refuse any exchange request
that will disadvantage it, or to refuse multiple exchange requests
submitted by a shareholder or dealer.
- The Fund may amend, suspend or terminate the exchange privilege
at any time. Although the Fund will attempt to provide you notice
whenever it is reasonably able to do so, it may impose these changes at
any time.
- If the Transfer Agent cannot exchange all the shares you request
because of a restriction cited above, only the shares eligible for
exchange will be exchanged.
Shareholder Account Rules and Policies
- Net Asset Value Per Share is determined for each class of shares
as of the close of The New York Stock Exchange on each regular business
day by dividing the value of the Fund's net assets attributable to a class
by the number of shares of that class that are outstanding. The Fund's
Board of Trustees has established procedures to value the Fund's
securities to determine net asset value. In general, securities values
are based on market value. There are special procedures for valuing
illiquid and restricted securities, obligations for which market values
cannot be readily obtained, and call options and hedging instruments.
These procedures are described more completely in the Statement of
Additional Information.
- The offering of shares may be suspended during any period in
which the determination of net asset value is suspended, and the offering
may be suspended by the Board of Trustees at any time the Board believes
it is in the Fund's best interest to do so.
- Telephone Transaction Privileges for purchases, redemptions or
exchanges may be modified, suspended or terminated by the Fund at any
time. If an account has more than one owner, the Fund and the Transfer
Agent may rely on the instructions of any one owner. Telephone privileges
apply to each owner of the account and the dealer representative of record
for the account unless and until the Transfer Agent receives cancellation
instructions from an owner of the account.
- The Transfer Agent will record any telephone calls to verify data
concerning transactions and has adopted other procedures to confirm that
telephone instructions are genuine, by requiring callers to provide tax
identification numbers and other account data or by using PINs, and by
confirming such transactions in writing. If the Transfer Agent does not
use reasonable procedures, it may be liable for losses due to unauthorized
transactions, but otherwise neither the Transfer Agent nor the Fund will
not be liable for losses or expenses arising out of telephone instructions
reasonably believed to be genuine. If you are unable to reach the
Transfer Agent during periods of unusual market activity, you may not be
able to complete a telephone transaction and should consider placing your
order by mail.
- Redemption or transfer requests will not be honored until the
Transfer Agent receives all required documents in proper form. From time
to time, the Transfer Agent in its discretion may waive certain of the
requirements for redemptions stated in this Prospectus.
- Dealers that can perform account transactions for their clients
by participating in NETWORKING through the National Securities Clearing
Corporation are responsible for obtaining their clients' permission to
perform those transactions and are responsible to their clients who are
shareholders of the Fund if the dealer performs any transaction
erroneously or improperly.
- The redemption price for shares will vary from day to day because
the value of the securities in the Fund's portfolio fluctuates, and the
redemption price, which is the net asset value per share, will normally
be different for Class A and Class B shares. Therefore, the redemption
value of your shares may be more or less than their original cost.
- Payment for redeemed shares is made ordinarily in cash and
forwarded by check or through AccountLink (as elected by the shareholder
under the redemption procedures described above) within 7 days after the
Transfer Agent receives redemption instructions in proper form, except
under unusual circumstances determined by the Securities and Exchange
Commission delaying or suspending such payments. The Transfer Agent may
delay forwarding a check or processing a payment via AccountLink for
recently purchased shares, but only until the purchase payment has
cleared. That delay may be as much as 10 days from the date the shares
were purchased. That delay may be avoided if you purchase shares by
certified check or arrange with your bank to provide telephone or written
assurance to the Transfer Agent that your purchase payment has cleared.
- Involuntary redemptions of small accounts may be made by the Fund
if the account value has fallen below $200 for reasons other than the fact
that the market value of shares has dropped, and in some cases involuntary
redemptions may be made to repay the Distributor for losses from the
cancellation of share purchase orders.
- Under unusual circumstances, shares of the Fund may be redeemed
"in kind," which means that the redemption proceeds will be paid with
securities from the Fund's portfolio. Please refer to "How to Sell
Shares" in the Statement of Additional Information for more details.
- "Backup Withholding" of Federal income tax may be applied at the
rate of 31% from dividends, distributions and redemption proceeds
(including exchanges) if you fail to furnish the Fund a certified Social
Security or Employer Identification Number when you sign your application,
or if you violate Internal Revenue Service regulations on tax reporting
of income.
- The Fund does not charge a redemption fee, but if your dealer or
broker handles your redemption, they may charge a fee. That fee can be
avoided by redeeming your Fund shares directly through the Transfer Agent.
Under the circumstances described in "How To Buy Shares," you may be
subject to a contingent deferred sales charges when redeeming certain
Class A and Class B shares.
- To avoid sending duplicate copies of materials to households, the
Fund will mail only one copy of each annual and semi-annual report to
shareholders having the same surname and address on the Fund's records.
However, each shareholder may call the Transfer Agent at 1-800-525-7048
to ask that copies of those materials be sent personally to that
shareholder.
Dividends, Capital Gains and Taxes
Dividends. The Fund declares dividends separately for Class A and Class
B shares from net investment income, if any, on each regular business day.
Daily dividends accrued since the prior dividend payment will normally be
paid to shareholders on or about the last business day of the month (or
such other day as the Board may determine). It is expected that
distributions paid with respect to Class A shares will generally be higher
than for Class B shares because expenses allocable to Class B shares will
generally be higher.
The Fund's dividends and distributions may also be subject to state
and local taxes. Interest from securities issued by the U.S. Government
may be exempt from income taxation by some state and local governments,
although interest from obligations which are merely guaranteed by the U.S.
Government or one of its agencies (such as Ginnie Mae) may not be entitled
to this exclusion, and will therefore be separately identified when tax
information is made available by the Fund. Further information is
contained in the Statement of Additional Information.
Capital Gains. The Fund may make distributions annually in December out
of any net short-term or long-term capital gains, and the Fund may make
supplemental distributions of dividends and capital gains following the
end of its fiscal year. Long-term capital gains will be separately
identified in the tax information the Fund sends you after the end of the
year. Short-term capital gains are treated as dividends for tax purposes.
There can be no assurance that the Fund will pay any capital gains
distributions in a particular year.
Distribution Options. When you open your account, specify on your
application how you want to receive your distributions. For
OppenheimerFunds retirement accounts, all distributions are reinvested.
For other accounts, you have four options:
- Reinvest All Distributions in the Fund. You can elect to reinvest
all dividends and long-term capital gains distributions in additional
shares of the Fund.
- Reinvest Long-Term Capital Gains Only. You can elect to reinvest
long-term capital gains in the Fund while receiving dividends by check or
sent to your bank account on AccountLink.
- Receive All Distributions in Cash. You can elect to receive a
check for all dividends and long-term capital gains distributions or have
them sent to your bank on AccountLink.
- Reinvest Your Distributions in Another OppenheimerFunds Account.
You can reinvest all distributions in another OppenheimerFunds account you
have established.
Taxes. If your account is not a tax-deferred retirement account, you
should be aware of the following tax implications of investing in the
Fund. Long-term capital gains are taxable as long-term capital gains when
distributed to shareholders. It does not matter how long you held your
shares. Dividends paid from short-term capital gains and net investment
income are taxable as ordinary income. Distributions are subject to
federal income tax and may be subject to state or local taxes. Since the
Fund's income is expected to be derived from interest rather than
dividends, dividends paid by the Fund are not expected to be eligible for
the dividends-received deduction for corporations. Your distributions are
taxable when paid, whether you reinvest them in additional shares or take
them in cash. Every year the Fund will send you and the IRS a statement
showing the amount of each taxable distribution you received in the
previous year.
- "Buying a Dividend": When a fund goes ex-dividend, its share
price is reduced by the amount of the distribution. If you buy shares on
or just before the ex-dividend date, or just before the Fund declares a
capital gains distribution, you will pay the full price for the shares and
then receive a portion of the price back as a taxable dividend or capital
gain.
- Taxes on Transactions: Share redemptions, including redemptions
for exchanges, are subject to capital gains tax. A capital gain or loss
is the difference between the price you paid for the shares and the price
you received when you sold them.
- Returns of Capital: In certain cases distributions made by the
Fund may be considered a non-taxable return of capital to shareholders.
If that occurs, it will be identified in notices to shareholders. A non-
taxable return of capital may reduce your tax basis in your Fund shares.
This information is only a summary of certain federal tax
information about your investment. More information is contained in the
Statement of Additional Information, and in addition you should consult
with your tax adviser about the effect of an investment in the Fund on
your particular tax situation.
<PAGE>
APPENDIX TO PROSPECTUS OF
OPPENHEIMER MORTGAGE INCOME FUND
Graphic material included in Prospectus of Oppenheimer Mortgage
Income Fund: "Comparison of Total Return of Oppenheimer Mortgage Income
Fund with The Lehman Aggregate Bond Index and The Lehman Mortgage-Backed
Securities Index - Change in Value of a $10,000 Hypothetical Investment"
A linear graph will be included in the Prospectus of Oppenheimer Mortgage
Income Fund (the "Fund") depicting the initial account value and
subsequent account value of a hypothetical $10,000 investment in (i) Class
A shares of the Fund during each of the Fund's fiscal years since the
commencement of the Fund's operations (September 11, 1986) and (ii) Class
B shares of the Fund since the first public offering of Class B shares on
May 17, 1993 to September 30, 1994, in each case comparing such values
with the same investments over the same time periods with The Lehman
Aggregate Bond Index and The Lehman Mortgage-Backed Securities Index. Set
forth below are the relevant data points that will appear on the linear
graph. Additional information with respect to the foregoing, including
a description of The Lehman Aggregate Bond Index and The Lehman Mortgage-
Backed Securities Index, is set forth in the Prospectus under "How has the
Fund Performed- Management's Discussion of Performance."
Class A shares
Fiscal Year Oppenheimer Lehman Aggregate Lehman Mortgage-
(Period) Ended Mortgage Income Bond Index Backed Securities
Fund Index
09/11/86* $ 9,525 $10,000 $10,000
09/30/86 $ 9,592(1) $10,006 $ 9,901
09/30/87 $ 9,675 $10,033 $10,144
09/30/88 $10,844 $11,367 $11,631
09/30/89 $11,725 $12,647 $12,923
09/30/90 $12,806 $13,604 $14,175
09/30/91 $14,451 $15,779 $16,487
09/30/92 $15,996 $17,759 $18,289
09/30/93 $17,161 $19,531 $19,504
09/30/94 $17,024 $18,902 $19,282
Class B shares
Fiscal Oppenheimer Lehman Aggregate Lehman Mortgage-
Period Ended Mortgage Income Bond Index Backed Securities
Fund Index
5/17/93 $10,000 $10,000 $10,000
9/30/93 $10,247(2) $10,447 $10,173
09/30/94 $9,758 $10,111 $10,057
_____________________________
* The Fund commenced operations on September 11, 1986.
(1) From commencement of operations (9/11/86) to 9/30/86.
(2) From commencement of first public offering of Class B shares
(5/17/93) to 9/30/93.
<PAGE>
Oppenheimer Mortgage Income Fund
Two World Trade Center
New York, New York 10048-0203
1-800-525-7048
Investment Advisor
Oppenheimer Management Corporation
Two World Trade Center
New York, New York 10048-0203
Distributor
Oppenheimer Funds Distributor, Inc.
Two World Trade Center
New York, New York 10048-0203 OPPENHEIMER
Mortgage Income Fund
Transfer Agent
Oppenheimer Shareholder Services
P.O. Box 5270
Denver, Colorado 80217 Prospectus and New
1-800-525-7048 Account Application
Effective January 24,1995
Custodian of Portfolio Securities
Citibank, N.A.
399 Park Avenue
New York, New York 10043
Independent Auditors
KPMG Peat Marwick LLP
707 Seventeenth Street
Denver, Colorado 80202
Legal Counsel
Gordon Altman Butowsky
Weitzen Shalov & Wein
114 West 47th Street
New York, New York 10036
No dealer, broker, salesperson or any other person has been authorized to
give any information or to make any representations other than those
contained in this Prospectus or the Statement of Additional Information,
and if given or made, such information and representations must not be
relied upon as having been authorized by the Fund, Oppenheimer Management
Corporation, Oppenheimer Funds Distributor, Inc. or any affiliate thereof.
This Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby in any state to any
person to whom it is unlawful to make such an offer in such state.
