Oppenheimer Strategic Income Fund
6803 South Tucson Way, Englewood, Colorado 80112
1-800-525-7048
Statement of Additional Information dated January 26, 1998, revised, February
12, 1998
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 26, 1998. It should be read together with the
Prospectus, which may be obtained by writing to the Fund's Transfer Agent,
OppenheimerFunds Services, at P.O. Box 5270, Denver, Colorado 80217 or by
calling the Transfer Agent at the toll-free number shown above.
TABLE OF CONTENTS
Page
About the Fund
Investment Objective and Policies...................................... 2
Investment Policies and Strategies................................ 2
Other Investment Techniques and Strategies........................ 11
Other Investment Restrictions..................................... 27
How the Fund is Managed ............................................... 28
Organization and History.......................................... 28
Trustees and Officers of the Fund................................. 29
The Manager and Its Affiliates.................................... 34
Brokerage Policies of the Fund......................................... 36
Performance of the Fund................................................ 37
Distribution and Service Plans......................................... 42
About Your Account
How To Buy Shares...................................................... 45
How To Sell Shares..................................................... 53
How To Exchange Shares................................................. 57
Dividends, Capital Gains and Taxes..................................... 59
Additional Information About the Fund.................................. 61
Financial Information About the Fund
Independent Auditors' Report........................................... 62
Financial Statements................................................... 63
Appendix: Corporate Industry Classifications........................... A-1
-1-
<PAGE>
ABOUT THE FUND
Investment Objective and Policies
Investment Policies and Strategies. The investment objective and policies of the
Fund are discussed in the Prospectus. Set forth below is supplemental
information about those policies and the types of securities in which the Fund
invests, as well as strategies the Fund may use to try to achieve its objective.
Capitalized terms used in this Statement of Additional Information have the same
meaning as those terms have in the Prospectus.
In selecting securities for the Fund's portfolio, the Fund's investment
manager, OppenheimerFunds, Inc. (the "Manager"), evaluates the investment merits
of debt securities primarily through the exercise of its own investment
analysis. This may include, among other things, consideration of the financial
strength of an issuer, including its historic and current financial condition,
the trading activity in its securities, present and anticipated cash flow,
estimated current value of its assets in relation to their historical cost, the
issuer's experience and managerial expertise, responsiveness to changes in
interest rates and business conditions, debt maturity schedules, current and
future borrowing requirements, and any change in the financial condition of an
issuer and the issuer's continuing ability to meet its future obligations. The
Manager also may consider anticipated changes in business conditions, levels of
interest rates of bonds as contrasted with levels of cash dividends, industry
and regional prospects, the availability of new investment opportunities and the
general economic, legislative and monetary outlook for specific industries, the
nation and the world.
o Investment Risks. With the exception of U.S. Government securities
(which are generally not subject to credit risk), the debt securities the Fund
invests in will have one or more types of investment risk: credit risk, interest
rate risk or foreign exchange rate risk. Credit risk relates to the ability of
the issuer to meet interest or principal payments or both as they become due.
Generally, higher yielding bonds are subject to credit risk to a greater extent
than higher quality bonds. Interest rate risk refers to the fluctuations in
value of debt securities resulting solely from the inverse relationship between
price and yield of outstanding debt securities. An increase in prevailing
interest rates will generally reduce the market value of debt securities, and a
decline in interest rates will tend to increase their value. In addition, debt
securities with longer maturities, which tend to produce higher yields, are
subject to potentially greater capital appreciation and depreciation than
obligations with shorter maturities. Fluctuations in the market value of debt
securities subsequent to their acquisition will not affect the interest payable
on those securities, and thus the cash income from such securities, but will be
reflected in the valuations of these securities used to compute the Fund's net
asset values. Foreign exchange rate risk refers to the change in value of the
currency in which a foreign security the Fund holds is denominated against the
U.S. dollar.
o Special Risks - High Yield Securities. As stated in the Prospectus, the
corporate debt securities in which the Fund may principally invest will not be
in the higher rating categories. The Fund may invest in securities rated as low
as "C" by Moody's Investors Service, Inc. ("Moody's) or "D" by Standard & Poor's
Corporation ("Standard & Poor's"), or other rating agencies. The Manager will
not rely solely on the ratings assigned by rating services and may invest,
without limitation, in unrated securities which offer, in the opinion of the
Manager, comparable yields and risks as those rated securities in which the Fund
may invest.
-2-
<PAGE>
Risks of high yield securities may include: (i) limited liquidity and
secondary market support, (ii) substantial market price volatility resulting
from changes in prevailing interest rates, (iii) subordination to the prior
claims of banks and other senior lenders, (iv) the operation of mandatory
sinking fund or call/redemption provisions during periods of declining interest
rates that could cause the Fund to be able to reinvest premature redemption
proceeds only in lower yielding portfolio securities, (v) the possibility that
earnings of the issuer may be insufficient to meet its debt service, and (vi)
the issuer's low creditworthiness and potential for insolvency during periods of
rising interest rates and economic downturn. As a result of the limited
liquidity of high yield securities, their prices have at times experienced
significant and rapid decline when a substantial number of holders decided to
sell. A decline is also likely in the high yield bond market during an economic
downturn. An economic downturn or an increase in interest rates could severely
disrupt the market for high yield bonds and adversely affect the value of
outstanding bonds and the ability of the issuers to repay principal and
interest.
o Portfolio Turnover. The Manager will monitor the Fund's tax status under
the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code")
during periods in which the Fund's annual turnover rate exceeds 100%. No
limitations are placed on the weighted average maturity of the portfolio, which
will generally be of longer duration. Preferred stocks, other than those of a
finite maturity, will be assumed to have a 40 year maturity for the purpose of
calculating a weighted average maturity. The Fund anticipates it will shift its
investment focus to securities of longer maturity as interest rates decline, and
to securities of shorter maturity as interest rates rise. Although changes in
the value of the Fund's portfolio securities subsequent to their acquisition are
reflected in the net asset value of the Fund's shares, such changes will not
affect the income received by the Fund from such securities. The dividends paid
by the Fund will increase or decrease in relation to the income received by the
Fund from its investments, which will in any case be reduced by the Fund's
expenses before being distributed to the Fund's shareholders.
o Debt Securities of Foreign Governments and Companies. As noted in the
Prospectus, the Fund may invest in debt obligations and other securities (which
may be denominated in U.S. dollars or non-U.S. currencies) issued or guaranteed
by foreign corporations, certain supranational entities (described below) and
foreign governments or their agencies or instrumentalities, and in debt
obligations and other securities issued by U.S. corporations denominated in
non-U.S. currencies. All of these are considered to be "foreign securities."
The percentage of the Fund's assets that will be allocated to foreign
securities will vary depending on the relative yields of foreign and U.S.
securities, the economies of foreign countries, the condition of such countries'
financial markets, the interest rate climate of such countries and the
relationship of such countries' currency to the U.S. dollar. These factors are
judged on the basis of fundamental economic criteria (e.g., relative inflation
levels and trends, growth rate forecasts, balance of payments status, and
economic policies) as well as technical and political data.
Investments in foreign securities offer potential benefits not available
from investments solely in securities of domestic issuers, by offering the
opportunity to invest in foreign issuers that appear to offer growth potential,
or in foreign countries with economic policies or business cycles different from
those of the U.S., or to reduce fluctuations in portfolio value by taking
advantage of
-3-
<PAGE>
foreign bond or other markets that do not move in a manner parallel to U.S.
markets. From time to time, U.S. government policies have discouraged certain
investments abroad by U.S. investors, through taxation or other restrictions,
and it is possible that such restrictions could be reimposed.
Securities of foreign issuers that are represented by American depository
receipts, or that are listed on a U.S. securities exchange, or are traded in the
U.S. over-the-counter market are not considered "foreign securities" when the
Fund moves its investment focus among different sectors, because they are not
subject to many of the special considerations and risks (discussed below) that
apply to foreign securities traded and held abroad.
o Risks of Foreign Securities. Investment in foreign securities involves
considerations and risks not associated with investment in securities of U.S.
issuers. For example, foreign issuers are not required to use generally-accepted
accounting principles ("G.A.A.P."). If foreign securities are not registered
under the Securities Act of 1933, the issuer does not have to comply with the
disclosure requirements of the Securities Exchange Act of 1934. In addition, it
is generally more difficult to obtain court judgments outside the United States.
The values of foreign securities will be affected by incomplete or inaccurate
information available as to foreign issuers, changes in currency rates or
exchange control regulations or currency blockage, application of foreign tax
laws, including withholding taxes, changes in governmental administration or
economic or monetary policy (in the U.S. or abroad) or changed circumstances in
dealings between nations. Costs will be incurred in connection with conversions
between various currencies. Foreign brokerage commissions are generally higher
than commissions in the U.S., and foreign securities markets may be less liquid,
more volatile and less subject to governmental regulation than in the U.S.
Investments in foreign countries could be affected by other factors not
generally thought to be present in the U.S., including expropriation or
nationalization, confiscatory taxation and potential difficulties in enforcing
contractual obligations, and could be subject to extended settlement periods.
Because the Fund may purchase securities denominated in foreign
currencies, a change in the value of any such currency against the U.S. dollar
will result in a change in the U.S. dollar value of the Fund's assets and its
income available for distribution. In addition, although a portion of the Fund's
investment income may be received or realized in foreign currencies, the Fund
will be required to compute and distribute its income in U.S. dollars, and
absorb the cost of currency fluctuations. The Fund may engage in foreign
currency exchange transactions for hedging purposes to protect against changes
in future exchange rates. See "Hedging With Options and Futures Contracts,"
below.
The values of foreign investments and the investment income derived from
them may also be affected unfavorably by changes in currency exchange control
regulations. Although the Fund will invest primarily in securities denominated
in foreign currencies that at the time of investment do not have significant
government-imposed restrictions on conversion into U.S. dollars, there can be no
assurance against subsequent imposition of currency controls. In addition, the
values of foreign securities will fluctuate in response to a variety of factors,
including changes in U.S. and foreign interest rates.
The Fund may invest in U.S. dollar-denominated foreign securities
referred to as "Brady
-4-
<PAGE>
Bonds." These are debt obligations of foreign entities that may be fixed-rate
par bonds or floating-rate discount bonds and are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
that have the same maturity as the Brady Bonds. However, the Fund may also
invest in uncollateralized Brady Bonds. Brady Bonds are generally viewed as
having three or four valuation components: (i) any collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute what is
referred to as the "residual risk" of such bonds). In the event of a default
with respect to collateralized Brady Bonds as a result of which the payment
obligations of the issuer are accelerated, the zero coupon U.S. Treasury
securities held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held by the collateral agent to the
scheduled maturity of the defaulted Brady Bonds, which will continue to be
outstanding, at which time the face amount of the collateral will equal the
principal payments which would have then been due on the Brady Bonds in the
normal course. In addition, in light of the residual risk of Brady Bonds and,
among other factors, the history of defaults with respect to commercial bank
loans by public and private entities of countries issuing Brady Bonds,
investments in Brady Bonds are to be viewed as speculative.
The obligations of foreign governmental entities may or may not be
supported by the full faith and credit of a foreign government. Obligations of
"supranational entities" include those of international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and of international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
members, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income. There is no assurance that foreign
governments will be able or willing to honor their commitments.
o Special Risks of Emerging Market Countries. Investments in emerging
market countries may involve further risks in addition to those identified above
for investments in foreign securities. Securities issued by emerging market
countries and companies located in those countries may be subject to extended
settlement periods, whereby the Fund might not receive principal and/or income
on a timely basis and its net asset value could be affected. There may be a lack
of liquidity for emerging market securities; interest rates and foreign currency
exchange rates may be more volatile; sovereign limitations on foreign
investments may be more likely to be imposed; there may be significant balance
of payment deficits; and their economies and markets may respond in a more
volatile manner to economic changes than those in developed countries.
o U.S. Government Securities. U.S. Government securities are debt obligations
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities. The U.S. Government securities the Fund can invest in are
described in the Prospectus and include U.S. Treasury securities such as "zero
coupon" Treasury securities, mortgage-backed securities and CMOs.
-5-
<PAGE>
o Zero Coupon Treasury Securities. The Fund may invest in zero coupon
Treasury securities, which are U.S. Treasury bills issued without interest
coupons, U.S. Treasury notes and bonds which have been stripped of their
unmatured interest coupons, and receipts or certificates representing interests
in such stripped obligations and coupons. These securities usually trade at a
deep discount from their face or par value and will be subject to greater
fluctuations in market value in response to changing interest rates than debt
obligations of comparable maturities that make current payments of interest. The
interest rate is effectively "locked in" and there is no risk of having to
reinvest periodic interest payments prior to maturity of the zero coupon
security in securities having lower rates.
o Mortgage-Backed U.S. Government Securities and CMOs. These securities
represent participation interests in pools of residential mortgage loans made by
lenders such as banks and savings and loan associations. The pools are assembled
for sale to investors (such as the Fund) by government agencies, which issue or
guarantee the securities relating to the pool. 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. Some mortgage-backed U.S.
Government 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 (e.g., Federal National Mortgage Association). Those guarantees do not
extend to the value or yield of the mortgage-backed securities themselves or to
the net asset value of the Fund's shares. Those government agencies may also
issue derivative mortgage backed securities such as collateralized mortgage
obligations ("CMOs"), 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 is not
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
-6-
<PAGE>
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 a premium or at a discount. Accelerated prepayments adversely
affect yields for pass-through securities purchased at a premium (i.e., at a
price in excess of 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.
o Ginnie Mae Certificates. Certificates of Government National Mortgage
Association ("Ginnie Mae") are mortgage-backed securities of Ginnie Mae that
evidence an undivided interest in a pool or pools of mortgages ("Ginnie Mae
Certificates"). The Ginnie Mae Certificates that the Fund may purchase are of
the "modified pass-through" type, which entitle the holder to receive timely
payment of all interest and principal payments due on the mortgage pool, net of
fees paid to the "issuer" and Ginnie Mae, regardless of whether the mortgagor
actually makes the payments when due.
The National Housing Act authorizes Ginnie Mae to guarantee the timely
payment of principal and interest on securities backed by a pool of mortgages
insured by the Federal Housing Administration ("FHA") or guaranteed by the
Veterans Administration ("VA"). The Ginnie Mae guarantee is backed by the full
faith and credit of the U.S. Government. Ginnie Mae is also empowered to borrow
without limitation from the U.S. Treasury if necessary to make any payments
required under its guarantee.
The average life of a Ginnie Mae Certificate is likely to be substantially
shorter than the original maturity of the mortgages underlying the securities.
Prepayments of principal by mortgagors and mortgage foreclosures will usually
result in the return of the greater part of principal investment long before the
maturity of the mortgages in the pool. Foreclosures impose no risk to principal
investment because of the Ginnie Mae guarantee, except to the extent that the
Fund has purchased the certificates at a premium in the secondary market.
o FNMA Securities. The Federal National Mortgage Association ("FNMA") was
established to create a secondary market in mortgages insured by the FHA. FNMA
issues guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA
Certificates resemble Ginnie Mae Certificates in that each FNMA Certificate
represents a pro rata share of all interest and principal payments made and owed
on the underlying pool. FNMA guarantees timely payment of interest and principal
on FNMA Certificates. The FNMA guarantee is not backed by the full faith and
credit of the U.S. Government.
o FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC")
was created to promote development of a nationwide secondary market for
conventional residential
-7-
<PAGE>
mortgages. FHLMC issues two types of mortgage pass-through securities ("FHLMC
Certificates"): mortgage participation certificates ("PCs") and guaranteed
mortgage certificates ("GMCs"). PCs resemble Ginnie Mae Certificates in that
each PC represents a pro rata share of all interest and principal payments made
and owed on the underlying pool. FHMLC guarantees timely monthly payment of
interest on PCs and the ultimate payment of principal. The FHLMC guarantee is
not
-8-
<PAGE>
backed by the full faith and credit of the U.S. Government.
o 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
-9-
<PAGE>
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.
o Stripped Mortgage-Backed Securities. These are derivative multi-class
mortgage back securities, that are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of Ginnie Mae, FNMA or FHLMC certificates. Commonly, one class receives
some of the interest and most of the principal, while the other class will
receive most of the interest and the rest of the principal. In some cases, one
class will receive all of the interest ("interest-only" securities) and the
other will receive all of the principal. The yield on interest-only securities
is extremely sensitive to the rate of principal payments (including prepayments)
on the underlying pool, and a rapid rate of principal prepayments may have a
material adverse effect on the yield of the interest-only class. If the
underlying pool experiences greater than anticipated principal prepayments, the
Fund may fail to fully recoup its initial investment.
o Mortgage-Backed Security Rolls. The Fund may enter into "forward roll"
transactions with respect to mortgage-backed securities issued by Ginnie Mae,
FNMA or FHLMC. In a forward roll transaction, which is considered to be a
borrowing by the Fund, the Fund will sell a mortgage security to selected banks
or other entities and simultaneously agree to repurchase a similar security
(same type, coupon and maturity) from the institution at a specified later date
at an agreed upon price. The mortgage securities that are repurchased will bear
the same interest rate as those sold, but generally will be collateralized by
different pools of mortgages with different prepayment histories than those
sold. Risks of mortgage-backed security rolls include: (i) the risk of
prepayment prior
-10-
<PAGE>
to maturity, (ii) the possibility that the Fund may not be entitled to receive
interest and principal payments on the securities sold and that the proceeds of
the sale may have to be invested in money market instruments (typically
repurchase agreements) maturing not later than the expiration of the roll, and
(iii) the possibility that the market value of the securities sold by the Fund
may decline below the price at which the Fund is obligated to purchase the
securities. Upon entering into a mortgage-backed security roll, the Fund will be
required to identify liquid securities, either debt or equity, to its Custodian
in an amount at least equal to its obligation under the roll.
o Debt Securities of U.S. Companies. The Fund's investments in
fixed-income securities issued by domestic companies and other issuers may
include debt obligations (bonds, debentures, notes, mortgage-backed and
asset-backed securities and CMOs) together with preferred stocks.
The risks attendant to investing in high-yielding, lower-rated bonds are
described above. If a sinking fund or callable bond held by the Fund is selling
at a premium (or discount) and the issuer exercises the call or makes a
mandatory sinking fund payment, the Fund would realize a loss (or gain) in
market value; the income from the reinvestment of the proceeds would be
determined by current market conditions, and reinvestment of that income may
occur at times when rates are generally lower than those on the called bond.
o Preferred Stocks. Preferred stock, unlike common stock, offers a stated
dividend rate payable from the corporation's earnings. Such preferred stock
dividends may be cumulative or non-cumulative, participating, or auction rate.
If interest rates rise, the fixed dividend on preferred stocks may be less
attractive, causing the price of preferred stocks to decline. Preferred stock
may have mandatory sinking fund provisions, as well as call/redemption
provisions prior to maturity, a negative feature when interest rates decline.
Dividends on some preferred stock may be "cumulative," requiring all or a
portion of prior unpaid dividends to be paid. Preferred stock also generally has
a preference over common stock on the distribution of a corporation's assets in
the event of liquidation of the corporation, and may be "participating," which
means that it may be entitled to a dividend exceeding the stated dividend in
certain cases. The rights of preferred stocks on distribution of a corporation's
assets in the event of a liquidation are generally subordinate to the rights
associated with a corporation's debt securities.
o 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
borrower. Participation interests are primarily dependent upon the financial
strength of the borrowing corporation, 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, or other rating agencies.
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
-11-
<PAGE>
and/or interest. The Manager has set certain creditworthiness standards for
issuers of loan participation and monitors their creditworthiness. These same
standards apply to participation interests in loans to foreign companies.
o Warrants and Rights. The Fund may, to the limited extent described in
the Prospectus, invest in warrants and rights. Warrants basically are options to
purchase equity securities at specific prices valid for a specific period of
time. Their prices do not necessarily move parallel to the prices of the
underlying securities. Rights are similar to warrants but normally have a short
duration and are distributed directly by the issuer to its shareholders.
Warrants and rights have no voting rights, receive no dividends and have no
rights with respect to the assets of the issuer.
o Asset-Backed Securities. These securities, issued by trusts and special
purpose entities, are backed by pools of assets, primarily automobile and
credit-card receivables and home equity loans, which pass through the payments
on the underlying obligations to the security holders (less servicing fees paid
to the originator or fees for any credit enhancement).
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. Payments of principal and interest passed through to holders of
asset-backed securities are typically supported by some form of credit
enhancement, such as a letter of credit, surety bond, limited guarantee by
another entity or having a priority to certain of the borrower's other
securities. The degree of credit enhancement varies, and generally applies to
only a fraction of the asset-backed security's par value until exhausted. If the
credit enhancement of an asset-backed security held by the Fund has been
exhausted, and if any required payments of principal and interest are not made
with respect to the underlying loans, the Fund may experience losses or delays
in receiving payment. The risks of investing in asset-backed securities are
ultimately dependent upon payment of consumer loans by the individual borrowers.
As a purchaser of an asset-backed security, the Fund would generally have no
recourse to the entity that originated the loans in the event of default by a
borrower. The underlying loans are subject to prepayments, which shorten the
weighted average life of asset-backed securities and may lower their return, in
the same manner as described above for prepayments of a pool of mortgage loans
underlying mortgage-backed securities. However, asset-backed securities do not
have the benefit of the same security interest in the underlying collateral as
do mortgage-backed securities.
o Zero Coupon Corporate Securities. The Fund may invest in zero coupon
securities issued by corporations. Corporate zero coupon securities are: (i)
notes or debentures which do not pay current interest and are issued at
substantial discounts from par value, or (ii) notes or debentures that pay no
current interest until a stated date one or more years into the future, after
which the issuer is obligated to pay interest until maturity, usually at a
higher rate than if interest were payable from the date of issuance. Such
corporate zero coupon securities, in addition to the risks identified above
under "U.S. Government Securities - Zero Coupon Treasury Securities," are
subject to the risk of the issuer's failure to pay interest and repay principal
in accordance with the terms of the obligation.
o Mortgage-Backed Securities. Mortgage-backed securities may also be issued
by private issuers such as commercial banks, savings and loan associations,
mortgage insurance companies and
-12-
<PAGE>
other secondary market issuers that create pass-through pools of conventional
residential mortgage loans and on commercial mortgage loans. They may be the
originators of the underlying loans as well as the guarantors of the
mortgage-backed securities. There are no direct or indirect government
guarantees of payments on these pools. However, timely payment of interest and
principal of these pools is generally supported by various forms of insurance or
guarantees. The insurance and guarantees are issued by government entities,
private insurers and the mortgage poolers. The insurance available, the
guarantees, and the creditworthiness of the issuers will be evaluated by the
Manager to determine whether a particular mortgage-backed security of this type
meets the Fund's investment standards. There can be no assurance that the
private insurers can meet their obligations under the policies. Securities
issued by certain private poolers may not be readily marketable, and would be
treated as illiquid securities subject to the Fund's limitations on investments
in such securities.
o Temporary Defensive Investments. In times of unstable or uncertain
economic or market conditions, when the Manager determines it appropriate to do
so, the Fund may assume a temporary defensive position and invest an unlimited
amount of its assets in U.S. dollar-denominated debt obligations, issued by the
U.S. or foreign governments, domestic or foreign corporations or banks, maturing
in one year or less ("money market securities"). The Fund will purchase money
market securities to maintain liquidity deemed necessary by the Manager for
investment purposes, and to minimize the impact of fluctuating interest rates on
the net asset value of the Fund. To the extent the Fund is so invested, it is
not invested to achieve its investment objective of seeking a high level of
current income.
Other Investment Techniques and Strategies
o Repurchase Agreements. The Fund may acquire securities that are subject
to repurchase agreements, in order to generate income while providing liquidity.
In a repurchase transaction, the Fund acquires a security from, and
simultaneously resells it to, an approved vendor (a U.S. commercial bank, U.S.
branch of a foreign bank or a broker-dealer which has been designated a primary
dealer in government securities, which must meet the credit requirements set by
the Fund's Board of Trustees from time to time), for delivery on an agreed upon
future date. The sale 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 resale typically will occur within one to
five days of the purchase. Repurchase agreements are considered "loans" under
the Investment Company Act, collateralized by the underlying security. The
Fund's repurchase agreements will require that at all times while the repurchase
agreement is in effect, the collateral's value must equal or exceed the
repurchase price to collateralize the repayment obligation fully. Additionally,
the Manager will impose creditworthiness requirements to confirm that the vendor
is financially sound and will continuously monitor the collateral's value. If
the vendor of a repurchase agreement fails to pay the agreed-upon resale price
on the delivery date, the Fund's risks in such event may include any costs of
disposing of the collateral, and any loss from any delay in foreclosing on the
collateral.
o Illiquid and Restricted Securities. The Fund will not purchase or
otherwise acquire any security if, as a result, more than 10% of its net assets
(taken at current value) would be invested in
-13-
<PAGE>
securities that are illiquid by virtue of the absence of a readily available
market or because of legal or contractual restrictions on resale ("restricted
securities"). As noted in the Prospectus, the Board may increase that limit to
15%. This policy applies to participation interests, bank time deposits, master
demand notes, repurchase transactions having a maturity beyond seven days,
over-the-counter options held by the Fund and that portion of assets used to
cover such options and certain derivative instruments. This policy is not a
fundamental policy and does not limit purchases of restricted securities
eligible for resale to qualified institutional purchasers pursuant to Rule 144A
under the Securities Act of 1933 that are determined to be liquid by the Board
of Trustees or by the Manager under Board-approved guidelines. Such guidelines
take into account trading activity for such securities and the availability of
reliable pricing information, among other factors. If there is a lack of trading
interest in particular Rule 144A securities, the Fund's holdings of those
securities may be illiquid. There may be undesirable delays in selling illiquid
securities at prices representing their fair value. The expenses of registration
of restricted securities that are subject to legal restrictions on resale
(excluding securities that may be resold by the Fund pursuant to Rule 144A, as
explained in the Prospectus) may be negotiated at the time such securities are
purchased by the Fund. When registration is required, a considerable period may
elapse between a decision to sell the securities and the time the Fund would be
permitted to sell them. Thus, the Fund might not be able to obtain as favorable
a price as that prevailing at the time of the decision to sell.
The Fund also may acquire, through private placements, securities having
contractual resale restrictions, which might lower the amount realizable upon
the sale of such securities. Illiquid securities include repurchase agreements
maturing in more than seven days, or certain participation interests other than
those with puts exercisable within seven days.
o Loans of Portfolio Securities. The Fund may lend its portfolio
securities (other than in repurchase transactions) to brokers, dealers and other
financial institutions meeting certain credit standards if the loan is
collateralized in accordance with applicable regulatory requirements, and if,
after any loan, the value of securities loaned does not exceed 25% of the value
of the Fund's total assets. Under applicable regulatory requirements (which are
subject to change), the loan collateral must, on each business day, at least
equal the market value of the loaned securities and must consist of cash, bank
letters of credit, U.S. Government securities, or other cash equivalents in
which the Fund is permitted to invest. To be acceptable as collateral, letters
of credit must obligate a bank to pay amounts demanded by the Fund if the demand
meets the terms of the letter.
Such terms and the issuing bank must be satisfactory to the Fund. In a portfolio
securities lending transaction, the Fund receives from the borrower an amount
equal to the interest paid or the dividends declared on the loaned securities
during the term of the loan as well as the interest on the collateral
securities, less any finders' or administrative or other fees the Fund pays in
connection with the loan. The Fund may share the interest it receives on the
collateral securities with the borrower as long as it realizes at least a
minimum amount of interest required by the lending guidelines established by its
Board of Trustees. In connection with securities lending, the Fund might
experience risks of delay in receiving additional collateral, or risks of delay
in recovery of the securities, or loss of rights in the collateral should the
borrower fail financially. The Fund will not lend its portfolio securities to
any officer, trustee, employee or affiliate of the Fund or its Manager. The
terms of the Fund's loans must meet certain 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.
-14-
<PAGE>
o Borrowing for Leverage. From time to time, the Fund may increase its
ownership of securities by borrowing from banks on a unsecured basis and
investing the borrowed funds, subject to the restrictions stated in the
Prospectus. Any such borrowing will be made only from banks, and pursuant to the
current requirements of the Investment Company Act, will be made only to the
extent that the value of the Fund's assets, less its liabilities other than
borrowings, is equal to at least 300% of all borrowings including the proposed
borrowing and amounts covering the Fund's obligations under "forward roll"
transactions. If the value of the Fund's assets so computed should fail to meet
the 300% asset coverage requirement, the Fund is required within three days to
reduce its bank debt to the extent necessary to meet such requirement and may
have to sell a portion of its investments at a time when independent investment
judgment would not dictate such sale. Borrowing for investment increases both
investment opportunity and risk. Since substantially all of the Fund's assets
fluctuate in value, but borrowing obligations are fixed, when the Fund has
outstanding borrowings, the net asset value per share of the Fund
correspondingly will tend to increase and decrease more when portfolio assets
fluctuate in value than otherwise would be the case.
o "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 or are to be
delivered at a later date. 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. Such securities may bear interest at a lower rate than longer-term
securities. 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 (usually within two months
but generally 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 be required to
identify liquid securities, either debt or equity, to its Custodian in an amount
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 security 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 against a forward
commitment, it may incur a gain or loss.
-15-
<PAGE>
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. Although the Fund may enter into such transactions with
the intention of actually receiving or delivering the securities, when-issued
securities and forward commitments may be sold prior to settlement date. In
addition, changes in interest rates before settlement in a direction other than
that expected by the Manager will affect the value of such securities and may
cause a loss to the Fund.
When-issued transactions and forward commitments allow the Fund a
technique to use against anticipated changes in interest rates and prices. For
instance, in periods of rising interest rates and falling prices, the Fund might
sell securities in its portfolio on a forward commitment basis to attempt to
limit its exposure to anticipated falling prices. In periods of falling interest
rates and rising prices, the Fund might sell portfolio securities and purchase
the same or similar securities on a when-issued or forward commitment basis,
thereby obtaining the benefit of currently higher cash yields.
o Floating Rate/Variable Rate Obligations. Some of the notes the Fund may
purchase may have variable or floating interest rates. Variable rates are
adjustable at stated periodic intervals; floating rates are automatically
adjusted according to a specified market rate for such investments, such as the
percentage of the prime rate of a bank, or the 91-day U.S. Treasury Bill rate.
Such obligations may be secured by bank letters of credit or other credit
support arrangements.
o Hedging with Options and Futures Contracts. As described in the
Prospectus, the Fund may employ one or more types of Hedging Instruments for
temporary defensive purposes. The Fund's strategy of hedging with Futures and
options on Futures will be incidental to the Fund's activities in the underlying
cash market. Puts may also be written on debt securities to attempt to increase
the Fund's income. For hedging purposes, the Fund may use Interest Rate Futures;
Financial Futures (together with Interest Rate Futures, "Futures"); Forward
Contracts (defined below); and call and put options on debt securities, Futures,
bond indices and foreign currencies (all of the foregoing are referred to as
"Hedging Instruments"). Hedging Instruments may be used to attempt to: (i)
protect against possible declines in the market value of the Fund's portfolio
resulting from downward trends in the debt securities markets (generally due to
a rise in interest rates), (ii) protect unrealized gains in the value of the
Fund's debt securities which have appreciated, (iii) facilitate selling debt
securities for investment reasons, (iv) establish a position in the debt
securities markets as a temporary substitute for purchasing particular debt
securities, or (v) reduce the risk of adverse currency fluctuations. A call or
put may be purchased only if, after such purchase, the net value of all call and
put options owned by the Fund would not exceed 5% of the Fund's total assets.
The Fund will not use Futures and options on Futures for speculation. The
Hedging Instruments the Fund may use are described below.
When hedging to attempt to protect against declines in the market value of
the Fund's portfolio, to permit the Fund to retain unrealized gains in the value
of portfolio securities which have appreciated, or to facilitate selling
securities for investment reasons, the Fund may: (i) sell Futures, (ii) purchase
puts on such Futures or securities, (iii) write calls on securities held by it
or on Futures or (iv) purchase call options on interest rate, currency or asset
spreads. When hedging to attempt to
-16-
<PAGE>
protect against the possibility that portfolio securities are not fully included
in a rise in value of the debt securities market, the Fund may: (i) purchase
Futures, or (ii) purchase calls on such Futures or on securities. Covered calls
and puts may also be written on debt securities to attempt to increase the
Fund's income. When hedging to protect against declines in the dollar value of a
foreign currency-denominated security, the Fund may: (a) purchase puts on that
foreign currency and on foreign currency Futures, (b) write calls on that
currency or on such Futures, or (c) enter into Forward Contracts at a lower rate
than the spot ("cash") rate.
The Fund may also purchase calls and puts on spread options. Spread
options pay the difference between two interest rates, two exchange rates or two
referenced assets. Spread options are used to hedge the decline in the value of
an interest rate, currency or asset compared to a referenced or base interest
rate, currency or asset. The risks associated with spread options are similar to
those for individual interest rate options, foreign exchange options and debt or
equity options.
The Fund's strategy of hedging with Futures and options on Futures will be
incidental to the Fund's activities in the underlying cash market. Additional
Information about the Hedging Instruments the Fund may use is provided below.
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, legally permissible and
adequately disclosed.
o Writing Call Options. The Fund may write (that is, sell) call options
("calls") on debt securities that are traded on U.S. and foreign securities
exchanges and over-the-counter markets, to enhance income through the receipt of
premiums from expired calls and any net profits from closing purchase
transactions. After any such sale up to 100% of the Fund's total assets may be
subject to calls. All such calls written by the Fund must be "covered" while the
call is outstanding. Calls on Futures (discussed below) must be covered by
deliverable securities or by liquid assets segregated to satisfy the Futures
contract. When the Fund writes a call on a security it receives a premium and
agrees to sell the callable investment to a purchaser of a corresponding call on
the same security during the call period at a fixed exercise price (which may
differ from the market price of the underlying security), regardless of market
price changes during the call period. The Fund has retained the risk of loss
should the price of the underlying security decline during the call period,
which may be offset to some extent by the premium.
To terminate its obligation on a call it has written, the Fund may
purchase a corresponding call in a "closing purchase transaction." A profit or
loss will be realized, depending upon whether the net of the amount of the
option transaction costs and the premium received on the call written was more
or less than the price of the call subsequently purchased. A profit may also be
realized if the call lapses unexercised, because the Fund retains the underlying
investment and the premium received. Any such profits are considered short-term
capital gains for Federal income tax purposes, and when distributed by the Fund
are taxable as ordinary income. If the Fund could not effect a closing purchase
transaction due to lack of a market, it would have to hold the callable
investments until the call lapsed or was exercised.
-17-
<PAGE>
The Fund may also write calls on Futures without owning a futures contract
or a deliverable bond, provided that at the time the call is written, the Fund
covers the call by segregating in escrow an equivalent dollar amount of 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 Future. In no
circumstances would an exercise notice require the Fund to deliver a futures
contract; it would simply put the Fund in a short futures position, which is
permitted by the Fund's hedging policies.
o Writing Put Options. The Fund may write put options on debt securities
or Futures but only if such puts are covered by segregated liquid assets. The
Fund will not write puts if, as a result, more than 50% of the Fund's net assets
would be required to be segregated to cover such put obligations. In writing
puts, there is the risk that the Fund may be required to buy the underlying
security at a disadvantageous price. A put option on securities gives the
purchaser the right to sell, and the writer the obligation to buy, the
underlying investment at the exercise price during the option period. Writing a
put covered by segregated liquid assets equal to the exercise price of the put
has the same economic effect to the Fund as writing a covered call. The premium
the Fund receives from writing a put option represents a profit, as long as the
price of the underlying investment remains above the exercise price. However,
the Fund has also assumed the obligation during the option period to buy the
underlying investment from the buyer of the put at the exercise price, even
though the value of the investment may fall below the exercise price. If the put
lapses unexercised, the Fund (as the writer of the put) realizes a gain in the
amount of the premium. If the put is exercised, the Fund must fulfill its
obligation to purchase the underlying investment at the exercise price, which
will usually exceed the market value of the investment at that time. In that
case, the Fund may incur a loss, equal to the sum of the current market value of
the underlying investment plus the premium received minus the sum of the
exercise price and any transaction costs incurred.
When writing put options on securities, to secure its obligation to pay
for the underlying security, the Fund will deposit in escrow liquid assets with
a value equal to or greater than the exercise price of the put option. The Fund
therefore forgoes the opportunity of investing the segregated assets or writing
calls against those assets. As long as the obligation of the Fund as the put
writer continues, it may be assigned an exercise notice by the broker-dealer
through whom such option was sold, requiring the Fund to take delivery of the
underlying security against payment of the exercise price. The Fund has no
control over when it may be required to purchase the underlying security, since
it may be assigned an exercise notice at any time prior to the termination of
its obligation as the writer of the put. This obligation terminates upon
expiration of the put, or such earlier time at which the Fund effects a closing
purchase transaction by purchasing a put of the same series as that previously
sold. Once the Fund has been assigned an exercise notice, it is thereafter not
allowed to effect a closing purchase transaction.
The Fund may effect a closing purchase transaction to realize a profit on
an outstanding put option it has written or to prevent an underlying security
from being put. Furthermore, effecting such a closing purchase transaction will
permit the Fund to write another put option to the extent that the exercise
price thereof is secured by the deposited assets, or to utilize the proceeds
from the sale of such assets for other investments by the Fund. The Fund will
realize a profit or loss from a closing purchase transaction if the cost of the
transaction is less or more than the premium received from writing the option.