PR491 (1/95) * Printed on Recycled Paper OppenheimerFunds Logo
<PAGE>
Oppenheimer Mortgage Income Fund
Two World Trade Center
New York, New York 10048-0203
1-800-525-7048
Investment Advisor
Oppenheimer Management Corporation
Two World Trade Center
New York, New York 10048-0203
Distributor
Oppenheimer Funds Distributor, Inc.
Two World Trade Center
New York, New York 10048-0203 OPPENHEIMER
Mortgage Income Fund
Transfer Agent
Oppenheimer Shareholder Services
P.O. Box 5270
Denver, Colorado 80217
1-800-525-7048 Prospectus
Effective January 24, 1995
Custodian of Portfolio Securities
Citibank, N.A.
399 Park Avenue
New York, New York 10043
Independent Auditors
KPMG Peat Marwick LLP
707 Seventeenth Street
Denver, Colorado 80202
Legal Counsel
Gordon Altman Butowsky
Weitzen Shalov & Wein
114 West 47th Street
New York, New York 10036
No dealer, broker, salesperson or any other person has been authorized to
give any information or to make any representations other than those
contained in this Prospectus or the Statement of Additional Information,
and if given or made, such information and representations must not be
relied upon as having been authorized by the Fund, Oppenheimer Management
Corporation, Oppenheimer Funds Distributor, Inc. or any affiliate thereof.
This Prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby in any state to any
person to whom it is unlawful to make such an offer in such state.
PR491 (1/95) * Printed on Recycled Paper OppenheimerFunds Logo
<PAGE>
Oppenheimer Mortgage Income Fund
Two World Trade Center, New York, New York 10048-0203
1-800-525-7048
Statement Of Additional Information dated January 24, 1995
This Statement of Additional Information is not a Prospectus. This
document contains additional information about the Fund and supplements
information in the Prospectus dated January 24, 1995. It should be read
together with the Prospectus which may be obtained by writing to the
Fund's Transfer Agent, Oppenheimer Shareholder Services, at P.O. Box 5270,
Denver, Colorado 80217 or by calling the Transfer Agent at the toll-free
number shown above.
TABLE OF CONTENTS
Page
About the Fund
Investment Objective and Policies 2
Other Investment Techniques and Strategies 4
Other Investment Restrictions 12
How the Fund is Managed 13
Organization and History 13
Trustees and Officers of the Fund 13
The Manager and Its Affiliates 18
Brokerage Policies of the Fund 19
Performance of the Fund 20
Distribution and Service Plans 24
About Your Account 26
How to Buy Shares 26
How to Sell Shares 32
How to Exchange Shares 36
Dividends, Capital Gains and Taxes 39
Additional Information About the Fund 39
Financial Information About the Fund 40
Independent Auditors' Report 40
Financial Statements 41
Appendix A A-1
<PAGE>
ABOUT THE FUND
Investment Objective And Policies
Investment Policies and Strategies. The investment objective and policies
of the Fund are described in the Prospectus. Supplemental information
about those policies is set forth below. Certain capitalized terms used
in this Additional Statement and not otherwise defined herein are defined
in the Prospectus.
- 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 any credit enhancement has
been exhausted. The risks of investing in asset-backed securities are
ultimately dependent upon payment of consumer loans by the individuals.
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.
- 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 generally provide for periodic payment of interest in fixed or
determinable 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 Government National
Mortgage Association); some are supported by the right of the issuer to
borrow from the U.S. Government (e.g., obligations of Federal Home Loan
Mortgage Corporation); and some are backed by only the credit of the
issuer itself. Those 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. Any of those government agencies may also issue
collateralized mortgage-backed obligations ("CMO's"), discussed below.
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 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
may not be as likely to rise to the extent that the values of other debt
securities rise, 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 times when available
investments offer higher or lower 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 the
Fund more than debt obligations that pay interest semi-annually. Because
of 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 par or at a premium or a discount. Accelerated prepayments
adversely affect yields for pass-through securities purchased at a premium
(i.e., at a price in excess of their 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.
The Fund may invest in "stripped" mortgage backed securities, in which
the principal and interest portions of the security are separated and
sold. Stripped mortgage-backed securities usually have at least two
classes each of which receives different proportions of interest and
principal distributions on the underlying pool of mortgage assets. One
common variety of stripped mortgage-backed security has one class that
receives some of the interest and most of the principal, while the other
class receives most of the interest and remainder of the principal. In
some cases, one class will receive all of the interest (the "interest-
only" or "IO" class), while the other class will receive all of the
principal (the "principal-only" or "PO" class). Interest only securities
are extremely sensitive to interest rate changes, and prepayments of
principal on the underlying mortgage assets. An increase in principal
payments or prepayments will reduce the income available to the IO
security. In other types of CMOs, the underlying principal payments may
apply to various classes in a particular order, and therefore the value
of certain classes or "tranches" of such securities may be more volatile
than the value of the pool as a whole, and losses may be more severe than
on other classes.
- Collateralized Mortgage-Backed Obligations ("CMOs"). CMOs are
fully-collateralized bonds that are the general obligations of the issuer
thereof, either the U.S. Government, a U.S. Government instrumentality,
or a private issuer. Such bonds generally are secured by an assignment
to a trustee (under the indenture pursuant to which the bonds are issued)
of collateral consisting of a pool of mortgages. Payments with respect
to the underlying mortgages generally are made to the trustee under the
indenture. Payments of principal and interest on the underlying mortgages
are not passed through to the holders of the CMOs as such (i.e., the
character of payments of principal and interest is not passed through, and
therefore payments to holders of CMOs attributable to interest paid and
principal repaid on the underlying mortgages do not necessarily constitute
income and return of capital, respectively, to such holders), but such
payments are dedicated to payment of interest on and repayment of
principal of the CMOs. CMOs often are issued in two or more classes with
different characteristics such as varying maturities and stated rates of
interest. Because interest and principal payments on the underlying
mortgages are not passed through to holders of CMOs, CMOs of varying
maturities may be secured by the same pool of mortgages, the payments on
which are used to pay interest on each class and to retire successive
maturities in sequence. Unlike other mortgage-backed securities
(discussed above), CMOs are designed to be retired as the underlying
mortgages are repaid. In the event of prepayment on such mortgages, the
class of CMO first to mature generally will be paid down. Therefore,
although in most cases the issuer of CMOs will not supply additional
collateral in the event of such prepayment, there will be sufficient
collateral to secure CMOs that remain outstanding.
- Whole Loan and Participation Mortgages. Title to whole loan and
participation mortgages in which the Fund may invest may be held in the
name of, and enforcement rights may be assigned to, third parties, such
as trustees or lead lenders. The Fund cannot assure the adequacy of such
third parties to protect the Fund's interests, nor that claims may not be
asserted against any such parties that might interfere with enforcement
of the Fund's rights. In addition, claims, such as environmental claims,
may be assessed against the Fund on account of its position as mortgage
holder. Costs and delays may be involved in the effectuation of a
foreclosure, and the proceeds after payment of expenses may not satisfy
the entire outstanding balance of principal and interest. As a result,
while whole loan and participation mortgages generally will have a higher
yield than mortgage-backed securities, holders of such interests may bear
a greater risk of loss arising from a default on the part of the borrower
of the underlying loans than do holders of mortgage-backed securities.
The Fund may also invest in adjustable rate mortgage-related securities
("ARMS"), including classes of derivative CMO's, the rate of interest
payable under which varies with a designated rate or index. Because ARM's
are frequently issued subject to maximum adjustments during a particular
period or during the life of the loan, the mortgage holder may not realize
all of the benefit of any particularly rapid or steep increase in interest
rates that occurs while the loan is outstanding.
- Loan Participation Interests. The Fund may invest in participation
interests, subject to the limitation, described in "Illiquid and
Restricted Securities" in the Prospectus, on investments by the Fund in
illiquid investments. Participation interests represent an undivided
interest in or assignment of a loan made by the issuing financial
institution. No more than 5% of the Fund's net assets can be invested in
participation interests of the same issuing bank. Participation interests
are primarily dependent upon the financial strength of the borrowing
entity, which is obligated to make payments of principal and interest on
the loan, and there is a risk that such borrowers may have difficulty
making payments. Such borrowers may have senior securities rated as low
as "C" by Moody's or "D" by Standard & Poor's. In the event the borrower
fails to pay scheduled interest or principal payments, the Fund could
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 financial
institution to perform its obligation 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. The Manager
has set certain creditworthiness standards for issuers of loan
participations and monitors their creditworthiness.
Other Investment Techniques and Strategies.
- 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.
In a repurchase transaction, the Fund acquires a security from, and
simultaneously resells it to, an approved vendor. An "approved vendor"
is a U.S. commercial bank or the U.S. branch of a foreign bank or a
broker-dealer 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. 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 of 1940, collateralized by the underlying security.
The Fund's repurchase agreements require that at all times while the
repurchase agreement is in effect, the value of the collateral must equal
or exceed the repurchase price to fully collateralize the repayment
obligation. Additionally, the Management will impose creditworthiness
requirements to confirm that the vendor is financially sound and will
continuously monitor the collateral's value.
- "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. The Fund does not intend to make such
purchases for speculative purposes. The commitment to purchase a security
for which payment will be made on a future date may be deemed a separate
security and involve a risk of loss if the value of the security declines
prior to the settlement 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 maintain a segregated
account with its Custodian, consisting of cash, U.S. Government securities
or other high grade debt obligations at least equal to the value of
purchase commitments until payment is made.
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 of the buyer or
seller to do so may result in the Fund losing the opportunity to obtain
a price and yield considered to be advantageous. 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 securities purchased, or if a sale, the proceeds to be
received, in determining its net asset value. 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 payment
against a forward commitment, it may incur a gain or loss.
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. The Fund enters into such
transactions only with the intention of actually receiving or delivering
the securities, although (as noted above), when-issued securities and
forward commitments may be sold 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 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.
- 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.
- 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 market 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 of the letter and the issuing bank must be
satisfactory to the Fund. When it lends securities, the Fund receives
amounts equal to the interest paid or the dividends declared on the 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 finders', custodian or administrative fees. The terms of the
Fund's loans must meet applicable tests under the Internal Revenue Code
and permit the Fund to reacquire loaned securities on five business days'
notice or in time to vote on any important matter.
- Hedging With Options and Futures Contracts. The Fund may use hedging
instruments for the purposes described in the Prospectus. When hedging to
attempt to protect against declines in the market value of the Fund's
portfolio, or 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, (ii) buy puts or such Futures or debt securities, or (iii) write
covered calls on debt securities or on Interest Rate Futures. When
hedging to attempt to protect against the possibility that the portfolio
securities are not fully included in a rise in value of the bond market,
the Fund may: (i) buy Interest Rate Futures, or (ii) buy calls on such
Futures or debt securities held by it.
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.
- Interest Rate Futures. The Fund may buy Futures relating to debt
securities ("Interest Rate Futures"). An Interest Rate Future obligates
the seller to deliver and the purchaser to take a specific type of debt
security at a specific future date for a fixed price to settle the futures
transaction, or to enter into an offsetting contract. No monetary amount
is paid or received by the Fund on the purchase of an Interest Rate
Future.
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"). Initial margin
payments 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 certain specified conditions. As
the Future is marked to market (that is, its value on the Fund's books is
changed) 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 the 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. Any gain or loss is then
realized by the Fund on the Future for tax purposes. Although Interest
Rate Futures call for the delivery of a specific debt security, in most
cases the settlement obligation is fulfilled without such delivery by
entering into an offsetting transaction. All Futures transactions are
effected through a clearing house associated with the exchange on which
the contracts are traded.
- Purchasing Puts and Calls. The Fund may purchase calls to protect
against the possibility that the Fund's portfolio will not participate in
an anticipated rise in the securities market. When the Fund purchases a
call, it pays a premium (other than in a closing purchase transaction)
and, except as to calls on stock indices, 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. 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, 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.
When the Fund purchases a put, it pays a premium and 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 (a "protective put") enables the Fund
to attempt to protect itself during the put period against a decline in
the value of the underlying investment below the exercise price by selling
the 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 and
the Fund will lose the premium payment and the right to sell the
underlying investment. However, the put may be sold prior to expiration
(whether or not at a profit).
Purchasing either a put on Interest Rate Futures or on debt securities
it does not own permits the Fund either to resell the put or to 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 the expiration date. In the event of a decline in
price of the underlying investment, 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 Interest rate
Future or debt security not held by it, the put protects the Fund to the
extent that the prices of the underlying Future or debt securities move
in a similar pattern of the debt securities in the Fund's portfolio.
The Fund's option activities may affect its portfolio turnover rate
and brokerage commissions. The exercise of calls written by the Fund may
cause the Fund to sell related portfolio securities, thus increasing its
turnover rate. The exercise by the Fund of puts on securities will cause
the sale of underlying investments, increasing portfolio turnover.
Although the decision whether to exercise a put it holds is within the
Fund's control, holding a put might cause the Fund to sell the related
investments for reasons that would not exist in the absence of the put.
The Fund will pay a brokerage commission each time it buys or sells a
call, put or an underlying investment in connection with the exercise of
a put or call. Those commissions may be higher than the commissions for
direct purchases or sales of the underlying investments.
- Writing Covered Calls. As described in the Prospectus, the Fund may
write covered calls. When the Fund writes a call on an investment, it
receives a premium and agrees to sell the callable investment to a
purchaser of a corresponding call during the call period (usually not more
than 9 months) at a fixed exercise price (which may differ from the market
price of the underlying investment) regardless of market price changes
during the call period. 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 option transaction costs and the premium
received on the call the Fund has written is more or less than the price
of the call the Fund subsequently purchased. A profit may also be
realized if the call lapses unexercised, because the Fund retains the
underlying investment and the premium received. Those profits are
considered short-term capital gains for Federal income tax purposes, as
are premiums on lapsed calls, and when distributed by the Fund are taxable
as ordinary income. If the Fund could not effect a closing purchase
transaction due to the lack of a market, it would have to hold the
callable investment until the call lapsed or was exercised.
The Fund may also write calls on Interest Rate Futures without owning
a futures contract or deliverable securities, provided that at the time
the call is written, the Fund covers the call by segregating in escrow an
equivalent dollar value of deliverable securities or liquid assets. The
Fund will segregate additional liquid assets if the value of the escrowed
assets drops below 100% of the current value of the Interest Rate Futures.
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.
The Fund's Custodian, or a securities depository acting for the
Custodian, will act as the Fund's escrow agent, through the facilities of
the Options Clearing Corporation ("OCC"), as to the investments on which
the Fund has written options that are traded on exchanges, or as to other
acceptable escrow securities, so that no margin will be required from the
Fund for such option transactions. OCC will release the securities
covering a call on the expiration of the call or when the Fund enters into
a closing purchase transaction. Call writing affects the Fund's turnover
rate and the brokerage commissions it pays. Commissions, normally higher
than on general securities transactions, are payable on writing or
purchasing a call.
Premiums paid for options are small in relation to the market value
of the underlying 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.
- Writing Put Options. The Fund may write put options on debt
securities. A put option 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 expires unexercised, the Fund (as the writer) 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 sale price of the underlying investment and the premium
received minus the sum of the exercise price and any transaction costs
incurred.
When writing put options, 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 underlying
securities. 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 investment against
payment of the exercise price. The Fund has no control over when it may
be required to purchase the underlying investment, 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.
- 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 part, the measure of that part'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 Fund will not invest more
than 25% of its assets in interest rate swap transactions.
- 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 on Futures 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 options 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 also
must use short Futures and Futures options positions solely for "bona fide
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 option exchanges governing the maximum number of options
that 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 adviser as the Fund (or an adviser
that is an affiliate of the Fund's adviser). The exchanges also impose
position limits on Futures transactions. 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 maintain, in a segregated account or
accounts with its Custodian, cash or readily-marketable, short-term
(maturing in one year or less) debt instruments in an amount equal to the
market value of the securities underlying such Future, less the margin
deposit applicable to it.
- Tax Aspects of Covered Calls and Hedging Instruments. The Fund
intends to qualify as a "regulated investment company" under the Internal
Revenue Code (although it reserves the right not to qualify). That
qualification enables the Fund to "pass through" its income and realized
capital gains to shareholders without having to pay tax 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). One of the tests for
the Fund's qualification as a regulated investment company is that less
than 30% of its gross income must be derived from gains realized on the
sale of securities held for less than three months. To comply with this
30% cap, the Fund will limit the extent to which it engages in the
following activities, but will not be precluded from them: (i) selling
investments, including Interest Rate Futures, held for less than three
months, whether or not they were purchased on the exercise of a call held
by the Fund; (ii) purchasing options which expire in less than three
months; (iii) effecting closing transactions with respect to calls or puts
written or purchased less than three months previously; (iv) exercising
puts or calls held by the Fund for less than three months; or (v) writing
calls on investments held less than three months.
- 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 Interest Rate 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 Interest Rate Futures will correlate imperfectly with the
behavior of cash (i.e. market value) price of the Fund's 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 depends 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.
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 Interest Rate 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 a 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
equity securities purchased.
Other Investment Restrictions
The Fund's significant investment restrictions are described in the
Prospectus. There are additional investment restrictions that the Fund
must follow which are also fundamental policies. Fundamental policies and
the Fund's investment objective 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: (i) 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 (ii) more than 50% of the
outstanding shares.
Under these additional restrictions, the Fund cannot: (1) invest in
commodities or commodity contracts or invest in interests in oil, gas, or
other mineral exploration or development programs; however, the Fund may
use Hedging Instruments approved by the Board whether or not such Hedging
Instruments are considered commodities or commodity contracts; (2) invest
in real estate or in interests in real estate, but may purchase readily-
marketable securities of issuers holding real estate or interests therein;
(3) purchase securities on margin or make short sales of securities;
however, the Fund may make margin deposits in connection with its use of
Hedging Instruments approved by the Board; (4) underwrite securities of
other companies, except insofar as it might be deemed to be an underwriter
for purposes of the Securities Act in the resale of any securities held
in its own portfolio; or (5) invest or hold securities of any issuer if
those officers, trustees and directors of the Fund and its investment
adviser owning individually more than .5% of the securities of such issuer
together own more than 5% of the securities of such issuer.
The Fund has undertaken, in connection with the qualification for sale
of its shares in certain states, (i) with respect to investment
restriction (1) above, not to invest in oil, gas or mineral leases, (ii)
with respect to investment restriction (2) above, not to invest in real
property, including real estate limited partnerships interests, and (iii)
not to invest more than 5% of its net assets in warrants; no more than 2%
of the Fund's net assets may be invested in warrants not listed on the New
York Stock Exchange or the American Stock Exchange. Should its shares no
longer be offered in such states, the Fund would not be subject to the
foregoing undertakings.
For purposes of the Fund's policy not to concentrate described under
investment restriction number 6 of the Prospectus, the Fund has adopted
the Industry Classifications set forth in Appendix A to this Statement of
Additional Information.
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.
Trustees and Officers of the Fund. The Fund's Trustees and officers and
their principal occupations and business affiliations during the past five
years are listed below. The address of each Trustee and officer is Two
World Trade Center, New York, New York 10048-0203, unless another address
is listed below. All of the Trustees are also trustees of Oppenheimer
Fund, Oppenheimer Global Fund, Oppenheimer Time Fund, Oppenheimer Growth
Fund, Oppenheimer Target Fund, Oppenheimer Discovery Fund, Oppenheimer
Global Growth & Income Fund, Oppenheimer Global Emerging Growth Fund,
Oppenheimer Gold & Special Minerals Fund, Oppenheimer Tax-Free Bond Fund,
Oppenheimer New York Tax-Exempt Fund, Oppenheimer California Tax-Exempt
Fund, Oppenheimer Multi-State Tax-Exempt Trust, Oppenheimer Asset
Allocation Fund, Oppenheimer U.S. Government Trust, Oppenheimer Multi-
Sector Income Trust and Oppenheimer Multi-Government Trust (the "New York-
based OppenheimerFunds"). Messrs. Spiro, Bishop, Bowen, Donohue, Farrar
and Zack respectively hold the same offices with the other New York-based
OppenheimerFunds as with the Fund. As of December 30, 1994, the Trustees
and officers of the Fund as a group owned of record or beneficially less
than 1% of each class of shares of the Fund. The foregoing does not
include shares held of record by an employee benefit plan for employees
of the Manager (for which plan one of the officers listed above, Mr.
Donohue, is a trustee), other than the shares beneficially owned under
that plan by the officers of the Fund listed above.
Leon Levy, Chairman of the Board of Trustees; Age 64.
General Partner of Odyssey Partners, L.P. (investment partnership)
and Chairman of Avatar Holdings, Inc. (real estate development).
Leo Cherne, Trustee; Age 82.
122 East 42nd Street, New York, New York 10168
Chairman Emeritus of the International Rescue Committee
(philanthropic organization); formerly Executive Director of The
Research Institute of America.
Robert G. Galli, Trustee; Age 61.*
Vice Chairman of the Manager and Vice President and Counsel of
Oppenheimer Acquisition Corp., the Manager's parent holding company;
formerly he held the following positions: a director of the Manager
and Oppenheimer Funds Distributor, Inc. (the "Distributor"), Vice
President and a director of HarbourView Asset Management Corporation
("HarbourView") and Centennial Asset Management Corporation
("Centennial"), investment advisory subsidiaries of the Manager, a
director of Shareholder Financial Services, Inc. ("SFSI") and
Shareholder Services, Inc. ("SSI"), transfer agent subsidiaries of
the Manager, an officer of other OppenheimerFunds and Executive Vice
President and General Counsel of the Manager and the Distributor.
Benjamin Lipstein, Trustee; Age 71.
591 Breezy Hill Road, Hillsdale, New York 12529
Professor Emeritus of Marketing, Stern Graduate School of Business
Administration, New York University; Director of Sussex Publishers,
Inc. (Publishers of Psychology Today and Mother Earth News) and
Director of Spy Magazine, L.P.
Elizabeth B. Moynihan, Trustee; Age 65.
801 Pennsylvania Avenue, N.W., Washington, DC 20004
Author and architectural historian; a trustee of the Freer Gallery of
Art (Smithsonian Institution), the Institute of Fine Arts (New York
University), National Building Museum; a member of the Trustees
Council, Preservation League of New York State; a member of the Indo-
U.S. Sub-Commission on Education and Culture.
Kenneth A. Randall, Trustee; Age. 67.
6 Whittaker's Mill, Williamsburg, Virginia 23185
A director of Dominion Resources, Inc. (electric utility holding
company), Dominion Energy, Inc. (electric power and oil & gas
producer), Enron-Dominion Cogen Corp. (cogeneration company), Kemper
Corporation (insurance and financial services company), Fidelity Life
Association (mutual life insurance company); formerly Chairman of the
Board of ICL, Inc. (information systems), and President and Chief
Executive Officer of The Conference Board, Inc. (international
economic and business research).
Edward V. Regan, Trustee; Age 64.
40 Park Avenue, New York, New York 10016
President of Jerome Levy Economics Institute; a member of the U.S.
Competitiveness Policy Council; a director or GranCare, Inc.
(healthcare provider); formerly New York State Comptroller and a
trustee, New York State and Local Retirement Fund.
Russell S. Reynolds, Jr., Trustee; Age 63.
200 Park Avenue, New York, New York 10166
Founder Chairman of Russell Reynolds Associates, Inc. (executive
recruiting); Chairman of Directors Publication, Inc. (consulting and
publishing); a trustee of Mystic Seaport Museum, International House,
Greenwich Hospital and the Greenwich Historical Society.
Sidney M. Robbins, Trustee; Age 82.
50 Overlook Road, Ossining, New York 10562
Chase Manhattan Professor Emeritus of Financial Institutions,
Graduate School of Business, Columbia University; Visiting Professor
of Finance, University of Hawaii; a director of The Korea Fund, Inc.
and The Malaysia Fund, Inc. (closed-end investment companies); a
member of the Board of Advisors, Olympus Private Placement Fund,
L.P.; Professor Emeritus of Finance, Adelphi University.
Donald W. Spiro, President and Trustee; Age 69.*
Chairman Emeritus and a director of the Manager; formerly Chairman of
the Manager and the Distributor.
Pauline Trigere, Trustee; Age 82.
498 Seventh Avenue, New York, New York 10018
Chairman and Chief Executive Officer of Trigere, Inc. (design and
sale of women's fashions).
Clayton K. Yeutter, Trustee; Age 64.
1325 Merrie Ridge Road, McLean, Virginia 22101
Of Counsel to Hogan & Hartson (a law firm); a director of B.A.T.
Industries, Ltd. (tobacco and financial services), Caterpillar, Inc.
(machinery), ConAgra, Inc. (food and agricultural products), Farmers
Insurance Company (insurance), FMC Corp. (chemicals and machinery),
Lindsay Manufacturing Co. (irrigation equipment), Texas Instruments,
Inc. (electronics) and The Vigoro Corporation (fertilizer
manufacturer); formerly (in descending chronological order)
Counsellor to the President (Bush) for Domestic Policy, Chairman of
the Republican National Committee, Secretary of the U.S. Department
of Agriculture, and U.S. Trade Representative.