As above for writing covered calls, any and all such profits described herein
-18-
<PAGE>
from writing puts are considered short-term gains for Federal tax purposes, and
when distributed by the Fund, are taxable as ordinary income.
o Purchasing Calls and Puts. The Fund may purchase calls on debt
securities, spreads, or on Futures that are traded on U.S. and foreign
securities exchanges and the U.S. over-the-counter markets, in order to protect
against the possibility that the Fund's portfolio will not fully participate in
an anticipated rise in value of the long-term debt securities market. When the
Fund purchases a call (other than in a closing purchase transaction), it pays a
premium and, except as to calls on indices, spreads or Futures, has the right to
buy the underlying investment from a seller of a corresponding call on the same
investment during the call period at a fixed exercise price. When the Fund
purchases a call on an index, spread or Future, it pays a premium, but
settlement is in cash rather than by delivery of the underlying investment to
the Fund. In purchasing a call, the Fund benefits only if the call is sold at a
profit or if, during the call period, the market price of the underlying
investment is above the sum of the call price plus the transaction costs and the
premium paid and the call is exercised. If the call is not exercised or sold
(whether or not at a profit), it will become worthless at its expiration date
and the Fund will lose its premium payment and the right to purchase the
underlying investment.
The Fund may purchase put options ("puts") which relate to debt securities
(whether or not it holds such securities in its portfolio), spreads or Futures.
When the Fund purchases a put, it pays a premium and, except as to puts on
indices or spreads, has the right to sell the underlying investment to a seller
of a corresponding put on the same investment during the put period at a fixed
exercise price. Buying a put on an investment the Fund owns enables the Fund to
protect itself during the put period against a decline in the value of the
underlying investment below the exercise price by selling such underlying
investment at the exercise price to a seller of a corresponding put. If the
market price of the underlying investment is equal to or above the exercise
price and as a result the put is not exercised or resold, the put will become
worthless at its expiration date, and the Fund will lose its premium payment and
the right to sell the underlying investment. The put may, however, be sold prior
to expiration (whether or not at a profit.)
Buying a put on an investment it does not own, either a put on an index or
a put on a Future not held by the Fund, permits the Fund either to resell the
put or buy the underlying investment and sell it at the exercise price. The
resale price of the put will vary inversely with the price of the underlying
investment. If the market price of the underlying investment is above the
exercise price and as a result the put is not exercised, the put will become
worthless on its expiration date. In the event of a decline in the stock market,
the Fund could exercise or sell the put at a profit to attempt to offset some or
all of its loss on its portfolio securities. When the Fund purchases a put on an
index, or on a Future not held by it, the put protects the Fund to the extent
that the index moves in a similar pattern to the securities held. In the case of
a put on an index or Future, settlement is in cash rather than by delivery by
the Fund of the underlying investment.
Puts and calls on broadly-based indices or Futures are similar to puts and
calls on securities except that all settlements are in cash and gain or loss
depends on changes in the index in question (and thus on price movements in the
stock market generally) rather than on price movements in individual securities
or futures contracts. When the Fund buys a call on an index or Future, it pays
-19-
<PAGE>
a premium. During the call period, upon exercise of a call by the Fund, a seller
of a corresponding call on the same investment will pay the Fund an amount of
cash to settle the call if the closing level of the index or Future upon which
the call is based is greater than the exercise price of the call. That cash
payment is equal to the difference between the closing price of the index and
the exercise price of the call times a specified multiple (the "multiplier")
which determines the total dollar value for each point of difference. When the
Fund buys a put on an index or Future, it pays a premium and has the right
during the put period to require a seller of a corresponding put, upon the
Fund's exercise of its put, to deliver to the Fund an amount of cash to settle
the put if the closing level of the index or Future upon which the put is based
is less than the exercise price of the put. That cash payment is determined by
the multiplier, in the same manner as described above as to calls.
An option position may be closed out only on a market which provides
secondary trading for options of the same series and there is no assurance that
a liquid secondary market will exist for any particular option. The Fund's
option activities may affect its turnover rate and brokerage commissions. The
exercise by the Fund of puts on securities will cause the sale of related
investments, increasing portfolio turnover. Although such exercise is within the
Fund's control, holding a put might cause the Fund to sell the related
investments for reasons which would not exist in the absence of the put. The
Fund may pay a brokerage commission each time it buys a put or call, sells a
call, or buys or sells an underlying investment in connection with the exercise
of a put or call. Such commissions may be higher than those which would apply to
direct purchases or sales of such underlying investments. Premiums paid for
options are small in relation to the market value of the related investments,
and consequently, put and call options offer large amounts of leverage. The
leverage offered by trading in options could result in the Fund's net asset
value being more sensitive to changes in the value of the underlying
investments.
o Options on Foreign Currencies. The Fund intends to write and purchase
calls on foreign currencies. The Fund may purchase and write puts and calls on
foreign currencies that are traded on a securities or commodities exchange or
quoted by major recognized dealers in such options, for the purpose of
protecting against declines in the dollar value of foreign securities and
against increases in the dollar cost of foreign securities to be acquired. If a
rise is anticipated in the dollar value of a foreign currency in which
securities to be acquired are denominated, the increased cost of such securities
may be partially offset by purchasing calls or writing puts on that foreign
currency. If a decline in the dollar value of a foreign currency is anticipated,
the decline in value of portfolio securities denominated in that currency may be
partially offset by writing calls or purchasing puts on that foreign currency.
However, in the event of currency rate fluctuations adverse to the Fund's
position, it would lose the premium it paid and transactions costs. A call
written on a foreign currency by the Fund is covered if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange of other foreign currency held in its portfolio. A
call may be written by the Fund on a foreign currency to provide a hedge against
a decline due to an expected adverse change in the exchange rate in the U.S.
dollar value of a security which the Fund owns or has the right to acquire and
which is denominated in a currency other than that of underlying the option.
This is a cross-hedging strategy. In such circumstances, the Fund collateralizes
the option by maintaining in a segregated account with the Fund's custodian,
liquid assets in an amount not less
-20-
<PAGE>
than the value of the underlying foreign currency in U.S. dollars
marked-to-market daily.
o Futures. The Fund may buy and sell Futures. No price is paid or received
upon the purchase or sale of an Interest Rate Future or a foreign currency
exchange contract ("Forward Contract"), discussed below. 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. That obligation may
be satisfied by actual delivery of the debt security or by entering into an
offsetting contract. A securities index assigns relative values to the
securities included in that index and is used as a basis for trading long-term
Financial Futures contracts. Financial Futures reflect the price movements of
securities included in the index. They differ from Interest Rate Futures in that
settlement is made in cash rather than by delivery of the underlying investment.
Upon entering into a Futures transaction, the Fund will be required to
deposit an initial margin payment in cash or U.S. Treasury bills with the
futures commission merchant (the "futures broker"). The initial margin will be
deposited with the Fund's Custodian in an account registered in the futures
broker's name; however the futures broker can gain access to that account only
under specified conditions. As the Future is marked to market to reflect changes
in its market value, subsequent margin payments, called variation margin, will
be made to or by the futures broker on a daily basis. Prior to expiration of the
Future, if the Fund elects to close out its position by taking an opposite
position, a final determination of variation margin is made, additional cash is
required to be paid by or released to the Fund, and any loss or gain is realized
for tax purposes. Although Interest Rate Futures by their terms call for
settlement by delivery or acquisition of debt securities, in most cases the
obligation is fulfilled by entering into an offsetting position. All futures
transactions are effected through a clearinghouse associated with the exchange
on which the contracts are traded.
Financial Futures are similar to Interest Rate Futures except that
settlement is made in cash, and net gain or loss on options on Financial Futures
depends on price movements of the securities included in the index. The
strategies which the Fund employs regarding Financial Futures are similar to
those described above with regard to Interest Rate Futures.
o Forward Contracts. The Fund may enter into foreign currency exchange
contracts ("Forward Contracts"), which obligate the seller to deliver and the
purchaser to take a specific amount of foreign currency at a specific future
date for a fixed price. A Forward Contract involves bilateral obligations of one
party to purchase, and another party to sell, a specific currency at a future
date (which may be any fixed number of days from the date of the contract agreed
upon by the parties), at a price set at the time the contract is entered into.
These contracts are traded in the interbank market conducted directly between
currency traders (usually large commercial banks) and their customers. The Fund
may enter into a Forward Contract in order to "lock in" the U.S. dollar price of
a security denominated in a foreign currency which it has purchased or sold but
which has not yet settled, or to protect against a possible loss resulting from
an adverse change in the relationship between the U.S. dollar and a foreign
currency. There is a risk that use of Forward Contracts may reduce the gain that
would otherwise result from a change in the relationship between the U.S. dollar
and a foreign currency.
-21-
<PAGE>
The Fund may also enter into a forward contract to sell a foreign currency
denominated in a currency other than that in which the underlying security is
denominated. This technique is referred to as "cross hedging," and this is done
in the expectation that there is a greater correlation between the foreign
currency of the forward contract and the foreign currency of the underlying
investment than between the U.S. dollar and the foreign currency of the
underlying investment, or as a tactical allocation to take advantage of
differences in foreign interest rates. Cross hedges may be established with the
U.S. dollar as the base currency or with another currency closely correlated
with the U.S. dollar as the base.
The success of cross hedging is dependent on many factors, including the
ability of the Manager to correctly identify and monitor the correlation between
foreign currencies and the U.S. dollar and between foreign currencies and other
base currencies closely correlated with the U.S. dollar. To the extent that
these correlations are not identical, the Fund may experience losses or gains on
both the underlying security and the cross currency hedge.
The Fund may use Forward Contracts to protect against uncertainty in the
level of future exchange rates. The use of Forward Contracts does not eliminate
fluctuations in the prices of the underlying securities the Fund owns or intends
to acquire, but it does fix a rate of exchange in advance. In addition, although
Forward Contracts limit the risk of loss due to a decline in the value of the
hedged currencies, at the same time they limit any potential gain that might
result should the value of the currencies increase.
There is no limitation as to the percentage of the Fund's assets that may
be committed to foreign currency exchange contracts. The Fund will not enter
into such forward contracts or maintain a net exposure in such contracts to the
extent that the Fund would be obligated to deliver an amount of foreign currency
in excess of the value of the Fund's assets denominated in that currency, or
enter into a "cross hedge," unless it is denominated in a currency or currencies
that the Manager believes will have price movements that tend to correlate
closely with the currency in which the investment being hedged is denominated.
See "Tax Aspects of Covered Calls and Hedging Instruments" below for a
discussion of the tax treatment of foreign currency exchange contracts.
The Fund may enter into Forward Contracts with respect to specific
transactions. For example, when the Fund enters into a contract for the purchase
or sale of a security denominated in a foreign currency, or when the Fund
anticipates receipt of dividend payments in a foreign currency, the Fund may
desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar
equivalent of such payment by entering into a Forward Contract, for a fixed
amount of U.S. dollars per unit of foreign currency, for the purchase or sale of
the amount of foreign currency involved in the underlying transaction
("transaction hedge"). The Fund will thereby be able to protect itself against a
possible loss resulting from an adverse change in the relationship between the
currency exchange rates during the period between the date on which the security
is purchased or sold, or on which the payment is declared, and the date on which
such payments are made or received.
The Fund may also use Forward Contracts to lock in the U.S. dollar value of
portfolio positions ("position hedge"). In a position hedge, for example, when
the Fund believes that foreign
-22-
<PAGE>
currency may suffer a substantial decline against the U.S. dollar, it may enter
into a forward sale contract to sell an amount of that foreign currency
approximating the value of some or all of the Fund's portfolio securities
denominated in such foreign currency, or when the Fund believes that the U.S.
dollar may suffer a substantial decline against a foreign currency, it may enter
into a forward purchase contract to buy that foreign currency for a fixed dollar
amount. In this situation the Fund may, in the alternative, enter into a forward
contract to sell a different foreign currency for a fixed U.S. dollar amount
where the Fund believes that the U.S. dollar value of the currency to be sold
pursuant to the forward contract will fall whenever there is a decline in the
U.S. dollar value of the currency in which portfolio securities of the Fund are
denominated ("cross hedge").
The Fund's Custodian will place liquid assets in a separate account of the
Fund with the Custodian having a value equal to the aggregate amount of the
Fund's commitments under forward contracts entered into with respect to position
hedges and cross hedges. If the value of the assets placed in the separate
account declines, additional cash or securities will be placed in the account on
a daily basis so that the value of the account will equal the amount of the
Fund's obligations with respect to such contracts. As an alternative to
maintaining all or part of the separate account, the Fund may purchase a call
option permitting the Fund to purchase the amount of foreign currency being
hedged by a forward sale contract at a price no higher than the forward contract
price, or the Fund may purchase a put option permitting the Fund to sell the
amount of foreign currency subject to a forward purchase contract at a price as
high or higher than the forward contract price. Unanticipated changes in
currency prices may result in poorer overall performance for the Fund than if it
had not entered into such contracts.
The precise matching of the Forward Contract amounts and the value of the
securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of these securities between the date the Forward Contract
is entered into and the date it is sold. Accordingly, it may be necessary for
the Fund to purchase additional foreign currency on the spot (i.e., cash) market
(and bear the expense of such purchase), if the market value of the security is
less than the amount of foreign currency the Fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency. Conversely, it may be necessary to sell on the spot market some of the
foreign currency received upon the sale of the portfolio security if its market
value exceeds the amount of foreign currency the Fund is obligated to deliver.
The projection of short-term currency market movements is extremely difficult,
and the successful execution of a short-term hedging strategy is highly
uncertain. Forward Contracts involve the risk that anticipated currency
movements will not be accurately predicted, causing the Fund to sustain losses
on these contracts and transactions costs.
At or before the maturity of a Forward Contract requiring the Fund to sell
a currency, the Fund may either sell a portfolio security and use the sale
proceeds to make delivery of the currency or retain the security and offset its
contractual obligation to deliver the currency by purchasing a second contract
pursuant to which the Fund will obtain, on the same maturity date, the same
amount of the currency that it is obligated to deliver. Similarly, the Fund may
close out a Forward Contract requiring it to purchase a specified currency by
entering into a second contract entitling it to sell the same amount of the same
currency on the maturity date of the first contract. The Fund would realize
-23-
<PAGE>
a gain or loss as a result of entering into such an offsetting Forward Contract
under either circumstance to the extent the exchange rate or rates between the
currencies involved moved between the execution dates of the first contract and
offsetting contract.
The cost to the Fund of engaging in Forward Contracts varies with factors
such as the currencies involved, the length of the contract period and the
market conditions then prevailing. Because Forward Contracts are usually entered
into on a principal basis, no fees or commissions are involved. Because such
contracts are not traded on an exchange, the Fund must evaluate the credit and
performance risk of each particular counterparty under a Forward Contract.
Although the Fund values its assets daily in terms of U.S. dollars, it
does not intend to convert its holdings of foreign currencies into U.S. dollars
on a daily basis. The Fund may convert foreign currency from time to time, and
investors should be aware of the costs of currency conversion. Foreign exchange
dealers do not charge a fee for conversion, but they do seek to realize a profit
based on the difference between the prices at which they buy and sell various
currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at
one rate, while offering a lesser rate of exchange should the Fund desire to
resell that currency to the dealer.
o 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 that master agreement shall be regarded as
parts of an integral agreement. If on any date amounts are payable in the same
currency in respect of one or more swap transactions, the net amount payable on
that date in that currency shall be paid. In addition, the master netting
agreement may provide that if one party defaults generally or on one swap, the
counterparty may terminate the swaps with that party. Under such agreements, if
there is a default resulting in a loss to one party, the measure of that party's
damages is calculated by reference to the average cost of a replacement swap
with respect to each swap (i.e., the mark-to-market value at the time of the
termination of each swap). The gains and losses on all swaps are then netted,
and the result is the counterparty's gain or loss on termination. The
termination of all swaps and the netting of gains and losses on termination is
generally referred to as "aggregation".
o Commodity Futures Contracts. The Fund intends to invest a portion of its
assets in commodity futures contracts (referred to as commodity futures).
Commodity futures may be based upon commodities within five main commodity
groups: (1) energy, which includes crude oil, natural gas, gasoline and heating
oil; (2) livestock, which includes cattle and hogs; (3) agriculture, which
includes wheat, corn, soybeans, cotton, coffee, sugar and cocoa; (4) industrial
metals, which includes aluminum, copper, lead, nickel, tin and zinc; and (5)
precious metals, which includes gold, platinum and silver. For hedging purposes,
the Fund may purchase and sell commodity futures contracts,
-24-
<PAGE>
options on futures contracts and options and futures on commodity indices with
respect to these five main commodity groups and the individual commodities
within each group, as well as other types of commodities.
o Characteristics of the commodity futures markets. A commodity futures
contract is an agreement between two parties in which one party agrees to buy an
asset from the other party at a later date at a price and quantity agreed upon
when the contract is made. In the United States, commodity futures contracts are
traded on futures exchanges. These futures exchanges offer a central marketplace
for transactions in futures contracts, a clearing corporation to process trades,
a standardization of expiration dates and contract sizes, and the availability
of a secondary market. Futures markets also regulate the terms and conditions of
delivery as well as the maximum permissible price movement during a trading
session. Additionally, the commodity futures exchanges have position limit rules
which limit the amount of futures contracts that any one party may hold in a
particular commodity at any point in time. These position limit rules are
designed to prevent any one participant from controlling a significant portion
of the market.
o Comparison to forward contracts. Futures contracts and forward contracts
have the same economic effect: both are an agreement to purchase a specified
amount of a specified commodity at a specified future date for a price agreed
upon at the time the contract is entered into. However, there are significant
differences in the two types of contracts. Forward contracts are individually
negotiated transactions and are not exchange traded.
o Storage Costs. As in the financial futures markets, there are hedgers
and speculators in the commodity futures markets. However, unlike financial
instruments, commodities entail costs of physical storage when purchased. For
instance, a large manufacturer of baked goods that wishes to hedge against a
rise in the price of wheat has two basic choices: (i) it can purchase the wheat
today in the cash market and store the wheat at its cost until it needs the
wheat to produce baked goods, or (ii) it can buy commodity futures related to
wheat. The price of the commodity futures will reflect the storage costs
associated with purchasing the physical commodity. To the extent that these
storage costs change for an underlying commodity while the Fund is "long" (that
is, owns) futures contracts on that commodity, the value of the futures contract
may change commensurately.
o Reinvestment Risk. In the commodity futures markets, if producers of the
underlying commodity wish to hedge the price risk of selling the commodity, they
will sell futures contracts to lock in the price of the commodity at delivery in
the future. In order to induce speculators to take the corresponding purchase
side of the same futures contract, the commodity producer must be willing to
sell the futures contract at a price which is below the expected future spot
price. Conversely, if the predominant group of hedgers in the futures market are
the purchasers of the underlying commodity who purchase futures contracts to
hedge against a rise in prices, then speculators will take the short side of the
futures contract only if the futures price is greater than the expected future
spot price of the commodity.
o Strategies. The changing strategies of the hedgers and speculators in
the commodity markets can determine whether futures prices are above or below
the expected future spot price. This can have significant implications for the
Fund when it is time to reinvest the proceeds from a
-25-
<PAGE>
maturing futures contract into a new futures contract. If the strategy of
hedgers and speculators in futures markets has shifted such that commodity
purchasers are the predominant group of hedgers in the market, the Fund might
have to reinvest at higher futures prices or choose other related commodity
investments.
o Additional Economic Factors. The values of commodities which underlie
commodity futures contracts are subject to additional variables which may be
less significant in the case of traditional securities such as stocks and bonds.
Variables such as drought, floods, weather, livestock disease, embargoes and
tariffs may have a greater impact on commodity prices and commodity- linked
instruments, including futures contracts, Hybrid Instruments, commodity options
and commodity swaps, than on traditional securities. These additional variables
may create additional investment risks which subject the Fund's
commodity-related investments to greater volatility than investments in
traditional securities.
o Leverage. There is much greater leverage in futures trading than in
trading stocks and bonds. As a registered investment company, the Fund must pay
in full for all securities it purchases. In other words, the Fund is not allowed
to purchase securities on margin. However, for hedging purposes, the Fund is
allowed to purchase futures contracts on margin where the initial margin
requirements are typically between 3 and 6 percent of the face value of the
contract. That means the Fund is required to pay up front only between 3 to 6
percent of the face value of the futures contract. Therefore, the Fund has a
higher degree of leverage in its futures contract purchases than in its stock
purchases. As a result there may be greater volatility in the rates of return on
futures contract purchases than on stock purchases.
o Price volatility. Despite the daily price limits on the futures
exchanges, the short-term price volatility of commodity futures contracts has
been historically greater than that for traditional securities such as stocks
and bonds. To the extent that the Fund invests in commodity futures contracts,
the assets of the Fund, and hence the net asset value of Fund shares, may be
subject to greater volatility.
o Marking-to-market futures positions. The futures clearinghouse marks
every futures contract to market at the end of each trading day, to ensure that
the outstanding futures obligations are limited by the maximum daily permissible
price movement. This process of marking-to-market is designed to prevent losses
from accumulating in any futures account. Therefore, if the Fund's futures
positions have declined in value, the Fund may be required to post additional
margin to cover that decline. Alternatively, if the Fund's futures positions
have increased in value, that increase will be credited to the Fund's account.
o Characteristics of the commodity futures markets. Commodity futures
contracts are an agreement between two parties for one party to buy an asset
from the other party at a later date at a price and quantity agreed upon today.
Commodity futures contracts are traded on futures exchanges. These futures
exchanges offer a central marketplace in which to transact futures contracts, a
clearing corporation to process trades, a standardization of expiration dates
and contract sizes, and the availability of a secondary market. Futures markets
also specify the terms and conditions of delivery as well as the maximum
permissible price movement during a trading session.
-26-
<PAGE>
Additionally, the commodity futures exchanges have position limit rules which
limit the amount of futures contracts that any one party may hold in a
particular commodity at any point in time. These position limit rules are
designed to prevent any one participant from controlling a significant portion
of the market.
o Additional Information About Hedging Instruments and Their Use. 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
traded on exchanges or as to other acceptable escrow securities, so that no
margin will be required for such transactions. OCC will release the securities
on the expiration of the option or upon the Fund's entering into a closing
transaction. An option position may be closed out only on a market which
provides secondary trading for options of the same series, and there is no
assurance that a liquid secondary market will exist for any particular option.
When the Fund writes an over-the-counter ("OTC") option, it will enter
into an arrangement with a primary U.S. Government securities dealer, which
would establish a formula price at which the Fund would have the absolute right
to repurchase that OTC option. That formula price would generally be based on a
multiple of the premium received for the option, plus the amount by which the
option is exercisable below the market price of the underlying security (that
is, the extent to which the option is "in-the-money"). When the Fund writes an
OTC option, it will treat as illiquid (for purposes of the limit on its assets
that may be invested in illiquid securities, stated in the Prospectus) the
mark-to-market value of any OTC option held by it unless the option is subject
to a buy-back agreement by the executing broker. The Securities and Exchange
Commission ("SEC") is evaluating whether OTC options should be considered liquid
securities, and the procedure described above could be affected by the outcome
of that evaluation.
o 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 the Rule 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 options
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 options on futures 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 each of the exchanges governing the maximum number of options which may be
written or held by a single investor or group of investors acting in concert,
regardless of whether the options were written or purchased on the same or
different exchanges or are held in one or more accounts or through one or more
exchanges or 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 or an affiliated investment advisor.
Position limits also apply to Futures. An exchange
-27-
<PAGE>
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 bank, 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.
o Tax Aspects of Covered Calls and Hedging Instruments. Certain foreign
currency exchange contracts ("Forward Contracts") in which the Fund may invest
are treated as "section 1256 contracts." Gains or losses relating to section
1256 contracts generally are characterized under the Internal Revenue Code as
60% long-term and 40% short-term capital gains or losses. However, foreign
currency gains or losses arising from certain section 1256 contracts (including
Forward Contracts) generally are treated as ordinary income or loss. In
addition, section 1256 contracts held by the Fund at the end of each taxable
year are "marked-to market" with the result that unrealized gains or losses are
treated as though they were realized. These contracts also may be marked-to-
market for purposes of the excise tax applicable to investment company
distributions and for other purposes under rules prescribed pursuant to the
Internal Revenue Code. An election can be made by the Fund to exempt these
transactions from this mark-to-market treatment.
Certain Forward Contracts entered into by the Fund may result in
"straddles" for Federal income tax purposes. The straddle rules may affect the
character and timing of gains (or losses) recognized by the Fund on straddle
positions. Generally, a loss sustained on the disposition of a position making
up a straddle is allowed only to the extent such loss exceeds any unrecognized
gain in the offsetting positions making up the straddle. Disallowed loss is
generally allowed at the point where there is no unrecognized gain in the
offsetting positions making up the straddle, or the offsetting position is
disposed of.
Under the Internal Revenue Code, gains or losses attributable to
fluctuations in exchange rates that occur between the time the Fund accrues
interest or other receivables or accrues expenses or other liabilities
denominated in a foreign currency and the time the Fund actually collects such
receivables or pays such liabilities generally are treated as ordinary income or
ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of foreign currency forward contracts, gains
or losses attributable to fluctuations in the value of a foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. Currency gains and losses
are offset against market gains and losses before determining a net "Section
988" gain or loss under the Internal Revenue Code, which may increase or
decrease the amount of the Fund's investment company income available for
distribution to its shareholders.
o Possible Risk Factors in Hedging. In addition to the risks with respect
to options discussed in the Prospectus and above, there is a risk in using short
hedging by selling Futures to attempt to protect against decline in value of the
Fund's portfolio securities (due to an increase in interest rates) that the
prices of such Futures will correlate imperfectly with the behavior of the cash
(i.e., market value) prices of the Fund's 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.
-28-
<PAGE>
First, all participants in the futures markets are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures markets depend on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures markets could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures
markets are less onerous than margin requirements in the securities markets.
Therefore, increased participation by speculators in the futures markets may
cause temporary price distortions.
If the Fund uses Hedging Instruments to establish a position in the debt
securities markets as a temporary substitute for the purchase of individual debt
securities (long hedging) by buying Futures and/or calls on such Futures or on
debt securities, it is possible that the market may decline; if the Fund then
concludes not to invest in such securities at that time because of concerns as
to possible further market decline or for other reasons, the Fund will realize a
loss on the Hedging Instruments that is not offset by a reduction in the price
of the debt securities purchased.
Other Investment Restrictions
The Fund's most significant investment restrictions are set forth in the
Prospectus. There are additional investment restrictions that the Fund must
follow that are fundamental policies of the Fund. 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 shareholders'
meeting, if the holders of more than 50% of the outstanding shares are present
or represented by a proxy, or (ii) more than 50% of the outstanding shares.
Under these additional restrictions, the Fund cannot do any of the
following:
o The Fund cannot buy or sell real estate, or commodities or commodity
contracts; however, the Fund may invest in debt securities secured by real
estate or interests therein or issued by companies, including real estate
investment trusts, which invest in real estate or interests therein, and the
Fund may buy and sell Hedging Instruments;
o The Fund cannot buy securities on margin, except that the Fund may make
margin deposits in connection with any of the Hedging Instruments which it may
use;
o The Fund cannot underwrite securities issued by other persons except to
the extent that, in connection with the disposition of its portfolio
investments, it may be deemed to be an underwriter for purposes of the
Securities Act of 1933;
o The Fund cannot buy and retain securities of any issuer if those
officers, Trustees or Directors of the Fund or the Manager who beneficially own
more than 0.5% of the securities of such issuer together own more than 5% of the
securities of such issuer;
-29-
<PAGE>
o The Fund cannot invest in oil, gas, or other mineral exploration or
development programs;
o The Fund cannot buy the securities of any company for the purpose of
exercising
management control;
o The Fund cannot make loans, except by purchasing debt obligations in
accordance with its investment objectives and policies, or by entering into
repurchase agreements, or as described in "Loans of Portfolio Securities";
o The Fund cannot buy securities of an issuer which, together with any
predecessor, has been in operation for less than three years, if as a result,
the aggregate of such investments would exceed 5% of the value of the Fund's
total assets; or
o The Fund cannot make short sales of securities or maintain a short
position, unless at all times when a short position is open it owns an equal
amount of such securities or by virtue of ownership of other securities has the
right, without payment of further consideration to obtain an equal amount of
securities sold short.
For purposes of the Fund's policy not to concentrate as described in the
Prospectus, the Fund has adopted the corporate industry classifications set
forth in Appendix A to this Statement of Additional Information. This is not a
fundamental policy.
How the Fund Is Managed
Organization and History. As a series of 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.
Each Share of the Fund represents an interest in the Fund proportionately
equal to the interest of each other share of the same class and entitles the
holder to one vote per share (and a fractional vote for a fractional share) on
matters submitted to their vote at shareholders' meetings. Shareholders of the
Fund vote together in the aggregate on certain matters at shareholder meetings,
such as the election of Trustees and ratification of appointment of auditors for
the Fund. Shareholders of a particular series or class vote separately on
proposals which affect that series or
-30-
<PAGE>
class, and shareholders of a series or class which is not affected by that
matter are not entitled to vote on the proposal.
The Trustees are authorized to create new series and classes of series.
The Trustees may reclassify unissued shares of the Fund or its series or classes
into additional series or classes of shares. The Trustees may also divide or
combine the shares of a class into a greater or lesser number of shares without
thereby changing the proportionate beneficial interest of a shareholder in the
Fund. Shares do not have cumulative voting rights or preemptive or subscription
rights. Shares may be voted in person or by proxy.
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 and occupations during the past
five years are listed below. All of the Trustees are also trustees, directors or
managing general partners of Oppenheimer Total Return Fund, Inc., Oppenheimer
Real Asset Fund, Oppenheimer Equity Income Fund, Oppenheimer High Yield Fund,
Oppenheimer Cash Reserves, Oppenheimer Municipal Fund, Oppenheimer Limited-Term
Government Fund, The New York Tax-Exempt Income Fund, Inc., Centennial America
Fund, L.P., Oppenheimer Champion Income Fund, Oppenheimer Main Street Funds,
Inc., Oppenheimer International Bond Fund, Oppenheimer Variable Account Funds,
and Oppenheimer Integrity Funds; as well as the following "Centennial Funds":
Daily Cash Accumulation Fund, Inc., Centennial Money Market Trust, Centennial
Government Trust, Centennial New York Tax Exempt Trust, Centennial Tax Exempt
Trust, Centennial California Tax Exempt Trust and Panorama Series Fund, Inc.,
(all of the foregoing funds are collectively referred to as the "Denver-based
Oppenheimer funds") except for Mr. Fossel who is not a trustee of Centennial New
York Tax-Exempt Trust or a Managing General Partner of Centennial America Fund,
L.P. All of the Fund's officers except Messrs. Steinmetz and Negri are officers
of the Denver-based Oppenheimer funds. Ms. Macaskill is President and Mr. Swain
is Chairman and Chief Executive Officer of the Denver-based Oppenheimer funds.
As of January 2, 1998, the Trustees and officers of the Fund as a group owned
less than 1% of each class of shares of the Fund. The foregoing statement does
not reflect ownership of shares held of record by an employee benefit plan for
employees of the Manager (for which plan two officers of the Fund, Bridget A.
Macaskill and Andrew J. Donohue, are trustees), other than the shares
beneficially owned under that plan by officers of the Fund listed above.
-31-
<PAGE>
Robert G. Avis, Trustee;* Age 66
One North Jefferson Ave., St. Louis, Missouri 63103
Vice Chairman of A.G. Edwards & Sons, Inc. (a broker-dealer) and A.G. Edwards,
Inc. (its parent holding company); Chairman of A.G.E. Asset Management and A.G.
Edwards Trust Company (its affiliated investment advisor and trust company,
respectively).
William A. Baker, Trustee; Age 82
197 Desert Lakes Drive, Palm Springs, California 92264
Management Consultant.
Charles Conrad, Jr., Trustee; Age 67
1501 Quail Street, Newport Beach, California 92660
Chairman and Chief Executive Officer of Universal Space Lines, Inc. (a space
services management company); formerly Vice President of McDonnell Douglas Space
Systems Co. and associated with the National Aeronautics and Space
Administration.
Jon S. Fossel, Trustee; Age 55
P.O. Box 44, Mead Street, Waccabuc, New York 10597
Member of the Board of Governors of the Investment Company Institute (a national
trade association of investment companies), Chairman of the Investment Company
Institute Education Foundation; formerly Chairman and a director of the Manager,
President and a director of Oppenheimer Acquisition Corp. ("OAC"), the Manager's
parent holding company, and Shareholder Services, Inc. ("SSI") and Shareholder
Financial Services, Inc. ("SFSI"), transfer agent subsidiaries of the Manager.
Sam Freedman, Trustee; Age 57
4975 Lakeshore Drive, Littleton, Colorado 80123
Formerly Chairman and Chief Executive Officer of OppenheimerFunds Services,
Chairman, Chief Executive Officer and a director of SSI, Chairman, Chief
Executive and Officer director of SFSI, Vice President and director of OAC and a
director of OppenheimerFunds, Inc.
Raymond J. Kalinowski, Trustee; Age 68
44 Portland Drive, St. Louis, Missouri 63131
Director of Wave Technologies International, Inc. (a computer products training
company); formerly Vice Chairman and a director of A.G. Edwards, Inc., parent
holding company of A.G. Edwards & Sons, Inc. (a broker-dealer), of which he was
a Senior Vice President.
C. Howard Kast, Trustee; Age 76
2552 East Alameda, Denver, Colorado 80209
Formerly the Managing Partner of Deloitte, Haskins & Sells (an accounting firm).
- ------------------------
* A Trustee who is an "interested person" of the Fund as defined in the
Investment Company Act.
-32-
<PAGE>
Robert M. Kirchner, Trustee; Age 76
7500 E. Arapahoe Road, Englewood, Colorado 80112
President of The Kirchner Company (management consultants).
Ned M. Steel, Trustee; Age 82
3416 S. Race Street, Englewood, Colorado 80110
Chartered Property and Casualty Underwriter; Director of Visiting Nurse
Corporation of Colorado.
James C. Swain, Chairman, Chief Executive Officer and Trustee;* Age 64 6803
South Tucson Way, Englewood, Colorado 80012 Vice Chairman of the Manager;
formerly President and a Director of Centennial Asset Management Corporation, an
investment advisor subsidiary of the Manager ("Centennial"); a director of the
Manager and Chairman of the Board of SSI.
Bridget A. Macaskill, President; Age 49
President, Chief Executive Officer and a Director of the Manager; President and
director of HarbourView Asset Management("HarbourView"); Chairman and a director
of SSI, and SFSI; President and a director of OAC; President and a director of
Oppenheimer Partnership Holdings, Inc., a holding company subsidiary of the
Manager; a director of Oppenheimer Real Asset Management, Inc.; a director of
the NASDAQ Stock Market, Inc. and of Hillsdown Holdings plc, (a U.K. food
company); formerly an Executive Vice President of the Manager.
Andrew J. Donohue, Vice President and Secretary; Age 48
Executive Vice President, General Counsel and a Director of the Manager;
Executive Vice President, and a director of the Distributor; Executive Vice
President, General Counsel and a director of HarbourView, SSI, SFSI and
Oppenheimer Partnership Holdings, Inc.; President and a director of Centennial;
President and a director of Oppenheimer Real Asset Management, Inc.; General
Counsel and Secretary of OAC; an officer of other Oppenheimer funds.
George C. Bowen, Treasurer; Vice President, Assistant Secretary and
Treasurer; Age 61
6803 Tucson Way, Englewood, Colorado 80112
Senior Vice President and Treasurer of the Manager; Vice President and Treasurer
of the Distributor; Vice President and Treasurer of HarbourView; Senior Vice
President, Treasurer and a director of Centennial; President, Treasurer and a
director of Centennial Capital Corporation; Vice President and Treasurer and
Secretary of SSI; Vice President, Treasurer and Secretary of SFSI; Treasurer of
OAC; Treasurer of Oppenheimer Partnership Holdings, Inc.; Vice President and
Treasurer of Oppenheimer Real Asset Management, Inc.; a Trustee, Director and
officer of other Oppenheimer funds.
- ------------------------
* A Trustee who is an "interested person" of the Fund as defined in the
Investment Company Act.
-33-
<PAGE>
Arthur P. Steinmetz, Vice President and Portfolio Manager; Age 39
Two World Trade Center, New York, New York 10048-0203
Senior Vice President of the Manager; an officer of other Oppenheimer funds.
David P. Negri, Vice President and Portfolio Manager; Age 43
Two World Trade Center, New York, New York 10048-0203
Vice President of the Manager; an officer of other Oppenheimer funds.
Robert G. Zack, Assistant Secretary; Age 49
Two World Trade Center, New York, New York 10048-0203
Senior Vice President and Associate General Counsel of the Manager, Assistant
Secretary of SSI and SFSI; an officer of other Oppenheimer funds.
Robert J. Bishop, Assistant Treasurer; Age 39
6803 South Tucson Way, Englewood, Colorado 80012
Vice President of the Manager/Mutual Fund Accounting; an officer of other
Oppenheimer funds; formerly an Assistant Vice President of the Manager/Mutual
Fund Accounting and a Fund Controller of the Manager.
Scott Farrar, Assistant Treasurer; Age 32
6803 South Tucson Way, Englewood, Colorado 80012
Vice President of the Manager/Mutual Fund Accounting, an officer of other
Oppenheimer funds; formerly an Assistant Vice President of the Manager/Mutual
Fund Accounting and a Fund Controller for the Manager.
o Remuneration of Trustees. The officers of the Trust and certain Trustees
of the Fund are affiliated with the Manager (Mr. Swain, who is both an officer
and a Trustee) receive no salary or fee from the Fund. Mr. Fossel did not
receive any salary or fees from the Fund prior to January 1, 1997. The remaining
Trustees of the Fund received the compensation shown below. The compensation
from the Fund was paid during its fiscal year ended September 30, 1997.
Compensation from all of the Denver-based Oppenheimer funds includes the Fund
and compensation is received as a Trustee, Director, Managing General Partner or
member of a committee of the Board of those funds during the calendar year 1997.