Eva A. Zeff, Vice President and Portfolio Manager; Age 31.
Assistant Vice President of the Manager; an officer of other
OppenheimerFunds; previously a Securities Analyst for the Manager,
prior to which she was an Assistant Portfolio Manager for National
Securities & Research Corp., an Investment Adviser.
Andrew J. Donohue, Secretary; Age 44.
Executive Vice President and General Counsel of the Manager and the
Distributor; an officer of other OppenheimerFunds; formerly Senior
Vice President and Associate General Counsel of the Manager and the
Distributor, prior to which he was a partner in Kraft & McManimon (a
law firm), an officer of First Investors Corporation (a broker-
dealer) and First Investors Management Company, Inc. (broker-dealer
and investment adviser), and a director and an officer of First
Investors Family of Funds and First Investors Life Insurance Company.
George C. Bowen, Treasurer; Age 58.
3410 South Galena Street, Denver, Colorado 80231
Senior Vice President and Treasurer of the Manager; Vice President
and Treasurer of the Distributor and HarbourView; Senior Vice
President, Treasurer, Assistant Secretary and a director of
Centennial; Vice President, Treasurer and Secretary of SSI and SFSI;
an officer of other OppenheimerFunds.
Robert G. Zack, Assistant Secretary; Age 46.
Senior Vice President and Associate General Counsel of the Manager;
Assistant Secretary of SSI and SFSI; an officer of other
OppenheimerFunds.
Robert Bishop, Assistant Treasurer; Age 36.
3410 South Galena Street, Denver, Colorado 80231
Assistant Vice President of the Manager/Mutual Fund Accounting; an
officer of other OppenheimerFunds; previously a Fund Controller for
the Manager, prior to which he was an Accountant for Resolution Trust
Corporation and previously an Accountant and Commissions Supervisor
for Stuart James Company Inc., a broker-dealer.
Scott Farrar, Assistant Treasurer; Age 29.
3410 South Galena Street, Denver, Colorado 80231
Assistant Vice President of the Manager/Mutual Fund Accounting; an
officer of other OppenheimerFunds; previously a Fund Controller for
the Manager, prior to which he was an International Mutual Fund
Supervisor for Brown Brothers Harriman & Co., a bank, and previously
a Senior Fund Accountant for State Street Bank & Trust Company.
[FN]
_____________________________________
* A Trustee who is an "interested person" of the Fund as defined in
the Investment Company Act.
-Remuneration of Trustees. The officers of the Fund are affiliated
with the Manager; they and the Trustees of the Fund who are affiliated
with the Manager (Messrs. Galli and Spiro; Mr. Spiro is also an officer)
receive no salary or fee from the Fund. The Trustees of the Fund
(including Mr. Delaney, a former Trustee, but excluding Messrs. Galli and
Spiro) received the total amounts shown below from all 19 of the New York-
based OppenheimerFunds (including the Fund) listed in the first paragraph
of this section (and from Oppenheimer Global Environment Fund, a former
New York-based OppenheimerFund), for services in the positions shown:
Total Compensation From All
Name Position New York-based
OppenheimerFunds1
Leon Levy Chairman and Trustee $141,000.00
Leo Cherne Audit Committee Member and $ 68,800.00
Trustee
Edmund T. Delaney Study Committee Member and $ 86,200.00
Trustee2
Benjamin Lipstein Study Committee Member and $ 86,200.00
Trustee
Elizabeth B. Moynihan Study Committee Member3 and $ 60,625.00
Trustee
Kenneth A. Randall Audit Committee Member and $ 78,400.00
Trustee
Edward V. Regan Audit Committee Member3 and $ 56,275.00
Trustee
Russell S. Reynolds, Jr. Trustee $ 52,100.00
Sidney M. Robbins Study Committee Chairman, $122,100.00
Audit Committee Vice-Chairman
and Trustee
Pauline Trigere Trustee $ 52,100.00
Clayton K. Yuetter Trustee $ 52,100.00
______________________
1 For the 1994 calendar year.
2 Board and committee positions held during a portion of the period
shown.
3 Committee position held during a portion of the period shown.
The Fund has adopted a retirement plan that provides for payment to
a retired Trustee of up to 80% of the average compensation paid during
that Trustee's five years of service in which the highest compensation was
received. A Trustee must serve in that capacity for any of the New York-
based OppenheimerFunds for at least 15 years to be eligible for the
maximum payment. Mr. Delaney, a former trustee retired in October of
1994. The accumulated liability for the Fund's projected benefit
obligations under the plan was $27,432 as of September 30, 1994.
- Major Shareholders. As of December 30, 1994, no person owned
of record or was known by the Fund to own beneficially 5% or more of the
Fund's outstanding shares.
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 also
serve as officers of the Fund, and two of whom (Messrs. Galli and Spiro)
serve as Trustees of the Fund.
- The Investment Advisory Agreement. The investment 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. During the Fund's fiscal year ended September 30, 1992,
the management fee paid by the Fund to the Manager under the prior
Investment Advisory Agreement between the Fund and the Manager was
$732,555. For the Fund's fiscal years ended September 30, 1993, and 1994,
the management fees paid by the Fund to the Manager were $727,679, and
$611,316, respectively.
The advisory agreement contains no provision limiting the Fund's
expenses. However, independently of the advisory agreement, the Manager
has undertaken that the total expenses of the Fund in any fiscal year
(including the management fee but excluding taxes, interest, brokerage
commissions, distribution assistance payments and extraordinary expenses
such as litigation costs) shall not exceed the most stringent expense
limitation imposed under state law applicable to the Fund. Pursuant to the
undertaking, the Manager's fee will be reduced at the end of a month so
that there will not be any accrued but unpaid liability under this
undertaking. Currently, the most stringent state expense limitation is
imposed by California, and limits the Fund's expenses (with specified
exclusions) to 2.5% of the first $30 million of average annual net assets,
2% of the next $70 million of average annual net assets, and 1.5% of
average annual net assets in excess of $100 million. In addition, the
Manager has voluntarily reduced the management fee it collects from the
Fund by .10%. The Manager reserves the right to terminate or amend these
undertakings at any time. Any assumption of the Fund's expenses under
this limitation would lower the Fund's overall expense ratio and increase
its total return during any period in which expenses are limited
The advisory agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence in the performance of its duties,
or reckless disregard for its obligations thereunder, the Manager shall
not be liable for any loss sustained in connection with matters to which
the Agreement relates. The 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 its other activities. 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 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 shares but is not obligated to sell a
specific number of shares. Expenses normally attributable to sales,
(other than those expenses paid under the Distribution Plan, but 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 September 30, 1992, 1993, and 1994,
the aggregate sales charges on sales of the Fund's Class A shares were
$564,700, $401,435, and $237,418 respectively, of which the Distributor
and an affiliated broker-dealer retained in the aggregate $191,265,
$132,961, and $75,572 in those respective years. During the Fund's fiscal
year ended September 30, 1994, the Distributor retained $2,348 as
reimbursement for Class B sales commissions and service fee advances, as
well as financing costs. For additional information about distribution
of the Fund's shares and the expenses connected with such activities,
please refer to "Service Plan," below.
- The Transfer Agent. Oppenheimer Shareholder Services, 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 of the Fund. The advisory agreement contains
provisions relating to the employment of broker-dealers ("brokers") to
effect the Fund's portfolio transactions. In doing so, the Manager is
authorized by the advisory agreement to employ 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, but is expected to minimize the commissions paid to
the extent consistent with the interests and policies of the Fund as
established by the Board of Directors.
Under the advisory agreement, the Manager is authorized to select
brokers other than affiliates 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. Subject to the
foregoing considerations, the Manager may also consider sales of shares
of the Fund and other investment companies managed by the Manager and its
affiliates as a factor in the selection of brokers for the Fund's
portfolio transactions.
Description of Brokerage Practices Followed by the Manager. Subject to
the provisions of the advisory agreement, the procedures and rules
described above, allocations of brokerage are generally made by the
Manager's portfolio traders based 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 described above. Regardless,
brokerage is allocated under the supervision of the Manager's executive
orders. As most purchases made by the Fund are principal transactions at
net prices, the Fund incurs little or no brokerage costs. The Fund
usually deals directly with the selling or purchasing principal or market
makers without incurring charges for the services of a broker on its
behalf unless it is determined that better price or execution can be
obtained by utilizing the services of a broker. Purchases of securities
from underwriters include a commission or concession paid by the issuer
to the underwriter, and purchases from dealers include a spread between
the bid and asked price. The Fund seeks to obtain prompt execution of
orders at the most favorable net price. When possible, concurrent orders
to purchase or sell the same security by more than one of the accounts
managed by the Manager or it affiliates are combined. 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. Option commissions may be relatively higher than those
which would apply to direct purchases and sales of portfolio securities.
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 for 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 research services provided by brokers broaden the scope and
supplement the research activities of the Manager, by making available
additional views for consideration and comparisons, and enabling the
Manager to obtain market information for the valuation of securities held
in the Fund's portfolios or being considered for purchase. The Board,
including the "Independent Trustees" (those Trustees who are not
"interested persons" as defined in the Investment Company Act, and who
have no direct or indirect financial interest in the operation of the
advisory agreement or the Distribution Plans described below) annually
reviews information furnished by the Manager as to the commissions paid
to brokers furnishing such services so that the Board may ascertain
whether the amount of such commissions was reasonably related to the value
or the benefit of such services.
Performance of the Fund
Yield and Total Return Information. As described in the Prospectus, from
time to time the "standardized yield," "dividend yield," "average annual
total return," "cumulative total return" and "total return at net asset
value" of an investment in a class of shares of the Fund may be
advertised. An explanation of how these 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 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 and
Class B shares of the Fund are affected by portfolio quality, the type of
investments the Fund holds and its operating expenses allocated to the
particular class.
- Standardized Yields
- Yield. The Fund's "yield" (referred to as "standardized yield")
for a given 30-day period for a class of shares is calculated using the
following formula set forth in rules adopted by the Securities and
Exchange Commission that apply to all funds that quote yields:
a-b 6
Standardized Yield = 2 [(------ + 1) - 1]
cd
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 that class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield of a class of shares for a 30-day period may
differ from its yield for any other period. 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.
This standardized yield 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
calculated for that period. The standardized yield may differ from the
"dividend yield" of that class, described below. 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
the 30-day period ended September 30, 1994, the standardized yields for
the Fund's Class A and Class B shares were 7.00% and 6.59%, respectively.
- Dividend Yield and Distribution Return. From time to time the Fund
may quote a "dividend yield" or a "distribution return" for each class.
Dividend yield is based on the Class A or Class B share dividends derived
from net investment income during a stated period. Distribution return
includes dividends derived from net investment income and from realized
capital gains declared during a stated period. Under those calculations,
the dividends and/or distributions for that class declared during a stated
period of one year or less (for example, 30 days) are added together, and
the sum is divided by the maximum offering price per share of that class
on the last day of the period. When the result is annualized for a period
of less than one year, the "dividend yield" is calculated as follows:
Dividend Yield of the Class =
Dividends of the Class
- ---------------------------------------------------- +
Max Offering Price of the Class (last day of period)
Number of days (accrual period) x 365
The maximum offering price for Class A shares includes the maximum
front-end sales charge. For Class B shares, the maximum offering price
is the net asset value per share, without considering the effect of
contingent deferred sales charges.
From time to time similar yield or distribution return calculations
may also be made using the Class A net asset value (instead of its
respective maximum offering price) at the end of the period. The dividend
yields on Class A shares for the 30-day period ended September 30, 1994,
were 7.83% and 8.22% when calculated at maximum offering price and at net
asset value, respectively. The dividend yield on Class B shares for the
30-day period ended September 30, 1994, was 7.48% when calculated at net
asset value.
- - 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:
( ERV ) 1/n
(-----) -1 = Average Annual Total Return
( P )
- 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:
ERV - P
- ------- = Total Return
P
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 years, 2.0% in the fifth year, 1.0%
in the sixth year and none thereafter is applied, as described in the
Prospectus. 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 September 30, 1994 were (5.51)%, 6.70% and 6.83%,
respectively. The "average annual total returns" on an investment in
Class B shares of the Fund for the fiscal year ended September 30, 1994
and for the period from May 17, 1993 (inception of the Class) through
September 30, 1994 were (6.23)% and (1.77)%, respectively. The cumulative
"total return" on Class A shares for the ten year period ended September
30, 1994 was 70.24%. 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
cumulative total returns on Class B shares for the fiscal year ended
September 30, 1994 and for the period from May 17, 1993 through September
30, 1994 were (6.23)%and (2.42)%, respectively.