Compensation is paid for services in the positions listed beneath their names:
Total Compensation
Aggregate From All
Compensation Denver-based
Name and Position from Fund Oppenheimer funds1
Robert G. Avis $ 8,748 $63,501
Trustee
-34-
<PAGE>
Total Compensation
Aggregate From All
Compensation Denver-based
Name and Position from Fund Oppenheimer funds1
William A. Baker $12,022 $77,502
Audit and Review
Committee Member,
Ex Offico Member2
and Trustee
Charles Conrad, Jr. $11,268 $72,000
Trustee3
Jon S. Fossel $ 8,748 $63,277
Trustee
Sam Freedman $11,461 $66,501
Audit and Review
Committee Member2
and Trustee
Raymond J. Kalinowski $11,186 $71,561
Audit and Review Committee
Member2 and Trustee
C. Howard Kast $11,186 $76,503
Audit and Review Committee
Chairman2 and Trustee3
Robert M. Kirchner $11,268 $72,000
Trustee
Ned M. Steel $8,748 $63,501
Trustee
- ----------------------
1 For the 1997 calendar year.
2 Committee positions effective July 1, 1997.
3 Prior to July 1, 1997, Messrs. Conrad and Kirchner were also members of the
Audit and Review Committee.
Deferred Compensation Plan. The Board of Trustees has adopted a Deferred
Compensation plan for disinterested Trustees that enables Trustees to elect to
defer receipt of all or a portion of the
-35-
<PAGE>
annual fees they are entitled to receive from the Fund. As of September 30,
1997, none have elected to do so. Under the plan, the compensation deferred by a
Trustee is periodically adjusted as though an equivalent amount had been
invested in shares of one or more Oppenheimer funds selected by the Trustee. The
amount paid to the Trustee under the plan will be determined based upon the
performance of the selected funds. Deferral of Trustees' fees under the plan
will not materially affect the Fund's assets, liabilities or net income per
share. The plan will not obligate the Fund to retain the services of any Trustee
or to pay any particular level of compensation to any Trustee. Pursuant to an
Order issued by the SEC, the Fund may invest in the funds selected by the
Trustee under the plan for the limited purpose of determining the value of the
Trustee's deferred fee account.
Major Shareholders. As of January 2, 1998, no person owned of record or was
known by the Fund to own beneficially 5% or more of the Fund's outstanding Class
A, Class B or Class C shares except: Merrill Lynch Pierce Fenner & Smith, Inc.,
4800 Deer Lake Drive, Jacksonville, Florida 32246- 6484, which owned of record
11,111,382.787 Class C shares (approximately 11.71% of the Class C shares then
outstanding). The Manager has been advised that such shares were held by Merrill
Lynch for the benefit of its customers. As of that date, there were no
outstanding Class Y 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 one
of whom (Mr. Swain) serves as Trustee of the Fund.
The Manager and the Fund have a Code of Ethics. It is designed to detect
and prevent improper personal trading by certain employees, including portfolio
managers, that would compete with or take advantage of the Fund's portfolio
transactions. Compliance with the Code of Ethics is carefully monitored and
strictly enforced by the Manager.
|X| Portfolio Management. The portfolio managers of the Fund are Arthur P.
Steinmetz and David P. Negri, who are principally responsible for the day-to-day
management of the Fund's portfolio. The background of Messrs. Steinmetz and
Negri is described in the Prospectus under "Portfolio Managers." Other members
of the Manager's fixed-income portfolio department, particularly portfolio
analysts, traders and portfolio managers having broad experience with domestic
and international government and corporate fixed-income securities, provide the
Fund's portfolio managers with counsel and support in managing the Fund's
portfolio.
o The Investment Advisory Agreement. A management fee is payable monthly to
the Manager under the terms of the investment advisory agreement between the
Manager and the Fund, and is computed on the aggregate net assets of the Fund as
of the close of business each day. The investment advisory agreement 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
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.
-36-
<PAGE>
Expenses not expressly assumed by the Manager under the advisory agreement
or by the Distributor 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 unaffiliated trustees, legal,
bookkeeping and audit expenses, custodian and transfer agent expenses, share
issuance costs, certain printing and registration costs and non-recurring
expenses, including litigation. During the Fund's fiscal years ended September
30, 1995, 1996 and 1997, the management fees paid by the Fund to the Manager
were $25,850,869, $30,343,674 and $37,014,867, respectively.
The Investment Advisory Agreement contains no expense limitation. However,
because of state regulations limiting fund expenses that previously applied, the
Manager had voluntarily undertaken that the Fund's total expenses in any fiscal
year (including the investment advisory fee but exclusive of taxes, interest,
brokerage commissions, distribution plan payments and any extraordinary
non-recurring expenses, including litigation) would not exceed the most
stringent state regulatory limitation applicable to the Fund. Due to changes in
federal securities laws, such state regulations no longer apply and the
Manager's undertaking is therefore inapplicable and has been withdrawn. During
the Fund's last fiscal year, the Fund's expenses did not exceed the most
stringent state regulatory limit and the voluntary undertaking was not invoked.
The advisory agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence in the performance of its duties, or
reckless disregard of its obligations and duties under the advisory agreement,
the Manager is not liable for any loss sustained by reason of good faith errors
or omissions in connection with any matters to which the Agreement relates. The
advisory agreement permits the Manager to act as investment advisor for any
other person, firm or corporation and to use the name "Oppenheimer" in
connection with other investment companies for which it may act as investment
advisor or general distributor. If the Manager or one of its affiliates shall no
longer act as investment advisor to the Fund, the right of the Fund to use the
name "Oppenheimer" as part of its name may be withdrawn.
o The Distributor. Under its General Distributor's Agreement with the
Fund, the Distributor acts as the Fund's principal underwriter in the continuous
public offering of the Fund's Class A, Class B, Class C shares and Class Y
shares, but is not obligated to sell a specific number of shares. Expenses
normally attributable to sales (other than those paid under the Distribution and
Service Plans), including advertising and the cost of printing and mailing
prospectuses (other than those furnished to existing shareholders), are borne by
the Distributor. During the Fund's fiscal years ended September 30, 1995, 1996
and 1997, the aggregate amount of sales charges on sales of the Fund's Class A
shares was $16,024,553, $17,340,997 and $16,024,553, respectively, of which the
Distributor and an affiliated broker-dealer retained in the aggregate
$4,566,642, $5,066,780 and $5,660,176 in those respective years. During the
Fund's fiscal years ended September 30, 1995, 1996 and 1997, the contingent
deferred sales charges collected on the Fund's Class B shares totalled
$5,144,993, $5,337,650 and $6,604,974, respectively, all of which the
Distributor retained. During the Fund's fiscal period May 26, 1995 through
September 30, 1995 and the fiscal years ended September 30, 1996 and 1997, the
contingent deferred sales charges collected on the Fund's Class C shares
totalled $5,409, $81,871 and $191,856, all of which the Distributor retained.
For additional information about distribution of the Fund's shares and the
expenses connected with such activities,
-37-
<PAGE>
please refer to "Distribution and Service Plans," below.
o The Transfer Agent. OppenheimerFunds Services, as 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 Investment Advisory Agreement is to arrange the portfolio
transactions of the Fund. The Investment 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 Investment
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 or base its selection on "posted" rates, but is
expected to be aware of the current rates of eligible brokers and to minimize
the commissions paid to the extent consistent with the provisions of the
advisory agreement and the interests and policies of the Fund as established by
its Board of Trustees.
Under the Investment Advisory Agreement, the Manager is authorized to
select brokers which 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 the shares of the Fund and other investment companies
managed by the Manager or its affiliates as a factor in the selection of brokers
for the Fund's portfolio transactions. Most purchases made by the Fund are
principal transactions at net prices, and the Fund incurs little or no brokerage
costs.
Description of Brokerage Practices Followed by the Manager. Subject to the
provisions of the Investment Advisory Agreement and the procedures and rules
described above, allocations of brokerage generally are made by the Manager's
portfolio traders upon recommendation from the Manager's portfolio managers. In
certain instances, portfolio managers may place trades and allocate brokerage,
also subject to the provisions of the Investment Advisory Agreement and the
procedures described above. In either case, brokerage is allocated under the
supervision of the Manager's executive officers. Transactions in securities
other than those for which an exchange is the primary market are generally done
with principals or market makers. Brokerage commissions are paid primarily for
effecting transactions in listed securities or for certain fixed-income agency
transactions in the secondary market, and otherwise only if it appears likely
that a better price or execution can be obtained. When the Fund engages in an
option transaction, ordinarily the same broker will be used for the purchase or
sale of the option and any transactions in the securities to which the option
relates. Where possible, concurrent orders to purchase or sell the same security
by more than one of the accounts managed by the Manager or its affiliates are
combined. The transactions effected
-38-
<PAGE>
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.
Most purchases of money market instruments and debt obligations are
principal transactions at net prices. For those transactions, instead of using a
broker the Fund normally deals directly with the selling or purchasing principal
or market maker unless it is determined that a better price or execution can be
obtained by using a broker. Purchases of these securities from underwriters
include a commission or concession paid by the issuer to the underwriter, and
purchases from dealers include a spread between the bid and asked price. The
Fund seeks to obtain prompt execution of such orders at the most favorable net
price.
The research services provided by a particular broker may be useful only
to one or more of the advisory accounts of the Manager and its affiliates, and
investment research for the commissions of these 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 permits the Manager to use concessions on fixed-price offerings to
obtain research, in the same manner permitted for agency transactions. The Board
has also permitted the Manager to use stated commissions on secondary
fixed-income agency trades to obtain research where the broker has represented
to Manager that: (i) the trade is not from or for the broker's own inventory,
(ii) the trade was executed by the broker of an agency basis at the stated
commission, and (iii) the trade is not a riskless principal transaction.
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 portfolio or
being considered for purchase. The Manager provides information as to the
commissions paid to brokers furnishing such services together with the Manager's
representations that the amount of such commissions was reasonably related to
the value or benefit of such services.
During the Fund's fiscal years ended September 30, 1995, 1996 and 1997,
total brokerage commissions paid by the Fund (not including spreads or
concessions on principal transactions on a net trade basis) were $1,029,940,
$594,459 and $376,817, respectively. Of those amounts, $0, $11,373 and $39,801,
respectively, were paid during those same periods to brokers as commissions in
return for research services.
Performance of the Fund
Yield and Total Return Information. As described in the Prospectus, from
time to time the
-39-
<PAGE>
"standardized yield," "dividend yield," "average annual total return",
"cumulative total return," "average annual total return at net asset value," and
"total return at net asset value" of an investment in each class of Fund shares
may be advertised. An explanation of how yields and total returns are calculated
for each class and the components of those calculations is set forth below. No
performance information is presented below for Class Y shares because no Class Y
shares were publicly offered during the fiscal year ended September 30, 1997.
The Fund's advertisement of its performance must, under applicable SEC
rules, include the average annual total returns for each advertised class of
shares of the Fund for the 1, 5 and 10-year period (or the life of the class, if
less) as of the most recently ended calendar quarter. 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 yield and total return 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. Yield and total return for any given past period are not a
prediction or representation by the Fund of future yields or rates of return on
its shares. The yield and total returns of the Class A, Class B, Class C and
Class Y shares of the Fund are affected by portfolio quality, portfolio
maturity, the type of investments the Fund holds and expenses allocated to the
particular class.
o Yields.
o Standardized Yield. The Fund's standardized "yield" (referred to as
"yield") is shown for a class of shares for a stated 30-day period. It is not
based on actual distributions paid by the Fund to shareholders in the 30-day
period, but is a hypothetical yield based upon the net investment income from
the Fund's portfolio investments for that period. It may therefore differ from
the "dividend yield" for the same class of shares, described below. It is
calculated using the following formula set forth in rules adopted by the
Securities and Exchange Commission that apply to all funds that quote yields
designed to assure uniformity in the way that all funds calculate their yields:
Standardized ~ Yield ~ = ~ 2~ [~ (~ {a-b} over cd ~ +~ 1~ ) SUP 6~ -~ 1~ ]
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense
reimbursements).
c = the average daily number of shares of that class outstanding
during the 30- day period that were entitled to receive
dividends.
d = the maximum offering price per share of the class on the
last day of the period, adjusted for undistributed net
investment income.
The standardized yield for a 30-day period may differ from the yield for
other periods. The SEC formula assumes that the standardized yield for a 30-day
period occurs at a constant rate for a
-40-
<PAGE>
six-month period and is annualized at the end of the six-month period.
Additionally, because each class of shares is subject to different expenses, it
is likely that the standardized yields of the Fund's classes of shares will
differ for any 30-day period. For the 31-day period ended September 30, 1997,
the standardized yields for the Fund's classes were as follows:
Without Deducting Sales Charge With Sales Charge Deducted
Class A: 7.68% 7.31%
Class B: 6.92% N/A
Class C: 6.92% N/A
o Dividend Yield. The Fund may quote a "dividend yield" for each class of
its shares. Dividend yield is based on the dividends paid on shares of a class
during the actual dividend period. To calculate dividend yield, the dividends of
a class declared during a stated one month period are added together and the sum
is multiplied by 12 (to annualize the yield) and divided by the maximum offering
price on the last day of the dividend period. The formula is shown below:
Dividend yield = dividends paid x 12/maximum offering price (payment date)
The maximum offering price for Class A shares includes the current maximum
initial sales charge. The maximum offering price for Class B and Class C shares
is the net asset value per share, without considering the effect of contingent
deferred sales charges. The Class A dividend yield may also be quoted without
deducting the maximum initial sales charge.
The dividend yields for the 31-day dividend period ended September 30,
1997 were as follows:
Without Deducting Sales Charge With Sales Charge Deducted
Class A: 8.38% 7.98%
Class B: 7.60% N/A
Class C: 7.62% N/A
o Total Return Information
o 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"),
according to the following formula:
LEFT ( {~ERV~} OVER P~ right) SUP
{1/n}~-1~=~Average~Annual~Total~ Return
-41-
<PAGE>
o 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. For the Class C shares, the payment of the 1.0% contingent deferred sales
charge is applied to the investment result for the one-year period (or less).
Total return is determined as follows: ALIGNC {ERV~-~ P~} over P~ =~Total~
Return
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
discussed below). For Class B shares, the payment of the applicable contingent
deferred sales charge (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 to the investment result for the time period
shown (unless the total return is shown at net asset value, as described below).
For Class C shares, the payment of the 1.0% contingent deferred sales charge is
applied to the investment result for the one-year period (or less). Class Y
shares are not subject to a sales charge. Total returns also assume that all
dividends and capital gains distributions during the period are reinvested to
buy additional shares at net asset value per share, and that the investment is
redeemed at the end of the period. The "average annual total returns" on an
investment in Class A shares of the Fund for the one and five year periods ended
September 30, 1997 and for the period from October 16, 1989 (commencement of
operations) to September 30, 1997, were 6.00%, 8.54% and 10.33%, respectively.
The cumulative "total return" on Class A shares for the period from October 16,
1989 to September 30, 1997 was 118.60%. For the fiscal year ended September 30,
1997 and the period from November 30, 1992 through September 30, 1997, the
average annual total return on an investment in Class B shares of the Fund were
5.43% and 9.22%, respectively. The cumulative total return on an investment in
Class B shares of the Fund for the period from November 30, 1992 to September
30, 1997 was 53.13%. The average annual total return on an investment in Class C
shares of the Fund for the fiscal year ended September 30, 1997, and for the
period from May 26, 1995 through September 30, 1997 were 9.67% and 11.01%,
respectively. For the period from May 26, 1995 through September 30, 1997, the
cumulative total return on an investment in Class C shares of the Fund was
27.73%.
o Total Returns at Net Asset Value. From time to time the Fund may also
quote an "average annual total return at net asset value" or a cumulative "total
return at net asset value" for Class A, Class B, Class C and Class Y shares.
Each is based on the difference in net asset value per share at the beginning
and the end of the period for a hypothetical investment in that class of shares
(without considering front-end or contingent deferred sales charges) and takes
into consideration the reinvestment of dividends and capital gains
distributions. The cumulative "total returns at net asset value" on the Fund's
Class A shares for the fiscal year ended September 30, 1997, and for the period
from October 16, 1989 to September 30, 1997 were 11.29% and 129.51%,
respectively. The cumulative total return at net asset value on the Fund's Class
B shares for the fiscal year ended September 30, 1997 and for the period from
November 30, 1992 through September 30, 1997 was 10.43% and 55.13%,
respectively. The cumulative total returns at net asset value on the Fund's
Class
-42-
<PAGE>
C shares for the fiscal year ended September 30, 1997 and for the period from
May 26, 1995 through September 30, 1997 were 10.67% and 27.73%.
Other Performance Comparisons. From time to time the Fund may publish the
ranking of the performance of its Class A, Class B, Class C or Class Y shares by
Lipper Analytical Services, Inc. ("Lipper"), a widely-recognized independent
mutual fund monitoring service. Lipper monitors the performance of regulated
investment companies, including the Fund, and ranks their performance for
various periods based on categories relating to investment objectives. The
performance of the Fund's classes is ranked against (i) all other funds,
excluding money market funds, and (ii) all other general bond funds. The Lipper
performance rankings are based on total return that includes the reinvestment of
capital gains distributions and income dividends but does not take sales charges
or taxes into consideration. The Fund's performance may also be compared to the
performance of the Lipper General Bond Fund Index, which is a net asset value
weighted index of general bond funds compiled by Lipper. It is calculated with
adjustments for income dividends and capital gains distributions as of the
ex-dividend date.
From time to time the Fund may publish the star ranking of the performance
of its Class A, Class B, Class C or Class Y shares by Morningstar Inc., an
independent mutual fund monitoring service. Morningstar ranks mutual funds in
broad investment categories: domestic stock funds, international stock funds,
taxable bond funds and municipal bond funds, based on risk-adjusted total
investment returns. Investment return measure a fund's or class's one, three,
five and ten-year average annual total returns (depending on the inception of
the fund or class) in excess of 90-day U.S. Treasury bill returns after
considering the fund's sales charges and expenses. Risk measure a fund's class
performance below 90-day U.S. Treasury bill returns. Risk and investment return
are combined to produce star rankings reflecting performance relative to the
average fund in the fund's category. Five stars is the "highest" ranking (top
10%), four stars is "above average" (next 22.5%), three stars is "average" (next
35%), two stars is "below average" (next 22.5%) and one star is "lowest" (bottom
10%). The current star rankings is the fund's or class's 3-year ranking or its
combined 3 and 5-year ranking (weighted 60%/40% respectively, or its combined
3-,5-and 10-year ranking (weighted 40%, 30% and 30%, respectively) depending on
the inception of the fund or class. Rankings are subject to change monthly.
The Fund may also compare its performance to that of other funds in its
Morningstar Category. In addition to its star rankings, Morningstar also
categorizes and compares a fund's 3-year performance on Morningstar's
classification of the fund's investments and investment style, rather than how a
fund defines its investment objective. Morningstar's four broad categories
(domestic equity, international equity, municipal bond and taxable bond) are
each further subdivided into categories based on types of investments and
investment styles. Those comparison by Morningstar are based on the same risk
and return measurements as its star rankings but do not consider the effect of
sales charges.
The total return on an investment made in Class A, Class B, Class C or
Class Y shares of the Fund may be compared with the performance for the same
period of one or more of the following indices: the Consumer Price Index, the
Salomon Brothers World Government Bond Index, the Standard & Poor's 500 Index,
the Salomon Brothers High Grade Corporate Bond Index, the Shearson
-43-
<PAGE>
Lehman Government/Corporate Bond Index, the Lehman Brothers Aggregate Bond
Index, and the J.P. Morgan Government Bond Index. Other indices may be used from
time to time. The Consumer Price Index is generally considered to be a measure
of inflation. The Salomon Brothers World Government Bond Index generally
represents the performance of government debt securities of various markets
throughout the world, including the United States. The Salomon Brothers High
Grade Corporate Bond Index generally represents the performance of high grade
long-term corporate bonds, and the Lehman Government/Corporate Bond Index
generally represents the performance of intermediate and long-term government
and investment grade corporate debt securities. The Lehman Brothers Aggregate
Bond Index measures the performance of U.S. corporate bond issues, U.S.
government securities and mortgage-backed securities. The J.P. Morgan Government
Bond Index generally represents the performance of government bonds issued by
various countries including the United States. The S&P 500 Index is a composite
index of 500 common stocks generally regarded as an index of U.S. stock market
performance. The foregoing bond indices are unmanaged indices of securities that
do not reflect reinvestment of capital gains or take investment costs into
consideration, as these items are not applicable to indices. The performance of
the Fund's Class A, Class B, Class C or Class Y shares may also be compared in
publications to (i) the performance of various market indices or to other
investments for which reliable performance data is available, and (ii) to
averages, performance rankings or other benchmarks prepared by recognized mutual
fund statistical services.
From time to time the Fund may also include in its advertisements and
sales literature performance information about the Fund or rankings of the
Fund's performance cited in newspapers or periodicals, such as The New York
Times, Money, The Wall Street Journal, Fortune, or other publications. These
articles may include quotations of performance from other sources, such as
Lipper or Morningstar.
When comparing yield, total return and investment risk of an investment in
Class A, Class B, Class C or Class Y shares of the Fund with other investments,
investors should understand that certain other investments have different risk
characteristics than an investment in shares of the Fund. For example,
certificates of deposit may have fixed rates of return and may be insured as to
principal and interest by the FDIC, while the Fund's returns will fluctuate and
its share values and returns are not guaranteed. Money market accounts offered
by banks also may be insured by the FDIC and may offer stability of principal.
U.S. Treasury securities are guaranteed as to principal and interest by the full
faith and credit of the U.S. government. Money market mutual funds may seek to
offer a fixed price per share.
Distribution and Service Plans
The Fund has adopted a Service Plan for Class A Shares and Distribution and
Service Plans for Class B and Class C shares of the Fund under Rule 12b-1 of the
Investment Company Act, pursuant to which the Fund makes payments to the
Distributor in connection with the distribution and/or servicing of the shares
of that class, as described in the Prospectus. No such Plan has been adopted for
Class Y shares. Each Plan has been approved by a vote of (i) the Board of
Trustees of the Fund, including a majority of the Independent Trustees, cast in
person at a meeting called for the purpose of voting on that Plan, and (ii) the
holders of a "majority" (as defined in the Investment
-44-
<PAGE>
Company Act) of the shares of each class. For the Distribution and Service Plans
for the Class B and Class C shares, the votes were cast by the Manager as the
then-sole initial holder of such shares.
In addition, the Manager and the Distributor may, under the Plans, from
time to time from their own resources (which, as to the Manager, may include
profits derived from the advisory fee it receives from the Fund) make payments
to Recipients for distribution and administrative services they perform. The
Distributor and the Manager may, in their sole discretion, increase or decrease
the amount of distribution assistance payments they make to Recipients from
their own assets.
Unless terminated as described below, each Plan continues in effect from
year to year but only as long as such 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. Any 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.
No 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. In addition, because Class B shares of the Fund automatically convert
into Class A shares after six years, the Fund is required by a Securities and
Exchange Commission rule to obtain the approval of Class B as well as Class A
shareholders for a proposed amendment to the Class A Plan that would materially
increase payments under the plan. Such approval must be by a "majority" of the
Class A and Class B shares (as defined in the Investment Company Act), voting
separately by class. All material amendments must be approved by the Board the
Independent Trustees.
While the plans are in effect, the Treasurer of the Fund must provide
separate written reports to the Fund's Board of Trustees at least quarterly
describing the amount of payments made pursuant to each Plan and the purposes
for which the payments were made. The Class B report also must include the
Distributor's distribution costs for the quarter, and such costs for previous
quarters that have been carried forward. The Class A and Class B reports also
must include the identity of each Recipient that received any payment. These
reports are subject to the review and approval of the Independent Trustees.
Under the Plans, no payment will be made to any broker, dealer or other
financial institution under the Plan (each is referred to as a "Recipient") in
any quarter if the aggregate net asset value of all Fund shares held by the
Recipient for itself and its customers did not exceed a minimum amount, if any,
that may be determined from time to time by a majority of the Fund's Independent
Trustees. The Board of Trustees has set the fee at the maximum rate allowed
under the Plans and set no minimum amount.
For the fiscal year ended September 30, 1997, payments under the Class A
Plan totalled $9,227,904, all of which was paid by the Distributor to
Recipients, including $640,887 paid to an affiliate of the Distributor.
Unreimbursed expenses incurred with respect to Class A shares for any fiscal
quarter by the Distributor may not be recovered under the Class A Plan in
subsequent fiscal
-45-
<PAGE>
quarters. Payments received by the Distributor under the Class A Plan will not
be used to pay any interest expense, carrying charges, or other financial costs,
or allocation of overhead by the Distributor.
The Class B Plan and Class C Plan allow the service fee payments to be
paid by the Distributor to Recipients in advance for the first year such shares
are outstanding, and thereafter on a quarterly basis, as described in the
Prospectus. The advance payment is based on the net asset value of shares sold.
An exchange of shares does not entitle the Recipient to an advance payment of
the service fee. In the event shares are redeemed during the first year such
shares are outstanding, the Recipient will be obligated to repay a pro rata
portion of the advance of the service fee payment to the Distributor.
Although the Class B Plan and the Class C Plan permit the Distributor to
retain both the asset-based sales charges and the service fee, or to pay
Recipients the service fee on a quarterly basis, without payment in advance, the
Distributor presently intends to pay the service fee to Recipients in the manner
described above. A minimum holding period may be established from time to time
under the Class B Plan and the Class C Plan by the Board. Initially, the Board
has set no minimum holding period. All payments under the Class B Plan and the
Class C Plan are subject to the limitations imposed by the Conduct Rules of the
National Association of Securities Dealers, Inc. on payments of asset based
sales charges and service fees. The Distributor anticipates that it will take a
number of years for it to recoup (from the Fund's payments to the Distributor
under the Class B Plan and from the contingent deferred sales charges collected
on redeemed Class B shares) the sales commissions paid to authorized brokers or
dealers. For the fiscal year ended September 30, 1997, payments under the Class
B Plan totaled $30,147,429, including $165,360 paid to an affiliate of the
Distributor and $24,820,626 retained by the Distributor. For the fiscal year
ended September 30, 1997, payments under Class C Plan totaled $2,902,518,
including $31,149 paid to an affiliate of the Distributor and $1,957,863
retained by the Distributor
Asset-based sales charge payments are designed to permit an investor to
purchase shares of the Fund without the assessment of a front-end sales load and
at the same time permit the Distributor to compensate brokers and dealers in
connection with the sale of Class B and Class C shares of the Fund. The
Distributor's actual distribution expenses for any given year may exceed the
aggregate of payments received pursuant to the Class B or Class C Plan and from
contingent deferred sales charges. Under the Class B Plan, 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 such shares.
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 above and in the Prospectus. The asset-based sales charge paid to the
Distributor by the Fund under the Class B Plan is intended to
-46-
<PAGE>
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.
The Class C Plan provides for the Distributor to be compensated at a flat
rate, whether the Distributor's distribution expenses are more or less than the
amounts paid by the Fund. Such payments are made in recognition that the
Distributor (i) pays sales commissions to authorized brokers and dealers at the
time of sale, as described in the Prospectus, (ii) may finance such commissions
and/or the advance of the service fee payment to Recipients under that Plan,
(iii) employs personnel to support distribution of shares, and (iv) may bear the
costs of sales literature, advertising and prospectuses (other than those
furnished to current shareholders) and state "blue sky" registration fees.
ABOUT YOUR ACCOUNT
How To Buy Shares
Alternative Sales Arrangements - Class A, Class B and Class C Shares. The
availability of three classes of shares permits the individual investor to
choose the method of purchasing shares that is more beneficial to the investor
depending on the amount of the purchase, the length of time the investor expects
to hold shares and other relevant circumstances. Investors should understand
that the purpose and function of the deferred sales charge and asset-based sales
charge with respect to Class B and Class C shares are the same as those of the
initial sales charge with respect to Class A shares. Any salesperson or other
person entitled to receive compensation for selling Fund shares may receive
different compensation with respect to one class of shares than the other. The
Distributor will not accept any order of $500,000 or more of Class B shares or
$1 million or more of Class C shares on behalf of a single investor (not
including dealer "street name" or omnibus accounts) because generally it will be
more advantageous for that investor to purchase Class A shares of the Fund
instead. A fourth class of shares, Class Y shares, may be purchased only by
certain institutional investors at net asset value per share.
The four classes of shares each represent an interest in the same
portfolio investments of the Fund. However, each class has different shareholder
privileges and features.
The net income attributable to Class B and Class C shares and the dividends
payable on Class B and Class C shares will be reduced by incremental expenses
borne solely by that class, including the asset-based sales charge to which
Class B and Class C 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 advisor, to the effect
that the conversion of Class B shares does not constitute a taxable event for
the holder under Federal income tax law. If such a revenue ruling or opinion is
no longer available,
-47-
<PAGE>
the automatic conversion feature may be suspended, in which event no further
conversions of Class B shares would occur while such suspension remained in
effect. Although Class B shares could then be exchanged for Class A shares on
the basis of relative net asset value of the two classes, without the imposition
of a sales charge or fee, such exchange could constitute a taxable event for the
holder, and absent such exchange, Class B shares might continue to be subject to
the asset-based sales charge for longer than six years.
The methodology for calculating the net asset value, dividends and
distributions of the Fund's Class A, Class B, Class C and Class Y shares
recognizes two types of expenses. General expenses that do not pertain
specifically to any class are allocated pro rata to the shares of each class,
based on the percentage of the net assets of such class to the Fund's total
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 (a) Distribution Plan fees, (b) transfer and shareholder servicing agent
fees and expenses, (c) registration fees and (d) shareholder meeting expenses,
to the extent that such expenses pertain to a specific class rather than to the
Fund as a whole.
Retirement Plans. In describing certain types of employee benefit plans
that may purchase Class A shares without being subject to the Class A contingent
deferred sales charge, the term "employee benefit plan" means any plan or
arrangement, whether or not "qualified" under the Internal Revenue Code,
including, medical savings accounts, payroll deduction plans or similar plans in
which Class A shares are purchased by a fiduciary or other person for the
account of participants who are employees of a single employer or of affiliated
employers, if the Fund account is registered in the name of the fiduciary or
other person for the benefit of participants in the plan.
The term "group retirement plan" means any qualified or non-qualified
retirement plan (including 457 plans, SEPs, SARSEPs, 403(b) plans other than
public school 403(b) plans, and SIMPLE plans) for employees of a corporation or
a sole proprietorship, members and employees of a partnership or association or
other organized group of persons (the members of which may include other
groups), if the group or association has made special arrangements with the
Distributor and all members of the group or association participating in or who
are eligible to participate in the plan(s) purchase Class A shares of the Fund
through a single investment dealer, broker, or other financial institution
designated by the group. "Group retirement plan" also includes qualified
retirement plans and non-qualified deferred compensation plans and IRAs that
purchase Class A shares of the Fund through a single investment dealer, broker,
or other financial institution, if that broker-dealer has made special
arrangements with the Distributor enabling those plans to purchase Class A
shares of the Fund at net asset value but subject to a contingent deferred sales
charge.
In addition to the discussion in the Prospectus relating to the ability of
Retirement Plans to purchase Class A shares at net asset value in certain
circumstances, there is no initial sales charge on purchases of Class A shares
of any one or more of the Oppenheimer funds by a Retirement Plan
-48-
<PAGE>
in the following cases: (i) the recordkeeping for the Retirement Plan is
performed on a daily valuation basis by Merrill Lynch Pierce Fenner & Smith,
Inc. ("Merrill Lynch") and, on the date the plan sponsor signs the Merrill Lynch
recordkeeping service agreement, the Retirement Plan has $3 million or more in
assets invested in mutual funds other than those advised or managed by Merrill
Lynch Asset Management, L.P. ("MLAM") that are made available pursuant to a
Service Agreement between Merrill Lynch and the mutual fund's principal
underwriter or distributor and in funds advised or managed by MLAM
(collectively, the "Applicable Investments"); or (ii) the recordkeeping for the
Retirement Plan is performed on a daily valuation basis by an independent record
keeper whose services are provided under a contract or arrangement between the
Retirement Plan and Merrill Lynch. On the date the plan sponsor signs the
Merrill Lynch record keeping service agreement, the Plan must have $3 million or
more in assets, excluding assets held in money market funds, invested in
Applicable Investments; or (iii) the Plan has 500 or more eligible employees, as
determined by the Merrill Lynch plan conversion manager on the date the plan
sponsor signs the Merrill Lynch record keeping service agreement.
If a Retirement Plan's records are maintained on a daily valuation basis
by Merrill Lynch or an independent record keeper under a contract or alliance
arrangement with Merrill Lynch, and if on the date the plan sponsor signs the
Merrill Lynch record keeping service agreement the Retirement Plan has less than
$3 million in assets, excluding money market funds, invested in Applicable
Investments, then the Retirement Plan may purchase only Class B shares of one or
more of the Oppenheimer funds. Otherwise, the Retirement Plan will be permitted
to purchase Class A shares of one or more of the Oppenheimer funds. Any of those
Retirement Plans that currently invest in Class B shares of the Fund will have
their Class B shares be converted to Class A shares of the Fund once the Plan's
Applicable Investments have reached $5 million.
Any redemptions of shares of the Fund held by Retirement Plans whose
records are maintained on a daily valuation basis by Merrill Lynch or an
independent record keeper under a contract with Merrill Lynch that are currently
invested in Class B shares of the Fund shall not be subject to the Class B CDSC.
Determination of Net Asset Values Per Share. The net asset values per share of
Class A, Class B, Class C and Class Y shares of the Fund are determined as of
the close of business of The New York Stock Exchange (the "Exchange") on each
day that the Exchange is open by dividing the value of the Fund's net assets
attributable to a class by the number of shares of that class outstanding. The
Exchange normally closes at 4:00 P.M., New York time, but may close earlier on
some days (for example, in case of weather emergencies or on days falling before
or after a holiday). The Exchange most recent annual holiday schedule (which is
subject to change) states that it will close New Year's Day, Martin Luther King
Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. It may also close on other days. Trading may
occur in debt securities and in foreign securities at times when the Exchange is
closed, including weekends and holidays or after the close of the Exchange on a
regular business day. Because the net asset values of the Fund will not be
calculated at such times, if securities held in the Fund's portfolio are traded
at such times, the net asset values per share of Class A, Class B, Class C and
Class Y shares of the Fund may be significantly affected at times when
shareholders do not have the ability to purchase or redeem shares.
-49-
<PAGE>
The Fund's Board of Trustees has established procedures for the valuation
of the Fund's securities as follows: (i) equity securities traded on a U.S.
securities exchange or on the Automated Quotation System ("NASDAQ") of the
Nasdaq Stock Market, Inc. for which last sale information is regularly reported
are valued at the last reported sale price on the principal exchange for such
security or NASDAQ that day (the "Valuation Date") or, in the absence of sales
that day, at the last reported sale price preceding the Valuation Date if it is
within the spread of the closing "bid" and "asked" prices on the Valuation Date
or, if not, the closing "bid" price on the Valuation Date; (ii) equity
securities traded on a foreign securities exchange are valued generally at the
last sales price available to the pricing service approved by the Fund's Board
of Trustees or to the Manager as reported by the principal exchange on which the
security is traded at its last trading session on or immediately preceding the
Valuation Date, or, if unavailable, at the mean between "bid" and "asked" prices
obtained from the principal exchange or two active market makers in the security
on the basis of reasonable inquiry; (iii) a non-money market fund will value (x)
debt instruments that had a maturity of more than 397 days when issued, (y) debt
instruments that had a maturity of 397 days or less when issued and have a
remaining maturity in excess of 60 days, and (z) non-money market type debt
instruments that had a maturity of 397 days or less when issued and have a
remaining maturity of sixty days or less, at the mean between "bid" and "asked"
prices determined by a pricing service approved by the Fund's Board of Trustees
or, if unavailable, obtained by the Manager from two active market makers in the
security on the basis of reasonable inquiry; (iv) money market-type debt
securities held by a non-money market fund that had a maturity of less than 397
days when issued and have a remaining maturity of 60 days or less, and debt
instruments held by a money market fund that have a remaining maturity of 397
days or less, shall be valued at cost, adjusted for amortization of premiums and
accretion of discount; and (v) securities (including restricted securities) not
having readily-available market quotations are valued at fair value determined
under the Board's procedures. If the Manager is unable to locate two market
makers willing to give quotes (see (ii) and (iii) above), the security may be
priced at the mean between the "bid" and "asked" prices provided by a single
active market maker (which in certain cases may be the "bid" price if no "asked"
price is available) provided that the Manager is satisfied that the firm
rendering the quotes is reliable and that the quotes reflect the current market
value.
In the case of U.S. Government securities, foreign fixed income, corporate
bonds and mortgage-backed securities, where last sale information is not
generally available, such pricing procedures may include "matrix" comparisons to
the prices for comparable instruments on the basis of quality, yield, maturity
and other special factors involved. The Manager may use pricing services
approved by the Board of Trustees to price U.S. Government securities, foreign
corporate securities or mortgage-backed securities for which last sale
information is not generally available. The Manager will monitor the accuracy of
such pricing services, which may include comparing prices used for portfolio
evaluation to actual sales prices of selected securities.
Trading in securities on European and Asian exchanges and over-the-counter
markets is normally completed before the close of the Exchange. Events affecting
the values of foreign securities traded in securities markets that occur between
the time their prices are determined and the close of the Exchange will not be
reflected in the Fund's calculation of its net asset value unless the Board of
Trustees, or the Manager under procedures established by the Board, determines
that the particular event would materially affect the Fund's net asset value, in
which case an adjustment would be made. Foreign currency, including forward
contracts, will be valued at the closing price
-50-
<PAGE>
in the London foreign exchange market that day as provided by a reliable bank,
dealer or pricing service. The value of securities denominated in foreign
currency will be converted to U.S. dollars at the closing price in the London
foreign exchange market that day as provided by a reliable bank, dealer or
pricing service.
Calls, puts and Futures are valued at the last sale prices on the
principal exchanges or on the NASDAQ market on which they are traded, as
applicable, as determined by a pricing service approved by the Board of Trustees
or by the Manager. If there were no sales that day, value shall be the last sale
price on the preceding trading day if it is within the spread of the closing bid
and asked prices on the principal exchange or on NASDAQ on the valuation date,
or, if not, value shall be the closing bid price on the principal exchange or on
NASDAQ on the valuation date. If the put, call or future is not traded on an
exchange or on NASDAQ, it shall be valued at the mean between bid and asked
prices obtained by the Manager from two active market makers (which in certain
cases may be the bid price if no asked price is available).
When the Fund writes an option, an amount equal to the premium received by
the Fund is included in its Statement of Assets and Liabilities as an asset, and
an equivalent deferred credit is included in the liability section. The deferred
credit is adjusted ("marked-to-market") to reflect the current market value of
the option. In determining the Fund's gain on investments, if a call written by
the Fund is exercised, the proceeds are increased by the premium received.
If a put written by the Fund is exercised, the required payment by the Fund is
reduced 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 shares purchased by the
proceeds of ACH transfers on the business day the Fund receives Federal Funds
for the purchase through the ACH system before the close of The New York Stock
Exchange. The Exchange normally closes at 4:00 P.M., but may close earlier on
certain days.
If Federal Funds are received after the close of the Exchange, the shares will
be purchased and dividends will begin to accrue on the next regular business
day. The proceeds of ACH transfers are normally received by the Fund 3 days
after the transfers are initiated. The Distributor and the Fund are not
responsible for any delays in purchasing shares resulting from delays in ACH
transmissions.
Reduced Sales Charges. As discussed in the Prospectus, a reduced sales charge
rate may be obtained for Class A shares under Right of Accumulation and Letters
of Intent because of the economies of sales efforts and reduction in expenses
realized by the Distributor, dealers and brokers making such sales. No sales
charge is imposed in certain other circumstances described in the Prospectus
because the Distributor, dealer or broker incurs little or no selling expenses.
The term "immediate family" refers to one's spouse, children, grandchildren,
grandparents, parents, aunts, uncles, nieces, nephews, parents-in-law, brothers
and sisters, sons- and daughters-in-law, a sibling's
-51-
<PAGE>
spouse and a spouse's siblings. Relations by virtue of a remarriage
(step-children, step-parents, etc.)
are included.
o The Oppenheimer Funds. The Oppenheimer funds are those mutual funds
for which the
Distributor acts as the distributor or the sub-Distributor and include the
following:
Oppenheimer Municipal Bond Fund
Oppenheimer New York Municipal Fund
Oppenheimer California Municipal Fund
Oppenheimer Intermediate Municipal Fund
Oppenheimer Insured Municipal Fund
Oppenheimer Main Street California Municipal Fund
Oppenheimer Florida Municipal Fund
Oppenheimer New Jersey Municipal Fund
Oppenheimer Pennsylvania Municipal Fund
Oppenheimer Discovery Fund
Oppenheimer Capital Appreciation Fund
Oppenheimer Growth Fund
Oppenheimer Equity Income Fund
Oppenheimer Multiple Strategies Fund
Oppenheimer Total Return Fund, Inc.
Oppenheimer Main Street Income & Growth Fund
Oppenheimer MidCap Fund
Oppenheimer High Yield Fund
Oppenheimer Disciplined Value Fund
Oppenheimer Disciplined Allocation Fund
Oppenheimer LifeSpan Balanced Fund
Oppenheimer LifeSpan Income Fund
Oppenheimer LifeSpan Growth Fund
Oppenheimer Champion Income Fund
Oppenheimer Developing Markets Fund
Oppenheimer Bond Fund
Oppenheimer U.S. Government Trust
Oppenheimer Limited-Term Government Fund
Oppenheimer Global Fund
Oppenheimer Global Growth & Income Fund
Oppenheimer Gold & Special Minerals Fund
Oppenheimer Strategic Income Fund
Oppenheimer International Bond Fund
Oppenheimer International Small Company Fund
Oppenheimer International Growth Fund
Oppenheimer Enterprise Fund
Oppenheimer Quest Capital Value Fund, Inc.
Oppenheimer Quest Global Value Fund, Inc.
Oppenheimer Quest Value Fund, Inc.
Oppenheimer Quest Opportunity Value Fund
Oppenheimer Quest Small Cap Value Fund
Oppenheimer Quest Growth & Income Value Fund
Oppenheimer Quest Officers Value Fund
Oppenheimer Bond Fund For Growth
Oppenheimer Real Asset Fund
Rochester Fund Municipals
Limited-Term New York Municipal 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.
There is an initial sales charge on the purchase of Class A shares of each
of the Oppenheimer funds except Money Market Funds (under certain circumstances
described herein, redemption proceeds of Money Market Fund shares may be subject
to a CDSC).
-52-
<PAGE>
o Letters of Intent. A Letter of Intent (referred to as a "Letter") is an
investor's statement in writing to the Distributor of the intention to purchase
Class A shares of the Fund (or Class A and Class B shares of the Fund) and other
eligible Oppenheimer funds) sold with a front-end sales charge during a 13-month
period (the "Letter of Intent period"), which may, at the investor's request,
include purchases made up to 90 days prior to the date of the Letter. The Letter
states the investor's intention to make the aggregate amount of purchases of
shares which, when added to the investor's holdings of shares of those funds,
will equal or exceed the amount specified in the Letter. Purchases made by
reinvestment of dividends or distributions of capital gains and purchases made
at net asset value without sales charge do not count toward satisfying the
amount of the Letter. A Letter enables an investor to count the Class A and
Class B shares purchased under the Letter to obtain the reduced sales charge
rate on purchases of Class A shares of the Fund (and other Oppenheimer funds)
that applies under the Right of Accumulation to current purchases of Class A
shares. Each purchase under the Letter will be made at the public offering price
(including the sales charge) 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.
For purchases of shares of the Fund and other Oppenheimer funds by
OppenheimerFunds prototype 401(k) plans under a Letter of Intent, the Transfer
Agent will not hold shares in escrow.
If the intended purchase amount under the Letter entered into by an
OppenheimerFunds prototype 401(k) plan is not purchased by the plan by the end
of the Letter of Intent period, there will be no adjustment of commissions paid
to the broker-dealer or financial institution of record for accounts held in the
name of that plan.
If the total eligible purchases made during the Letter of Intent period do
not equal or exceed the intended purchase amount, the commissions previously
paid to the dealer of record for the account and the amount of sales charge
retained by the Distributor will be adjusted to the rates applicable to actual
total purchases. If total eligible purchases during the Letter of Intent period
exceed the intended purchase amount and exceed the amount needed to qualify for
the next sales charge rate reduction set forth in the applicable prospectus, the
sales charges paid will be adjusted to the lower rate, but only if and when the
dealer returns to the Distributor the excess of the amount of commissions
allowed or paid to the dealer over the amount of commissions that apply to the
actual amount of purchases. The excess commissions returned to the Distributor
will be used to purchase additional shares for the investor's account at the net
asset value per share in effect on the date of such purchase, promptly after the
Distributor's receipt thereof.
-53-
<PAGE>
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.
o Terms of Escrow That Apply to Letters of Intent.
1. Out of the initial purchase (or subsequent purchases if necessary) made
pursuant to a Letter, shares of the Fund equal in value up to 5% of the intended
purchase amount specified in the Letter shall be held in escrow by the Transfer
Agent. For example, if the intended purchase amount is $50,000, the escrow shall
be shares valued in the amount of $2,500 (computed at the public offering price
adjusted for a $50,000 purchase). Any dividends and capital gains distributions
on the escrowed shares will be credited to the investor's account.
2. If the intended purchase amount specified under the Letter is completed
within the thirteen-month Letter of Intent period, the escrowed shares will be
promptly released to the investor.
3. If, at the end of the thirteen-month Letter of Intent period the total
purchases pursuant to the Letter are less than the intended purchase amount
specified in the Letter, the investor must remit to the Distributor an amount
equal to the difference between the dollar amount of sales charges actually paid
and the amount of sales charges which would have been paid if the total amount
purchased had been made at a single time. Such sales charge adjustment will
apply to any shares redeemed prior to the completion of the Letter. If such
difference in sales charges is not paid within twenty days after a request from
the Distributor or the dealer, the Distributor will, within sixty days of the
expiration of the Letter, redeem the number of escrowed shares necessary to
realize such difference in sales charges. Full and fractional shares remaining
after such redemption will be released from escrow. If a request is received to
redeem escrowed shares prior to the payment of such additional sales charge, the
sales charge will be withheld from the redemption proceeds.
4. By signing the Letter, the investor irrevocably constitutes and
appoints the Transfer Agent as attorney-in-fact to surrender for redemption any
or all escrowed shares.
5. The shares eligible for purchase under the Letter (or the holding of
which may be counted toward completion of a Letter) include (a) Class A shares
sold with a front-end sales charge or subject to a Class A contingent deferred
sales charge, (b) Class B shares of other Oppenheimer funds acquired subject to
a contingent deferred sales charge, and (c) Class A or Class B shares acquired
in exchange for either (i) Class A shares sold with a front-end sales charge or
Class B shares of one of the other Oppenheimer funds that were acquired subject
to a Class A initial or contingent deferred sales charge or (ii) Class B shares
of one of the other Oppenheimer funds that were acquired subject to a contingent
deferred sales charge.
6. Shares held in escrow hereunder will automatically be exchanged for
shares of another fund to which an exchange is requested, as described in the
section of the Prospectus entitled "How To Exchange Shares," and the escrow will
be transferred to that other fund.
Asset Builder Plans. To establish an Asset Builder Plan from a bank account, a
check (minimum $25) for the initial purchase must accompany the application.
Shares purchased by Asset Builder Plan payments from bank accounts are subject
to the redemption restrictions for recent purchases described in "Shareholder
Account Rules and Policies," in the Prospectus. Asset Builder Plans also
-54-
<PAGE>
enable shareholders of Oppenheimer Cash Reserves to use those accounts for
monthly automatic purchases of shares of up to four other Oppenheimer funds. If
you make payments from your bank account to purchase shares of the Fund, your
bank account will be automatically debited normally four to five business days
prior to the investment dates selected in the Account Application. Neither the
Distributor, the Transfer Agent nor the Fund shall be responsible for any delays
in purchasing shares resulting from delays in ACH transmissions.
There is a front-end sales charge on the purchase of certain Oppenheimer
funds, or a contingent deferred sales charge may apply to shares purchased by
Asset Builder payments. An application should be obtained from the Transfer
Agent, completed and returned, and a prospectus of the selected fund(s)
(available from the Distributor) should be obtained 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.
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.
o Checkwriting. When a check is presented to the Bank for clearance, the
Bank will ask the Fund to redeem a sufficient number of full and fractional
shares in the shareholder's account to cover the amount of the check. This
enables the shareholder to continue receiving dividends on those shares until
the check is presented to the Fund. Checks may not be presented for payment at
the offices of the Bank or the Fund's Custodian. This limitation does not affect
the use of checks for the payment of bills or to obtain cash at other banks. The
Fund reserves the right to amend, suspend or discontinue offering Checkwriting
privileges at any time without prior notice.
By choosing the Check Writing privilege, whether you do so by signing the
Account Application or by completing a Check Writing card, the individuals
signing (1) represent that they are either the registered owner(s) of the shares
of the Fund, or are an officer, general partner, trustee or other fiduciary or
agent, as applicable, duly authorized to act on behalf of such registered
owner(s); (2) authorize the Fund, its Transfer Agent and any bank through which
the Fund's drafts ("checks") are payable (the "Bank"), to pay all checks drawn
on the Fund account of such person(s) and to effect a redemption of sufficient
shares in that account to cover payment of such checks; (3) specifically
acknowledge(s) that if you choose to permit a single signature on checks drawn
against joint accounts, or accounts for corporations, partnerships, trusts or
other entities, the signature of any one signatory on a check will be sufficient
to authorize payment of that check and redemption from an account even if that
account is registered in the names of more than one person or even if more than
-55-
<PAGE>
one authorized signature appears on the Check Writing card or the Application,
as applicable; and (4) understand(s) that the Check Writing privilege may be
terminated or amended at any time by the Fund and/or the Bank and neither shall
incur any liability for such amendment or termination or for effecting
redemptions to pay checks reasonably believed to be genuine, or for returning or
not paying checks which have not been accepted for any reason.
o 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.
o Payments "In Kind". The Prospectus states that payment for shares
tendered for redemption is ordinarily made in cash. However, the Board of
Trustees of the Fund may determine that it would be detrimental to the best
interests of the remaining shareholders of the Fund to make payment of a
redemption order wholly or partly in cash. In that case the Fund may pay the
redemption proceeds in whole or in part by a distribution "in kind" of
securities from the portfolio of the Fund, in lieu of cash, in conformity with
applicable rules of the Securities and Exchange Commission. The Fund has elected
to be governed by Rule 18f-1 under the Investment Company Act, pursuant to which
the Fund is obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of the net assets of the Fund during any 90-day period for any
one shareholder. If shares are redeemed in kind, the redeeming shareholder might
incur brokerage or other costs in selling the securities for cash. The method of
valuing securities used to make redemptions in kind will be the same as the
method the Fund uses to value its portfolio securities described above under the
"Determination of Net Asset Values Per Share" and that valuation will be made as
of the time the redemption price is determined.
Reinvestment Privilege. Within six months of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of (i) Class A shares that you
purchased subject to an initial sales charge or Class A contingent deferred
sales charge when you redeemed them or (ii) Class B shares that were subject to
the Class B contingent deferred sales charge when you redeemed them. The
reinvestment may be made without sales charge only in Class A shares of the Fund
or any of the other Oppenheimer funds into which shares of the Fund are
exchangeable as described in "How to Exchange Shares" below, at the net asset
value next computed after the Transfer Agent receives the reinvestment order.
This reinvestment privilege does not apply to Class C or Class Y shares. The
shareholder must ask the Distributor for such privilege at the time of
reinvestment. Any capital gain that was realized when the shares were redeemed
is taxable, and reinvestment will not alter any capital gains tax payable on
that gain. If there has been a capital loss on the redemption, some or all of
the loss may not be tax deductible, depending on the timing and amount of the
reinvestment. Under the Internal Revenue Code, if the redemption proceeds of
Fund shares on which a sales charge was paid are reinvested in shares of the
Fund or another of the Oppenheimer funds within 90 days of payment of the sales
charge, the shareholder's basis in the shares of the Fund that were redeemed may
not include the amount of the sales charge paid. That would reduce the loss or
increase the gain recognized from the redemption. However, in that case the
sales charge would be added to the basis of the shares acquired by the
reinvestment of the redemption proceeds. The Fund may amend,
-56-
<PAGE>
suspend or cease offering this reinvestment privilege at any time as to shares
redeemed after the date of such amendment, suspension or cessation.
Transfer of Shares. Shares are not subject to the payment of a contingent
deferred sales charge of any class at the time of transfer to the name of
another person or entity (whether the transfer occurs by absolute assignment,
gift or bequest, not involving, directly or indirectly, a public sale). The
transferred shares will remain subject to the contingent deferred sales charge,
calculated as if the transferee shareholder had acquired the transferred shares
in the same manner and at the same time as the transferring shareholder. If less
than all shares held in an account are transferred, and some but not all shares
in the account would be subject to a contingent deferred sales charge if
redeemed at the time of transfer, the priorities described in the Prospectus
under "How to Buy Shares" for the imposition of the Class B and Class C
contingent deferred sales charge will be followed in determining the order in
which shares are transferred.
Distributions From Retirement Plans. Requests for distributions from
OppenheimerFunds- sponsored IRAs, 403(b)(7) custodial plans, 401(k) plans, or
pension or profit-sharing plans should be addressed to "Trustee,
OppenheimerFunds Retirement Plans," c/o the Transfer Agent at its address listed
in "How To Sell Shares" in the Prospectus or on the back cover of 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 maintaining a plan account in their own name) in
OppenheimerFunds-sponsored prototype pension or profit-sharing or 401(k) plans
may not directly redeem or exchange shares held for their accounts under those
plans. 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 on behalf of their customers. The shareholder should contact the
broker or dealer to arrange their type of redemption. The repurchase price per
share will be the net asset value next computed after the Distributor receives
the order placed by such dealer or broker, except that if the Distributor
receives a repurchase order from a dealer or broker after the close of The New
York Stock Exchange on a regular business day, it will be processed at that
day's net asset value if the order was received by the dealer or broker from its
customers prior to the time the Exchange closes (normally, that is 4:00 P.M.,
but may be earlier on some days) and the order was transmitted to and received
by the Distributor prior to its close of business that day (normally 5:00 P.M.).
Ordinarily, for accounts redeemed by a broker-dealer under this procedure,
payment will be made within three business days after the shares have been
redeemed upon the Distributor's receipt of the required redemption documents in
proper form, with the signature(s) of the registered owners guaranteed on the
redemption document as described in the Prospectus.
-57-
<PAGE>
Automatic Withdrawal and Exchange Plans. Investors owning shares of the Fund
valued at $5,000 or more can authorize the Transfer Agent to redeem shares
(minimum $50) automatically on a monthly, quarterly, semi-annual or annual basis
under an Automatic Withdrawal Plan. Shares will be redeemed three business days
prior to the date requested by the shareholder for receipt of the payment.
Automatic withdrawals of up to $1,500 per month may be requested by telephone if
payments are to be made by check payable to all shareholders of record and sent
to the address of record for the account (and if the address has not been
changed within the prior 30 days). Required minimum distributions from
OppenheimerFunds-sponsored retirement plans may not be arranged on this basis.
Payments are normally made by check, but shareholders having AccountLink
privileges (see "How To Buy Shares") may arrange to have Automatic Withdrawal
Plan payments transferred to the bank account designated on the OppenheimerFunds
New Account Application or signature-guaranteed instructions. If a contingent
deferred sales charge applies to the redemption, the amount of the check or
payment will be reduced accordingly. The Fund cannot guarantee receipt of the
payment on the date requested and reserves the right to amend, suspend or
discontinue offering such plans at any time without prior notice. Because of the
sales charge assessed on Class A share purchases, shareholders should not make
regular additional Class A share purchases while participating in an Automatic
Withdrawal Plan. Class B and Class C shareholders should not establish
withdrawal plans, because of the imposition of the contingent deferred sales
charge on such withdrawals (except where the Class B or the Class C contingent
deferred sales charge is waived as described in the Prospectus in "Waivers of
Class B and Class C Sales Charge").
By requesting an Automatic Withdrawal or Exchange Plan, the shareholder
agrees to the terms and conditions applicable to such plans, as stated below as
well as the Prospectus. These provisions may be amended from time to time by the
Fund and/or the Distributor. When adopted, such amendments will automatically
apply to existing Plans.
o Automatic Exchange Plans. Shareholders can authorize the Transfer Agent
(on the OppenheimerFunds Application or signature-guaranteed instructions) to
exchange a pre-determined amount of shares of the Fund for shares (of the same
class) of other Oppenheimer funds automatically on a monthly, quarterly,
semi-annual or annual basis under an Automatic Exchange Plan. The minimum amount
that may be exchanged to each other fund account is $25. Exchanges made under
these plans are subject to the restrictions that apply to exchanges as set forth
in "How to Exchange Shares" in the Prospectus and below in this Statement of
Additional Information.
o 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 thereafter shares acquired with reinvested dividends and
capital gains distributions will be redeemed next, followed by shares acquired
with a sales charge, to the extent necessary to make withdrawal payments.
Depending upon the amount withdrawn, the investor's principal may be depleted.
Payments made under such plans should not be considered as a yield or income on
your investment. It may not be desirable to purchases additional Class A shares
while making automatic withdrawals because of the sales charges that apply to
purchases when made. Accordingly, a shareholder normally may not maintain an
Automatic Withdrawal Plan while simultaneously making regular purchases of Class
A shares.
The Transfer Agent will administer the investor's Automatic Withdrawal
Plan (the "Plan") as agent for the investor (the "Planholder") who executed the
Plan authorization and application submitted to the Transfer Agent. Neither the
Fund nor the Transfer Agent shall incur any liability to the Planholder for any
action taken or omitted by the Transfer Agent in good faith to administer the
Plan. Certificates will not be issued for shares of the Fund purchased for and
held under the Plan,
-58-
<PAGE>
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 ACH
transfer 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 Class A shares in
certificated form. Share certificates are not issued for Class B or Class C
shares. Upon written request from the Planholder, the Transfer Agent will
determine the number of shares for which a certificate may be issued without
causing the withdrawal checks to stop because of exhaustion of uncertificated
shares needed to continue payments. However, should such uncertificated shares
become exhausted, Plan withdrawals will terminate.
If the Transfer Agent ceases to act as transfer agent for the Fund, the
Planholder will be deemed to have appointed any successor transfer agent to act
as agent in
administering the Plan.
How to Exchange Shares
As stated in the Prospectus, shares of a particular class of Oppenheimer
funds having more than one class of shares may be exchanged only for shares of
the same class of other Oppenheimer funds. Shares of the Oppenheimer funds that
have a single class without a class designation are deemed "Class A" shares for
this purpose. All Oppenheimer funds offer Class A, B and C shares
-59-
<PAGE>
except Oppenheimer Money Market Fund, Inc., Centennial Money Market Trust,
Centennial Tax Exempt Trust, Centennial Government Trust, Centennial New York
Tax Exempt Trust, Centennial California Tax Exempt Trust and Centennial America
Fund, L.P., which only offer Class A shares and Oppenheimer Main Street
California Municipal Fund which only offers Class A and Class B shares, (Class B
and Class C shares of Oppenheimer Cash Reserves are generally available only by
exchange from the same class of shares of other Oppenheimer funds or through
OppenheimerFunds sponsored 401(k) plans). A current list showing which funds
offer which class can be obtained by calling the Distributor at 1-800-525-7048.
For accounts established on or before March 8, 1996 holding Class M shares
of Oppenheimer Bond Fund for Growth, Class M shares can be exchanged only for
Class A shares of other Oppenheimer funds. Exchanges to Class M shares of
Oppenheimer Bond Fund for Growth are permitted from Class A shares of
Oppenheimer Money Market Fund, Inc. or Oppenheimer Cash Reserves that were
acquired by exchange from Class M shares. Otherwise no exchanges of any class of
any Oppenheimer fund into Class M shares are permitted.
Class A shares of Oppenheimer funds may be exchanged at net asset value
for shares of any Money Market Fund. Shares of any Money Market Fund purchased
without a sales charge may be exchanged for shares of Oppenheimer funds offered
with a sales charge upon payment of the sales charge (or, if applicable, may be
used to purchase shares of Oppenheimer funds subject to a contingent deferred
sales charge). Shares of this Fund acquired by reinvestment of dividends or
distributions from any other of the Oppenheimer funds or from any unit
investment trust for which reinvestment arrangements have been made with the
Distributor may be exchanged at net asset value for shares of any of the
Oppenheimer funds. However, shares of Oppenheimer Money Market Fund, Inc.
purchased with the redemption procedures of shares of other mutual funds (other
than funds managed by the Manager or its subsidiaries) redeemed within the 6
months prior to that purchase may subsequently be exchanged for shares of other
Oppenheimer funds without being subject to an initial or contingent deferred
sales charge, whichever is applicable. To qualify for that privilege, the
investor or the investor's dealer must notify the Distributor of eligibility for
this privilege at the time the shares of Oppenheimer Money Market Fund, Inc. are
purchased, and, if requested, must supply proof of entitlement to this
privilege. The Class B contingent deferred sales charge is imposed on Class B
shares redeemed within six years of the initial purchase of the exchanged Class
B shares. The Class C contingent deferred sales charge is imposed on Class C
shares acquired by exchange if they are redeemed within 12 months of the initial
purchase of the exchanged Class C shares.
The Fund reserves the right to reject telephone or written exchange
requests submitted in bulk by anyone on behalf of more than one account. The
Fund may accept requests for exchanges of up to 50 accounts per day from
representatives of authorized dealers that qualify for this privilege. In
connection with any exchange request, the number of shares exchanged may be less
than the number requested if the exchange or the number requested would include
shares subject to a restriction cited in the Prospectus or this Statement of
Additional Information or would include shares covered by a share certificate
that is not tendered with the request. In those cases, only the shares available
for exchange without restriction will be exchanged.
When Class B or Class C shares are redeemed to effect an exchange, the
priorities described in "How To Buy Shares" in the Prospectus for the imposition
of the Class B and Class C contingent deferred sales charge will be followed in
determining the order in which the shares are exchanged. Shareholders should
take into account the effect of any exchange on the applicability and rate of
any contingent deferred sales charge that might be imposed in the subsequent
redemption of remaining shares. Shareholders owning shares of more than one
class must specify whether they intend to
-60-
<PAGE>
exchange Class A, Class B or Class C shares.
When exchanging shares by telephone, the shareholder must either have an
existing account in, or 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 Oppenheimer funds available for exchange have different
investment objectives, policies and risks, and a shareholder should assure that
the Fund selected is appropriate for his or her investment and should be aware
of the tax consequences of an exchange. For federal income tax purposes, an
exchange transaction is treated as a redemption of shares of one fund and a
purchase of shares of another. "Reinvestment Privilege," above, discusses some
of the tax consequences of reinvestment of redemption proceeds in such cases.
The Fund, the Distributor, and the Transfer Agent are unable to provide
investment, tax or legal advice to a shareholder in connection with an exchange
request or any other transaction.
Dividends, Capital Gains and Taxes
Dividends and Distributions. Dividends will be payable on shares held of record
at the time of the previous determination of net asset value, or as otherwise
described in "How to Buy Shares." Daily dividends on newly purchased shares will
not be declared or paid until such time as Federal Funds (funds credited to a
member bank's account at the Federal Reserve Bank) are available from the
purchase payment for such shares. Normally, purchase checks received from
investors are converted to Federal Funds on the next business day. Dividends
will be declared on shares repurchased by a dealer or broker for three business
days following the trade date (i.e., to and including the day prior to
settlement of the repurchase). If all shares in an account are redeemed, all
dividends accrued on shares of the same class in the account will be paid
together with the redemption proceeds.
Dividends, distributions and the proceeds of the redemption of Fund shares
represented by checks returned to the Transfer Agent by the Postal Service as
undeliverable will be invested in shares of Oppenheimer Money Market Fund, Inc.,
as promptly as possible after the return of such checks to the Transfer Agent,
to enable the investor to earn a return on otherwise idle funds.
Tax Status of the Fund's Dividends and Distributions. The Federal tax treatment
of the Fund's dividends and capital gains distributions is explained in the
Prospectus under the caption "Dividends, Capital Gains and Taxes." Special
provisions of the Internal Revenue Code govern the eligibility of the Fund's
dividends for the dividends-received deduction for corporate shareholders.
Long-term
-61-
<PAGE>
capital gains distributions are not eligible for the deduction. In addition, the
amount of dividends paid by the Fund which may qualify for the deduction is
limited to the aggregate amount of qualifying dividends (generally dividends
from domestic corporations) which the Fund derives from its portfolio
investments held for a minimum period, usually 46 days. A corporate shareholder
will not be eligible for the deduction on dividends paid on shares held by that
shareholder for 45 days or less. To the extent the Fund's dividends are derived
from its gross income from option premiums, interest income or short-term
capital gains from the sale of securities, or dividends from foreign
corporations, its dividends will not qualify for the deduction. It is expected
that for the most part the Fund's dividends will not qualify, because of the
nature of the investments held by the Fund in its portfolio.
The amount of a class's distributions may vary from time to time depending
on market conditions, the composition of the Fund's portfolio, and expenses
borne by the Fund or borne separately by a class, as described in "Alternative
Sales Arrangements -- Class A, Class B and Class C Shares," above. Dividends are
calculated in the same manner, at the same time and on the same day for shares
of each class. However, dividends on Class B and Class C shares are expected to
be lower as a result of the asset-based sales charge on Class B and Class C
shares, and Class B and Class C dividends will also differ in amount as a
consequence of any difference in net asset value between the classes.
If prior distributions must be re-characterized at the end of the fiscal
year as a result of the effect of the Fund's investment policies, shareholders
may have a non-taxable return of capital, which will be identified in notices to
shareholders. There is no fixed dividend rate (although the Fund may have a
targeted dividend rate for Class A shares which can be changed at ant time) and
there can be no assurance as to the payment of any dividends or the realization
of any capital gains.
If the Fund qualifies as a "regulated investment company" under the
Internal Revenue Code, it will not be liable for Federal income taxes on amounts
paid by it as dividends and distributions. The Fund qualified as a regulated
investment company in its last fiscal year and intends to qualify in future
years, but reserves the right not to qualify. The Internal Revenue Code contains
a number of complex tests to determine whether the Fund will qualify, and the
Fund might not meet those tests in a particular year.
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 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.
The Internal Revenue Code requires that a holder (such as the Fund) of a
zero coupon security accrue as income each year a portion of the discount at
which the security was purchased even though the Fund receives no interest
payment in cash on the security during the year. As an investment company, the
Fund must pay out substantially all of its net investment income each year or be
subject to excise taxes, as described above. Accordingly, when the Fund holds
zero coupon securities, it may be required to pay out as an income distribution
each year an amount which is greater than the total amount of cash interest the
Fund actually received during that year. Such
-62-
<PAGE>
distributions will be made from the cash assets of the Fund or by liquidation of
portfolio securities, if necessary. The Fund may realize a gain or loss from
such sales. In the event the Fund realizes net capital gains from such
transactions, its shareholders may receive a larger capital gain distribution
than they would have had in the absence of such transactions.
Dividend Reinvestment in Another Fund. Shareholders of the Fund may elect to
reinvest all dividends and/or capital gains distributions in shares of the same
class of any of the other Oppenheimer funds listed in "Reduced Sales Charges"
above at net asset value without sales charge. To elect this option, the
shareholder must notify the Transfer Agent in writing and either must have an
existing account in the fund selected for reinvestment or must obtain a
prospectus for that fund and an application from the Distributor to establish an
account. The investment will be made at the net asset value per share in effect
at the close of business on the payable date of the dividend or distribution.
Additional Information About The Fund
The Custodian. The Bank of New York is the custodian of the Fund's assets. The
Custodian's responsibilities include safeguarding and controlling the Fund's
portfolio securities, 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. The
Fund's cash balances with the Custodian in excess of $100,000 are not protected
by Federal deposit insurance. Such uninsured balances may at times be
substantial.
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 the Manager and certain other funds advised by the Manager and its
affiliates.
<PAGE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
================================================================================
The Board of Trustees and Shareholders of
Oppenheimer Strategic Income Fund:
We have audited the accompanying statement of assets and liabilities,
including the statement of investments, of Oppenheimer Strategic Income Fund as
of September 30, 1997, the related statement of operations for the year then
ended, the statements of changes in net assets for the years ended September 30,
1997 and 1996, and the financial highlights for the period October 1, 1992 to
September 30, 1997. 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. Our procedures included confirmation of securities owned at
September 30, 1997 by correspondence with the custodian and brokers; where
replies were not received from brokers, we performed other auditing procedures.
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, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Oppenheimer
Strategic Income Fund at September 30, 1997, the results of its operations, the
changes in its net assets, and the financial highlights for the respective
stated periods, in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
- ---------------------------
DELOITTE & TOUCHE LLP
Denver, Colorado
October 21, 1997
<PAGE>
STATEMENT OF INVESTMENTS September 30, 1997
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
======================================================================================================================
MORTGAGE-BACKED OBLIGATIONS--26.3%
- ----------------------------------------------------------------------------------------------------------------------
GOVERNMENT AGENCY--21.1%
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
FHLMC/FNMA/SPONSORED--15.0%
Federal Home Loan Mortgage Corp.:
Collateralized Mtg. Obligations, Gtd. Multiclass Mtg.
Participation Certificates:
Series 1455, Cl. J, 7.50%, 12/15/22 $ 9,527,500 $ 10,005,477
Series 1562, Cl. C, 7%, 3/15/21 10,000,000 10,073,330
Series 1751, Cl. PK, 8%, 9/15/24 6,735,000 7,275,401
Series 1914, Cl. H, 6.50%, 8/15/24 9,970,000 9,508,887
Series 1920, Cl. M, 6.50%, 6/15/23 11,950,000 11,684,932
Interest-Only Stripped Mtg.-Backed Security,
Series 177, Cl. B, 10.346%-12.833%, 7/1/26(2) 365,473,113 119,235,605
Principal-Only Stripped Mtg.-Backed Security,
Series 179, 4.852%-4.912%, 9/1/26(3) 41,692,785 31,940,582
- ----------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn.:
6.375%, 8/15/07(AUD) 67,605,000 49,485,819
6.50%, 4/1/26 2,450,814 2,388,736
7%, 10/25/27(4) 78,080,000 77,762,995
7%, 11/1/12(4) 70,160,000 70,818,101
7%, 4/1/26 13,290,472 13,252,861
7%, 9/26/00(NZD) 48,610,000 31,006,240
7.50%, 10/1/27(4) 212,500,000 216,019,000
7.50%, 11/25/12(4) 150,000,000 153,141,000
7.50%, 6/1/24-8/1/26 156,133,805 159,018,910
Sr. Unsub. Medium-Term Nts., 6.50%, 7/10/02(AUD) 31,660,000 23,684,739
Gtd. Real Estate Mtg. Investment Conduit
Pass-Through Certificates:
Trust 1989-4, Cl. D, 10%, 2/25/19 9,000,000 10,240,246
Trust 1990-143, Cl. J, 8.75%, 12/25/20 33,289,442 35,499,579
Trust 1990-18, Cl. K, 9.60%, 3/25/20 10,100,000 11,526,134
Trust 1992-162, Cl. C, 7%, 10/25/21 5,850,000 5,842,687
Trust 1994-51, Cl. PH, 6.50%, 1/25/23 13,841,000 13,776,086
Trust 1997-25, Cl. B, 7%, 12/18/22 8,618,000 8,654,352
Interest-Only Stripped Mtg.-Backed Security:
Trust 215, Cl. 2, 7.844%-10.204%, 4/1/23(2) 99,635,079 30,668,922
Trust 222, Cl. 2, 8.694%-10.309%, 6/1/23(2) 72,966,762 22,802,113
Trust 258, Cl. 2, 10.294%, 3/1/24(2) 28,471,631 8,634,912
Principal-Only Stripped Mtg.-Backed Security:
Trust 1994-57, Cl. D, 4.652%, 1/25/24(3) 9,094,765 6,062,230
Trust 1997-7, Cl. GA, 6.889%, 7/25/23(3) 5,961,179 3,256,294
Trust 277-C1, 5.331%, 4/1/27(3) 43,024,112 31,165,592
--------------
1,184,431,762
</TABLE>
10 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GNMA/GUARANTEED--6.1%
Government National Mortgage Assn.:
12.50%, 12/15/13 $ 10,797,431 $ 12,735,463
13%, 10/15/15 30,513,919 37,026,734
13.50%, 6/15/15 39,545,027 48,924,614
6%, 11/1/27(4) 175,000,000 176,093,750
7.50%, 10/1/27(4) 130,000,000 132,234,700
7.50%, 1/30/07-6/15/27 32,021,644 32,608,053
8%, 5/15/26 13,805,691 14,284,059
Collateralized Mtg. Obligations, Gtd. Real Estate Mtg.
Investment Conduit Pass-Through Certificates,
Series 1994-5, Cl. PQ, 7.493%, 7/16/24 10,000,000 10,480,422
- ----------------------------------------------------------------------------------------------------------------------
U.S. Department of Veterans Affairs, Interest-Only Gtd.
Real Estate Mtg. Investment Conduit Pass-Through Certificates,
Vendee Mtg. Trust:
Series 1992-2, Cl. IO, 13.67%, 9/15/22(2)(5) 150,282,020 6,536,681
Series 1995-2B, Cl. 2-IO, 22.639%, 6/15/25(2)(5) 15,029,235 589,428
Series 1995-3, Cl. 1-IO, 20.516%, 9/15/25(2)(5) 359,011,879 6,955,855
--------------
478,469,759
- ----------------------------------------------------------------------------------------------------------------------
PRIVATE--5.2%
- ----------------------------------------------------------------------------------------------------------------------
AGRICULTURAL--0.1%
Prudential Agricultural Credit, Inc., Farmer Mac Agricultural
Real Estate Trust Sr. Sub. Mtg. Pass-Through Certificates,
Series 1992-2:
Cl. B2, 9.199%, 1/15/03(5)(6) 5,671,990 5,108,337
Cl. B3, 9.475%, 4/15/09(5)(6) 7,109,361 6,071,839
--------------
11,180,176
- ----------------------------------------------------------------------------------------------------------------------
COMMERCIAL--4.0%
Asset Securitization Corp., Commercial Mtg. Pass-Through
Certificates:
Series 1995-MD4, Cl. A-4, 7.384%, 8/13/29 5,000,000 5,167,969
Series 1995-MD4, Cl. A-5, 7.384%, 8/13/29 20,000,000 20,146,875
Series 1997-D4, Cl. B1, 7.525%, 4/14/29(6) 10,000,000 9,712,500
Series 1997-D4, Cl. B2, 7.525%, 4/14/29(6) 17,082,312 16,180,152
Series 1997-D4, Cl. B3, 7.525%, 4/14/29(6) 5,532,925 5,088,562
- ----------------------------------------------------------------------------------------------------------------------
CBA Mortgage Corp., Mtg. Pass-Through Certificates,
Series 1993-C1:
Cl. E, 7.76%, 12/25/03(6) 2,609,000 2,628,567
Cl. F, 7.76%, 12/25/03(6)(7) 14,300,000 11,493,625
- ----------------------------------------------------------------------------------------------------------------------
Citicorp Mortgage Securities, Inc., Sub. Bonds, Series 1993-5:
Cl. B3, 7%, 4/25/23(5) 1,629,234 1,479,040
Cl. B4, 7%, 4/25/23(5) 1,247,587 299,421
- ----------------------------------------------------------------------------------------------------------------------
Commercial Mortgage Acceptance Corp., Collateralized Mtg.
Obligation, Series 1996-C1, Cl. E, 8.115%, 12/25/20(6)(7) 2,750,000 2,843,672
</TABLE>
11 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMERCIAL (CONTINUED)
Criimi Mae Financial Corp., Collateralized Mtg. Obligations,
Trust I, Cl. A-2, 7.56%, 8/30/05(7) $ 6,300,000 $ 6,391,547
- ----------------------------------------------------------------------------------------------------------------------
CS First Boston Mortgage Securities Corp., Collateralized Mtg.