- 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 or Class B 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 Fund's total return at net asset
value of Class A shares for the one-year period ended September 30, 1994
was (0.80)%. The Fund's total return at net asset value on Class B shares
for the fiscal year ended September 30, 1994 was (1.62)%.
Other Performance Comparisons. From time to time the Fund may publish the
ranking of its Class A or Class B shares by Lipper Analytical Services,
Inc. ("Lipper"), a widely-recognized independent 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 is ranked against
(i) all other funds, (ii) all other U.S. mortgage funds, and (iii) all
other U.S. mortgage 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 publish the ranking of the performance
of its Class A or Class B shares by Morningstar, Inc., an independent
mutual fund monitoring service that ranks mutual funds, including the
Fund, monthly in broad investment categories (equity, taxable bond,
municipal bond and hybrid) based on risk-adjusted investment return.
Investment return measures a fund's three, five and ten-year average
annual total returns (when available) in excess of 90-day U.S. Treasury
bill returns after considering sales charges and expenses. Risk reflects
fund performance below 90-day U.S. Treasury bill monthly returns. Risk
and 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%). Morningstar ranks the Class
A and Class B shares of the Fund in relation to other corporate bond
funds. Rankings are subject to change.
The total return on an investment in the Fund's Class A or Class B
shares may be compared with performance for the same period of the Lehman
Aggregate Bond Index and the Lehman Mortgage-Backed Securities Index. The
Lehman Aggregate Bond Index is an unmanaged index of investment grade debt
securities with a maturity of at least one year, consisting of treasury
issues, agency issues, corporate bond issues and mortgage-backed
securities, and is widely regarded as a measure of the performance of the
general fixed-rate investment grade debt market. The Lehman Mortgage-
Backed Securities Index is an unmanaged index of fixed-rate securities
backed by mortgage pools of the GNMA, FHLMC and FNMA and is widely
recognized as a measure of the performance of the mortgage-backed
securities market, the market in which the Fund principally invests. Each
Index includes a factor for the reinvestment of interest but does not
reflect expenses or taxes. The Fund's return for Class A shares reflects
the deduction of the current maximum sales charge of 4.75% and includes
reinvestment of all dividends and capital gains distributions, but does
not consider taxes.
Yields and total return information may be useful to investors in
reviewing the Fund's performance. The yield and total return of a class'
shares are affected by portfolio quality, portfolio maturity, type of
investments held and operating expenses. The Fund's returns and share
price are not guaranteed 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.
Distribution and Service Plans
The Fund has adopted a Service Plan for Class A shares and a
Distribution and Service Plan for Class B shares under Rule 12b-1 of the
Investment Company Act pursuant to which the Fund will reimburse the
Distributor quarterly for all or a portion of its costs incurred in
connection with the distribution and/or servicing of the shares of that
class, as described in the Prospectus. 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 shares, that vote was cast by
the Manager as the sole initial holder of Class B 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) 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. Either 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. Neither Plan 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. All material amendments must be approved by the Independent
Trustees.
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 on the amount of all payments made pursuant to each Plan, the
purpose for which each payment was made and the identity of each Recipient
that received any payment. The report for the Class B Plan shall also
include the distribution costs for that quarter, and such costs for
previous fiscal periods that have been carried forward, as explained in
the Prospectus and below. 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 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 on 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. Initially, the Board of Trustees has set the
fees at the maximum rate and set no requirement for a minimum amount of
the assets.
For the fiscal year ended September 30, 1994, payments under the
Class A Plan totalled $206,668, all of which was paid by the Distributor
to Recipients, including $13,423 paid to MML Investor Services, Inc., an
affiliate of the Distributor. Any unreimbursed expenses incurred by the
Distributor with respect to Class A shares for any fiscal year may not be
recovered in subsequent 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 Plan allows the service fee payment to be paid by the
Distributor to Recipients in advance for the first year Class B shares are
outstanding, and thereafter on a quarterly basis, as described in the
Prospectus. Service fee payments by the Distributor to Recipients will
be made (i) in advance for the first year Class B shares are outstanding,
following the purchase of shares, in an amount equal to 0.25% of the net
asset value of the shares purchased by the Recipient or its customers and
(ii) thereafter, on a quarterly basis, computed as of the close of
business each day at an annual rate of .25% of the average daily net asset
value of Class B shares held in accounts of the Recipient or its
customers. An exchange of shares does not entitle the Recipient to an
advance service fee payment. In the event Class B shares are redeemed
during the first year that the shares are outstanding, the Recipient will
be obligated to repay a pro rata portion of the advance payment for those
shares to the Distributor. Payments made under the Class B Plan during the
fiscal year ended September 30, 1994 totalled $19,481, of which the
Distributor retained $19,061, and $39 was paid to a dealer affiliated with
the Distributor and the remainder was paid to unaffiliated dealers.
Although the Class B Plan permits the Distributor to retain both the
asset-based sales charges and the service fee on Class B shares, or to pay
Recipients the service fee on a quarterly basis, without payment in
advance, the Distributor intends to pay the service fee to Recipients in
the manner described above. A minimum holding period may be established
from time to time under the Class B Plan by the Board. Initially, the
Board has set no minimum holding period. All payments under the Class B
Plan are subject to the limitations imposed by the Rules of Fair Practice
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.
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 shares of the Fund. The
Distributor's actual distribution expenses for any given year may exceed
the aggregate of payments received pursuant to the Class B Plan and from
contingent deferred sales charges, and such expenses will be carried
forward and paid in future years. The Fund will be charged only for
interest expenses, carrying charges or other financial costs that are
directly related to the carry-forward of actual distribution expenses.
For example, if the Distributor incurred distribution expenses of $4
million in a given fiscal year, of which $2,000,000 was recovered in the
form of contingent deferred sales charges paid by investors and $1,600,000
was reimbursed in the form of payments made by the Fund to the Distributor
under the Class B Plan, the balance of $400,000 (plus interest) would be
subject to recovery in future fiscal years from such sources.
The Class B Plan allows for the carry-forward of distribution
expenses, to be recovered from asset-based sales charges in subsequent
fiscal periods, as described in the Prospectus. The asset-based sales
charge paid to the Distributor by the Fund under the Class B Plan is
intended to allow the Distributor to recoup the cost of sales commissions
paid to authorized brokers and dealers at the time of sale, plus financing
costs, as described in the Prospectus. Such payments may also be used to
pay for the following expenses in connection with the distribution of
Class B shares: (i) financing the advance of the service fee payment to
Recipients under the Class B Plan, (ii) compensation and expenses of
personnel employed by the Distributor to support distribution of Class B
shares, and (iii) costs of sales literature, advertising and prospectuses
(other than those furnished to current shareholders) and state "blue sky"
registration fees.
ABOUT YOUR ACCOUNT
How To Buy Shares
Alternative Sales Arrangements - Class A and Class B Shares. The
availability of two 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 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 normally will not accept any
order for $1 million or more of Class B 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.
The two 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 shares and the dividends payable on Class B shares will be reduced by
incremental expenses borne solely by that class, including the asset-based
sales charge to which Class B shares are subject.
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 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 and Class B shares recognizes two
types of expenses. General expenses that do not pertain specifically to
either 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 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 Independent 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 (i) Distribution Plan
fees, (ii) incremental transfer and shareholder servicing agent fees and
expenses, (iii) registration fees and (iv) 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 Values Per Share. The net asset values per
share of Class A and Class B shares of the Fund are determined each day
The New York Stock Exchange (the "NYSE") is open, as of the close of the
NYSE that day, by dividing the value of the Fund's net assets attributable
to that class by the number of shares of that class outstanding. The
NYSE's most recent annual announcement (which is subject to change) states
that it will close on New Year's 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 substantial
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 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 Fund's Board of Trustees has established procedures for the
valuation of the Fund's securities, generally as follows: (i) long-term
debt securities, and short-term debt securities having a maturity in
excess of 60 days are valued at the mean between the bid and asked prices
determined by a portfolio pricing service approved by the Board or
obtained from active market makers on the basis of reasonable inquiry;
(ii) short-term debt securities having a remaining maturity of 60 days or
less are valued at cost, adjusted for amortization of premiums and
accretion of discounts; and (iii) securities (including restricted
securities) not having readily-available market quotations are valued at
fair value under the Board's procedures. In the case of U.S. Government
Securities, and all mortgage-backed securities, such pricing procedures
may include "matrix" comparisons to the prices for comparable instruments
on the basis of yield, maturity, and other special factors involved. With
the approval of the Board, the Manager may employ a pricing service, bank
or broker-dealer experienced in such matters to perform any of the above
described functions. Trustees will monitor the accuracy of such pricing
services by comparing prices used for portfolio evaluation to actual sales
prices of selected securities.
Puts, calls and Interest Rate Futures held by the Fund are valued at
the last sales price on the principal exchange on which they are traded
or, if there are no sales on the principal exchange, the last sale on any
exchange is used. 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 "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 received 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
transfer to buy the shares. Dividends will begin to accrue on such shares
on the day the Fund receives Federal Funds for such purchase through the
ACH system before 4:00 P.M., which is normally 3 days after the ACH
transfer is initiated. The Distributor and the Fund are not responsible
for any delays. If the Federal Funds are received after 4:00 P.M.,
dividends will begin to accrue on the next regular business day after such
Federal Funds are received.
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 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, a sibling's spouse
and a spouse's siblings.
- The OppenheimerFunds. The OppenheimerFunds are those mutual funds
for which the Distributor acts as the distributor or the sub-distributor
and include the following:
Oppenheimer Tax-Free Bond Fund
Oppenheimer New York Tax-Exempt Fund
Oppenheimer California Tax-Exempt Fund
Oppenheimer Intermediate Tax-Exempt Bond Fund
Oppenheimer Insured Tax-Exempt Bond Fund
Oppenheimer Main Street California Tax-Exempt Fund
Oppenheimer Florida Tax-Exempt Fund
Oppenheimer Pennsylvania Tax-Exempt Fund
Oppenheimer New Jersey Tax-Exempt Fund Oppenheimer Fund
Oppenheimer Discovery Fund
Oppenheimer Time Fund
Oppenheimer Target Fund
Oppenheimer Growth Fund
Oppenheimer Equity Income Fund
Oppenheimer Value Stock Fund
Oppenheimer Asset Allocation Fund
Oppenheimer Total Return Fund, Inc.
Oppenheimer Main Street Income & Growth Fund
Oppenheimer High Yield Fund
Oppenheimer Champion High Yield Fund
Oppenheimer Investment Grade Bond Fund
Oppenheimer U.S. Government Trust
Oppenheimer Limited-Term Government Fund
Oppenheimer Mortgage Income Fund
Oppenheimer Global Fund
Oppenheimer Global Emerging Growth Fund
Oppenheimer Global Growth & Income Fund
Oppenheimer Gold & Special Minerals Fund
Oppenheimer Strategic Income Fund
Oppenheimer Strategic Investment Grade Bond Fund
Oppenheimer Strategic Short-Term Income Fund
Oppenheimer Strategic Income & Growth Fund
Oppenheimer Strategic Diversified Income Fund
and the following "Money Market Funds":
Oppenheimer Money Market Fund, Inc.
Oppenheimer Cash Reserves
Centennial Money Market Trust
Centennial Tax Exempt Trust
Centennial Government Trust
Centennial New York Tax Exempt Trust
Centennial California Tax Exempt Trust
Centennial America Fund, L.P.
Daily Cash Accumulation Fund, Inc.
There is an initial sales charge on the purchase of Class A shares
of each of the OppenheimerFunds 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).
- Letters of Intent. A Letter of Intent ("Letter") is the
investor's statement of intention to purchase Class A shares of the Fund
(and other eligible OppenheimerFunds) sold with a front-end sales charge
during the 13-month period from the investor's first purchase pursuant to
the Letter (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 (excluding any purchases made by reinvestments of
dividends or distributions or purchases made at net asset value without
sales charge), which together with the investor's holdings of such funds
(calculated at their respective public offering prices calculated on the
date of the Letter) will equal or exceed the amount specified in the
Letter. This enables the investor to obtain the reduced sales charge rate
(as set forth in the Prospectus) applicable to purchases of shares in that
amount (the "intended purchase amount"). Each purchase under the Letter
will be made at the public offering price applicable to a single lump-sum
purchase of shares in the intended purchase amount, as described in the
Prospectus.
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.
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 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 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.
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 the Letter) do not include
any shares sold without a front-end sales charge or without being subject
to a Class A contingent deferred sales charge unless (for the purpose of
determining completion of the obligation to purchase shares under the
Letter) the shares were acquired in exchange for shares of one of the
OppenheimerFunds whose shares were acquired by payment of a 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 "Exchange Privilege," 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
OppenheimerFunds.
There is a front-end sales charge on the purchase of certain
OppenheimerFunds, 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.
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.
- 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.
- Selling Shares by Wire. The wire of redemptions proceeds may be
delayed if the Fund's custodian bank is not open for business on a day
when the Fund would normally authorize the wire to be made, which is
usually the Fund's next regular business day following the redemption. In
those circumstances, the wire will not be transmitted until the next bank
business day on which the Fund is open for business. No dividends will
be paid on the proceeds of redeemed shares awaiting transfer by wire.
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.
- 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 granting permission to 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,
or (ii) Class B shares that were subject to the Class B contingent
deferred sales charge when redeemed. The reinvestment may be made without
sales charge only in Class A shares of the Fund or any of the other
OppenheimerFunds into which shares of the Fund are exchangeable as
described 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 OppenheimerFunds 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.
Transfers of Shares. Shares are not subject to the payment of a
contingent deferred sales charge of either 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 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, 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 this 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) in OppenheimerFunds-sponsored pension or
profit-sharing plans may not directly request redemption of their
accounts. The employer or plan administrator must sign the request.
Distributions from pension and 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. The repurchase price will be the net asset
value next computed after the receipt of an order placed by such dealer
or broker, except that orders received from dealers or brokers after the
close of the NYSE on a regular business day will be processed at that
day's net asset value if such orders were received by the dealer or broker
from its customers prior to the close of the NYSE and were transmitted to
and received by the Distributor prior to its close of business that day
(normally 5:00 P.M.). Payment ordinarily will be made within seven days
after the Distributor's receipt of the required redemption documents, with
signature(s) guaranteed as described in the Prospectus.
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. 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 shareholders should not establish withdrawal
plans that would require the redemption of shares purchased subject to a
contingent deferred sales charge and held less than 6 years, because of
the imposition of the Class B contingent deferred sales charge on such
withdrawals (except where the Class B contingent deferred sales charge is
waived as described in the Prospectus under "Class B 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 and in the provisions of the OppenheimerFunds Application
relating to such Plans, 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.
- 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 OppenheimerFunds
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.
- 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 withdrawal plans should
not be considered as a yield or income on your investment.
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. The Transfer Agent shall incur no 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 shares.
Upon written request from the Planholder, the Transfer Agent will
determine the number of Class A 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.
How To Exchange Shares
As stated in the Prospectus, shares of a particular class of
OppenheimerFunds having more than one class of shares may be exchanged
only for shares of the same class of other OppenheimerFunds. Shares of
the OppenheimerFunds that have a single class without a class designation
are deemed "Class A" shares for this purpose. All OppenheimerFunds offer
Class A shares (except for Oppenheimer Strategic Diversified Income Fund),
but only the following other OppenheimerFunds currently offer Class B
shares:
Oppenheimer Main Street Income & Growth Fund
Oppenheimer Strategic Income Fund
Oppenheimer Strategic Income & Growth Fund
Oppenheimer Strategic Investment Grade Bond Fund
Oppenheimer Strategic Short-Term Income Fund
Oppenheimer New York Tax-Exempt Fund
Oppenheimer Tax-Free Bond Fund
Oppenheimer California Tax-Exempt Fund
Oppenheimer Pennsylvania Tax-Exempt Fund
Oppenheimer Florida Tax-Exempt Fund
Oppenheimer New Jersey Tax-Exempt Fund
Oppenheimer Insured Tax-Exempt Bond Fund
Oppenheimer Main Street California Tax-Exempt Fund
Oppenheimer Total Return Fund, Inc.
Oppenheimer Investment Grade Bond Fund
Oppenheimer Value Stock Fund
Oppenheimer Limited-Term Government Fund
Oppenheimer High Yield Fund
Oppenheimer Equity Income Fund
Oppenheimer Cash Reserves (Class B shares are only
available by exchange)
Oppenheimer Growth Fund
Oppenheimer Global Fund
Oppenheimer Discovery Fund
Class A shares of OppenheimerFunds 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
OppenheimerFunds offered with a sales charge upon payment of the sales
charge (or, if applicable, may be used to purchase shares of
OppenheimerFunds subject to a contingent deferred sales charge). Shares
of this Fund acquired by reinvestment of dividends or distributions from
any other of the OppenheimerFunds 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 OppenheimerFunds.
No contingent deferred sales charge is imposed on exchanges of shares of
either class purchased subject to a contingent deferred sales charge.
However, when Class A shares acquired by exchange of Class A shares of
other OppenheimerFunds purchased subject to a Class A contingent deferred
sales charge are redeemed 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). The Class
B contingent deferred sales charge is imposed on Class B shares acquired
by exchange if they are redeemed within 6 years of the initial purchase
of the exchanged Class B shares.
When Class B 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 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 both classes must specify whether they intend to exchange
Class A or Class B shares.
The Fund reserves the right to reject telephone or written exchange
requests submitted in bulk by anyone on behalf of 10 or more accounts. 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 obtain and 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).
The different OppenheimerFunds 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
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." Dividends paid by the Fund derived from net investment income
or net short-term capital gains are taxable to shareholders as ordinary
income, whether received in cash or reinvested in additional shares.
Since the Fund's income is expected to be derived from interest rather
than dividends, dividends paid by the Fund are not expected to be eligible
for the dividends-received deduction for corporations. Long-term capital
gains distributions, if any, are taxable as long-term capital gains,
whether received in cash or reinvested and regardless of how long Fund
shares have been held. A shareholder purchasing Fund shares immediately
prior to the declaration of a dividend or capital gain distribution will
receive a distribution subject to income tax, and the distribution will
have the effect of reducing the Fund's net asset value per share by the
amount of the distribution. For information as to "backup" withholding
on dividends, see "Shareholder Account Rules and Policies - Back-Up
Withholding" in the Fund's Prospectus.
Dividends, distributions and proceeds of the redemptions 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, to enable the investor to earn a return on
otherwise idle funds.
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.
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 OppenheimerFunds listed in "Reduced
Sales Charges," above, at net asset value without sales charge. Class B
shareholders should be aware that as of the date of this Statement of
Additional Information, not all of the OppenheimerFunds offer Class B
shares. To elect this option, a shareholder must notify the Transfer
Agent in writing and either 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 OppenheimerFunds may be invested
in shares of this Fund on the same basis.
Additional Information About the Fund
The Custodian. Citibank, N.A. is the Custodian of the Fund's assets. The
Custodian's responsibilities include safeguarding and controlling the
Fund's portfolio securities, collecting income on the 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.
Independent Auditors. The independent auditors of the Fund audit the
Fund's financial statements and perform other related audit services.
They also act as auditors for certain other funds advised by the Manager
and its affiliates.
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Trustees and Shareholders of Oppenheimer Mortgage Income
Fund:
We have audited the accompanying statements of investments and assets and
liabilities of Oppenheimer Mortgage Income Fund as of September 30, 1994,
and the related statement of operations for the year then ended, the
statements of changes in net assets for each of the years in the two-year
period then ended and the financial highlights for each of the years in
the eight-year period then ended and the period from September 11, 1986
(commencement of operations)to September 30, 1986. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of September 30,
1994, by correspondence with the custodian. An audit also includes
assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Oppenheimer Mortgage Income Fund as of September 30, 1994, the
results of its operations for the year then ended, the changes in its net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the eight-year period then
ended and the period from September 11, 1986 (commencement of operations)
to September 30, 1986, in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
_____________________
/s/ KPMG Peat Marwick LLP
Denver, Colorado
October 21, 1994
<PAGE>
STATEMENT OF INVESTMENTS September 30, 1994
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT SEE NOTE 1
==========================================================
==========================================================
==============
<S> <C> <C>
MORTGAGE/ASSET-BACKED OBLIGATIONS--79.8%
- ----------------------------------------------------------------------------------------------------------------------------------
AGENCY: FULL FAITH Government National Mortgage Assn.:
AND CREDIT--26.4% 10.50%, 9/15/17 $ 165,102 $ 180,067
9.50%, 7/15/18 784,126 828,383
10.50%, 11/15/18 87,801 95,782
10%, 5/15/19 1,114,199 1,199,324
10.50%, 7/15/19 735,462 802,490
9.50%, 12/15/19 1,008,601 1,065,920
9.50%, 1/15/20 481,064 508,595
10.50%, 12/15/20 172,977 188,779
10.50%, 2/15/21 113,613 124,016
10.50%, 4/15/21 61,539 66,742
9%, 7/15/21 1,312,021 1,359,897
9%, 8/15/21 5,108,409 5,294,815
7.50%, 9/15/22 3,163,666 2,986,944
8%, 1/15/23 6,904,379 6,718,858
-----------
21,420,612
- ----------------------------------------------------------------------------------------------------------------------------------
AGENCY: GOVERNMENT Federal Home Loan Mortgage Corp., 7%, Series 1548, Cl. C, 4/15/21 3,000,000
2,625,930
SPONSORED--3.2%
- ----------------------------------------------------------------------------------------------------------------------------------
PRIVATE MORTGAGE--50.2% Countrywide Funding Corp.:
6.25%, Series 1993-11, Cl. B1, 1/25/09 1,449,161 1,191,935
6.25%, Series 1993-11, Cl. B3, 2/25/09(2) 845,347 317,005
---------------------------------------------------------------------------------------------------------
First Boston Corp.:
Mtg. Securities, 7.04%, Series 1993-AFC-1, 10/25/02 3,458,335 3,187,072
Pass-Through Interest-Only Certificates, Series 94-M1:
.52%, Cl. AX, 2/15/02(3) 88,100,000 798,406
.61%, Cl. BX, 2/15/02(3) 19,300,000 180,938
.66%, Cl. CX, 2/15/02(3) 15,400,000 149,188
.82%, Cl. DX, 2/15/02(3) 2,968,000 29,680
Pass-Through Certificates, 11%, Series 94-M1, Cl. E, 2/15/14(2) 3,000,000 2,925,312
---------------------------------------------------------------------------------------------------------
Prudential Agricultural Credit, Inc. Farmer Mac Agricultural
Real Estate Trust Sr. Sub. Mtg. Pass-Through Certificates:
9.18%, Series 1992-2, Cl. B2, 1/15/03(1)(2) 936,432 712,505
9.47%, Series 1992-2, Cl. B3, 4/15/09(1)(2) 2,345,442 1,783,452
---------------------------------------------------------------------------------------------------------
Multi-Family Capital Access One, Inc., 10.6715%, Series 1, Cl. D, 1/15/24 3,576,803 3,384,550
---------------------------------------------------------------------------------------------------------
Residential Funding Corp. Mtg. Pass-Through Certificates:
8.50%, Series 1993-S10, Cl. A9, 2/25/23 2,985,123 2,957,511
7.785%, Series 1993-6, Cl. B5, 6/15/23(2) 1,973,570 1,458,592
7.97%, Series 1993-J2, Cl. B1, 6/15/23(2) 1,979,984 1,488,082
---------------------------------------------------------------------------------------------------------
Resolution Trust Corp. Commercial Mtg. Pass-Through Certificates:
9%, Series 1991-M5, Cl. A, 3/25/17 1,493,579 1,500,581
8.25%, Series 1992-CHF, Cl. C, 12/25/20 2,911,225 2,829,348
10.6403%, Series 1992-16, Cl. B3, 5/25/24(1) 4,400,000 4,457,750
9.50%, Series 1993-C1, Cl. E, 5/25/24 2,518,771 2,495,945
8.50%, Series 1993-C2, Cl. E, 3/25/25 3,072,109 3,013,068
8%, Series 1994-C1, Cl. E, 6/25/26 2,000,000 1,512,500
---------------------------------------------------------------------------------------------------------
Ryland Mortgage Securities Corp. Sub. Bonds, 6.7125%,
Series 1993-3, Cl. B2, 8/25/08(2) 1,405,405 1,051,419
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PRIVATE MORTGAGE
(CONTINUED) SE Commercial Mortgage Pass-Through Certificates, 6.65%, Series 93-01,
Cl. A1, 11/28/13 $ 2,645,823 $ 2,453,181
---------------------------------------------------------------------------------------------------------
SKW Real Estate Limited Partnership, 9.05%, Secured Note, Cl. D, 4/15/04(2) 1,000,000 952,500
-----------
40,830,520
-----------
Total Mortgage/Asset-Backed Obligations (Cost $67,707,463) 64,877,062
==========================================================
==========================================================
==============
TREASURY--20.2%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bond, 11.50%, 11/15/95 10,000,000 10,590,619
---------------------------------------------------------------------------------------------------------
U.S. Treasury Nts., 7.25%, 5/15/04 6,000,000 5,851,871
-----------
Total Treasury (Cost $16,989,063) 16,442,490
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, AT VALUE (COST $84,696,526) 100.0%
81,319,552
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS NET OF LIABILITIES -- 3,658
----------- -----------
NET ASSETS 100.0% $81,323,210
===========
===========
</TABLE>
(1) Represents the current interest rate for a variable rate security.