Obligations, Gtd. Multiclass Mtg. Participation Certificates,
Series 1994-M1, Cl. E3A, 8.406%, 2/15/02(5)(6) 15,000,000 15,000,000
- ----------------------------------------------------------------------------------------------------------------------
FDIC Trust, Gtd. Real Estate Mtg. Investment
Conduit Pass-Through Certificates, Series 1994-C1:
Cl. 2-D, 8.70%, 9/25/25(5) 2,500,000 2,602,344
Cl. 2-E, 8.70%, 9/25/25(5) 2,500,000 2,609,375
Cl. 2-G, 8.70%, 9/25/25(5) 4,870,000 5,013,056
- ----------------------------------------------------------------------------------------------------------------------
General Motors Acceptance Corp.:
Collateralized Mtg. Obligations, Series 1997-C1,
Cl. G, 7.414%, 7/20/29 19,440,000 18,395,100
Interest-Only Stripped Mtg.-Backed Security,
Series 1997-C1, Cl. X, 1.63%, 7/15/27(2) 184,125,000 18,930,352
- ----------------------------------------------------------------------------------------------------------------------
Merrill Lynch Mortgage Investors, Inc., Mtg. Pass-Through
Certificates, Series 1995-C2, Cl. D, 7.919%, 6/15/21(6) 3,159,456 3,255,474
- ----------------------------------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., Commercial Mtg. Pass-Through
Certificates, Series 1996-C1:
Cl. E, 7.51%, 2/15/28(5)(6) 9,365,000 8,762,128
Cl. F, 7.51%, 2/15/28(5)(6) 13,360,980 9,966,456
- ----------------------------------------------------------------------------------------------------------------------
Nykredit AS, Mtg.-Backed Security, Series ANN, 6%, 10/1/26(DKK) 139,995,000 19,454,234
- ----------------------------------------------------------------------------------------------------------------------
Realkredit Danmark, Mtg.-Backed Security, 6%, 10/1/26(DKK) 139,995,000 19,402,190
- ----------------------------------------------------------------------------------------------------------------------
Resolution Trust Corp., Commercial Mtg. Pass-Through
Certificates:
Series 1992-CHF, Cl. D, 8.25%, 12/25/20 9,580,443 9,637,328
Series 1993-C1, Cl. B, 8.75%, 5/25/24 7,074,009 7,050,798
Series 1993-C1, Cl. D, 9.45%, 5/25/24 6,597,507 6,656,782
Series 1993-C1, Cl. E, 9.50%, 5/25/24 835,336 839,318
Series 1993-C2, Cl. E, 8.50%, 3/25/25 123,442 123,018
Series 1994-C1, Cl. C, 8%, 6/25/26 8,000,000 8,196,875
Series 1994-C1, Cl. E, 8%, 6/25/26 5,887,424 5,797,273
Series 1994-C2, Cl. E, 8%, 4/25/25 17,227,761 17,440,417
Series 1994-C2, Cl. G, 8%, 4/25/25 6,290,199 6,308,382
Series 1995-C1, Cl. F, 6.90%, 2/25/27 9,487,609 8,887,222
- ----------------------------------------------------------------------------------------------------------------------
Salomon Brothers Mortgage Securities VII, Series 1996-C1,
Cl. E, 9.18%, 1/20/06 4,550,000 4,700,719
- ----------------------------------------------------------------------------------------------------------------------
Structured Asset Securities Corp., Multiclass Pass-Through
Certificates:
Series 1995-C4, Cl. E, 8.804%, 6/25/26(5)(6) 9,453,000 9,721,820
Series 1996-C3, Cl. E, 8.458%, 6/25/30(7) 9,350,000 9,297,406
Series 1996-CFL, Cl. D, 7.034%, 2/25/28 14,220,000 14,357,756
--------------
313,837,753
- ----------------------------------------------------------------------------------------------------------------------
MULTI-FAMILY--0.4%
ACP Mortgage LP, Cl. E, 7.156%, 2/25/28(6)(7) 2,376,695 2,159,822
</TABLE>
12 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Countrywide Funding Corp.:
Mtg. Pass-Through Certificates, Series 1993-12, Cl. B1,
6.625%, 2/25/24 $ 3,500,000 $ 3,313,516
Series 1993-11, Cl. B1, 6.25%, 2/25/09 1,238,056 1,187,276
Series 1993-11, Cl. B3, 6.25%, 2/25/09(7) 722,201 281,997
- ----------------------------------------------------------------------------------------------------------------------
Mortgage Capital Funding, Inc.:
Commercial Mtg. Pass-Through Certificates, Series 1997-MC1,
Cl. F, 7.452%, 5/20/07(5) 2,939,000 2,814,092
Multifamily Mtg. Pass-Through Certificates, Series 1996-MC1,
Cl. G, 7.15%, 6/15/06(7) 9,700,000 9,245,313
- ----------------------------------------------------------------------------------------------------------------------
Multifamily Capital Access One, Inc., Series 1, Cl. D,
10.382%, 1/15/24(5)(6) 3,576,000 3,383,231
- ----------------------------------------------------------------------------------------------------------------------
Resolution Trust Corp., Commercial Mtg. Pass-Through
Certificates:
Series 1991-M6, Cl. B4, 7.174%, 6/25/21(6) 589,258 585,484
Series 1992-M4, Cl. B, 7.20%, 9/25/21 1,129,974 1,132,976
- ----------------------------------------------------------------------------------------------------------------------
Salomon Brothers Mortgage Securities VII, Series 1996-CL,
Cl. F, 9.186%, 1/20/28(4) 9,632,000 8,199,240
--------------
32,302,947
- ----------------------------------------------------------------------------------------------------------------------
RESIDENTIAL--0.7%
Amresco Commercial Mortgage Funding I Corp., Multiclass Mtg.
Pass-Through Certificates, Series 1997-C1:
Cl. E, 7%, 6/17/29(5) 1,550,000 1,407,109
Cl. H, 7%, 6/17/29(5) 1,600,000 1,442,500
- ----------------------------------------------------------------------------------------------------------------------
CS First Boston Mortgage Securities Corp., Mtg. Pass-Through
Certificates, Series 1997-C1:
Cl. F, 7.50%, 6/20/13(7) 2,400,000 2,268,000
Cl. G, 7.50%, 6/20/14(5) 3,271,000 2,964,344
Cl. H, 7.50%, 8/20/14(5) 2,580,000 1,930,163
- ----------------------------------------------------------------------------------------------------------------------
First Chicago/Lennar Trust 1, Commercial Mtg. Pass-Through
Certificates, Series 1997-CHL1:
8.134%, 2/25/11(5)(6) 14,500,000 11,944,375
8.134%, 5/25/08(5)(6) 8,500,000 8,407,031
- ----------------------------------------------------------------------------------------------------------------------
Morgan Stanley Capital I, Inc., Commercial Mtg. Pass-Through
Certificates, Series 1997-HF1, Cl. F, 6.86%, 2/15/20(5) 3,475,000 3,170,938
- ----------------------------------------------------------------------------------------------------------------------
Prudential Home Mortgage Securities Corp., Sub. Fixed Rate
Mtg. Securities, Real Estate Mtg. Investment Conduit Pass-
Through Certificates, Series 1995-A, Cl. B2, 8.684%, 3/28/25(5)(6) 5,324,241 5,567,160
- ----------------------------------------------------------------------------------------------------------------------
Residential Accredit Loans, Inc., Commercial Mortgage Pass-
Through Certificates, Series 1997-QS8, Cl. M3, 7.50%, 8/25/27 3,270,500 3,255,170
- ----------------------------------------------------------------------------------------------------------------------
Ryland Mortgage Securities Corp. Sub. Bonds, Series
1993-3, Cl. B2, 6.713%, 8/25/08 1,195,807 1,173,759
- ----------------------------------------------------------------------------------------------------------------------
Salomon Brothers Mortgage Securities VII, Series
1996-B, Cl. 1, 7.136%, 4/25/26 14,783,871 10,182,391
--------------
53,712,940
--------------
Total Mortgage-Backed Obligations (Cost $2,043,741,276) 2,073,935,337
</TABLE>
13 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
======================================================================================================================
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS--12.7%
- ----------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds:
6%, 2/15/26(8) $ 65,380,000 $ 61,436,799
6.50%, 11/15/26 1,870,000 1,882,273
8.125%, 8/15/21(8) 100,000,000 119,687,592
9.375%, 2/15/06 71,100,000 86,008,814
11.625%, 11/15/04 70,035,000 91,964,774
11.875%, 11/15/03 68,150,000 88,083,937
12%, 8/15/13 71,700,000 103,382,503
13.125%, 5/15/01(8) 41,500,000 51,109,863
13.375%, 8/15/01 70,400,000 88,220,064
13.75%, 8/15/04 13,810,000 19,653,369
- ----------------------------------------------------------------------------------------------------------------------
U.S. Treasury Nts.:
6.375%, 5/15/99 1,000,000 1,009,063
6.50%, 5/15/05 9,750,000 9,963,290
7.25%, 5/15/04 28,160,000 29,928,813
7.50%, 10/31/99(9) 74,300,000 76,691,565
7.875%, 11/15/04 45,800,000 50,394,333
8.50%, 11/15/20 21,000,000 22,535,644
10.75%, 5/15/03 53,370,000 65,161,459
14.25%, 2/15/02(9) 27,100,000 35,619,587
--------------
Total U.S. Government Obligations (Cost $999,215,213) 1,002,733,742
======================================================================================================================
FOREIGN GOVERNMENT OBLIGATIONS--24.9%
- ----------------------------------------------------------------------------------------------------------------------
ARGENTINA--1.9%
Argentina (Republic of) Bonds:
5%, 12/20/02(JPY) 1,820,000,000 16,109,475
Bonos de Consolidacion de Deudas, Series I, 5.625%,
4/1/01(6) 10,153,637 9,863,812
- ----------------------------------------------------------------------------------------------------------------------
Argentina (Republic of) Floating Rate Bonds, Series L, 6.688%,
3/31/05(6) 15,878,900 15,156,410
- ----------------------------------------------------------------------------------------------------------------------
Argentina (Republic of) Par Bonds, 5.50%, 3/31/23(11) 34,050,000 25,792,875
- ----------------------------------------------------------------------------------------------------------------------
Argentina (Republic of) Unsec. Unsub. Bonds, 11.50%,
8/14/01(GBP) 2,575,000 4,497,632
- ----------------------------------------------------------------------------------------------------------------------
Argentina (Republic of) Unsec. Unsub. Medium-Term Nts.,
5.50%, 3/27/01(JPY) 4,300,000,000 38,531,878
- ----------------------------------------------------------------------------------------------------------------------
Argentina (Republic of) Unsec. Unsub. Nts., 5.50%, 3/27/01(JPY) 1,620,000,000 14,516,661
- ----------------------------------------------------------------------------------------------------------------------
Banco Hipotecario Nacional (Argentina) Medium-Term Nts.,
10.625%, 8/7/06(8) 15,000,000 16,631,250
- ----------------------------------------------------------------------------------------------------------------------
Buenos Aires (Province of) Sr. Unsec. Unsub. Medium-Term
Nts., 11.50%, 10/19/98(5) 950,000 991,563
- ----------------------------------------------------------------------------------------------------------------------
Buenos Aires (Province of) Sr. Unsec. Unsub. Nts., 11.50%,
10/19/98(5) 5,000,000 5,218,750
--------------
147,310,306
</TABLE>
14 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUSTRALIA--3.6%
Australia (Commonwealth of) Bonds, 10%, 2/15/06(AUD) 38,510,000 $ 35,005,846
- ----------------------------------------------------------------------------------------------------------------------
New South Wales Treasury Corp. Gtd. Bonds, 8%, 12/1/01(AUD) 87,180,000 68,702,265
- ----------------------------------------------------------------------------------------------------------------------
Queensland Treasury Corp. Exchangeable Gtd. Nts.:
10.50%, 5/15/03(AUD) 220,000 194,321
8%, 5/14/03(AUD) 77,250,000 61,673,219
8%, 8/14/01(AUD) 99,508,000 78,137,052
8%, 9/14/07(AUD) 46,460,000 38,007,606
- ----------------------------------------------------------------------------------------------------------------------
Treasury Corp. of Victoria Gtd. Bonds, 8.25%, 10/15/03(AUD) 6,330,000 5,122,368
--------------
286,842,677
- ----------------------------------------------------------------------------------------------------------------------
BRAZIL--1.3%
Banco Estado Minas Gerais:
8.25%, 2/10/00 11,800,000 11,763,125
8.25%, 2/10/00(7) 2,000,000 1,993,750
- ----------------------------------------------------------------------------------------------------------------------
Brazil (Federal Republic of) Bonds, 10.125%, 5/15/27 30,800,000 30,923,198
- ----------------------------------------------------------------------------------------------------------------------
Brazil (Federal Republic of) Capitalization Bonds, 8%, 4/15/14 54,530,829 46,427,889
- ----------------------------------------------------------------------------------------------------------------------
Telecomunicacoes Brasileiras SA Bonds, 13%, 2/5/99(ITL) 15,600,000,000 9,693,314
- ----------------------------------------------------------------------------------------------------------------------
Telecomunicacoes Brasileiras SA Medium-Term Nts.,
11.437%, 12/9/99(5)(6) 500,000 530,000
--------------
101,331,276
- ----------------------------------------------------------------------------------------------------------------------
BULGARIA--0.3%
Bulgaria (Republic of) Disc. Bonds, Tranche A,
6.688%, 7/28/24(6) 9,730,000 8,100,225
- ----------------------------------------------------------------------------------------------------------------------
Bulgaria (Republic of) Front-Loaded Interest Reduction Bearer
Bonds, Tranche A, 2.30%, 7/28/12(11) 22,620,000 14,900,925
--------------
23,001,150
- ----------------------------------------------------------------------------------------------------------------------
CANADA--1.6%
Canada (Government of) Bonds:
9.75%, 6/1/01(CAD) 82,400,000 68,866,647
Series A-33, 11.50%, 9/1/00(CAD) 64,645,000 55,043,622
--------------
123,910,269
- ----------------------------------------------------------------------------------------------------------------------
COLOMBIA--0.1%
Financiera Energetica Nacional SA Eurobonds, 9.375%,
6/15/06(7) 3,650,000 3,951,125
- ----------------------------------------------------------------------------------------------------------------------
DENMARK--1.0%
Denmark (Kingdom of) Bonds, 8%, 3/15/06(DKK) 473,345,000 80,488,951
- ----------------------------------------------------------------------------------------------------------------------
ECUADOR--0.1%
Ecuador (Republic of) Past Due Interest Bonds, 5.727%,
2/27/15(6) 15,965,976 11,635,205
</TABLE>
15 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY--1.2%
Germany (Republic of) Bonds:
Series 94, 6.25%, 1/4/24(8)(DEM) 167,100,000 $ 95,764,843
Series 95, 6.875%, 5/12/05(DEM) 1,000,000 619,470
--------------
96,384,313
- ----------------------------------------------------------------------------------------------------------------------
GREAT BRITAIN--1.3%
United Kingdom Treasury Bonds, 8.50%, 12/7/05(GBP) 29,375,000 53,502,615
- ----------------------------------------------------------------------------------------------------------------------
United Kingdom Treasury Nts., 7.75%, 9/8/06(GBP) 29,160,000 51,020,732
--------------
104,523,347
- ----------------------------------------------------------------------------------------------------------------------
GREECE--0.0%
Hellenic Republic Bonds, 11.10%, 6/30/00(6)(GRD) 217,464,000 786,625
- ----------------------------------------------------------------------------------------------------------------------
Hellenic Republic Treasury Bills, Zero Coupon,
10.62%, 2/5/98(12)(GRD) 487,500,000 1,690,188
--------------
2,476,813
- ----------------------------------------------------------------------------------------------------------------------
HUNGARY--0.4%
Hungary (Government of) Bonds:
Series 98/I, 23.50%, 5/17/98(HUF) 3,536,000,000 18,523,194
Series 98/J, 23.50%, 7/25/98(HUF) 1,000,000,000 5,275,876
Series 99-G, 16.50%, 7/24/99(HUF) 1,946,000,000 9,684,865
--------------
33,483,935
- ----------------------------------------------------------------------------------------------------------------------
INDONESIA--0.2%
PT Hutama Karya Medium-Term Nts., Zero Coupon:
15.38%, 11/19/97(12)(IDR) 5,000,000,000 1,481,870
25.14%, 9/3/98(12)(IDR) 25,000,000,000 5,962,699
- ----------------------------------------------------------------------------------------------------------------------
Perusahaan Listr, 17%, 8/21/01(IDR) 9,000,000,000 2,512,270
--------------
9,956,839
- ----------------------------------------------------------------------------------------------------------------------
IRELAND--0.5%
Ireland (Government of) Bonds, 9.25%, 7/11/03(IEP) 11,685,000 20,093,654
- ----------------------------------------------------------------------------------------------------------------------
National Treasury Management Agency (Irish Government)
Bonds, 8%, 8/18/06(IEP) 10,710,000 17,707,787
--------------
37,801,441
- ----------------------------------------------------------------------------------------------------------------------
ITALY--1.5%
Italy (Republic of) Treasury Bonds, Buoni del Tesoro Poliennali:
10.50%, 4/1/05(ITL) 25,280,000,000 18,591,088
12%, 1/1/02(ITL) 65,065,000,000 46,566,869
9%, 10/1/03(ITL) 27,270,000,000 18,308,951
9.50%, 2/1/01(ITL) 31,285,000,000 20,326,156
9.50%, 5/1/01(ITL) 18,530,000,000 12,122,067
--------------
115,915,131
</TABLE>
16 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
MEXICO--2.4%
Banco Nacional de Comercio Exterior SNC International
Finance BV Gtd. Registered Bonds, 11.25%, 5/30/06 $ 14,575,000 $ 16,743,031
- ----------------------------------------------------------------------------------------------------------------------
Banco Nacional de Obras y Servicios SNC Bonds, 9.625%,
11/15/03 10,000,000 10,587,500
- ----------------------------------------------------------------------------------------------------------------------
Bonos de la Tesoreria de la Federacion, Zero Coupon:
23.41%, 12/31/97(12)(MXP) 398,444,080 48,963,564
24.71%, 12/4/97(12)(MXP) 93,010,960 11,584,190
23.44%, 2/4/98(12)(MXP) 36,832,060 4,447,757
- ----------------------------------------------------------------------------------------------------------------------
Fideicomiso Petacalco Trust Nts., 10.16%, 12/23/09(5) 8,000,000 8,370,000
- ----------------------------------------------------------------------------------------------------------------------
Mexican Williams Bonds, 6.75%, 11/15/08(5)(6) 1,500,000 1,410,000
- ----------------------------------------------------------------------------------------------------------------------
United Mexican States Bonds:
10.375%, 1/29/03(DEM) 19,525,000 12,685,484
11.50%, 5/15/26 18,525,000 22,415,250
16.50%, 9/1/08(5)(GBP) 2,445,000 6,121,969
- ----------------------------------------------------------------------------------------------------------------------
United Mexican States:
Collateralized Fixed Rate Par Bonds, Series B, 6.25%, 12/31/19 33,900,000 28,221,750
Nacional Financiera SNC Nts., 13.60%, 4/2/98(ESP) 1,773,000,000 12,316,623
Petroleos Mexicanos Gtd. Unsec. Unsub. Nts.,
7.875%, 3/2/99(CAD) 5,600,000 4,166,326
--------------
188,033,444
- ----------------------------------------------------------------------------------------------------------------------
NEW ZEALAND--1.5%
New Zealand (Government of) Bonds:
7%, 7/15/09(NZD) 34,160,000 22,519,668
8%, 11/15/06(NZD) 27,205,000 19,029,365
8%, 7/15/98(NZD) 121,620,000 78,224,424
--------------
119,773,457
- ----------------------------------------------------------------------------------------------------------------------
NORWAY--0.2%
Norway (Government of) Bonds, 9.50%, 10/31/02(NOK) 106,700,000 17,883,651
- ----------------------------------------------------------------------------------------------------------------------
PERU--0.2%
Peru (Republic of) Front-Loaded Interest Reduction Bonds,
3.25%, 3/7/17(6) 20,045,000 12,377,788
- ----------------------------------------------------------------------------------------------------------------------
POLAND--0.6%
Poland (Republic of) Bonds:
15%, 10/12/99(PLZ) 28,900,000 7,505,990
15%, 6/12/99(PLZ) 9,500,000 2,479,871
16%, 2/12/99(PLZ) 115,052,000 30,849,086
16%, 6/12/98(PLZ) 14,900,000 4,111,738
--------------
44,946,685
</TABLE>
17 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RUSSIA--0.9%
City of St. Petersburg Sr. Unsub. Nts., 9.50%, 6/18/02(7) $ 19,530,000 $ 20,164,725
- ----------------------------------------------------------------------------------------------------------------------
Ministry of Finance (Russian Government) Unsec. Unsub.
Bonds, 10%, 6/26/07(7) 14,600,000 15,446,798
- ----------------------------------------------------------------------------------------------------------------------
Russian (Government of) Principal Loans Debs., 5.80%,
12/29/49 (4)(6) 48,650,000 36,320,266
--------------
71,931,789
- ----------------------------------------------------------------------------------------------------------------------
SOUTH AFRICA--0.9%
South Africa (Republic of) Bonds:
Series 150, 12%, 2/28/05(ZAR) 174,418,290 34,230,778
Series 162, 12.50%, 1/15/02(ZAR) 107,822,000 22,165,785
Series 175, 9%, 10/15/02(ZAR) 87,076,530 15,426,233
--------------
71,822,796
- ----------------------------------------------------------------------------------------------------------------------
SPAIN--1.6%
Spain (Kingdom of) Debs., Bonos y Obligacion del
Estado, 10.10%, 2/28/01(ESP) 1,720,000,000 13,328,641
- ----------------------------------------------------------------------------------------------------------------------
Spain (Kingdom of) Gtd. Bonds, Bonos y Obligacion
del Estado:
10.30%, 6/15/02(ESP) 3,018,100,000 24,391,427
10.50%, 10/30/03(ESP) 2,996,320,000 25,214,716
12.25%, 3/25/00(ESP) 8,161,000,000 63,843,104
--------------
126,777,888
- ----------------------------------------------------------------------------------------------------------------------
SWEDEN--0.4%
Sweden (Kingdom of) Bonds, Series 1033, 10.25%, 5/5/03(SEK) 194,600,000 31,173,394
- ----------------------------------------------------------------------------------------------------------------------
TURKEY--0.5%
Turkey (Government of) Treasury Bills, Zero Coupon:
103.54%, 8/5/98(12)(TRL) 96,500,000,000 21,807,778
101.87%, 9/16/98(12)(TRL) 74,250,000,000 17,802,133
--------------
39,609,911
- ----------------------------------------------------------------------------------------------------------------------
VENEZUELA--0.7%
Venezuela (Republic of) Debs., Banco Venezuela TCI,
Zero Coupon, 6.13%, 12/13/98(5)(12) 3,954,016 3,766,201
- ----------------------------------------------------------------------------------------------------------------------
Venezuela (Republic of) Disc. Bonds, Series DL,
6.75%, 12/18/07(6) 31,000,000 29,663,125
- ----------------------------------------------------------------------------------------------------------------------
Venezuela (Republic of) New Money Bonds:
Series A, 6.875%, 12/18/05(6) 8,000,000 7,700,000
Series B, 6.75%, 12/18/05(6) 12,000,000 11,550,000
Series P, 6.75%, 12/18/05(6) 3,250,000 3,134,219
--------------
55,813,545
--------------
Total Foreign Government Obligations (Cost $1,946,836,566) 1,959,157,126
</TABLE>
18 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
======================================================================================================================
<S> <C> <C>
LOAN PARTICIPATIONS--0.0%
- ----------------------------------------------------------------------------------------------------------------------
Jamaica (Government of) 1990 Refinancing Agreement Nts.:
Tranche A, 6.563%, 10/16/00(5)(6) $ 978,482 $ 949,128
Tranche B, 6.563%, 11/15/04(5)(6) 270,000 253,800
- ----------------------------------------------------------------------------------------------------------------------
United Mexican States, Combined Facility 2, Loan Participation
Agreement, Tranche A, 13.595%, 3/20/99(5)(6) 478,769 440,468
--------------
Total Loan Participations (Cost $1,589,191) 1,643,396
======================================================================================================================
CORPORATE BONDS AND NOTES--34.0%
- ----------------------------------------------------------------------------------------------------------------------
BASIC INDUSTRY--3.5%
- ----------------------------------------------------------------------------------------------------------------------
CHEMICALS--0.9%
Harris Chemical North America, Inc.:
10.25% Gtd. Sr. Sec. Disc. Nts., 7/15/01 720,000 754,200
10.75% Gtd. Sr. Sub. Nts., 10/15/03 1,440,000 1,494,000
- ----------------------------------------------------------------------------------------------------------------------
ICO, Inc., 10.375% Sr. Nts., 6/1/07(7) 2,200,000 2,326,500
- ----------------------------------------------------------------------------------------------------------------------
ISP Holdings, Inc., 9% Sr. Nts., Series B, 10/15/03 7,850,000 8,242,500
- ----------------------------------------------------------------------------------------------------------------------
Laroche Industries, Inc., 9.50% Sr. Sub. Nts., 9/15/07(7) 5,400,000 5,467,500
- ----------------------------------------------------------------------------------------------------------------------
NL Industries, Inc., 11.75% Sr. Sec. Nts., 10/15/03 1,970,000 2,181,775
- ----------------------------------------------------------------------------------------------------------------------
Pioneer Americas Acquisition Corp., 9.25% Sr. Nts., 6/15/07(7) 4,795,000 4,818,975
- ----------------------------------------------------------------------------------------------------------------------
Polytama International Finance BV, 11.25% Gtd. Sec.
Nts., 6/15/07 14,990,000 14,877,575
- ----------------------------------------------------------------------------------------------------------------------
Quantum Chemical Corp., 10.375% First Mtg. Nts., 6/1/03 3,500,000 3,711,897
- ----------------------------------------------------------------------------------------------------------------------
Sovereign Specialty Chemicals, Inc., 9.50% Sr. Sub. Nts., 8/1/07(7) 7,765,000 7,959,125
- ----------------------------------------------------------------------------------------------------------------------
Sterling Chemical Holdings, Inc., 0%/13.50% Sr. Disc. Nts.,
8/15/08(13) 10,810,000 7,648,075
- ----------------------------------------------------------------------------------------------------------------------
Sterling Chemicals, Inc.:
11.25% Sr. Sub. Nts., 4/1/07 2,330,000 2,551,350
11.75% Sr. Unsec. Sub. Nts., 8/15/06 8,400,000 9,303,000
--------------
71,336,472
- ----------------------------------------------------------------------------------------------------------------------
CONTAINERS--0.3%
Consumers International, Inc., 10.25% Sr. Sec. Nts., 4/1/05(5) 4,375,000 4,768,750
- ----------------------------------------------------------------------------------------------------------------------
IVEX Holdings Corp., 0%/13.25% Sr. Disc. Debs., Series B,
3/15/05(13) 18,915,000 16,172,325
- ----------------------------------------------------------------------------------------------------------------------
Ivex Packaging Corp., 12.50% Sr. Sub. Nts., 12/15/02(5) 1,440,000 1,558,800
--------------
22,499,875
- ----------------------------------------------------------------------------------------------------------------------
METALS/MINING--0.2%
Carbide/Graphite Group, Inc. (The), 11.50% Sr. Nts., 9/1/03 11,080,000 12,284,950
- ----------------------------------------------------------------------------------------------------------------------
Royal Oak Mines, Inc., 11% Sr. Sub. Nts., 8/15/06 5,515,000 5,377,125
--------------
17,662,075
</TABLE>
19 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PAPER--1.5%
Ainsworth Lumber Ltd., 12.50% Sr. Nts., 7/15/07(7)(10) $ 8,125,000 $ 8,125,000
- ----------------------------------------------------------------------------------------------------------------------
Asia Pulp & Paper International Finance Co., Zero
Coupon Asian Currency Nts.:
14.46%, 1/23/98(12)(IDR) 10,670,000,000 3,029,712
26.84%, 12/4/97(12)(IDR) 9,000,000,000 2,645,451
14.71%, 12/8/97(12)(IDR) 8,600,000,000 2,520,805
- ----------------------------------------------------------------------------------------------------------------------
Domtar, Inc., 10.85% Debs., 8/5/17(CAD) 1,700,000 1,597,265
- ----------------------------------------------------------------------------------------------------------------------
Fletcher Challenge Ltd.:
10% Cv. Unsec. Sub. Nts., 4/30/05(NZD) 4,900,000 3,453,539
10.75% Cv. Sub. Nts., 12/15/97(NZD) 4,755,000 3,055,806
14.50% Cv. Sub. Nts., 9/30/00(NZD) 4,900,000 3,646,769
- ----------------------------------------------------------------------------------------------------------------------
Florida Coast Paper Co. LLC, 12.75% First Mtg. Nts., 6/1/03 2,950,000 3,200,750
- ----------------------------------------------------------------------------------------------------------------------
Four M Corp., 12% Sr. Nts., Series B, 6/1/06(5) 1,520,000 1,637,800
- ----------------------------------------------------------------------------------------------------------------------
Gaylord Container Corp., 9.75% Sr. Nts., 6/15/07(7) 4,300,000 4,396,750
- ----------------------------------------------------------------------------------------------------------------------
Indah Kiat International Finance Co. BV, 11.375% Gtd.
Sec. Nts., 6/15/99 5,400,000 5,663,250
- ----------------------------------------------------------------------------------------------------------------------
Pacific Lumber Co., 10.50% Sr. Nts., 3/1/03 12,375,000 12,900,937
- ----------------------------------------------------------------------------------------------------------------------
Repap New Brunswick, Inc., 9.063% First Priority Sr. Sec.
Nts., 7/15/00(6) 3,950,000 3,910,500
- ----------------------------------------------------------------------------------------------------------------------
Repap Wisconsin, Inc.:
9.25% First Priority Sr. Sec. Nts., 2/1/02 11,350,000 12,016,812
9.875% Second Priority Sr. Nts., 5/1/06 13,055,000 14,197,312
- ----------------------------------------------------------------------------------------------------------------------
Riverwood International Corp., 10.625% Sr. Nts., 8/1/07(7) 15,690,000 16,474,500
- ----------------------------------------------------------------------------------------------------------------------
Scotia Pacific Holding Co., 7.95% Timber Collateralized
Nts., 7/20/15 2,327,018 2,387,181
- ----------------------------------------------------------------------------------------------------------------------
SD Warren Co., 12% Sr. Sub. Nts., Series B, 12/15/04 5,250,000 5,971,875
- ----------------------------------------------------------------------------------------------------------------------
Stone Container Corp., 9.875% Sr. Nts., 2/1/01 3,805,000 3,885,856
--------------
114,717,870
- ----------------------------------------------------------------------------------------------------------------------
STEEL--0.6%
AK Steel Corp., 9.125% Sr. Nts., 12/15/06 17,100,000 18,147,375
- ----------------------------------------------------------------------------------------------------------------------
Algoma Steel, Inc., 12.375% First Mtg. Nts., 7/15/05 7,950,000 9,321,375
- ----------------------------------------------------------------------------------------------------------------------
Bar Technologies, Inc., 13.50% Sr. Sec. Nts., 4/1/01 7,600,000 8,208,000
- ----------------------------------------------------------------------------------------------------------------------
Keystone Consolidated Industries, Inc., 9.625% Sr. Nts.,
8/1/07(7) 6,250,000 6,414,062
- ----------------------------------------------------------------------------------------------------------------------
Sheffield Steel Corp., 12% First Mtg. Nts., 11/1/01 4,000,000 4,140,000
--------------
46,230,812
</TABLE>
20 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CONSUMER RELATED--4.7%
- ----------------------------------------------------------------------------------------------------------------------
CONSUMER PRODUCTS--1.1%
- ----------------------------------------------------------------------------------------------------------------------
Coleman Escrow Corp., Zero Coupon Sr. First Priority Disc. Nts.,
11.03%, 5/15/01(7)(12) $13,900,000 $ 9,521,500
- ----------------------------------------------------------------------------------------------------------------------
Dyersburg Corp., 9.75% Sr. Sub. Nts., 9/1/07(7) 2,625,000 2,700,469
- ----------------------------------------------------------------------------------------------------------------------
Icon Fitness Corp., 0%/14% Sr. Disc. Nts., 11/15/06(5)(13) 8,800,000 4,972,000
- ----------------------------------------------------------------------------------------------------------------------
Icon Health & Fitness, Inc., 13% Sr. Sub. Nts., Series B, 7/15/02 10,400,000 11,830,000
- ----------------------------------------------------------------------------------------------------------------------
IHF Holdings, Inc., 0%/15% Sr. Sub. Disc. Nts., Series B, 11/15/04(13) 8,750,000 7,481,250
- ----------------------------------------------------------------------------------------------------------------------
Indorayon International Finance Co. BV, 10% Gtd. Unsec.
Unsub. Nts., 3/29/01(5) 1,850,000 1,840,750
- ----------------------------------------------------------------------------------------------------------------------
International Semi-Tech Microelectronics, Inc., 0%/11.50%
Sr. Sec. Disc. Nts., 8/15/03(13) 4,585,000 2,934,400
- ----------------------------------------------------------------------------------------------------------------------
MacAndrews & Forbes Holdings, Inc., 13% Sub. Debs., 3/1/99(5) 4,222,000 4,258,942
- ----------------------------------------------------------------------------------------------------------------------
Revlon Worldwide Corp., Zero Coupon Sr. Sec. Disc. Nts.,
10.78%, 3/15/01(12) 24,805,000 18,045,637
- ----------------------------------------------------------------------------------------------------------------------
Samsonite Corp., 11.125% Sr. Sub. Nts., 7/15/05 3,226,000 3,709,900
- ----------------------------------------------------------------------------------------------------------------------
TAG Heuer International SA, 12% Sr. Sub. Nts., 12/15/05(5) 4,705,000 5,563,662
- ----------------------------------------------------------------------------------------------------------------------
Vitro SA, 13% Nts., 12/7/99(6)(MXP) 21,374,000 5,865,832
- ----------------------------------------------------------------------------------------------------------------------
Williams (J. B.) Holdings, Inc., 12% Sr. Nts., 3/1/04(5) 5,700,000 6,127,500
--------------
84,851,842
- ----------------------------------------------------------------------------------------------------------------------
FOOD/BEVERAGES/TOBACCO--0.3%
CFP Holdings, Inc., 11.625% Gtd. Sr. Nts., 1/15/04 4,360,000 4,403,600
- ----------------------------------------------------------------------------------------------------------------------
Consolidated Cigar Corp., 10.50% Sr. Sub. Nts., 3/1/03 3,000,000 3,135,000
- ----------------------------------------------------------------------------------------------------------------------
Doane Products Co., 10.625% Sr. Nts., 3/1/06(5) 3,000,000 3,225,000
- ----------------------------------------------------------------------------------------------------------------------
Dr. Pepper Bottling Holdings, Inc., 0%/11.625% Sr. Disc.