(2) Restricted security--See Note 5 of Notes to Financial Statements.
(3) Interest-Only Strips represent the right to receive the monthly interest
payments on an underlying pool of mortgage loans. These securities typically
decline in price as interest rates decline. Most other fixed-income securities
increase in price when interest rates decline. The principal amount of the
underlying pool represents the notional amount on which current interest is
calculated. The price of these securities is typically more sensitive to
changes in prepayment rates than traditional mortgage-backed securities (for
example, GNMA pass-throughs).
See accompanying Notes to Financial Statements.
<PAGE> 6
STATEMENT OF ASSETS AND LIABILITIES September 30, 1994
<TABLE>
<S> <C> <C>
==========================================================
==========================================================
============
ASSETS Investments, at value (cost $84,696,526)--see accompanying statement $81,319,552
--------------------------------------------------------------------------------------------------
Receivables:
Interest and principal paydowns 1,338,662
Shares of beneficial interest sold 975,620
--------------------------------------------------------------------------------------------------
Other 6,251
-----------
Total assets 83,640,085
==========================================================
==========================================================
============
LIABILITIES Bank overdraft 1,110,347
--------------------------------------------------------------------------------------------------
Payables and other liabilities:
Shares of beneficial interest redeemed 1,054,260
Distribution and service plan fees--Note 4 50,646
Other 101,622
-----------
Total liabilities 2,316,875
==========================================================
==========================================================
============
NET ASSETS $81,323,210
===========
==========================================================
==========================================================
============
COMPOSITION OF Paid-in capital $86,869,346
--------------------------------------------------------------------------------------------------
NET ASSETS Overdistributed net investment income (390,141)
--------------------------------------------------------------------------------------------------
Accumulated net realized loss from investment transactions (1,779,021)
--------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments--Note 3 (3,376,974)
-----------
Net Assets $81,323,210
===========
==========================================================
==========================================================
============
NET ASSET VALUE Class A Shares:
PER SHARE Net asset value and redemption price per share (based on net assets
of $78,601,769 and 5,998,960 shares of beneficial interest outstanding) $13.10
Maximum offering price per share (net asset value plus sales
charge of 4.75% of offering price) $13.75
--------------------------------------------------------------------------------------------------
Class B Shares:
Net asset value, redemption price and offering price per share
(based on net assets of $2,721,441 and 207,809 shares of beneficial
interest outstanding) $13.10
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 7
STATEMENT OF OPERATIONS For the Year Ended September 30, 1994
<TABLE>
<S> <C>
==========================================================
==========================================================
============
INVESTMENT INCOME Interest $7,353,904
==========================================================
==========================================================
============
EXPENSES Management fees--Note 4 611,316
--------------------------------------------------------------------------------------------------
Distribution and service plan fees:
Class A--Note 4 206,668
Class B--Note 4 19,481
--------------------------------------------------------------------------------------------------
Transfer and shareholder servicing agent fees--Note 4 103,841
--------------------------------------------------------------------------------------------------
Shareholder reports 77,840
--------------------------------------------------------------------------------------------------
Custodian fees and expenses 25,244
--------------------------------------------------------------------------------------------------
Trustees' fees and expenses 17,060
--------------------------------------------------------------------------------------------------
Legal and auditing fees 16,922
--------------------------------------------------------------------------------------------------
Registration and filing fees--Class B 717
--------------------------------------------------------------------------------------------------
Other 598
----------
Total expenses 1,079,687
==========================================================
==========================================================
============
NET INVESTMENT INCOME 6,274,217
==========================================================
==========================================================
============
REALIZED AND UNREALIZED Net realized loss on investments (1,327,293)
LOSS ON INVESTMENTS
--------------------------------------------------------------------------------------------------
Net change in unrealized appreciation or depreciation on investments (5,744,870)
----------
Net realized and unrealized loss on investments (7,072,163)
==========================================================
==========================================================
============
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS
$ (797,946)
==========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 8
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1994 1993
==========================================================
==========================================================
===========
<S> <C> <C> <C>
OPERATIONS Net investment income $ 6,274,217 $ 6,292,543
-------------------------------------------------------------------------------------------------
Net realized gain (loss) on investments (1,327,293) 1,723,648
-------------------------------------------------------------------------------------------------
Net change in unrealized appreciation or depreciation on investments (5,744,870) (1,161,447)
----------- -----------
Net increase (decrease) in net assets resulting from operations (797,946) 6,854,744
==========================================================
==========================================================
===========
EQUALIZATION Net change (385,171) (908)
==========================================================
==========================================================
===========
DIVIDENDS AND Dividends from net investment income:
DISTRIBUTIONS TO Class A ($.947 and $.933 per share, respectively) (5,801,295) (6,389,654)
SHAREHOLDERS Class B ($.842 and $.315 per share, respectively) (118,798) (12,229)
-------------------------------------------------------------------------------------------------
Dividends in excess of net investment income:
Class A ($.005 per share) (30,088) --
Class B ($.005 per share) (1,042) --
-------------------------------------------------------------------------------------------------
Tax return of capital distribution:
Class A ($.038 per share) (229,563) --
Class B ($.038 per share) (7,948) --
==========================================================
==========================================================
===========
BENEFICIAL INTEREST Net decrease in net assets resulting from Class A
TRANSACTIONS beneficial interest transactions--Note 2 (7,865,844) (6,139,469)
-------------------------------------------------------------------------------------------------
Net increase in net assets resulting from Class B
beneficial interest transactions--Note 2 1,492,178 1,177,488
==========================================================
==========================================================
===========
NET ASSETS Total decrease (13,745,517) (4,510,028)
-------------------------------------------------------------------------------------------------
Beginning of year 95,068,727 99,578,755
----------- -----------
End of year [including overdistributed net investment
income of ($390,141) and ($17,162), respectively] $81,323,210 $95,068,727
===========
===========
</TABLE>
See accompanying Notes to Financial Statements.
<PAGE> 9
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------------------------------------------------
YEAR ENDED
SEPTEMBER 30,
1994 1993 1992 1991 1990 1989 1988 1987 1986(2)
==========================================================
==========================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
<C>
PER SHARE OPERATING DATA:
Net asset value, beginning
of period $14.20 $14.14 $13.70 $13.18 $13.24 $13.41 $13.14 $14.39 $14.29
Income (loss) from
investment operations:
Net investment income .94 .92 .97 1.11 1.22 1.23 1.33 1.29 .07
Net realized and
unrealized gain
(loss) on investments (1.04) .07 .45 .52 (.05) (.20) .21 (1.16) .03
------ ------ ------ ------ ------ ------ ------ ------ ------
Total income (loss) from
investment operations (.10) .99 1.42 1.63 1.17 1.03 1.54 .13 .10
- --------------------------------------------------------------------------------------------------------------------
Dividends and distributions
to shareholders:
Dividends from net
investment income (.95) (.93) (.98) (1.11) (1.23) (1.20) (1.27) (1.38) --
Dividends in excess of net
investment income (.01) -- -- -- -- -- -- -- --
Tax return of capital
distribution (.04) -- -- -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------ ------
Total dividends and
distributions to
shareholders (1.00) (.93) (.98) (1.11) (1.23) (1.20) (1.27) (1.38) --
- --------------------------------------------------------------------------------------------------------------------
Net asset value, end
of period $13.10 $14.20 $14.14 $13.70 $13.18 $13.24 $13.41 $13.14 $14.39
====== ====== ====== ====== ====== ======
====== ====== ======
==========================================================
==========================================================
TOTAL RETURN, AT NET ASSET
VALUE(3) (.80)% 7.29% 10.69% 12.85% 9.21% 8.12% 12.09% .87% .70%
==========================================================
==========================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) $78,602 $93,893 $99,579 $91,052 $67,234 $55,483 $59,835 $55,085 $2,746
- --------------------------------------------------------------------------------------------------------------------
Average net assets
(in thousands) $85,181 $96,817 $97,712 $80,208 $60,699 $57,162 $58,892 $45,099 $2,135
- --------------------------------------------------------------------------------------------------------------------
Number of shares
outstanding
at end of period
(in thousands) 5,999 6,610 7,042 6,648 5,102 4,191 4,462 4,191 191
- --------------------------------------------------------------------------------------------------------------------
Ratios to average net
assets:
Net investment income 7.21% 6.49% 6.92% 8.22% 9.12% 9.24% 8.93% 9.81% 11.16%(4)
Expenses 1.22% 1.39% 1.40% 1.29% 1.22% 1.38% 1.12% .26% --%(4)
- --------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(5) 78.4% 142.7% 144.6% 103.7% 47.9% 82.2% 96.0% 184.4% 0.0%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-----------------
YEAR ENDED
SEPTEMBER 30,
1994 1993(1)
================================================
<S> <C> <C>
PER SHARE OPERATING DATA:
Net asset value, beginning
of period $14.21 $14.14
- ------------------------------------------------
Income (loss) from
investment operations:
Net investment income .90 .28
Net realized and
unrealized gain
(loss) on investments (1.12) .11
------ ------
Total income (loss) from
investment operations (.22) .39
- ------------------------------------------------
Dividends and distributions
to shareholders:
Dividends from net
investment income (.84) (.32)
Dividends in excess of net
investment income (.01) --
Tax return of capital
distribution (.04) --
------ ------
Total dividends and
distributions to
shareholders (.89) (.32)
- ------------------------------------------------
Net asset value, end
of period $13.10 $14.21
====== ======
================================================
TOTAL RETURN, AT NET ASSET
VALUE(3) (1.62)% 2.96%
================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(in thousands) $2,721 $1,176
- ------------------------------------------------
Average net assets
(in thousands) $1,951 $463
- ------------------------------------------------
Number of shares
outstanding
at end of period
(in thousands) 208 83
- ------------------------------------------------
Ratios to average net
assets:
Net investment income 6.60% 5.29%(4)
Expenses 1.93% 2.53%(4)
- ------------------------------------------------
Portfolio turnover rate(5) 78.4% 142.7%(4)
</TABLE>
(1) For the period from May 17, 1993 (inception of offering) to September 30,
1993.
(2) For the period from September 11, 1986 (commencement of operations) to
September 30, 1986.
(3) Assumes a hypothetical initial investment on the business day before the
first day of the fiscal period, with all dividends and distributions reinvested
in additional shares on the reinvestment date, and redemption at the net asset
value calculated on the last business day of the fiscal period. Sales charges
are not reflected in the total returns.
(4) Annualized.
(5) The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at the
time of acquisition of one year or less are excluded from the calculation.
Purchases and sales of investment securities (excluding short-term securities)
for the year ended September 30, 1994 were $70,145,100 and $74,034,285,
respectively.
See accompanying Notes to Financial Statements.
<PAGE> 10
NOTES TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
==========================================================
==========================================================
===============
1. SIGNIFICANT Oppenheimer Mortgage Income Fund (the Fund), is registered under the Investment Company
Act of 1940,
ACCOUNTING POLICIES as amended, as a diversified, open-end management investment company. The Fund's
investment advisor is
Oppenheimer Management Corporation (the Manager). The Fund offers both Class A and Class B shares.
Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent
deferred sales charge. Both classes of shares have identical rights to earnings, assets and voting
privileges, except that each class has its own distribution and/or service plan, expenses directly
attributable to a particular class and exclusive voting rights with respect to matters affecting a
single class. Class B shares will automatically convert to Class A shares six years after the date of
purchase. The following is a summary of significant accounting policies consistently followed by the
Fund.