Nts., 2/15/03(5)(13) 6,430,000 6,526,450
- ----------------------------------------------------------------------------------------------------------------------
Foodbrands America, Inc., 10.75% Sr. Sub. Nts., 5/15/06 2,000,000 2,320,000
- ----------------------------------------------------------------------------------------------------------------------
Stroh Brewery Co., 11.10% Sr. Sub. Nts., 7/1/06(5) 123,000 128,535
- ----------------------------------------------------------------------------------------------------------------------
Windy Hill Pet Food, Inc., 9.75% Sr. Sub. Nts., 5/15/07(7) 3,000,000 3,120,000
--------------
22,858,585
- ----------------------------------------------------------------------------------------------------------------------
HEALTHCARE--0.5%
Genesis Health Ventures, Inc., 9.25% Sr. Sub. Nts., 10/1/06 3,810,000 3,924,300
- ----------------------------------------------------------------------------------------------------------------------
Integrated Health Services, Inc.:
11% Sr. Sub. Nts., 4/30/06(6)(7) 605,000 647,350
9.50% Sr. Sub. Nts., 9/15/07(7) 5,350,000 5,537,250
- ----------------------------------------------------------------------------------------------------------------------
Magellan Health Services, Inc., 11.25% Sr. Sub. Nts.,
Series A, 4/15/04 6,960,000 7,699,500
- ----------------------------------------------------------------------------------------------------------------------
Mariner Health Group, Inc., 9.50% Sr. Sub. Nts.,
Series B, 4/1/06(5) 900,000 938,250
- ----------------------------------------------------------------------------------------------------------------------
Multicare Cos., Inc. (The), 12.50% Sr. Sub. Nts., 7/1/02(5) 9,865,000 10,728,187
- ----------------------------------------------------------------------------------------------------------------------
Sun Healthcare Group, Inc., 9.50% Sr. Sub. Nts., 7/1/07(7) 12,055,000 12,476,925
--------------
41,951,762
</TABLE>
21 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOTEL/GAMING--2.0%
Arizona Charlie's, Inc., 12% First Mtg. Nts.,
Series B, 11/15/00(5)(14) $ 5,775,000 $ 3,089,625
- ----------------------------------------------------------------------------------------------------------------------
Aztar Corp., 13.75% Sr. Sub. Nts., 10/1/04 3,725,000 4,283,750
- ----------------------------------------------------------------------------------------------------------------------
Boyd Gaming Corp., 9.25% Sr. Nts., 10/1/03 4,950,000 5,197,500
- ----------------------------------------------------------------------------------------------------------------------
Capital Gaming International, Inc., Promissory Nts., 8/1/95(14) 33,500 --
- ----------------------------------------------------------------------------------------------------------------------
Capitol Queen & Casino, Inc., 12% First Mtg. Nts.,
Series A, 11/15/00(5)(14) 2,100,000 367,500
- ----------------------------------------------------------------------------------------------------------------------
Capstar Hotel Co., 8.75% Sr. Sub. Nts., 8/15/07(7) 7,725,000 7,840,875
- ----------------------------------------------------------------------------------------------------------------------
Casino America, Inc., 12.50% Sr. Nts., 8/1/03 4,950,000 5,321,250
- ----------------------------------------------------------------------------------------------------------------------
Casino Magic of Louisiana Corp., 13% First Mtg. Nts., 8/15/03 7,150,000 6,971,250
- ----------------------------------------------------------------------------------------------------------------------
Grand Casinos, Inc., 10.125% Gtd. First Mtg. Nts., 12/1/03 17,585,000 18,728,025
- ----------------------------------------------------------------------------------------------------------------------
Grupo Posadas SA de CV, 10.375% Bonds, 2/13/02(5) 2,500,000 2,625,000
- ----------------------------------------------------------------------------------------------------------------------
HMC Acquisition Properties, Inc., 9% Sr. Nts., Series B, 12/15/07 5,900,000 6,091,750
- ----------------------------------------------------------------------------------------------------------------------
HMH Properties, Inc., 8.875% Sr. Nts., 7/15/07(7) 21,450,000 22,120,312
- ----------------------------------------------------------------------------------------------------------------------
Horseshoe Gaming LLC, 9.375% Sr. Sub. Nts., 6/15/07(7) 13,350,000 13,850,625
- ----------------------------------------------------------------------------------------------------------------------
Mohegan Tribal Gaming Authority, 13.50% Sr. Sec. Nts.,
Series B, 11/15/02 12,350,000 16,240,250
- ----------------------------------------------------------------------------------------------------------------------
Rio Hotel & Casino, Inc.:
10.625% Sr. Sub. Nts., 7/15/05 3,230,000 3,528,775
9.50% Gtd. Sr. Sub. Nts., 4/15/07 9,230,000 9,806,875
- ----------------------------------------------------------------------------------------------------------------------
Santa Fe Hotel, Inc., 11% Gtd. First Mtg. Nts., 12/15/00 100,000 85,500
- ----------------------------------------------------------------------------------------------------------------------
Showboat Marina Casino Partnership/Showboat Marina
Finance Corp., 13.50% First Mtg. Nts., Series B, 3/15/03 9,850,000 11,376,750
- ----------------------------------------------------------------------------------------------------------------------
Signature Resorts, Inc., 9.75% Sr. Sub. Nts., 10/1/07(7) 10,150,000 10,327,625
- ----------------------------------------------------------------------------------------------------------------------
Station Casinos, Inc., 10.125% Sr. Sub. Nts., 3/15/06 7,525,000 7,656,687
- ----------------------------------------------------------------------------------------------------------------------
Trump Atlantic City Associates/Trump Atlantic City
Funding, Inc., 11.25% First Mtg. Nts., 5/1/06 3,145,000 3,062,444
--------------
158,572,368
- ----------------------------------------------------------------------------------------------------------------------
RESTAURANTS--0.4%
Ameriking, Inc., 10.75% Sr. Nts., 12/1/06 7,600,000 8,094,000
- ----------------------------------------------------------------------------------------------------------------------
Carrols Corp., 11.50% Sr. Nts., 8/15/03 3,570,000 3,815,437
- ----------------------------------------------------------------------------------------------------------------------
Family Restaurants, Inc., 10.875% Sr. Sub. Disc. Nts., 2/1/04 4,000,000 2,820,000
- ----------------------------------------------------------------------------------------------------------------------
Foodmaker, Inc.:
9.25% Sr. Nts., 3/1/99(5) 4,645,000 4,766,931
9.75% Sr. Sub. Nts., 6/1/02(5) 14,000,000 14,490,000
--------------
33,986,368
</TABLE>
22 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TEXTILE/APPAREL--0.4%
CMI Industries, Inc., 9.50% Sr. Sub. Nts., 10/1/03(5) $ 3,850,000 $ 3,792,250
- ----------------------------------------------------------------------------------------------------------------------
Dan River, Inc., 10.125% Sr. Sub. Nts., 12/15/03 2,225,000 2,403,000
- ----------------------------------------------------------------------------------------------------------------------
PT Inti Indorayon Utama, 9.125% Sr. Nts., 10/15/00 4,025,000 4,070,281
- ----------------------------------------------------------------------------------------------------------------------
PT Polysindo Eka Perkasa, Zero Coupon Promissory Nts.,
9.39%, 7/14/98(12) 11,350,000 10,352,897
- ----------------------------------------------------------------------------------------------------------------------
Tultex Corp., 9.625% Sr. Nts., 4/15/07 3,450,000 3,704,437
- ----------------------------------------------------------------------------------------------------------------------
William Carter Co., 10.375% Sr. Sub. Nts., 12/1/06 5,300,000 5,538,500
--------------
29,861,365
- ----------------------------------------------------------------------------------------------------------------------
ENERGY--2.8%
- ----------------------------------------------------------------------------------------------------------------------
Belco Oil & Gas Corp., 8.875% Sr. Sub. Nts., 9/15/07(7) 1,650,000 1,670,625
- ----------------------------------------------------------------------------------------------------------------------
Belden & Blake Corp., 9.875% Sr. Sub. Nts., 6/15/07(7) 19,750,000 19,996,875
- ----------------------------------------------------------------------------------------------------------------------
Canadian Forest Oil Ltd., 8.75% Sr. Sub. Nts., 9/15/07(7) 4,535,000 4,537,834
- ----------------------------------------------------------------------------------------------------------------------
Chesapeake Energy Corp.:
12% Gtd. Sr. Exchangeable Nts., 3/1/01 5,000,000 5,400,000
8.50% Sr. Nts., 3/15/12 3,000,000 2,925,000
9.125% Sr. Nts., 4/15/06 2,630,000 2,682,600
- ----------------------------------------------------------------------------------------------------------------------
Clark Oil & Refining Corp., 10.50% Sr. Nts., 12/1/01 1,900,000 1,966,500
- ----------------------------------------------------------------------------------------------------------------------
Clark R&M Holdings, Inc., Zero Coupon Sr. Sec. Nts.,
Series A, 10.52%, 2/15/00(12) 16,700,000 13,213,875
- ----------------------------------------------------------------------------------------------------------------------
Cliffs Drilling Co., 10.25% Sr. Nts., 5/15/03(7) 1,700,000 1,846,625
- ----------------------------------------------------------------------------------------------------------------------
Dailey Petroleum Services Corp., 9.75% Gtd. Sr.
Unsec. Nts., 8/15/07(7) 4,115,000 4,300,175
- ----------------------------------------------------------------------------------------------------------------------
DI Industries, Inc., 8.875% Sr. Nts., 7/1/07 4,840,000 5,009,400
- ----------------------------------------------------------------------------------------------------------------------
Energy Corp. of America, 9.50% Sr. Sub. Nts., 5/15/07 8,150,000 8,231,500
- ----------------------------------------------------------------------------------------------------------------------
Forcenergy, Inc.:
8.50% Sr. Sub. Nts., 2/15/07 1,000,000 1,000,000
9.50% Sr. Sub. Nts., 11/1/06 16,600,000 17,471,500
- ----------------------------------------------------------------------------------------------------------------------
Global Marine, Inc., 12.75% Sr. Sec. Nts., 12/15/99(5) 6,785,000 6,988,550
- ----------------------------------------------------------------------------------------------------------------------
Gothic Energy Corp., Units (each unit consists of $1,000
principal amount of 0%/12.25% sr. disc. nts., 9/1/04 and
14 warrants to purchase one ordinary share)(7)(13)(15) 13,500,000 14,073,750
- ----------------------------------------------------------------------------------------------------------------------
J. Ray McDermott SA, 9.375% Sr. Sub. Bonds, 7/15/06 15,750,000 16,498,125
- ----------------------------------------------------------------------------------------------------------------------
Mariner Energy, Inc., 10.50% Sr. Sub. Nts., 8/1/06 1,640,000 1,676,900
- ----------------------------------------------------------------------------------------------------------------------
Maxus Energy Corp., 8.50% Debs., 4/1/08 1,000,000 1,013,200
- ----------------------------------------------------------------------------------------------------------------------
Mesa Operating Co.:
0%/11.625% Gtd. Sr. Sub. Disc. Nts., 7/1/06(13) 11,290,000 9,032,000
10.625% Gtd. Sr. Sub. Nts., 7/1/06 14,800,000 17,112,500
- ----------------------------------------------------------------------------------------------------------------------
National Energy Group, Inc., 10.75% Sr. Nts., 11/1/06 9,675,000 10,158,750
- ----------------------------------------------------------------------------------------------------------------------
Parker Drilling Corp., 9.75% Gtd. Sr. Nts., 11/15/06 8,800,000 9,460,000
- ----------------------------------------------------------------------------------------------------------------------
Petroleum Heat & Power Co., Inc., 9.375% Sub. Debs., 2/1/06 16,220,000 15,327,900
- ----------------------------------------------------------------------------------------------------------------------
Pogo Producing Co., 8.75% Sub. Nts., 5/15/07(7) 9,680,000 9,922,000
- ----------------------------------------------------------------------------------------------------------------------
Rutherford-Moran Oil Corp., 10.75% Sr. Sub. Nts., 10/1/04(7) 2,150,000 2,233,312
</TABLE>
23 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENERGY (CONTINUED)
Statia Terminals International/Statia Terminals (Canada),
Inc., 11.75% First Mtg., Series B, 11/15/03 $ 1,775,000 $ 1,883,719
- ----------------------------------------------------------------------------------------------------------------------
Stone Energy Corp., 8.75% Sr. Sub. Nts., 9/15/07(7) 8,250,000 8,219,062
- ----------------------------------------------------------------------------------------------------------------------
Wiser Oil Co., 9.50% Sr. Sub. Nts., 5/15/07(7) 3,750,000 3,675,000
--------------
217,527,277
- ----------------------------------------------------------------------------------------------------------------------
FINANCIAL SERVICES--2.7%
- ----------------------------------------------------------------------------------------------------------------------
BANKS & THRIFTS--0.9%
Alliance & Leicester Building Society, 8.75% Unsec.
Sub. Nts., 12/7/06(GBP) 10,660,000 18,834,576
- ----------------------------------------------------------------------------------------------------------------------
Banco Bamerindus do Brasil SA, 9% Unsec. Unsub.
Bonds, 10/29/98 3,240,000 3,288,600
- ----------------------------------------------------------------------------------------------------------------------
Banco de Colombia, 5.20% Cv. Jr. Unsec. Sub. Nts., 2/1/99(5) 1,250,000 1,293,750
- ----------------------------------------------------------------------------------------------------------------------
Banco Nacional de Mexico SA, 11% Sub. Exchangeable
Capital Debs., 7/15/03 9,750,000 10,505,625
- ----------------------------------------------------------------------------------------------------------------------
Bank Plus Corp., 12% Sr. Nts., 7/18/07 4,167,000 4,604,535
- ----------------------------------------------------------------------------------------------------------------------
First Nationwide Holdings, Inc., 10.625% Sr. Sub. Nts., 10/1/03 7,015,000 7,769,112
- ----------------------------------------------------------------------------------------------------------------------
Local Financial Corp., 11% Sr. Nts., 9/8/04(5) 10,000,000 10,500,000
- ----------------------------------------------------------------------------------------------------------------------
Ongko International Finance Co. BV, 10.50% Gtd. Nts., 3/29/04(7) 11,100,000 11,571,750
--------------
68,367,948
- ----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED FINANCIAL--1.4%
Aames Financial Corp., 9.125% Sr. Nts., 11/1/03 7,815,000 8,010,375
- ----------------------------------------------------------------------------------------------------------------------
Americredit Corp., 9.25% Sr. Nts., 2/1/04 2,190,000 2,233,800
- ----------------------------------------------------------------------------------------------------------------------
Amresco, Inc., 10% Sr. Sub. Nts., Series 97-A, 3/15/04 6,250,000 6,546,875
- ----------------------------------------------------------------------------------------------------------------------
Bakrie Investindo, Zero Coupon Promissory Nts.,
26.59%, 7/10/98(12)(IDR) 27,000,000,000 6,634,757
- ----------------------------------------------------------------------------------------------------------------------
Banco del Atlantico SA, 7.875% Eurobonds, 11/5/98 12,980,000 13,045,809
- ----------------------------------------------------------------------------------------------------------------------
Cityscape Financial Corp., 12.75% Sr. Nts., 6/1/04(7) 3,560,000 3,123,900
- ----------------------------------------------------------------------------------------------------------------------
ECM Fund, L.P.I., 14% Sub. Nts., 6/10/02(5) 412,897 455,220
- ----------------------------------------------------------------------------------------------------------------------
Emergent Group, Inc., 10.75% Sr. Nts., 9/15/04(7) 3,300,000 3,366,000
- ----------------------------------------------------------------------------------------------------------------------
Ocwen Capital Trust I, 10.875% Gtd. Bonds, 8/1/27 5,350,000 5,644,250
- ----------------------------------------------------------------------------------------------------------------------
Ocwen Financial Corp., 11.875% Nts., 10/1/03(5) 9,275,000 10,457,562
- ----------------------------------------------------------------------------------------------------------------------
Pindo Deli Finance Mauritius Ltd., 10.75% Gtd. Nts., 10/1/07(4)(5) 5,520,000 5,713,200
- ----------------------------------------------------------------------------------------------------------------------
Saul (B.F.) Real Estate Investment Trust, 11.625% Sr. Sec. Nts.,
Series B, 4/1/02 19,900,000 21,442,250
- ----------------------------------------------------------------------------------------------------------------------
Shoshone Partners Loan Trust, 7.375% Sr. Nts., 5/31/02(5)(6) 14,526,000 15,035,519
- ----------------------------------------------------------------------------------------------------------------------
Washington Mutual Capital I, 8.375% Gtd. Bonds, 6/1/27 2,000,000 2,093,618
- ----------------------------------------------------------------------------------------------------------------------
Wilshire Financial Services Group, Inc., 13% Nts., 1/1/04 5,965,000 6,054,475
--------------
109,857,610
</TABLE>
24 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INSURANCE--0.4%
American International Group, Inc., 11.70% Unsec.
Unsub. Bonds, 12/4/01(ITL) 3,000,000,000 $ 2,124,637
- ----------------------------------------------------------------------------------------------------------------------
Residential Reinsurance, 11.416% Nts., 12/15/98(6) 20,000,000 20,353,125
- ----------------------------------------------------------------------------------------------------------------------
Terra Nova Insurance (UK) Holdings plc, 10.75% Sr. Nts., 7/1/05 900,000 1,005,558
- ----------------------------------------------------------------------------------------------------------------------
Veritas Holdings, Inc., 9.625% Sr. Nts., 12/15/03 9,445,000 10,082,537
--------------
33,565,857
- ----------------------------------------------------------------------------------------------------------------------
HOUSING RELATED--0.7%
- ----------------------------------------------------------------------------------------------------------------------
BUILDING MATERIALS--0.4%
Building Materials Corp. of America, 8.625% Sr. Nts., Series B, 12/15/06 3,350,000 3,475,625
- ----------------------------------------------------------------------------------------------------------------------
Falcon Building Products, Inc., 9.50% Sr. Sub. Nts., 6/15/07(7) 4,680,000 4,843,800
- ----------------------------------------------------------------------------------------------------------------------
Nortek, Inc.:
9.125% Sr. Nts., 9/1/07(7) 10,550,000 10,721,437
9.25% Sr. Nts., 3/15/07 6,000,000 6,120,000
--------------
25,160,862
- ----------------------------------------------------------------------------------------------------------------------
HOMEBUILDERS/REAL ESTATE--0.3%
Blue Bell Funding, Inc., 11.85% Sec. Extendible Adjustable
Rate Nts., 5/1/99 4,414,000 4,546,420
- ----------------------------------------------------------------------------------------------------------------------
Continental Homes Holding Corp., 10% Gtd. Unsec.
Bonds, 4/15/06 660,000 699,600
- ----------------------------------------------------------------------------------------------------------------------
First Place Tower, Inc.:
9.22% First Mtg. Bonds, 12/15/05(CAD) 1,547,050 1,325,778
Units (each unit consists of one $10 principal amount of 8.50%
cv. sub. debs., 12/15/15 and 40 common shares)(15)(CAD) 930,410 2,195,231
- ----------------------------------------------------------------------------------------------------------------------
Greystone Homes, Inc., 10.75% Sr. Nts., 3/1/04 2,400,000 2,640,000
- ----------------------------------------------------------------------------------------------------------------------
Hovnanian K. Enterprises, Inc., 11.25% Gtd. Sub. Nts., 4/15/02 8,571,000 9,063,832
- ----------------------------------------------------------------------------------------------------------------------
International de Ceramica SA, 9.75% Gtd. Unsec. Unsub. Nts., 8/1/02(5) 3,510,000 3,553,875
--------------
24,024,736
- ----------------------------------------------------------------------------------------------------------------------
MANUFACTURING--3.0%
- ----------------------------------------------------------------------------------------------------------------------
AEROSPACE--1.1%
America West Airlines, Inc., 10.75% Sr. Nts., 9/1/05 25,940,000 27,885,500
- ----------------------------------------------------------------------------------------------------------------------
Amtran, Inc., 10.50% Sr. Nts., 8/1/04(7) 3,525,000 3,608,719
- ----------------------------------------------------------------------------------------------------------------------
Atlas Air, Inc.:
10.75% Sr. Nts., 8/1/05(7) 8,050,000 8,492,750
12.25% Pass-Through Certificates, 12/1/02 12,650,000 14,231,250
- ----------------------------------------------------------------------------------------------------------------------
GPA Delaware, Inc., 9.75%, 12/10/01(5) 2,000,000 2,092,500
- ----------------------------------------------------------------------------------------------------------------------
Northwest Airlines Corp., 12.092% Sr. Gtd. Nts., 12/31/00(5) 1,309,418 1,348,701
- ----------------------------------------------------------------------------------------------------------------------
Pegasus Aircraft Lease Securitization Trust, 11.76% Sr. Nts.,
Cl. A, 6/15/04(5) 4,480,538 4,582,695
- ----------------------------------------------------------------------------------------------------------------------
Rohr, Inc., 11.625% Sr. Nts., 5/15/03 10,665,000 12,078,113
- ----------------------------------------------------------------------------------------------------------------------
SC International Services, Inc., 9.25% Sr. Sub. Nts., 9/1/07(7) 9,975,000 10,149,563
--------------
84,469,791
</TABLE>
25 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
AUTOMOTIVE--0.8%
Aftermarket Technology Corp., 12% Sr. Sub. Nts.,
Series B, 8/1/04 $ 3,400,000 $ 3,769,750
- ----------------------------------------------------------------------------------------------------------------------
Cambridge Industries, Inc., 10.25% Sr. Sub. Nts., 7/15/07(7) 4,775,000 5,013,750
- ----------------------------------------------------------------------------------------------------------------------
Chrysler Financial Corp., 13.25% Nts., 10/15/99 4,500,000 5,102,959
- ----------------------------------------------------------------------------------------------------------------------
Collins & Aikman Products Co., 11.50% Gtd. Sr. Sub. Nts., 4/15/06 10,600,000 12,176,750
- ----------------------------------------------------------------------------------------------------------------------
Hayes Wheels International, Inc.:
11% Sr. Sub. Nts., 7/15/06 6,690,000 7,517,888
9.125% Sr. Sub. Nts., 7/15/07(7) 6,550,000 6,779,250
- ----------------------------------------------------------------------------------------------------------------------
Key Plastics, Inc., 10.25% Sr. Sub. Nts., Series B, 3/15/07 4,335,000 4,573,425
- ----------------------------------------------------------------------------------------------------------------------
Lear Corp., 9.50% Sub. Nts., 7/15/06 2,825,000 3,107,500
- ----------------------------------------------------------------------------------------------------------------------
Oxford Automotive, Inc., 10.125% Sr. Sub. Nts., 6/15/07(7) 12,100,000 12,674,750
--------------
60,716,022
- ----------------------------------------------------------------------------------------------------------------------
CAPITAL GOODS--1.1%
Burke Industries, Inc., 10% Sr. Nts., 8/15/07(7) 3,475,000 3,587,938
- ----------------------------------------------------------------------------------------------------------------------
Clark-Schwebel, Inc.:
10.50% Sr. Nts., 4/15/06 8,700,000 9,461,250
12.50% Debs., 7/15/07(7)(10) 3,311,568 3,642,725
- ----------------------------------------------------------------------------------------------------------------------
Communications & Power Industries, Inc., 12% Sr. Sub. Nts.,
Series B, 8/1/05 11,503,000 12,797,088
- ----------------------------------------------------------------------------------------------------------------------
Hydrochem Industrial Services, Inc., 10.375% Sr. Sub. Nts., 8/1/07(7) 6,300,000 6,583,500
- ----------------------------------------------------------------------------------------------------------------------
Insilco Corp., 10.25% Sr. Sub. Nts., 8/15/07(7) 8,650,000 8,974,375
- ----------------------------------------------------------------------------------------------------------------------
International Wire Group, Inc., 11.75% Sr. Sub. Nts., 6/1/05(7) 7,835,000 8,598,913
- ----------------------------------------------------------------------------------------------------------------------
Mettler Toledo, Inc., 9.75% Gtd. Sr. Sub. Nts., 10/1/06 9,275,000 10,434,375
- ----------------------------------------------------------------------------------------------------------------------
Polymer Group, Inc., 9% Sr. Sub. Nts., 7/1/07(7) 4,550,000 4,618,250
- ----------------------------------------------------------------------------------------------------------------------
Roller Bearing Co. (America), 9.625% Sr. Sub. Nts., 6/15/07(5) 6,400,000 6,568,000
- ----------------------------------------------------------------------------------------------------------------------
Synthetic Industries, Inc., 9.25% Sr. Sub. Nts., 2/15/07 2,585,000 2,675,475
- ----------------------------------------------------------------------------------------------------------------------
Titan Wheel International, Inc., 8.75% Sr. Sub. Nts., 4/1/07 4,575,000 4,792,313
- ----------------------------------------------------------------------------------------------------------------------
Unifrax Investment Corp., 10.50% Sr. Nts., 11/1/03(5) 5,000,000 5,187,500
--------------
87,921,702
- ----------------------------------------------------------------------------------------------------------------------
MEDIA--5.3%
- ----------------------------------------------------------------------------------------------------------------------
BROADCASTING--1.4%
Argyle Television, Inc., 9.75% Sr. Sub. Nts., 11/1/05 2,710,000 2,967,450
- ----------------------------------------------------------------------------------------------------------------------
Azteca Holdings SA, 11% Sr. Nts., 6/15/02(7) 5,730,000 6,059,475
- ----------------------------------------------------------------------------------------------------------------------
Capstar Broadcasting Partners, Inc., 9.25% Sr. Sub. Nts., 7/1/07 9,825,000 10,119,750
- ----------------------------------------------------------------------------------------------------------------------
Chancellor Radio Broadcasting Co., 8.75% Sr. Sub. Nts., 6/15/07(7) 7,400,000 7,603,500
- ----------------------------------------------------------------------------------------------------------------------
Conecel Holdings Ltd., Units (each unit consists of $1,000
principal amount of 14% sec. nts., 10/1/00 and one warrant
to purchase Class B common stock)(4)(5)(15) 4,075,000 4,197,250
- ----------------------------------------------------------------------------------------------------------------------
Consorcio Ecuatoriano, 14% Nts., 5/1/02(5) 7,035,000 7,615,388
</TABLE>
26 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BROADCASTING (CONTINUED)
Jacor Communications Co., 8.75% Gtd. Sr. Sub. Nts., 6/15/07(7) $ 4,400,000 $ 4,504,500
- ----------------------------------------------------------------------------------------------------------------------
Outlet Broadcasting, Inc., 10.875% Sr. Sub. Nts., 7/15/03 2,000,000 2,149,708
- ----------------------------------------------------------------------------------------------------------------------
Paxson Communications Corp., 11.625% Sr. Sub. Nts., 10/1/02 8,425,000 9,225,375
- ----------------------------------------------------------------------------------------------------------------------
Radio One, Inc., 7% Sr. Sub. Nts., 5/15/04(7)(11) 3,000,000 2,895,000
- ----------------------------------------------------------------------------------------------------------------------
SCI Television, Inc., 11% Sr. Sec. Nts., 6/30/05(5) 2,153,155 2,266,196
- ----------------------------------------------------------------------------------------------------------------------
SFX Broadcasting, Inc., 10.75% Sr. Sub. Nts., Series B, 5/15/06 1,900,000 2,092,375
- ----------------------------------------------------------------------------------------------------------------------
Sinclair Broadcast Group, Inc.:
10% Sr. Sub. Nts., 9/30/05 1,800,000 1,899,000
9% Sr. Sub. Nts., 7/15/07(7) 18,050,000 18,004,875
- ----------------------------------------------------------------------------------------------------------------------
Spanish Broadcasting Systems, Inc.:
11% Sr. Nts., 3/15/04 2,400,000 2,628,000
12.50% Sr. Nts., 6/15/02 1,000,000 1,145,000
- ----------------------------------------------------------------------------------------------------------------------
TV Azteca SA de CV:
10.125% Gtd. Sr. Nts., Series A, 2/15/04 3,300,000 3,460,875
10.50% Gtd. Sr. Nts., Series B, 2/15/07 5,150,000 5,478,313
- ----------------------------------------------------------------------------------------------------------------------
Young Broadcasting, Inc.:
8.75% Sr. Sub. Debs., 6/15/07 13,125,000 12,862,500
9% Sr. Sub. Nts., Series B, 1/15/06 825,000 829,125
--------------
108,003,655
- ----------------------------------------------------------------------------------------------------------------------
CABLE TELEVISION--2.4%
Adelphia Communications Corp.:
10.50% Sr. Nts., 7/15/04(7) 6,040,000 6,440,150
9.25% Sr. Nts., 10/1/02(7) 7,175,000 7,246,750
9.875% Sr. Nts., 3/1/07 2,100,000 2,178,750
- ----------------------------------------------------------------------------------------------------------------------
American Telecasting, Inc., 0%/14.50% Sr. Disc. Nts., 6/15/04(13) 3,744,080 1,497,632
- ----------------------------------------------------------------------------------------------------------------------
Cablevision Industries Corp., 9.25% Sr. Debs., Series B, 4/1/08 4,400,000 4,761,587
- ----------------------------------------------------------------------------------------------------------------------
Cablevision Systems Corp.:
10.50% Sr. Sub. Debs., 5/15/16 7,950,000 9,063,000
9.875% Sr. Sub. Debs., 2/15/13 2,620,000 2,842,700
9.875% Sr. Sub. Nts., 5/15/06 2,215,000 2,408,813
- ----------------------------------------------------------------------------------------------------------------------
EchoStar Communications Corp., 0%/12.875% Sr. Disc. Nts., 6/1/04(13) 2,525,000 2,288,281
- ----------------------------------------------------------------------------------------------------------------------
EchoStar DBS Corp., 12.50% Gtd. Nts., 7/1/02(7) 13,100,000 14,508,250
- ----------------------------------------------------------------------------------------------------------------------
EchoStar I, 8.25% Bonds, 2/26/01(5) 8,259,155 8,176,564
- ----------------------------------------------------------------------------------------------------------------------
EchoStar II, 8.25% Bonds, 11/9/01(5) 7,600,684 7,524,678
- ----------------------------------------------------------------------------------------------------------------------
EchoStar Satellite Broadcasting Corp., 0%/13.125% Sr. Sec.
Disc. Nts., 3/15/04(13) 18,170,000 15,262,800
- ----------------------------------------------------------------------------------------------------------------------
FrontierVision Holdings LP, 0%/11.875% Sr. Disc.
Nts., 9/15/07(7)(13) 1,075,000 741,750
- ----------------------------------------------------------------------------------------------------------------------
Fundy Cable Ltd./Ltee, 11% Sr. Sec. Second Priority
Nts., 11/15/05(5) 3,400,000 3,723,000
- ----------------------------------------------------------------------------------------------------------------------
Helicon Group LP/Helicon Capital Corp., 11% Sr. Sec. Nts.,
Series B, 11/1/03(6) 11,649,000 12,318,818
</TABLE>
27 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CABLE TELEVISION (CONTINUED)
Marcus Cable Operating Co. LP/Marcus Cable Capital Corp.,
0%/13.50% Gtd. Sr. Sub. Disc. Nts., Series II, 8/1/04(13) $ 1,900,000 $ 1,724,250
- ----------------------------------------------------------------------------------------------------------------------
Optel, Inc., 13% Sr. Nts., Series B, 2/15/05 10,950,000 10,908,938
- ----------------------------------------------------------------------------------------------------------------------
Panamsat International Systems LP, 12.75% Debs., 4/15/05(6) 17,492,000 21,165,320
- ----------------------------------------------------------------------------------------------------------------------
Panamsat LP/Panamsat Capital Corp., 0%/11.375% Sr. Sub.
Disc. Nts., 8/1/03(5)(13) 20,500,000 20,077,084
- ----------------------------------------------------------------------------------------------------------------------
Rogers Cablesystems Ltd., 10% Second Priority Sr.
Sec. Debs., 12/1/07 5,000,000 5,500,000
- ----------------------------------------------------------------------------------------------------------------------
Rogers Communications, Inc., 8.75% Sr. Nts., 7/15/07(CAD) 20,000,000 14,436,779
- ----------------------------------------------------------------------------------------------------------------------
TCI Satellite Entertainment, Inc.:
0%/10.875% Sr. Sub. Nts., 2/15/07(7)(13) 5,030,000 3,294,650
10.875% Sr. Sub. Nts., 2/15/07(7) 9,365,000 9,880,075
- ----------------------------------------------------------------------------------------------------------------------
TKR Cable I, Inc., 10.50% Sr. Debs., 10/30/07 2,900,000 3,220,586
--------------
191,191,205
- ----------------------------------------------------------------------------------------------------------------------
DIVERSIFIED MEDIA--1.2%
Ackerley Communications, Inc., 10.75% Sr. Sec. Nts., Series A, 10/1/03 9,050,000 9,728,750
- ----------------------------------------------------------------------------------------------------------------------
GSP I Corp., 10.15% First Mtg. Bonds, 6/24/10(7) 795,459 757,246
- ----------------------------------------------------------------------------------------------------------------------
Heritage Media Corp., 8.75% Sr. Sub. Nts., 2/15/06 1,425,000 1,503,375
- ----------------------------------------------------------------------------------------------------------------------
Hollywood Theaters, Inc., 10.625% Sr. Sub. Nts., 8/1/07(7) 2,075,000 2,209,875
- ----------------------------------------------------------------------------------------------------------------------
ITT Promedia, 9.125% Sr. Sub. Nts., 9/15/07(7)(DEM) 33,825,000 19,989,301
- ----------------------------------------------------------------------------------------------------------------------
ITT Publimedia BV, 9.375% Sr. Sub. Nts., 9/15/07(7) 4,750,000 4,940,000
- ----------------------------------------------------------------------------------------------------------------------
Katz Media Corp., 10.50% Sr. Sub. Nts., 1/15/07 3,870,000 4,179,600
- ----------------------------------------------------------------------------------------------------------------------
Lamar Advertising Co.:
8.625% Sr. Sub. Nts., 9/15/07(7) 4,250,000 4,239,375
9.625% Sr. Sub. Nts., 12/1/06 8,575,000 9,089,500
- ----------------------------------------------------------------------------------------------------------------------
News America Holdings, Inc., 10.125% Gtd. Sr. Debs., 10/15/12 3,300,000 3,846,255
- ----------------------------------------------------------------------------------------------------------------------
Outdoor Systems, Inc., 8.875% Sr. Sub. Nts., 6/15/07 4,650,000 4,766,250
- ----------------------------------------------------------------------------------------------------------------------
Time Warner Entertainment LP/Time Warner, Inc.,
8.375% Sr. Debs., 3/15/23 8,209,000 8,892,702
- ----------------------------------------------------------------------------------------------------------------------
Time Warner, Inc.:
9.125% Debs., 1/15/13 2,000,000 2,324,918
9.15% Debs., 2/1/23 9,000,000 10,472,256
- ----------------------------------------------------------------------------------------------------------------------
Universal Outdoor, Inc.:
9.75% Sr. Sub. Nts., 10/15/06 6,785,000 7,259,950
9.75% Sr. Sub. Nts., Series B, 10/15/06 3,175,000 3,397,250
--------------
97,596,603
- ----------------------------------------------------------------------------------------------------------------------
ENTERTAINMENT/FILM--0.2%
Imax Corp., 10% Sr. Nts., 3/1/01 13,780,000 14,589,575
</TABLE>
28 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUBLISHING/PRINTING--0.1%
Hollinger International Publishing, Inc.,
9.25% Gtd. Sr. Sub. Nts., 3/15/07 $ 2,700,000 $ 2,821,500
- ----------------------------------------------------------------------------------------------------------------------
Sun Media Corp.:
9.50% Sr. Sub. Nts., 2/15/07 3,100,000 3,224,000
9.50% Sr. Sub. Nts., 5/15/07 1,000,000 1,040,000
--------------
7,085,500
- ----------------------------------------------------------------------------------------------------------------------
OTHER--1.2%
- ----------------------------------------------------------------------------------------------------------------------
CONGLOMERATES--0.4%
Acadia Partners LP, 13% Sr. Sub. Nts., 10/1/97(7) 25,000,000 25,187,500
- ----------------------------------------------------------------------------------------------------------------------
Cia Latino Americana de Infraestructura & Servicios SA-
CLISA, 11.625% Gtd. Sr. Nts., 6/1/04(5) 650,000 690,625
- ----------------------------------------------------------------------------------------------------------------------
Grupo Mexicano de Desarrollo SA, 8.25% Gtd. Nts., 2/17/01(7)(14) 6,000,000 2,715,000
- ----------------------------------------------------------------------------------------------------------------------
Maxxam Group, Inc., 0%/12.25% Sr. Sec. Disc. Nts., 8/1/03(13) 1,075,000 1,058,875
- ----------------------------------------------------------------------------------------------------------------------
Mechala Group Jamaica Ltd., 12.75% Bonds, 12/30/99 4,870,000 4,943,050
--------------
34,595,050
- ----------------------------------------------------------------------------------------------------------------------
ENVIRONMENTAL--0.1%
Allied Waste Industries, Inc., 0%/11.30% Sr. Disc. Nts., 6/1/07(7)(13) 4,150,000 2,816,813
- ----------------------------------------------------------------------------------------------------------------------
Allied Waste North America, Inc., 10.25% Sr. Sub. Nts., 12/1/06 3,435,000 3,769,913
--------------
6,586,726
- ----------------------------------------------------------------------------------------------------------------------
SERVICES--0.7%
Borg-Warner Security Corp.:
9.125% Sr. Sub. Nts., 5/1/03(16) 10,660,000 10,899,850
9.625% Sr. Sub. Nts., 3/15/07 1,450,000 1,508,000
- ----------------------------------------------------------------------------------------------------------------------
Coinstar, Inc., 0%/13% Sr. Disc. Nts., 10/1/06(5)(13) 6,650,000 5,220,250
- ----------------------------------------------------------------------------------------------------------------------
Kindercare Learning Centers, Inc., 9.50% Sr. Sub. Nts., 2/15/09 4,850,000 4,753,000
- ----------------------------------------------------------------------------------------------------------------------
Neodata Services, Inc., 12% Sr. Deferred Coupon Nts.,
Series B, 5/1/03 4,475,000 4,905,719
- ----------------------------------------------------------------------------------------------------------------------
Protection One Alarm Monitoring, Inc.:
0%/13.625% Sr. Disc. Nts., 6/30/05(13) 5,600,000 6,048,000
6.75% Cv. Gtd. Sr. Sub. Nts., 9/15/03 11,090,000 12,919,850
- ----------------------------------------------------------------------------------------------------------------------
United Stationers Supply Co., 12.75% Sr. Sub. Nts., 5/1/05 5,000,000 5,693,750
--------------
51,948,419
- ----------------------------------------------------------------------------------------------------------------------
RETAIL--1.2%
- ----------------------------------------------------------------------------------------------------------------------
SPECIALTY RETAILING--0.3%
Brylane LP/Brylane Capital Corp., 10% Sr. Sub. Nts.,
Series B, 9/1/03 3,000,000 3,187,500
- ----------------------------------------------------------------------------------------------------------------------
Central Termica Guemes, 12% Bonds, 11/26/01(5) 6,025,000 6,559,719
- ----------------------------------------------------------------------------------------------------------------------
Eye Care Centers of America, Inc., 12% Sr. Nts., 10/1/03 6,600,000 7,326,000
- ----------------------------------------------------------------------------------------------------------------------
Finlay Fine Jewelry Corp., 10.625% Sr. Nts., 5/1/03(5) 5,185,000 5,522,025
</TABLE>
29 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SPECIALTY RETAILING (CONTINUED)
Specialty Retailers, Inc.:
8.50% Gtd. Sr. Nts., 7/15/05 $ 2,175,000 $ 2,240,250
9% Gtd. Sr. Sub. Nts., 7/15/07 1,000,000 1,025,000
--------------
25,860,494
- ----------------------------------------------------------------------------------------------------------------------
SUPERMARKETS--0.9%
Fleming Cos., Inc.:
10.625% Sr. Sub. Nts., 7/31/07(7) 14,750,000 15,487,500
10.50% Sr. Sub. Nts., 12/1/04(7) 4,100,000 4,305,000
- ----------------------------------------------------------------------------------------------------------------------
Kroger Co., 8.50% Sr. Sec. Debs., 6/15/03 4,000,000 4,223,480
- ----------------------------------------------------------------------------------------------------------------------
P&C Food Markets, Inc., 11.50% Sr. Nts., 10/15/01 2,225,000 2,158,250
- ----------------------------------------------------------------------------------------------------------------------
Ralph's Grocery Co.:
11% Sr. Sub. Nts., 6/15/05(7) 3,925,000 4,317,500
10.45% Sr. Nts., 6/15/04 12,790,000 14,069,000
- ----------------------------------------------------------------------------------------------------------------------
Randall's Food Markets, Inc., 9.375% Sr. Sub. Nts., 7/1/07(7) 19,050,000 19,288,125
- ----------------------------------------------------------------------------------------------------------------------
Stater Brothers Holdings, Inc., 9% Sr. Sub. Nts., 7/1/04(7) 7,225,000 7,450,781
--------------
71,299,636
- ----------------------------------------------------------------------------------------------------------------------
TECHNOLOGY--6.9%
- ----------------------------------------------------------------------------------------------------------------------
INFORMATION TECHNOLOGY--4.0%
Amphenol Corp., 9.875% Sr. Sub. Nts., 5/15/07 2,150,000 2,289,750
- ----------------------------------------------------------------------------------------------------------------------
Bell & Howell Co. (New), 0%/11.50% Sr. Disc. Debs.,
Series B, 3/1/05(13) 3,400,000 2,873,000
- ----------------------------------------------------------------------------------------------------------------------
Celcaribe SA, 0%/13.50% Sr. Sec. Nts., 3/15/04(5)(13) 11,525,000 11,121,625
- ----------------------------------------------------------------------------------------------------------------------
CellNet Data Systems, Inc.:
0%/13% Sr. Disc. Nts., 6/15/05(5)(13) 6,700,000 4,723,500
Units (each unit consists of $1,000 principal amount of
0%/14% sr. disc. nts., 10/1/07 and one warrant to purchase
13.671 shares of common stock at $14.30 per share)(5)(13)(15) 10,200,000 5,189,250
- ----------------------------------------------------------------------------------------------------------------------
Cellular Communications International, Inc., Zero Coupon
Sr. Disc. Nts., 11.16%, 8/15/00(12) 24,615,000 19,076,625
- ----------------------------------------------------------------------------------------------------------------------
Cellular, Inc., 0%/11.75% Sr. Sub. Disc. Nts., 9/1/03(5)(13) 26,956,000 26,282,100
- ----------------------------------------------------------------------------------------------------------------------
Clearnet Communications, Inc., 0%/14.75% Sr. Disc.