-----------------------------------------------------------------------------------------------------
INVESTMENT VALUATION. Portfolio securities are valued at 4:00 p.m. (New York time) on each
trading
day. Long-term debt securities are valued by a portfolio pricing service approved by the Board of
Trustees. Long-term debt securities which cannot be valued by the approved portfolio pricing service
are valued by averaging the mean between the bid and asked prices obtained from two active market
makers in such securities. Short-term debt securities having a remaining maturity of 60 days or less
are valued at cost (or last determined market value) adjusted for amortization to maturity of any
premium or discount. Securities for which market quotes are not readily available are valued under
procedures established by the Board of Trustees to determine fair value in good faith.
-----------------------------------------------------------------------------------------------------
ALLOCATION OF INCOME, EXPENSES AND GAINS AND LOSSES. Income, expenses (other than
those attributable
to a specific class) and gains and losses are allocated daily to each class of shares based upon the
relative proportion of net assets represented by such class. Operating expenses directly attributable
to a specific class are charged against the operations of that class.
-----------------------------------------------------------------------------------------------------
FEDERAL INCOME TAXES. The Fund intends to continue to comply with provisions of the Internal
Revenue
Code applicable to regulated investment companies and to distribute all of its taxable income,
including any net realized gain on investments not offset by loss carryovers, to shareholders.
Therefore, no federal income tax provision is required. At September 30, 1994, the Fund had available
for federal income tax purposes an unused capital loss carryover of approximately $731,000, $85,000
of
which will expire in 1997 and $646,000 in 1998.
-----------------------------------------------------------------------------------------------------
TRUSTEES' FEES AND EXPENSES. The Fund has adopted a nonfunded retirement plan for the Fund's
independent trustees. Benefits are based on years of service and fees paid to each trustee during the
years of service. The accumulated liability for the Fund's projected benefit obligations was $27,432
at September 30, 1994. No payments have been made under the plan.
-----------------------------------------------------------------------------------------------------
EQUALIZATION. Prior to September 30, 1993, the Fund followed the accounting practice of
equalization,
by which a portion of the proceeds from sales and costs of redemption of Fund shares equivalent on a
per share basis to the amount of undistributed net investment income was credited or charged to
undistributed income. Effective October 1, 1993, the Fund discontinued equalization accounting in
conjunction with the adoption of a daily dividend declaration policy. The cumulative effect of the
change in accounting practice resulted in a reclassification of $385,171 from undistributed net
investment income to paid-in capital.
-----------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS. The Fund intends to declare dividends separately for Class
A and Class
B shares from net investment income each day the New York Stock Exchange is open for business and
pay
such dividends monthly. Distributions from net realized gains on investments, if any, will be declared
at least once each year. Prior to October 1, 1993, dividends and distributions to shareholders were
recorded on the ex-dividend date.
-----------------------------------------------------------------------------------------------------
CHANGE IN ACCOUNTING FOR DISTRIBUTIONS TO SHAREHOLDERS. Effective October 1,
1993, the Fund adopted
Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of
Income, Capital Gain, and Return of Capital Distributions by Investment Companies. As a result, the
Fund changed the classification of distributions to shareholders to better disclose the differences
between financial statement amounts and distributions determined in accordance with income tax
regulations. Accordingly, subsequent to September 30, 1993, amounts have been reclassified to reflect
a decrease in paid-in capital of $50, and an increase in undistributed net investment income of $50.
During the year ended September 30, 1994, in accordance with Statement of Position 93-2, undistributed
net investment income was decreased by $73,341, undistributed capital loss was decreased by $310,852,
and paid-in capital was decreased by $237,511.
</TABLE>
<PAGE> 11
<TABLE>
<S> <C>
==========================================================
==========================================================
===============
1. SIGNIFICANT ACCOUNTING OTHER. Investment transactions are accounted for on the date the investments are
purchased or sold
POLICIES (CONTINUED) (trade date). Discount on securities purchased is amortized over the life of the respective
securities, in accordance with federal income tax requirements. Realized gains and losses on
investments and unrealized appreciation and depreciation are determined on an identified cost basis,
which is the same basis used for federal income tax purposes.
==========================================================
==========================================================
===============
2. SHARES OF The Fund has authorized an unlimited number of no par value shares of beneficial interest of each
BENEFICIAL INTEREST class. Transactions in shares of beneficial interest were as follows:
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1994 YEAR ENDED SEPTEMBER
30, 1993(1)
----------------------------- --------------------------------
SHARES AMOUNT SHARES AMOUNT
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A:
Sold 5,291,328 $71,615,758 5,333,620 $74,887,227
Dividends reinvested 250,875 4,502,560 338,074 4,736,584
Redeemed (6,153,140) (83,984,162) (6,104,228) (85,763,280)
--------- ----------- --------- -----------
Net decrease (610,937) $(7,865,844) (432,534) $(6,139,469)
========= =========== =========
===========
---------------------------------------------------------------------------------------------------
Class B:
Sold 165,304 $ 2,352,715 100,656 $ 1,432,224
Dividends reinvested 14,319 96,532 718 10,184
Redeemed (54,560) (957,069) (18,628) (264,920)
--------- ----------- --------- -----------
Net increase 125,063 $ 1,492,178 82,746 $ 1,177,488
========= =========== =========
===========
</TABLE>
(1) For the year ended September 30, 1993 for
Class A shares and for the period from May 17,
1993 (inception of offering) to September 30,
1993 for Class B shares.
<TABLE>
<S> <C>
==========================================================
==========================================================
===============
3. UNREALIZED GAINS AND At September 30, 1994, net unrealized depreciation on investments of $3,376,974 was
composed of gross
LOSSES ON INVESTMENTS appreciation of $446,954, and gross depreciation of $3,823,928.
==========================================================
==========================================================
===============
4. MANAGEMENT FEES Management fees paid to the Manager were in accordance with the investment advisory
agreement with the
AND OTHER TRANSACTIONS Fund, which provides for an annual fee of .65% on the first $200 million of net assets,
.60% on the
WITH AFFILIATES next $200 million, .55% on the next $400 million and .50% on net assets in excess of $800
million. The
Manager voluntarily agreed to reduce its fees by .05% at each net asset level effective January 1,
1994, with a further decrease of .05% at each net asset level on July 1, 1994. The Manager has agreed
to reimburse the Fund if aggregate expenses (with specified exceptions) exceed the most stringent
applicable regulatory limit on Fund expenses.
For the year ended September 30, 1994, commissions (sales charges paid by
investors) on sales of Class A shares totaled $237,418, of which $75,572 was retained by Oppenheimer
Funds Distributor, Inc. (OFDI), a subsidiary of the Manager, as general distributor, and by an
affiliated broker/dealer. During the year ended September 30, 1994, OFDI received contingent
deferred sales charges of $2,348 upon redemption of Class B shares as reimbursement for sales
commissions advanced by OFDI at the time of sale of such shares.
Oppenheimer Shareholder Services (OSS), a division of the Manager, is the
transfer and shareholder servicing agent for the Fund, and for other registered investment
companies. OSS's total costs of providing such services are allocated ratably to these companies.
Under separate approved plans, each class may expend up to .25% of its net
assets annually to reimburse OFDI for costs incurred in connection with the personal service and
maintenance of accounts that hold shares of the Fund, including amounts paid to brokers, dealers,
banks and other financial institutions. In addition, Class B shares are subject to an asset-based
sales charge of .75% of net assets annually, to reimburse OFDI for sales commissions paid from its
own resources at the time of sale and associated financing costs. In the event of termination or
discontinuance of the Class B plan, the Board of Trustees may allow the Fund to continue payment of
the asset-based sales charge to OFDI for distribution expenses incurred on Class B shares sold prior
to termination or discontinuance of the plan. During the period ended September 30, 1994, OFDI paid
$13,423 and $39, respectively, to an affiliated broker/dealer as reimbursement for Class A and
Class B personal service and maintenance expenses and retained $19,061 as reimbursement for Class
B
sales commissions and service fee advances, as well as financing costs.
</TABLE>
<PAGE> 12
NOTES TO FINANCIAL STATEMENTS (Continued)
<TABLE>
==========================================================
==========================================================
=======
<S> <C>
5. RESTRICTED The Fund owns securities purchased in private placement transactions, without registration under the
SECURITIES Securities Act of 1933 (the Act). The securities are valued under methods approved by the Board of
Trustees as reflecting fair value. The Fund intends to invest no more than 10% of its net assets
(determined at the time of purchase) in restricted and illiquid securities, excluding securities
eligible for resale pursuant to Rule 144A of the Act that are determined to be liquid by the Board of
Trustees or by the Manager under Board-approved guidelines. Restricted and illiquid securities,
excluding securities eligible for resale pursuant to Rule 144A of the Act amount to $2,812,962, or
3.5% of the Fund's net assets, at September 30, 1994. Illiquid and/or restricted securities, including
those restricted securities that are transferable under Rule 144A of the Act, are listed below.
</TABLE>
<TABLE>
<CAPTION>
VALUATION
PER UNIT AS OF
SECURITY ACQUISITION DATE COST PER UNIT SEPTEMBER
30, 1994
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
First Boston Mortgage Securities Corp. Pass-Through
Certificates, 11%, Series 1994-M1, Cl. E, 2/15/14(1) 5/17/94 $98.85 $97.51
-----------------------------------------------------------------------------------------------------------
Countrywide Funding Corp., 6.25%, Series 1993-11,
Cl. B3, 2/25/09 12/27/93 $50.63 $37.50
-----------------------------------------------------------------------------------------------------------
Prudential Agricultural Credit, Inc. Farmer Mac Agricultural
Real Estate Trust Sr. Sub. Mtg. Pass-Through Certificates:
9.18%, Series 1992-2, Cl. B2, 1/15/03 5/26/93 $76.13 $76.09
9.47%, Series 1992-2, Cl. B3, 4/15/09 5/26/93 $72.13 $76.09
-----------------------------------------------------------------------------------------------------------
Residential Funding Corp. Mtg. Pass-Through Certificates:
7.785%, Series 1993-6, Cl. B5, 6/15/23(1) 6/10/93 $82.11 $73.91
7.97%, Series 1993-J2, Cl. B1, 6/15/23(1) 6/29/93 $83.97 $75.16
-----------------------------------------------------------------------------------------------------------
Ryland Mortgage Securities Corp. Sub. Bonds,
6.7125%, Series 1993-3, Cl. B2, 8/25/08(1) 6/9/93 $80.78 $74.81
-----------------------------------------------------------------------------------------------------------
SKW Real Estate Limited Partnership, 9.05%
Secured Note, Cl. E, 4/15/04(1) 4/29/94 $99.96 $95.25
</TABLE>
(1) Transferable under Rule 144A of the Act.
<PAGE>
<PAGE>
Appendix A
Industry Classifications
Aerospace/Defense
Air Transportation
Auto Parts Distribution
Automotive
Bank Holding Companies
Banks
Beverages
Broadcasting
Broker-Dealers
Building Materials
Cable Television
Chemicals
Commercial Finance
Computer Hardware
Computer Software
Conglomerates
Consumer Finance
Containers
Convenience Stores
Department Stores
Diversified Financial
Diversified Media
Drug Stores
Drug Wholesalers
Durable Household Goods
Education
Electric Utilities
Electrical Equipment
Electronics
Energy Services & Producers
Entertainment/Film
Environmental
Food
Gas Utilities
Gold
Health Care/Drugs
Health Care/Supplies & Services
Homebuilders/Real Estate
Hotel/Gaming
Industrial Services
Insurance
Leasing & Factoring
Leisure
Manufacturing
Metals/Mining
Nondurable Household Goods
Oil - Integrated
Paper
Publishing/Printing
Railroads
Restaurants
Savings & Loans
Shipping
Special Purpose Financial
Specialty Retailing
Steel
Supermarkets
Telecommunications - Technology
Telephone - Utility
Textile/Apparel
Tobacco
Toys
Trucking
<PAGE>
Investment Adviser
Oppenheimer Management Corporation
Two World Trade Center
New York, New York 10048-0203
Distributor
Oppenheimer Funds Distributor, Inc.
Two World Trade Center
New York, New York 10048-0203
Transfer Agent and Shareholder Servicing Agent
Oppenheimer Shareholder Services
P.O. Box 5270
Denver, Colorado 80217
1-800-525-7048
Custodian of Portfolio Securities
Citibank, N.A.
399 Park Avenue
New York, New York 10043
Independent Auditors
KPMG Peat Marwick LLP
707 Seventeenth Street
Denver, Colorado 80202
Legal Counsel
Gordon Altman Butowsky Weitzen
Shalov & Wein
114 West 47th Street
New York, New York 10036