Nts., 12/15/05(13) 11,075,000 8,583,125
- ----------------------------------------------------------------------------------------------------------------------
Comcast Cellular Communications, Inc., 9.50% Sr. Nts., 5/1/07(7) 1,275,000 1,338,750
- ----------------------------------------------------------------------------------------------------------------------
Comunicacion Celular SA, 0%/13.125% Sr. Deferred Coupon
Bonds, 11/15/03(13) 15,659,000 12,214,020
- ----------------------------------------------------------------------------------------------------------------------
Dial Call Communications, Inc., 0%/12.25% Sr. Disc. Nts.,
4/15/04(13) 13,430,000 12,607,413
- ----------------------------------------------------------------------------------------------------------------------
DII Group, Inc., 8.50% Sr. Sub. Nts., 9/15/07(7) 2,250,000 2,264,063
- ----------------------------------------------------------------------------------------------------------------------
Dobson Communications Corp., 11.75% Sr. Nts., 4/15/07 1,140,000 1,128,600
- ----------------------------------------------------------------------------------------------------------------------
Dyncorp, Inc., 9.50% Sr. Sub. Nts., 3/1/07 6,345,000 6,424,313
</TABLE>
30 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INFORMATION TECHNOLOGY (CONTINUED)
Geotek Communications, Inc.:
0%/15% Sr. Sec. Disc. Nts., 7/15/05(13) $ 7,175,000 $ 4,340,875
12% Cv. Sr. Sub. Nts., 2/15/01(5) 750,000 637,500
- ----------------------------------------------------------------------------------------------------------------------
Globalstar LP/Globalstar Capital Corp., 11.375%
Sr. Nts., 2/15/04(7) 3,070,000 3,208,150
- ----------------------------------------------------------------------------------------------------------------------
HighwayMaster Communications, Inc., Units (each
unit consists of $1,000 principal amount of 13.75% sr. nts.,
9/15/05 and one warrant to purchase 6.566 shares of
common stock at $9.625 per share)(7)(15) 3,300,000 3,456,750
- ----------------------------------------------------------------------------------------------------------------------
Metrocall, Inc., 10.375% Sr. Sub. Nts., 10/1/07 7,200,000 7,353,000
- ----------------------------------------------------------------------------------------------------------------------
Microcell Telecommunications, Inc., 0%/14% Sr. Disc.
Nts., 6/1/06(13) 9,275,000 6,353,375
- ----------------------------------------------------------------------------------------------------------------------
Millicom International Cellular SA, 0%/13.50% Sr. Disc.
Nts., 6/1/06(13) 20,200,000 15,756,000
- ----------------------------------------------------------------------------------------------------------------------
Nextel Communications, Inc.:
0%/10.65% Sr. Disc. Nts., 9/15/07(7)(13) 18,100,000 11,267,250
0%/11.50% Sr. Disc. Nts., 9/1/03(13) 13,000,000 12,658,750
- ----------------------------------------------------------------------------------------------------------------------
NEXTLINK Communications, Inc., 9.625% Sr. Nts., 10/1/07(4) 6,400,000 6,624,000
- ----------------------------------------------------------------------------------------------------------------------
Occidente y Caribe Celular SA, 0%/14% Sr. Disc. Nts.,
Series B, 3/15/04(13) 5,400,000 4,293,000
- ----------------------------------------------------------------------------------------------------------------------
Omnipoint Corp.:
11.625% Sr. Nts., 8/15/06 5,710,000 5,938,400
11.625% Sr. Nts., Series A, 8/15/06 10,105,000 10,509,200
- ----------------------------------------------------------------------------------------------------------------------
ORBCOMM Global LP/ORBCOMM Capital Corp.,
14% Sr. Nts., 8/15/04 19,105,000 19,964,725
- ----------------------------------------------------------------------------------------------------------------------
PriCellular Wireless Corp.:
0%/12.25% Sr. Sub. Disc. Nts., 10/1/03(13) 7,900,000 8,038,250
0%/14% Sr. Sub. Disc. Nts., 11/15/01(13) 24,067,000 26,955,040
10.75% Sr. Nts., 11/1/04 2,355,000 2,555,175
- ----------------------------------------------------------------------------------------------------------------------
Real Time Data, Inc., Units (each unit consists of $1,000
principal amount of 0%/13.50% sub. disc. nts., 8/15/06 and
one warrant to purchase six ordinary shares)(5)(13)(15) 18,540,000 11,170,350
- ----------------------------------------------------------------------------------------------------------------------
Sprint Spectrum LP/Sprint Spectrum Finance Corp., 0%/12.50%
Sr. Disc. Nts., 8/15/06(13) 3,240,000 2,470,500
- ----------------------------------------------------------------------------------------------------------------------
Teletrac, Inc., Units (each unit consists of $1,000 principal
amount of 14% sr. nts., 8/1/07 and one warrant to buy .537495
ordinary share)(5)(15) 2,450,000 2,566,375
- ----------------------------------------------------------------------------------------------------------------------
Therma-Wave, Inc., 10.625% Sr. Nts., 5/15/04(7) 1,300,000 1,397,500
- ----------------------------------------------------------------------------------------------------------------------
Tracor, Inc., 8.50% Sr. Sub. Nts., 3/1/07 3,190,000 3,285,700
- ----------------------------------------------------------------------------------------------------------------------
Unisys Corp., 11.75% Sr. Nts., 10/15/04 3,800,000 4,294,000
- ----------------------------------------------------------------------------------------------------------------------
USA Mobile Communications, Inc. II:
14% Sr. Nts., 11/1/04 9,965,000 11,260,450
9.50% Sr. Nts., 2/1/04 10,070,000 10,019,650
- ----------------------------------------------------------------------------------------------------------------------
Wavetek Corp., 10.125% Sr. Sub. Nts., 6/15/07(7) 5,625,000 5,821,875
--------------
318,311,974
</TABLE>
31 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS/TECHNOLOGY--2.9%
American Communications Services, Inc.:
0%/12.75% Sr. Disc. Nts., 4/1/06(13) $ 840,000 $ 579,600
0%/13% Sr. Disc. Nts., 11/1/05(13) 1,495,000 1,091,350
13.75% Sr. Nts., 7/15/07(7) 5,925,000 6,784,125
- ----------------------------------------------------------------------------------------------------------------------
Bell Cablemedia plc:
0%/11.875% Sr. Disc. Nts., 9/15/05(13) 7,950,000 6,933,823
0%/11.95% Sr. Disc. Nts., 7/15/04(5)(13) 22,800,000 21,318,000
- ----------------------------------------------------------------------------------------------------------------------
Brooks Fiber Properties, Inc.:
0%/10.875% Sr. Disc. Nts., 3/1/06(13) 7,150,000 5,809,375
0%/11.875% Sr. Disc. Nts., 11/1/06(13) 11,615,000 9,103,256
10% Sr. Nts., 6/1/07 14,350,000 16,359,000
- ----------------------------------------------------------------------------------------------------------------------
BTI Telecom Corp., 10.50% Sr. Nts., 9/15/07(7) 6,600,000 6,831,000
- ----------------------------------------------------------------------------------------------------------------------
Call-Net Enterprises, Inc.:
0%/13.25% Sr. Disc. Nts., 12/1/04(13) 6,800,000 6,154,000
0%/9.27% Sr. Disc. Nts., 8/15/07(13) 6,050,000 4,053,500
8.375% Sr. Nts., 8/15/07(CAD) 6,400,000 4,813,586
- ----------------------------------------------------------------------------------------------------------------------
Colt Telecom Group plc, Units (each unit consists of
$1,000 principal amount of 0%/12% sr. disc. nts., 12/15/06
and one warrant to purchase 7.8 ordinary shares)(13)(15) 17,325,000 12,907,125
- ----------------------------------------------------------------------------------------------------------------------
Comcast UK Cable Partner Ltd., 0%/11.20% Sr. Disc. Debs.,
11/15/07(13) 6,260,000 4,945,400
- ----------------------------------------------------------------------------------------------------------------------
Diamond Cable Communications plc, 0%/11.75% Sr. Disc.
Nts., 12/15/05(13) 15,025,000 11,343,875
- ---------------------------------------------------------------------------------------------------------------------
GST Telecommunications, Inc., 0%/13.875% Cv. Sr. Sub.
Disc. Nts., 12/15/05(7)(13) 1,800,000 1,356,750
- ----------------------------------------------------------------------------------------------------------------------
GST USA, Inc., 0%/13.875% Bonds, 12/15/05(13) 12,220,000 9,378,850
- ----------------------------------------------------------------------------------------------------------------------
ICG Holdings, Inc.:
0%/12.50% Gtd. Sr. Disc. Nts., 5/1/06(13) 1,465,000 1,098,750
0%/13.50% Sr. Disc. Nts., 9/15/05(13) 14,200,000 11,502,000
- ----------------------------------------------------------------------------------------------------------------------
Intermedia Communications, Inc., 0%/11.25% Sr. Disc.
Nts., 7/15/07(13) 13,000,000 9,100,000
- ----------------------------------------------------------------------------------------------------------------------
McLeodUSA, Inc.:
0%/10.50% Sr. Disc. Nts., 3/1/07(13) 5,145,000 3,678,675
9.25% Sr. Nts., 7/15/07(7) 1,725,000 1,845,750
- ----------------------------------------------------------------------------------------------------------------------
MGC Communications, Inc., Units (each unit consists
of $1,000 principal amount of 13% sr. sec. nts., 10/1/04
and one warrant to purchase 8.07 shares of common stock
at $0.01 per share)(7)(15) 5,100,000 5,329,500
- ----------------------------------------------------------------------------------------------------------------------
NTL, Inc.:
0%/10.875% Sr. Deferred Coupon Nts., 10/15/03(13) 900,000 825,750
10% Sr. Nts., 2/15/07 7,725,000 8,111,250
- ----------------------------------------------------------------------------------------------------------------------
Petersburg Long Distance, Inc.:
9% Cv. Sub. Nts., 6/1/06(7) 1,500,000 2,000,625
Units (each unit consists of $1,000 principal amount of
0%/14% sr. disc. nts., 6/1/04 and one warrant to purchase
34 ordinary shares)(5)(13)(15) 13,200,000 12,606,000
</TABLE>
32 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TELECOMMUNICATIONS/TECHNOLOGY (CONTINUED)
PTC International Finance BV, 0%/10.75% Gtd. Sr. Sub.
Unsec. Bonds, 7/1/07(7)(13) $ 6,532,000 $ 4,000,850
- ----------------------------------------------------------------------------------------------------------------------
Shaw Communications, Inc., 8.54% Debs., 9/30/27(4)(CAD) 14,580,000 10,515,713
- ----------------------------------------------------------------------------------------------------------------------
Telefonica de Argentina SA, 11.875% Unsec. Nts., 11/1/04 300,000 365,250
- ----------------------------------------------------------------------------------------------------------------------
Teleport Communications Group, Inc., 0%/11.125% Sr.
Disc. Nts., 7/1/07(13) 21,350,000 16,759,750
- ----------------------------------------------------------------------------------------------------------------------
Telewest Communications plc, 0%/11% Sr. Disc. Debs., 10/1/07(13) 10,975,000 8,286,125
- ----------------------------------------------------------------------------------------------------------------------
UNIFI Communications, Inc., 14% Sr. Nts., 3/1/04 2,715,000 2,592,825
- ----------------------------------------------------------------------------------------------------------------------
Videotron Holdings plc, 0%/11% Sr. Disc. Nts., 8/15/05(13) 1,650,000 1,431,375
--------------
229,812,803
- ----------------------------------------------------------------------------------------------------------------------
TRANSPORTATION--0.9%
- ----------------------------------------------------------------------------------------------------------------------
RAILROADS--0.3%
Transtar Holdings LP/Transtar Capital Corp., 0%/13.375% Sr.
Disc. Nts., Series B, 12/15/03(13) 27,791,000 24,247,648
- ----------------------------------------------------------------------------------------------------------------------
SHIPPING--0.3%
Navigator Gas Transport plc:
10.50% First Priority Ship Mtg. Nts., 6/30/07(7) 11,800,000 12,685,000
Units (each unit consists of $1,000 principal amount of 12%
second priority ship mtg. nts., 6/30/07 and one warrant)(7)(15) 11,325,000 12,740,625
--------------
25,425,625
- ----------------------------------------------------------------------------------------------------------------------
TRUCKING--0.3%
Coach USA, Inc., 9.375% Gtd. Sr. Sub. Nts., 7/1/07(7) 9,965,000 10,064,650
- ----------------------------------------------------------------------------------------------------------------------
Tribasa Toll Road Trust, 10.50% Nts., Series 1993-A, 12/1/11(7) 14,783,746 12,806,420
- ----------------------------------------------------------------------------------------------------------------------
Western Star Truck Holdings Ltd., 8.75% Sr. Nts., 5/1/07(7) 2,875,000 2,990,000
--------------
25,861,070
- ----------------------------------------------------------------------------------------------------------------------
UTILITIES--1.1%
- ----------------------------------------------------------------------------------------------------------------------
ELECTRIC UTILITIES--1.1%
AES Corp., 8.375% Sr. Sub. Nts., 8/15/07 5,000,000 5,037,500
- ----------------------------------------------------------------------------------------------------------------------
C.A. La Electricidad de Caracas, 6.75% Exchange Eurobonds,
9/30/03(5)(6) 3,158,996 2,949,713
- ----------------------------------------------------------------------------------------------------------------------
CalEnergy, Inc., 9.50% Sr. Nts., 9/15/06 1,200,000 1,291,500
- ----------------------------------------------------------------------------------------------------------------------
California Energy, Inc., 10.25% Sr. Disc. Nts., 1/15/04 18,365,000 19,880,113
- ----------------------------------------------------------------------------------------------------------------------
Calpine Corp.:
10.50% Sr. Nts., 5/15/06(5) 595,000 653,013
8.75% Sr. Nts., 7/15/07(7) 10,000,000 10,225,000
9.25% Sr. Nts., 2/1/04 1,370,000 1,414,525
- ----------------------------------------------------------------------------------------------------------------------
El Paso Electric Co., 9.40% First Mtg. Bonds, Series E, 5/1/11 9,300,000 10,323,000
- ----------------------------------------------------------------------------------------------------------------------
First PV Funding Corp.:
10.15% Lease Obligation Bonds, Series 1986B, 1/15/16(5) 9,329,000 9,935,385
10.30% Lease Obligation Bonds, Series 1986A, 1/15/14(5) 11,837,000 12,606,405
</TABLE>
33 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ELECTRIC UTILITIES (CONTINUED)
Subic Power Corp.:
9.50% Sr. Sec. Nts., 12/28/08 $6,305,092 $ 6,472,399
9.50% Sr. Sec. Nts., 12/28/08(7) 5,075,862 5,210,550
--------------
85,999,103
- ----------------------------------------------------------------------------------------------------------------------
GAS UTILITIES--0.0%
Beaver Valley II Funding Corp., 9% Second Lease Obligation
Bonds, 6/1/17(5) 956,000 1,030,090
- ----------------------------------------------------------------------------------------------------------------------
CE Casecnan Water & Energy, Inc., 11.95% Sr. Nts.,
Series B, 11/15/10 1,800,000 1,998,000
--------------
3,028,090
--------------
Total Corporate Bonds and Notes (Cost $2,562,024,038) 2,677,584,375
<CAPTION>
SHARES
======================================================================================================================
<S> <C> <C>
COMMON STOCKS--0.5%
- ----------------------------------------------------------------------------------------------------------------------
Celcaribe SA(5)(17) 1,658,520 7,048,710
- ----------------------------------------------------------------------------------------------------------------------
CellNet Data Systems, Inc.(17) 39,200 492,450
- ----------------------------------------------------------------------------------------------------------------------
Coinstar, Inc.(17) 46,550 605,150
- ----------------------------------------------------------------------------------------------------------------------
ECM Fund, L.P.I.(5) 525 526,312
- ----------------------------------------------------------------------------------------------------------------------
El Paso Electric Co. 500,506 3,003,036
- ----------------------------------------------------------------------------------------------------------------------
Equitable Bag, Inc.(5) 68,985 344,925
- ----------------------------------------------------------------------------------------------------------------------
Grand Union Co.(17) 218,257 381,950
- ----------------------------------------------------------------------------------------------------------------------
GST Telecommunications, Inc.(17) 168,400 2,336,550
- ----------------------------------------------------------------------------------------------------------------------
Ladish Co., Inc.(5)(17) 806,000 2,619,500
- ----------------------------------------------------------------------------------------------------------------------
Omnipoint Corp.(5)(17) 640,625 12,856,543
- ----------------------------------------------------------------------------------------------------------------------
Optel, Inc.(5)(17) 10,950 110
- ----------------------------------------------------------------------------------------------------------------------
Sheridan Energy, Inc.(17)(18) 394,283 1,429,276
- ----------------------------------------------------------------------------------------------------------------------
Vail Resorts, Inc.(17) 170,000 4,547,500
- ----------------------------------------------------------------------------------------------------------------------
Walter Industries, Inc.(17) 119,583 2,384,186
--------------
Total Common Stocks (Cost $26,526,796) 38,576,198
======================================================================================================================
PREFERRED STOCKS--2.0%
- ----------------------------------------------------------------------------------------------------------------------
American Radio Systems Corp., 11.375% Cum.
Exchangeable Preferred 9,396 1,129,869
- ----------------------------------------------------------------------------------------------------------------------
AmeriKing, Inc., 13% Cum. Sr. Exchangeable
Preferred Stock, Non-Vtg. 108,875 3,075,719
- ----------------------------------------------------------------------------------------------------------------------
BankUnited Capital Trust, 10.25% Redeemable Trust
Preferred Securities(5) 10,050,000 10,150,500
- ----------------------------------------------------------------------------------------------------------------------
Cablevision Systems Corp.:
11.125% Exchangeable Preferred Stock, Series M(10) 59,798 6,570,305
8.50% Cum. Cv., Series I 36,500 1,067,625
- ----------------------------------------------------------------------------------------------------------------------
California Federal Bank, 11.50% Non-Cum., Non-Vtg. 111,500 12,717,969
- ----------------------------------------------------------------------------------------------------------------------
CGA Group Ltd., Preferred(5)(17)(18) 130,000 3,250,000
</TABLE>
34 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
MARKET VALUE
SHARES SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
PREFERRED STOCKS (CONTINUED)
Clark USA, Inc., 11.50% Cum. Preferred Stock(4)(7)(10) 1,700 $ 1,746,750
- ----------------------------------------------------------------------------------------------------------------------
CRIIMI MAE, Inc., 10.875% Cum. Cv. Preferred Stock, Series B 307,300 11,139,625
- ----------------------------------------------------------------------------------------------------------------------
Crown American Realty Trust, 11% Cum. Non-Vtg.
Preferred, Series A 49,500 2,648,250
- ----------------------------------------------------------------------------------------------------------------------
Earthwatch, Inc., 12% Cv. Sr. Preferred Stock, Series C(5)(10) 600,000 5,850,000
- ----------------------------------------------------------------------------------------------------------------------
EchoStar Communications Corp., 12.125% Sr. Redeemable
Exchangeable Preferred Stock, Series B(4)(7)(10) 5,250 5,460,000
- ----------------------------------------------------------------------------------------------------------------------
El Paso Electric Co., 11.40% Preferred Stock, Series A(10) 106,122 11,806,072
- ----------------------------------------------------------------------------------------------------------------------
Fresenius Medical Care Trust, 9% Preferred Securities 12,605,000 13,109,200
- ----------------------------------------------------------------------------------------------------------------------
Golden State Bancorp., 8.75% Cv. Preferred Stock, Series A 20,000 1,483,750
- ----------------------------------------------------------------------------------------------------------------------
K-III Communications Corp.:
$11.625 Exchangeable, Series B(5)(10) 70,912 7,702,820
9.20% Preferred Stock, Series E(7) 46,400 4,674,800
Sr. Exchangeable, Series A 80,000 2,160,000
- ----------------------------------------------------------------------------------------------------------------------
Kelley Oil & Gas Corp., $2.625 Cv.(18) 159,100 3,897,950
- ----------------------------------------------------------------------------------------------------------------------
NEXTLINK Communications, Inc., 14% Sr.
Exchangeable Preferred(10) 176,594 11,611,056
- ----------------------------------------------------------------------------------------------------------------------
Prime Retail, Inc., $19.00 Cv., Series B 325,000 7,881,250
- ----------------------------------------------------------------------------------------------------------------------
SFX Broadcasting, Inc., 12.625% Cum., Series E, Non-Vtg. 2,200 2,546,500
- ----------------------------------------------------------------------------------------------------------------------
Spanish Broadcasting System, Inc., 14.25% Cum. Sr.
Exchangeable Preferred Stock, Non-Vtg.(7) 5,000 5,237,500
- ----------------------------------------------------------------------------------------------------------------------
Unisys Corp., $3.75 Cv., Series A 80,000 3,685,000
- ----------------------------------------------------------------------------------------------------------------------
Walden Residential Properties, Inc.:
Preferred Stock(18) 387,400 10,048,188
9.16% Cv. Preferred Stock, Series B(18) 280,000 8,260,000
--------------
Total Preferred Stocks (Cost $144,060,275) 158,910,698
======================================================================================================================
OTHER SECURITIES--0.3%
- ----------------------------------------------------------------------------------------------------------------------
SD Warren Co., 14% Cum. Exchangeable, Series B 244,770 11,320,612
- ----------------------------------------------------------------------------------------------------------------------
SDW Holdings Corp., 15% Cum. Sr. Exchangeable Preferred(5) 162,350 5,966,363
- ----------------------------------------------------------------------------------------------------------------------
WorldCom, Inc., 8% Cv. Depositary Shares each Representing
1/100 Share of Dividend Enhanced Convertible Stock 50,000 6,150,000
--------------
Total Other Securities (Cost $20,375,020) 23,436,975
<CAPTION>
UNITS
======================================================================================================================
<S> <C> <C>
RIGHTS, WARRANTS AND CERTIFICATES--0.1%
- ----------------------------------------------------------------------------------------------------------------------
American Communications Services, Inc. Wts., Exp. 11/05(5) 5,225 496,375
- ----------------------------------------------------------------------------------------------------------------------
American Telecasting, Inc. Wts.:
Exp. 6/99(5) 119,070 1,191
Wts., Exp. 8/00(5) 8,000 80
- ----------------------------------------------------------------------------------------------------------------------
Ames Department Stores, Inc., Litigation Trust(5) 118,975 1,190
- ----------------------------------------------------------------------------------------------------------------------
Australis Media Ltd. Wts., Exp. 5/00(5) 780 6
- ----------------------------------------------------------------------------------------------------------------------
Becker Gaming, Inc. Wts., Exp. 11/00(5) 262,500 65,625
</TABLE>
35 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
MARKET VALUE
SHARES SEE NOTE 1
======================================================================================================================
<S> <C> <C>
RIGHTS, WARRANTS AND CERTIFICATES (CONTINUED)
- ----------------------------------------------------------------------------------------------------------------------
Capital Gaming International, Inc. Wts., Exp. 2/99(5) 74,086 $ --
- ----------------------------------------------------------------------------------------------------------------------
Cellular Communications International, Inc. Wts., Exp. 8/03(5) 16,370 278,290
- ----------------------------------------------------------------------------------------------------------------------
CGA Group Ltd. Wts., Exp. 12/49(5)(18) 130,000 65,000
- ----------------------------------------------------------------------------------------------------------------------
Clearnet Communications, Inc. Wts., Exp. 9/05 7,425 55,316
- ----------------------------------------------------------------------------------------------------------------------
Comunicacion Celular SA Wts., Exp. 11/03(5) 8,109 445,995
- ----------------------------------------------------------------------------------------------------------------------
Eye Care Centers of America, Inc. Wts., Exp. 10/03(5) 6,600 33,000
- ----------------------------------------------------------------------------------------------------------------------
Foamex LP/JPS Automotive Corp. Wts., Exp. 7/99(5) 7,250 203,000
- ----------------------------------------------------------------------------------------------------------------------
Geotek Communications, Inc. Wts., Exp. 7/05(5) 690,000 1,035,000
- ----------------------------------------------------------------------------------------------------------------------
Hyperion Telecommunications, Inc. Wts., Exp. 4/01(5) 1,035 41,917
- ----------------------------------------------------------------------------------------------------------------------
ICG Communications, Inc. Wts., Exp. 9/05(5) 46,860 702,900
- ----------------------------------------------------------------------------------------------------------------------
IHF Capital, Inc., Series I Wts., Exp. 11/99(5) 5,400 270,000
- ----------------------------------------------------------------------------------------------------------------------
IHF Holdings, Inc. Wts., Exp. 11/99(5) 1,750 280,000
- ----------------------------------------------------------------------------------------------------------------------
In-Flight Phone Corp. Wts., Exp. 8/02 13,050 --
- ----------------------------------------------------------------------------------------------------------------------
Mexican Value Rts. 25,000,000 --
- ----------------------------------------------------------------------------------------------------------------------
Microcell Telecommunications, Inc.:
Conditional Wts., Exp. 12/97(5) 29,300 18,312
Wts., Exp. 12/97(5) 29,300 410,200
- ----------------------------------------------------------------------------------------------------------------------
NEXTLINK Communications, Inc. Wts., Exp. 2/09(5) 165,715 --
- ----------------------------------------------------------------------------------------------------------------------
Occidente y Caribe Celular SA Wts., Exp. 3/04(5) 21,600 216
- ----------------------------------------------------------------------------------------------------------------------
Omnipoint Corp. Wts., Exp. 11/00(5) 102,500 2,057,047
- ----------------------------------------------------------------------------------------------------------------------
Protection One, Inc. Wts.:
Exp. 11/03(5) 182,000 2,366,000
Exp. 6/05(5) 13,440 174,720
- ----------------------------------------------------------------------------------------------------------------------
Stroh Brewery Co. Wts., Exp. 7/06(5) 19,164 148,521
- ----------------------------------------------------------------------------------------------------------------------
UNIFI Communications, Inc. Wts., Exp. 3/07(5) 2,715 5,430
- ----------------------------------------------------------------------------------------------------------------------
United International Holdings, Inc. Wts., Exp. 11/99(5) 20,345 244,140
- ----------------------------------------------------------------------------------------------------------------------
Walden Residential Properties, Inc. Wts., Exp. 1/02(5)(18) 196,400 257,775
--------------
Total Rights, Warrants and Certificates (Cost $3,355,785) 9,657,246
<CAPTION>
FACE
AMOUNT(1)
======================================================================================================================
<S> <C> <C>
STRUCTURED INSTRUMENTS--6.5%
- ----------------------------------------------------------------------------------------------------------------------
AIG International, Inc., Goldman Sachs Commodity Index Total
Return Leveraged-Linked Contingent Payment Promissory Nts.,
6.178%, 3/30/99(19) $ 5,000,000 5,000,000
- ----------------------------------------------------------------------------------------------------------------------
Bayerische Landesbank Girozentrale (New York Branch)
Canada Banker's Acceptance Indexed Yield Nts., 8.405%,
5/22/98 19,350,000 19,220,355
- ----------------------------------------------------------------------------------------------------------------------
Bayerische Landesbank Girozentrale (New York Branch)
CD Linked Nts.:
12.50%, 3/6/98 25,000,000 25,156,250
5.106%, 11/21/97 (linked to the Goldman Sachs Commodity
Index Excess Return)(19) 2,000,000 2,519,000
</TABLE>
36 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
STRUCTURED INSTRUMENTS (CONTINUED)
Bayerische Landesbank Girozentrale (New York Branch)
Goldman Sachs Commodity Index Excess Return
Leveraged-Linked Nts., 5.488%, 12/8/97(19) $ 8,750,000 $ 9,792,125
- ----------------------------------------------------------------------------------------------------------------------
Bayerische Landesbank Girozentrale (New York Branch)
Lehman Brothers High Yield Bond Index Nts., 12.50%, 2/4/98 14,250,000 14,291,325
- ----------------------------------------------------------------------------------------------------------------------
Bayerische Landesbank Girozentrale (New York Branch)
Nikkei 225 Equity-Linked Nts., 6.03%, 4/23/98 17,500,000 16,968,000
- ----------------------------------------------------------------------------------------------------------------------
Business Development Bank of Canada, Goldman Sachs
Commodity Index Excess Return Leveraged-Linked
Commercial Paper, 5.40%, 12/22/97(19) 7,000,000 7,750,400
- ----------------------------------------------------------------------------------------------------------------------
Canadian Imperial Bank of Commerce (New York Branch)
Canadian Dollar Three Month Banker's Acceptance Linked
Maximum Rate Nts., 8.66%, 4/13/98 1,000,000 1,001,000
- ----------------------------------------------------------------------------------------------------------------------
Canadian Imperial Bank of Commerce (New York Branch)
Three Month British Pound LIBOR Forward Linked Nts.,
5.79%, 5/22/98 20,440,000 20,260,128
- ----------------------------------------------------------------------------------------------------------------------
Canadian Imperial Bank of Commerce, U.S. Dollar/Japanese
Yen Basis Arbitrage Nts., 10.379%, 4/14/98(5)(6) 9,735,000 9,735,000
- ----------------------------------------------------------------------------------------------------------------------
Cargill Financial Services Corp., Goldman Sachs Commodity
Index Total Return Leveraged-Linked Nts., 5.469%, 12/4/97(19) 8,000,000 8,308,520
- ----------------------------------------------------------------------------------------------------------------------
Credit Suisse First Boston (Cayman) Ltd.:
OAO Bank Menatep Credit & Russian Rouble Convertibility
Linked Nts., Zero Coupon, 11.05%, 12/16/97(5)(12) 38,700,000 37,763,886
City of Moscow, Credit & Convertibility Linked Nts.,
Series EM 215, Zero Coupon, 12.05%, 12/30/97(12) 11,250,000 10,923,199
- ----------------------------------------------------------------------------------------------------------------------
Daiwa Finance Corp. (New York), Daiwa Physical
Commodity Index Leveraged-Linked Nts., 4.656%, 12/15/97(6)(20) 2,800,000 2,973,880
- ----------------------------------------------------------------------------------------------------------------------
First Boston Corp. (The), Russian GKO Linked Nts., Zero
Coupon, 13.95%, 1/20/98(12) 9,800,000 9,472,984
- ----------------------------------------------------------------------------------------------------------------------
Goldman, Sachs & Co. Argentina Local Market Securities Trust,
11.30%, 4/1/00 [representing debt of Argentina (Republic of)
Bonos del Tesoro Bonds, Series 10, 5.80%, 4/1/00 and an
interest rate swap between Goldman Sachs and the Trust](5) 11,334,782 11,646,489
- ----------------------------------------------------------------------------------------------------------------------
ING (U.S.) Financial Holdings Corp.:
Zero Coupon Czech Koruna Linked Promissory Nts., 10.98%,
11/17/97(5)(12)(CZK) 26,368,371 789,329
Zero Coupon Czech Koruna/U.S. Dollar Linked Nts.,
11.10%, 3/4/98(12) 9,645,000 7,956,161
Greek Drachma Linked Nts., Zero Coupon, 9.99%, 8/7/98(12) 19,500,000 18,323,760
PT Polysindo Linked Nts., Zero Coupon, 10.43%, 7/15/98(5)(12) 1,973,463 1,771,677
- ----------------------------------------------------------------------------------------------------------------------
ING Barings (U.S.) Financial Holdings Corp., Chilean Peso
Linked Nts., with Chilean Sovereign Risk, Zero Coupon,
9.22%, 6/25/98(12) 16,000,000 14,889,600
</TABLE>
37 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
======================================================================================================================
<S> <C> <C>
STRUCTURED INSTRUMENTS (CONTINUED)
Lehman Brothers Holdings, Inc.:
Greek Drachma/Swiss Franc Linked Nts., Zero Coupon,
14.71%, 1/15/98(12) $ 6,630,630 $ 6,749,981
U.S. Dollar Nts. Linked to the Greek Drachma/Swiss Franc
Exchange Rate, Zero Coupon, 23.05%, 12/26/97(12) 10,200,000 10,931,340
- ----------------------------------------------------------------------------------------------------------------------
Lehman Brothers, Inc., Guatemalan Letras de Tesoreria Linked
Nts., Zero Coupon, 8.66%, 11/24/97(12) 7,800,000 7,700,160
- ----------------------------------------------------------------------------------------------------------------------
Merrill Lynch & Co., Inc., Units, 9.75%, 6/15/99 (representing
debt of Chemical Banking Corp., sub. capital nts., and equity
of Citicorp, 7.75% preferred, series 22)(5) 10,000,000 11,807,000
- ----------------------------------------------------------------------------------------------------------------------
Morgan Guaranty Trust Co. of New York, Japanese
Government Bond 193 Currency Protected Bank Nts.,
8.14%, 4/29/98 8,100,000 6,164,100
- ----------------------------------------------------------------------------------------------------------------------
Morgan Stanley Group, Inc. Repackaged Argentina Domestic
Securities Trust, 14.75%, 9/1/02 [representing debt of
Argentina (Republic of) Bonos de Consolidacion de
Deudas Bonds, Series I, 5.625%, 9/1/02](5) 6,000,000 7,410,000
- ----------------------------------------------------------------------------------------------------------------------
Salomon, Inc.:
Chilean Peso Indexed Credit Linked Nts., Zero Coupon,
9.32%, 7/22/98(12) 3,750,000 3,467,250
Chilean Peso Indexed Enhanced Access Nts., Zero Coupon:
9.44%, 6/11/98(12) 20,000,000 18,692,000
9.18%, 6/18/98(12) 9,750,000 9,097,725
Chilean Peso Linked Nts., Zero Coupon:
9.33%, 6/24/98(12) 4,865,000 4,504,017
9.18%, 9/9/98(12) 4,865,000 4,408,663
Russian S-Account Credit Linked Nts., Zero Coupon:
13.71%, 4/3/98(12) 19,350,000 18,283,815
14.17%, 5/22/98(12) 9,600,000 8,938,560
14.10%, 5/7/98(12) 32,150,000 30,066,680
9.79%, 7/31/98(12) 19,500,000 17,778,150
27.11%, 8/7/98(12) 41,200,000 37,504,360
- ----------------------------------------------------------------------------------------------------------------------
SPARC EM Ltd., Russian GKO Linked/U.S. Dollar Nts.,
Zero Coupon, 12.24%, 10/15/97(12) 4,850,000 4,832,719
- ----------------------------------------------------------------------------------------------------------------------
Standard Chartered Bank:
Indian Rupee Linked Nts.:
15%, 10/20/97 7,020,000 6,909,084
32.641%, 11/28/97 3,656,000 3,762,755
35.115%, 11/28/97 3,656,000 3,749,228
Korean Wong Principal & Interest Linked Deposit:
11.62%, 6/30/98 9,516,534 8,945,542
11.68%, 7/3/98 14,601,366 13,726,744
U.S. Dollar/Chinese Yuan Linked Nts., 12.903%, 12/5/97 6,581,000 6,640,229
- ----------------------------------------------------------------------------------------------------------------------
Union Bank of Switzerland, Indian Rupee Linked
Nts., 5.40%, 11/17/97 4,680,000 4,692,168
--------------
Total Structured Instruments (Cost $514,246,318) 513,275,338
</TABLE>
38 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
MARKET VALUE
DATE STRIKE CONTRACTS SEE NOTE 1
====================================================================================================================
<S> <C> <C> <C> <C>
CALL OPTIONS PURCHASED--0.1%
- --------------------------------------------------------------------------------------------------------------------
German Mark/Japanese Yen Call Opt. 12/97 68.78(DEM/JPY) 86,060,000 $ 798,034
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury Bonds, 6.375%, 8/15/27
Call Opt. 10/97 99.672% 295,500 2,862,656
- --------------------------------------------------------------------------------------------------------------------
U.S. Treasury Nts., 6.125%, 8/15/07
Call Opt. 11/97 101.25 250,000 859,375
------------
Total Call Options Purchased (Cost $5,884,796) 4,520,065
====================================================================================================================
PUT OPTIONS PURCHASED--0.0%
German Mark/Japanese Yen Put Opt. 12/97 68.59(DEM/JPY) 85,780,000 1,329,590
- --------------------------------------------------------------------------------------------------------------------
German Mark Put Opt. 10/97 1.796(DEM) 43,830,000 58,820
- --------------------------------------------------------------------------------------------------------------------
German Mark Put Opt. 10/97 1.759(DEM) 85,551,000 377,194
- --------------------------------------------------------------------------------------------------------------------
German Mark Put Opt. 10/97 1.792(DEM) 43,830,000 66,797
- --------------------------------------------------------------------------------------------------------------------
German Mark Put Opt. 10/97 1.89(DEM) 90,580,000 --
- --------------------------------------------------------------------------------------------------------------------
German Mark Put Opt. 11/97 1.784(DEM) 169,270,000 899,501
------------
Total Put Options Purchased (Cost $5,193,484) 2,731,902
<CAPTION>
FACE
AMOUNT(1)
====================================================================================================================
<S> <C> <C>
CERTIFICATES OF DEPOSIT--0.1%
- --------------------------------------------------------------------------------------------------------------------
Bank Dagang Nasional Indonesia, Zero Coupon
Negotiable CD, 14.35%, 11/24/97(12)(IDR) 10,000,000,000 2,969,428
- --------------------------------------------------------------------------------------------------------------------
Bank Tabugan Negara Negotiable CD, Zero Coupon,
14.70%, 10/28/97(12)(IDR) 3,000,000,000 907,513
- --------------------------------------------------------------------------------------------------------------------
Wijaya Karya Negotiable CD, Zero Coupon, 14.79%,
12/19/97(12)(IDR) 20,000,000,000 5,826,178
------------
Total Certificates of Deposit (Cost $13,636,815) 9,703,119
====================================================================================================================
REPURCHASE AGREEMENTS--0.0%
- --------------------------------------------------------------------------------------------------------------------
Repurchase agreement with First Chicago Capital Markets, 6.125%, dated 9/30/97,
to be repurchased at $3,100,527 on 10/1/97, collateralized by U.S. Treasury
Bonds, 6.875%-12%, 5/15/05-8/15/25, with a value of $2,433,948 and U.S. Treasury
Nts., 5.875%-7.25%, 8/15/98-5/15/04, with a value of $729,927
(Cost $3,100,000) $ 3,100,000 3,100,000
- --------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, AT VALUE (COST $8,289,785,573) 107.5% 8,478,965,517
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES IN EXCESS OF OTHER ASSETS (7.5) (592,075,007)
------------ --------------
NET ASSETS 100.0% $7,886,890,510
============ ==============
</TABLE>
39 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
- -------------------------------------------------------------------------------
1. Face amount is reported in U.S. Dollars, except for those denoted in the
following currencies:
<TABLE>
<S> <C>
AUD--Australian Dollar IEP--Irish Punt
CAD--Canadian Dollar ITL--Italian Lira
CZK--Czech Koruna JPY--Japanese Yen
DEM--German Mark MXP--Mexican Peso
DKK--Danish Krone NOK--Norwegian Krone
ESP--Spanish Peseta NZD--New Zealand Dollar
GBP--British Pound Sterling PLZ--Polish Zloty
GRD--Greek Drachma SEK--Swedish Krona
HUF--Hungarian Forint TRL--Turkish Lira
IDR--Indonesian Rupiah ZAR--South African Rand
</TABLE>
2. 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). Interest rates disclosed represent current yields based
upon the current cost basis and estimated timing and amount of future cash
flows.
3. Principal-Only Strips represent the right to receive the monthly principal
payments on an underlying pool of mortgage loans. The value of these securities
generally increases as interest rates decline and prepayment rates rise. The
price of these securities is typically more volatile than that of coupon-bearing
bonds of the same maturity. Interest rates disclosed represent current yields
based upon the current cost basis and estimated timing of future cash flows.
4. When-issued security to be delivered and settled after September 30, 1997.
5. Identifies issues considered to be illiquid or restricted--See Note 8 of
Notes to Financial Statements.
6. Represents the current interest rate for a variable rate security.
7. Represents securities sold under Rule 144A, which are exempt from
registration under the Securities Act of 1933, as amended. These securities have
been determined to be liquid under guidelines established by the Board of
Trustees. These securities amount to $752,116,975 or 9.54% of the Fund's net
assets, at September 30, 1997.
8. A sufficient amount of liquid assets has been designated to cover outstanding
written options, as follows:
<TABLE>
<CAPTION>
CONTRACTS/FACE EXPIRATION EXERCISE PREMIUM MARKET VALUE
SUBJECT TO CALL/PUT DATE PRICE RECEIVED SEE NOTE 1
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Banco Hipotecario Nacional
(Argentina) Medium-Term Nts.,
10.625%, 8/7/06 Call Option $ 15,000,000 8/7/00 100.00% $ 138,000 $1,800,000
- -------------------------------------------------------------------------------------------------------------------------
British Pound Sterling Call Option 47,170,000 10/6/97 0.625(GBP) 556,606 780,664
- -------------------------------------------------------------------------------------------------------------------------
German Mark Call Option 130,890,000 10/16/97 1.72(DEM) 342,521 311,518
- -------------------------------------------------------------------------------------------------------------------------
Japanese Yen Call Option 4,860,600,000 10/1/97 119.00(JPY) 214,435 9,721
- -------------------------------------------------------------------------------------------------------------------------
Japanese Yen Put Option 4,860,600,000 10/1/97 121.00(JPY) 210,894 58,327
---------- ----------
$1,462,456 $2,960,230
========== ==========
</TABLE>
40 Oppenheimer Strategic Income Fund
<PAGE>
- -------------------------------------------------------------------------------
9. Securities with an aggregate market value of $12,971,445 are held in
collateralized accounts to cover initial margin requirements on open futures
sales contracts. See Note 6 of Notes to Financial Statements.
10. Interest or dividend is paid in kind.
11. Represents the current interest rate for an increasing rate security.
12. For zero coupon bonds, the interest rate shown is the effective yield on the
date of purchase.
13. Denotes a step bond: a zero coupon bond that converts to a fixed or variable
interest rate at a designated future date.
14. Non-income producing--issuer is in default of interest payment.
15. Units may be comprised of several components, such as debt and equity and/or
warrants to purchase equity at some point in the future. For units which
represent debt securities, face amount disclosed represents total underlying
principal.
16. A sufficient amount of securities has been designated to cover outstanding
forward foreign currency exchange contracts. See Note 5 of Notes to Financial
Statements.
17. Non-income producing security.
18. Affiliated company. Represents ownership of at least 5% of the voting
securities of the issuer, and is or was an affiliate, as defined in the
Investment Company Act of 1940, at or during the period ended September 30,
1997. The aggregate fair value of securities of affiliated companies held by the
Fund as of September 30, 1997 amounts to $27,208,189. Transactions during the
period in which the issuer was an affiliate are as follows:
<TABLE>
<CAPTION>
SHARES/UNITS SHARES/UNITS
SEPTEMBER 30, GROSS GROSS SEPTEMBER 30, DIVIDEND
1996 ADDITIONS REDUCTIONS 1997 INCOME
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CGA Group Ltd.,
Preferred -- 130,000 -- 130,000 $ --
- --------------------------------------------------------------------------------------------------------------------------
CGA Group Ltd. Wts.,
Exp. 12/49 -- 130,000 -- 130,000 --
- --------------------------------------------------------------------------------------------------------------------------
Kelley Oil & Gas Corp.,
$2.625 Cv. 82,000 77,100 -- 159,100 406,875
- --------------------------------------------------------------------------------------------------------------------------
Sheridan Energy, Inc. -- 394,283 -- 394,283 --
- --------------------------------------------------------------------------------------------------------------------------
Walden Residential
Properties, Inc.,
Preferred Stock -- 387,400 -- 387,400 570,602
- --------------------------------------------------------------------------------------------------------------------------
Walden Residential
Properties, Inc., 9.16% Cv.
Preferred Stock, Series B 280,000 -- -- 280,000 641,200
- --------------------------------------------------------------------------------------------------------------------------
Walden Residential
Properties, Inc. Wts.,
Exp. 1/02 -- 196,400 -- 196,400 --
----------
$1,618,677
==========
</TABLE>
19. Security is linked to a Goldman Sachs Commodity Index. The index is composed
of the futures prices of twenty-two different commodities in five main commodity
groups (energy, agriculture, livestock, industrial metals and precious metals)
in rough proportion to the value of their production in the world economy.
20. Security is linked to the Daiwa Physical Commodity Excess Return Index which
is calculated in the same manner as the Daiwa Physical Commodity Index (DPCI),
but with a Treasury bill rate of zero. The DPCI is a passively managed index
showing the total return from holding unleveraged long positions in futures
contracts of physical commodities. Nineteen commodity markets representing five
major commodity industry groups are included in the calculation of the DPCI.
These five major commodity groups are: grains, metals, energy, livestock and
food/fiber.
See accompanying Notes to Financial Statements.
41 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF ASSETS & LIABILITIES September 30, 1997
<TABLE>
<S> <C>
=====================================================================================================
ASSETS
Investments, at value--see accompanying statement:
Unaffiliated companies (cost $8,264,915,023) $8,451,757,328
Affiliated companies (cost $24,870,550) 27,208,189
- -----------------------------------------------------------------------------------------------------
Unrealized appreciation on forward foreign currency
exchange contracts--Note 5 11,047,547
- -----------------------------------------------------------------------------------------------------
Receivables:
Investments sold 759,979,849
Interest, dividends and principal paydowns 146,163,544
Shares of beneficial interest sold 25,035,803
Closed forward foreign currency exchange contracts 4,255,405
Daily variation on futures contracts--Note 6 308,031
- -----------------------------------------------------------------------------------------------------
Other 32,282
--------------
Total assets 9,425,787,978
=====================================================================================================
LIABILITIES
Bank overdraft 1,967,258
- -----------------------------------------------------------------------------------------------------
Unrealized depreciation on forward foreign currency
exchange contracts--Note 5 5,289,749
- -----------------------------------------------------------------------------------------------------
Options written, at value (premiums received $1,462,456)--
see accompanying statement--Note 7 2,960,230
- -----------------------------------------------------------------------------------------------------
Payables and other liabilities:
Investments purchased (including $1,424,306,645 purchased
on a when-issued basis)--Note 1 1,498,961,120
Shares of beneficial interest redeemed 8,647,125
Dividends 8,312,459
Distribution and service plan fees 4,776,771
Closed forward foreign currency exchange contracts 4,355,184
Daily variation on futures contracts--Note 6 1,227,794
Transfer and shareholder servicing agent fees 718,700
Other 1,681,078
--------------
Total liabilities 1,538,897,468
=====================================================================================================
NET ASSETS $7,886,890,510
==============
=====================================================================================================
COMPOSITION OF NET ASSETS
Paid-in capital $7,853,553,513
- -----------------------------------------------------------------------------------------------------
Undistributed net investment income 16,158,180
- -----------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (171,522,575)
- -----------------------------------------------------------------------------------------------------
Net unrealized appreciation on investments and translation of
assets and liabilities denominated in foreign currencies 188,701,392
--------------
Net assets $7,886,890,510
==============
</TABLE>
42 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<S> <C>
=========================================================================================================
NET ASSET VALUE PER SHARE
Class A Shares:
Net asset value and redemption price per share (based on
net assets of $3,969,438,182 and 801,890,287 shares of
beneficial interest outstanding) $4.95
Maximum offering price per share (net asset value plus
sales charge of 4.75% of offering price) $5.20
- ---------------------------------------------------------------------------------------------------------
Class B Shares:
Net asset value, redemption price (excludes applicable contingent deferred sales
charge) and offering price per share (based on net assets of $3,500,902,742 and
705,698,727
shares of beneficial interest outstanding) $4.96
- ---------------------------------------------------------------------------------------------------------
Class C Shares:
Net asset value, redemption price (excludes applicable contingent deferred sales
charge) and offering price per share (based on net assets of $416,549,586 and
84,230,913 shares of
beneficial interest outstanding) $4.95
</TABLE>
See accompanying Notes to Financial Statements.
43 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENT OF OPERATIONS For the Year Ended September, 30 1997
<TABLE>
<S> <C>
=====================================================================================================
INVESTMENT INCOME
Interest (net of foreign withholding taxes of $1,014,978) $668,426,986
- -----------------------------------------------------------------------------------------------------
Dividends:
Unaffiliated companies 10,144,788
Affiliated companies 1,618,677
------------
Total income 680,190,451
=====================================================================================================
EXPENSES
Distribution and service plan fees--Note 4:
Class A 9,227,904
Class B 30,147,429
Class C 2,902,518
- -----------------------------------------------------------------------------------------------------
Management fees--Note 4 37,014,867
- -----------------------------------------------------------------------------------------------------
Transfer and shareholder servicing agent fees--Note 4 7,681,822
- -----------------------------------------------------------------------------------------------------
Shareholder reports 1,580,641
- -----------------------------------------------------------------------------------------------------
Custodian fees and expenses 1,387,036
- -----------------------------------------------------------------------------------------------------
Registration and filing fees 208,886
- -----------------------------------------------------------------------------------------------------
Legal and auditing fees 122,562
- -----------------------------------------------------------------------------------------------------
Trustees' fees and expenses 94,635
- -----------------------------------------------------------------------------------------------------
Other 289,682
-----------
Total expenses 90,657,982
=====================================================================================================
NET INVESTMENT INCOME 589,532,469
=====================================================================================================
REALIZED AND UNREALIZED GAIN (LOSS) Net realized gain (loss) on:
Investments 176,727,616
Closing of futures contracts (29,166,867)
Closing and expiration of options written--Note 7 14,670,101
Foreign currency transactions (36,622,046)
------------
Net realized gain 125,608,804
- -----------------------------------------------------------------------------------------------------
Net change in unrealized appreciation or depreciation on:
Investments 84,914,787
Translation of assets and liabilities denominated in
foreign currencies (64,385,554)
------------
Net change 20,529,233
------------
Net realized and unrealized gain 146,138,037
=====================================================================================================
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $735,670,506
============
</TABLE>
See accompanying Notes to Financial Statements.
44 Oppenheimer Strategic Income Fund
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1997 1996
====================================================================================================================
<S> <C> <C>
OPERATIONS
Net investment income $ 589,532,469 $ 499,559,590
- --------------------------------------------------------------------------------------------------------------------
Net realized gain 125,608,804 43,346,428
- --------------------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation or depreciation 20,529,233 139,093,599
-------------- --------------
Net increase in net assets resulting from operations 735,670,506 681,999,617
====================================================================================================================
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Dividends from net investment
income:
Class A (316,472,362) (288,582,659)
Class B (232,118,433) (175,634,637)
Class C (22,358,462) (8,327,086)
- --------------------------------------------------------------------------------------------------------------------
Tax return of capital distribution:
Class A -- (11,371,215)
Class B -- (8,353,085)
Class C -- (562,714)
====================================================================================================================
BENEFICIAL INTEREST TRANSACTIONS Net increase in net assets resulting from
beneficial interest transactions--Note 2:
Class A 357,127,802 197,278,497
Class B 838,896,025 568,088,963
Class C 235,000,607 103,676,464
====================================================================================================================
NET ASSETS
Total increase 1,595,745,683 1,058,212,145
- --------------------------------------------------------------------------------------------------------------------
Beginning of period 6,291,144,827 5,232,932,682
-------------- --------------
End of period [including undistributed (overdistributed) net
investment income of $16,158,180 and $(6,688,731), respectively] $7,886,890,510 $6,291,144,827
============== ==============
</TABLE>
See accompanying Notes to Financial Statements.
45 Oppenheimer Strategic Income Fund
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
-------------------------------------------
YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993
===============================================================================================
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING DATA:
Net asset value, beginning of period $4.84 $4.68 $4.75 $5.21 $5.07
- -----------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .43 .44 .41 .45 .48
Net realized and unrealized
gain (loss) .09 .15 (.03) (.35) .17
----- ----- ----- ----- -----
Total income from investment operations .52 .59 .38 .10 .65
- -----------------------------------------------------------------------------------------------
Dividends and distributions to shareholders:
Dividends from net investment
income (.41) (.41) (.41) (.43) (.50)
Distributions from net
realized gain -- -- (.01) -- (.01)
Distributions in excess of net
realized gain -- -- -- (.12) --
Tax return of capital distribution -- (.02) (.03) (.01) --
----- ----- ----- ----- -----
Total dividends and distributions
to shareholders (.41) (.43) (.45) (.56) (.51)
- -----------------------------------------------------------------------------------------------
Net asset value, end of period $4.95 $4.84 $4.68 $4.75 $5.21
===== ===== ===== ===== =====
===============================================================================================
TOTAL RETURN, AT NET ASSET VALUE(3) 11.29% 13.06% 8.62% 1.85% 13.30%
===============================================================================================
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (in millions) $3,969 $3,526 $3,219 $3,143 $2,754
- -----------------------------------------------------------------------------------------------
Average net assets (in millions) $3,735 $3,340 $3,085 $3,082 $2,107
- -----------------------------------------------------------------------------------------------
Ratios to average net assets:
Net investment income 8.77% 9.09% 9.63% 8.72% 9.78%
Expenses 0.93% 0.97% 0.99% 0.95% 1.09%
- -----------------------------------------------------------------------------------------------
Portfolio turnover rate(5) 116.5% 104.8% 141.5% 119.0% 148.6%
</TABLE>
1. For the period from May 26, 1995 (inception of offering) to September 30,
1995.
2. For the period from November 30, 1992 (inception of offering) to September
30, 1993.
3. Assumes a hypothetical initial investment on the business day before the
first day of the fiscal period (or inception of offering), 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. Total
returns are not annualized for periods of less than one full year.
46 Oppenheimer Strategic Income Fund
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C
- ----------------------------------------------- ----------------------------------
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1997 1996 1995 1994 1993(2) 1997 1996 1995(1)
=============================================================================================
<S> <C> <C> <C> <C> <C>
$4.85 $4.69 $4.76 $5.22 $4.89 $4.83 $4.68 $4.68
- ---------------------------------------------------------------------------------------------
.39 .40 .37 .42 .36 .37 .38 .13
.10 .15 (.03) (.36) .34 .13 .16 .01
- ------ ----- ----- ----- ----- ----- ----- -----
.49 .55 .34 .06 .70 .50 .54 .14
- ---------------------------------------------------------------------------------------------
(.38) (.37) (.37) (.39) (.36) (.38) (.37) (.12)
-- -- (.01) -- (.01) -- -- (.01)
-- -- -- (.12) -- -- -- --
-- (.02) (.03) (.01) -- -- (.02) (.01)
- ------ ----- ----- ----- ----- ----- ----- -----
(.38) (.39) (.41) (.52) (.37) (.38) (.39) (.14)
- ---------------------------------------------------------------------------------------------
$4.96 $4.85 $4.69 $4.76 $5.22 $4.95 $4.83 $4.68
====== ===== ===== ===== ===== ===== ===== =====
=============================================================================================
10.43% 12.19% 7.79% 1.07% 13.58% 10.67% 11.96% 3.09%
=============================================================================================
$3,501 $2,590 $1,947 $1,586 $695 $417 $175 $67
- ---------------------------------------------------------------------------------------------
$3,018 $2,250 $ 1,711 $1,236 $276 $291 $110 $24
- ---------------------------------------------------------------------------------------------
7.94% 8.30% 8.83% 7.90% 8.13%(4) 7.73% 8.18% 8.28%(4)
1.69% 1.72% 1.75% 1.71% 1.80%(4) 1.69% 1.74% 2.02%(4)
- ---------------------------------------------------------------------------------------------
116.5% 104.8% 141.5% 119.0% 148.6% 116.5% 104.8% 141.5%
</TABLE>
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 and mortgage
"dollar-rolls") for the period ended September 30, 1997 were $9,979,242,934 and
$8,316,552,760, respectively. For the years ended September 30, 1995 and 1994,
purchases and sales of investment securities included mortgage "dollar-rolls."
See accompanying Notes to Financial Statements.
47 Oppenheimer Strategic Income Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
Oppenheimer Strategic Income Fund (the Fund) is a separate series of
Oppenheimer Strategic Funds Trust, a diversified, open-end management investment
company registered under the Investment Company Act of 1940, as amended. The
Fund's investment objective is to seek a high level of current income by
investing mainly in debt securities in U.S. government, foreign and lower-rated
corporate bonds and by writing covered call options on them. The Fund's
investment advisor is OppenheimerFunds, Inc. (the Manager). The Fund offers
Class A, Class B and Class C shares. Class A shares are sold with a front-end
sales charge. Class B and Class C shares may be subject to a contingent deferred
sales charge. All 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 the close of the New
York Stock Exchange on each trading day. Listed and unlisted securities for
which such information is regularly reported are valued at the last sale price
of the day or, in the absence of sales, at values based on the closing bid or
the last sale price on the prior trading day. Long-term and short-term
"non-money market" debt securities are valued by a portfolio pricing service
approved by the Board of Trustees. Such securities which cannot be valued by the
approved portfolio pricing service are valued using dealer-supplied valuations
provided the Manager is satisfied that the firm rendering the quotes is reliable
and that the quotes reflect current market value, or are valued under
consistently applied procedures established by the Board of Trustees to
determine fair value in good faith. Short-term "money market type" 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. Forward foreign currency exchange contracts are valued
based on the closing prices of the forward currency contract rates in the London
foreign exchange markets on a daily basis as provided by a reliable bank or
dealer. Options are valued based upon the last sale price on the principal
exchange on which the option is traded or, in the absence of any transactions
that day, the value is based upon the last sale price on the prior trading date
if it is within the spread between the closing bid and asked prices. If the last
sale price is outside the spread, the closing bid is used.
--------------------------------------------------------------------------
STRUCTURED NOTES. The Fund invests in commodity and foreign currency-linked
structured notes whereby the market value and redemption price are linked to
commodity indices and foreign currency exchange rates. The structured notes may
be leveraged, which increases the notes' volatility relative to the face value
of the security. Fluctuations in values of the securities are recorded as
unrealized gains and losses in the accompanying financial statements. During the
period ended September 30, 1997, the market value of these securities comprised
an average of 6% of the Fund's net assets, and resulted in realized and
unrealized losses of $18,301,605.
- -------------------------------------------------------------------------------
SECURITIES PURCHASED ON A WHEN-ISSUED BASIS. Delivery and payment for securities
that have been purchased by the Fund on a forward commitment or when-issued
basis can take place a month or more after the transaction date. During this
period, such securities do not earn interest, are subject to market fluctuation
and may increase or decrease in value prior to their delivery. The Fund
maintains, in a segregated account with its custodian, assets with a market
value equal to the amount of its purchase commitments. The purchase of
securities on a when-issued or forward commitment basis may increase the
volatility of the Fund's net asset value to the extent the Fund makes such
purchases while remaining substantially fully invested. As of September 30,
1997, the Fund had entered into outstanding when-issued or forward commitments
of $1,424,306,645.
In connection with its ability to purchase securities on a
when-issued or forward commitment basis, the Fund may enter into mortgage
"dollar-rolls" in which the Fund sells securities for delivery in the current
month and simultaneously contracts with the same counterparty to repurchase
similar (same type coupon and maturity) but not identical securities on a
specified future date. The Fund records each dollar-roll as a sale and a new
purchase transaction.
- -------------------------------------------------------------------------------
SECURITY CREDIT RISK. The Fund invests in high yield securities, which may be
subject to a greater degree of credit risk, greater market fluctuations and risk
of loss of income and principal, and may be more sensitive to economic
conditions than lower yielding, higher rated fixed income securities. The Fund
may acquire securities in default, and is not obligated to dispose of securities
whose issuers subsequently default. At September 30, 1997, securities with an
aggregate market value of $6,172,125, representing 0.08% of the Fund's net
assets, were in default.
- -------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION. The accounting records of the Fund are maintained
in U.S. dollars. Prices of securities denominated in foreign currencies are
translated into U.S. dollars at the closing rates of exchange. Amounts related
to the purchase and sale of foreign securities and investment income are
translated at the rates of exchange prevailing on the respective dates of such
transactions.
The effect of changes in foreign currency exchange rates on
investments is separately identified from the fluctuations arising from changes
in market values of securities held and reported with all other foreign currency
gains and losses in the Fund's Statement of Operations.
- -------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund requires the custodian to take possession, to
have legally segregated in the Federal Reserve Book Entry System or to have
segregated within the custodian's vault, all securities held as collateral for
repurchase agreements. The market value of the underlying securities is required
to be at least 102% of the resale price at the time of purchase. If the seller
of the agreement defaults and the value of the collateral declines, or if the
seller enters an insolvency proceeding, realization of the value of the
collateral by the Fund may be delayed or limited.
- -------------------------------------------------------------------------------
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 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 or excise tax provision is required. At September 30, 1997, the
Fund had available for federal income tax purposes an unused capital loss
carryover of approximately $153,183,000, expiring in 2004.
- -------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS. The Fund intends to declare dividends separately
for Class A, Class B and Class C 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.
- -------------------------------------------------------------------------------
CLASSIFICATION OF DISTRIBUTIONS TO SHAREHOLDERS. Net investment income (loss)
and net realized gain (loss) may differ for financial statement and tax purposes
primarily because of the recognition of certain foreign currency gains (losses)
as ordinary income (loss) for tax purposes. The character of distributions made
during the year from net investment income or net realized gains may differ from
its ultimate characterization for federal income tax purposes. Also, due to
timing of dividend distributions, the fiscal year in which amounts are
distributed may differ from the fiscal year in which the income or realized gain
was recorded by the Fund.
The Fund adjusts the classification of distributions to
shareholders to reflect the differences between financial statement amounts and
distributions determined in accordance with income tax regulations. Accordingly,
during the year ended September 30, 1997, amounts have been reclassified to
reflect an increase in undistributed net investment income of $4,263,699, an
increase in accumulated net realized loss on investments of $6,135,352, and an
increase in paid-in capital of $1,871,653.
- -------------------------------------------------------------------------------
OTHER. Investment transactions are accounted for on the date the investments are
purchased or sold (trade date) and dividend income is recorded on the
ex-dividend 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 options written and unrealized
appreciation and depreciation are determined on an identified cost basis, which
is the same basis used for federal income tax purposes.
<PAGE>
===============================================================================
Dividends-in-kind are recognized as income on the ex-dividend date, at the
current market value of the underlying security. Interest on payment-in-kind
debt instruments is accrued as income at the coupon rate and a market adjustment
is made periodically.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of income and expenses during the reporting
period. Actual results could differ from those estimates.
===============================================================================
2. SHARES OF BENEFICIAL INTEREST
The Fund has authorized an unlimited number of no par value shares of beneficial
interest of each class. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1997 YEAR ENDED SEPTEMBER 30, 1996
--------------------------------- ------------------------------------
SHARES AMOUNT SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A:
Sold 202,106,435 $ 987,184,469 161,911,012 $ 769,839,764
Dividends and distributions
reinvested 43,528,618 212,702,206 42,307,227 201,403,712
Issued in connection with
the acquisition of Quest for
Value Global Income
Fund--Note 9 -- -- 970,667 4,571,842
Redeemed (172,636,408) (842,758,873) (163,843,683) (778,536,821)
------------ -------------- ------------ -------------
Net increase 72,998,645 $ 357,127,802 41,345,223 $ 197,278,497
============ ============== ============ =============
- -----------------------------------------------------------------------------------------------------------------
Class B:
Sold 225,061,705 $1,101,712,593 164,417,334 $ 783,491,575
Dividends and distributions
reinvested 27,158,643 132,987,856 21,799,243 103,961,398
Issued in connection with
the acquisition of Quest for
Value Global Income
Fund--Note 9 -- -- 280,096 1,322,051
Redeemed (80,881,214) (395,804,424) (67,336,963) (320,686,061)
------------ -------------- ------------ -------------
Net increase 171,339,134 $ 838,896,025 119,159,710 $ 568,088,963
============ ============== ============ =============
- -----------------------------------------------------------------------------------------------------------------
Class C:
Sold 57,786,493 $ 282,043,074 25,473,363 $ 121,173,723
Dividends and distributions
reinvested 3,188,795 15,572,159 1,255,765 5,978,489
Issued in connection with the
acquisition of Quest for Value
Global Income Fund--Note 9 -- -- 36,170 170,362
Redeemed (12,845,030) (62,614,626) (4,978,579) (23,646,110)
------------ -------------- ------------ -------------
Net increase 48,130,258 $ 235,000,607 21,786,719 $ 103,676,464
============ ============== ============ =============
</TABLE>
51 Oppenheimer Strategic Income Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
3. UNREALIZED GAINS AND LOSSES ON INVESTMENTS
At September 30, 1997, net unrealized appreciation on investments and options
written of $187,682,170 was composed of gross appreciation of $291,749,879, and
gross depreciation of $104,067,709.
================================================================================
4. MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Management fees paid to the Manager were in accordance with the investment
advisory agreement with the Fund which provides for a fee of 0.75% of the first
$200 million of the Fund's average annual net assets, 0.72% of the next $200
million, 0.69% of the next $200 million, 0.66% of the next $200 million, 0.60%
of the next $200 million and 0.50% of average annual net assets in excess of $1
billion.
For the year ended September 30, 1997, commissions (sales charges
paid by investors) on sales of Class A shares totaled $20,149,168, of which
$5,660,176 was retained by OppenheimerFunds Distributor, Inc. (OFDI), a
subsidiary of the Manager, as general distributor, and by an affiliated
broker/dealer. Sales charges advanced to broker/dealers by OFDI on sales of the
Fund's Class B and Class C shares totaled $41,868,645 and $2,728,179,
respectively, of which $1,299,100 and $67,266, respectively, was paid to an
affiliated broker/dealer. During the year ended September 30, 1997, OFDI
received contingent deferred sales charges of $6,604,974 and $191,856,
respectively, upon redemption of Class B and Class C shares as reimbursement for
sales commissions advanced by OFDI at the time of sale of such shares.
OppenheimerFunds Services (OFS), a division of the Manager, is the
transfer and shareholder servicing agent for the Fund and for other registered
investment companies. OFS's total costs of providing such services are allocated
ratably to these companies.
The Fund has adopted a Service Plan for Class A shares to
reimburse OFDI for a portion of its costs incurred in connection with the
personal service and maintenance of shareholder 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. OFDI uses
the service fee to reimburse brokers, dealers, banks and other financial
institutions quarterly for providing personal service and maintaining accounts
of their customers that hold Class A shares. During the year ended September 30,
1997, OFDI paid $640,887 to an affiliated broker/dealer as reimbursement for
Class A personal service and maintenance expenses.
52 Oppenheimer Strategic Income Fund
<PAGE>
================================================================================
The Fund has adopted a Distribution and Service Plan for Class B
shares to reimburse OFDI for its services and costs in distributing Class B
shares and servicing accounts. Under the Plan, the Fund pays OFDI an annual
asset-based sales charge of 0.75% per year on Class B shares. OFDI also receives
a service fee of 0.25% per year to reimburse dealers for providing personal
services for accounts that hold Class B shares. Both fees are computed on the
average annual net assets of Class B shares, determined as of the close of each
regular business day. During the year ended September 30, 1997, OFDI paid
$165,360 to an affiliated broker/dealer as reimbursement for Class B personal
service and maintenance expenses and retained $24,820,626 as reimbursement for
Class B sales commissions and service fee advances, as well as financing costs.
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 OFDI for certain
expenses it incurred before the Plan was terminated. As of September 30, 1997,
OFDI had incurred unreimbursed expenses of $112,265,649 for Class B.
The Fund has adopted a Distribution and Service Plan for Class C
shares to compensate OFDI for its services and costs in distributing Class C
shares and servicing accounts. Under the Plan, the Fund pays OFDI an annual
asset-based sales charge of 0.75% per year on Class C shares. OFDI also receives
a service fee of 0.25% per year to compensate dealers for providing personal
services for accounts that hold Class C shares. Both fees are computed on the
average annual net assets of Class C shares, determined as of the close of each
regular business day. During the year ended September 30, 1997, OFDI paid
$31,149 to an affiliated broker/dealer as compensation for Class C personal
service and maintenance expenses and retained $1,957,863 as compensation for
Class C sales commissions and service fee advances, as well as financing costs.
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 OFDI for distributing
shares before the Plan was terminated. As of September 30, 1997, OFDI had
incurred unreimbursed expenses of $5,708,962 for Class C.
53 Oppenheimer Strategic Income Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
5. FORWARD CONTRACTS
A forward foreign currency exchange contract (forward contract) is a commitment
to purchase or sell a foreign currency at a future date, at a negotiated rate.
The Fund uses forward contracts to seek to manage foreign currency
risks. They may also be used to tactically shift portfolio currency risk. The
Fund generally enters into forward contracts as a hedge upon the purchase or
sale of a security denominated in a foreign currency. In addition, the Fund may
enter into such contracts as a hedge against changes in foreign currency
exchange rates on portfolio positions.
Forward contracts are valued based on the closing prices of the
forward currency contract rates in the London foreign exchange markets on a
daily basis as provided by a reliable bank or dealer. The Fund will realize a
gain or loss upon the closing or settlement of the forward transaction.
Securities held in segregated accounts to cover net exposure on
outstanding forward contracts are noted in the Statement of Investments where
applicable. Unrealized appreciation or depreciation on forward contracts is
reported in the Statement of Assets and Liabilities. Realized gains and losses
are reported with all other foreign currency gains and losses in the Fund's
Statement of Operations.
Risks include the potential inability of the counterparty to meet
the terms of the contract and unanticipated movements in the value of a foreign
currency relative to the U.S. dollar. At September 30, 1997, the Fund had
outstanding forward contracts as follows:
<TABLE>
<CAPTION>
CONTRACT AMOUNT VALUATION AS OF UNREALIZED UNREALIZED
EXPIRATION DATE (000S) SEPT. 30, 1997 APPRECIATION DEPRECIATION
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CONTRACTS TO PURCHASE
- ---------------------
Canadian Dollar (CAD) 10/2/97-10/20/97 170,414 CAD $123,415,758 $ 296,136 $ --
----------- ----------
CONTRACTS TO SELL
- -----------------
Australian Dollar (AUD) 10/6/97-11/24/97 526,890 AUD 381,761,656 1,541,467 1,556,056
British Pound Sterling (GBP) 10/1/97-10/14/97 24,349 GBP 39,316,728 -- 326,373
Canadian Dollar (CAD) 1/21/98 14,580 CAD 10,616,618 -- 16,836
German Mark (DEM) 10/1/97-12/19/97 77,192 DEM 43,859,098 70,352 329,908
Indonesia Rupiah (IDR) 10/28/97 57,681,875 IDR 17,543,192 4,101,038 --
Irish Punt (IEP) 11/24/97-11/28/97 78,220 IEP 113,555,922 4,643,973 --
Japanese Yen (JPY) 11/17/97 8,270,000 JPY 69,117,377 244,362 --
Mexican Peso (MXP) 11/3/97 267,920 MXP 34,042,782 58,918 --
South African Rand (ZAR) 10/27/97 115,063 ZAR 24,502,573 -- 264,510
Spanish Peseta (ESP) 10/3/97 3,481,541 ESP 23,346,792 91,301 --
Swiss Franc (CHF) 10/21/97-11/19/97 175,165 CHF 121,355,664 -- 2,796,066
----------- ----------
10,751,411 5,289,749
----------- ----------
Total Unrealized Appreciation and Depreciation $11,047,547 $5,289,749
=========== ==========
</TABLE>
54 Oppenheimer Strategic Income Fund
<PAGE>
================================================================================
6. FUTURES CONTRACTS
The Fund may buy and sell interest rate futures contracts in order to gain
exposure to or protect against changes in interest rates. The Fund may also buy
or write put or call options on these futures contracts.
The Fund generally sells futures contracts to hedge against
increases in interest rates and the resulting negative effect on the value of
fixed rate portfolio securities. The Fund may also purchase futures contracts to
gain exposure to changes in interest rates as it may be more efficient or cost
effective than actually buying fixed income securities.
Upon entering into a futures contract, the Fund is required to
deposit either cash or securities (initial margin) in an amount equal to a
certain percentage of the contract value. Subsequent payments (variation margin)
are made or received by the Fund each day. The variation margin payments are
equal to the daily changes in the contract value and are recorded as unrealized
gains and losses. The Fund recognizes a realized gain or loss when the contract
is closed or expires.
Securities held in collateralized accounts to cover initial margin
requirements on open futures contracts are noted in the Statement of
Investments. The Statement of Assets and Liabilities reflects a receivable or
payable for the daily mark to market for variation margin.
Risks of entering into futures contracts (and related options)
include the possibility that there may be an illiquid market and that a change
in the value of the contract or option may not correlate with changes in the
value of the underlying securities.
At September 30, 1997, the Fund had outstanding futures contracts as follows:
<TABLE>
<CAPTION>
UNREALIZED
NUMBER OF VALUATION AS OF APPRECIATION
EXPIRATION DATE CONTRACTS SEPTEMBER 30, 1997 (DEPRECIATION)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRACTS TO PURCHASE
- ---------------------
U.S. Treasury Nts., 10 yr. 12/97 125 $ 13,765,625 $ 152,344
U.S. Treasury Bonds, 30 yr. 12/97 2,550 293,967,188 (1,516,250)
-----------
(1,363,906)
-----------
CONTRACTS TO SELL
- -----------------
French Government Bonds 12/97 1,265 106,344,023 (895,618)
Gold 12/97 62 2,088,780 (78,880)
Standard & Poor's 500 12/97 50 23,862,500 (493,700)
U.S. Treasury Nts., 2 yr. 12/97 145 30,021,797 (90,625)
U.S. Treasury Nts., 5 yr. 12/97 2,153 231,245,656 (1,455,609)
-----------
(3,014,432)
-----------
$(4,378,338)
===========
</TABLE>
55 Oppenheimer Strategic Income Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
7. OPTION ACTIVITY
The Fund may buy and sell put and call options, or write put and covered call
options on portfolio securities in order to produce incremental earnings or
protect against changes in the value of portfolio securities.
The Fund generally purchases put options or writes covered call
options to hedge against adverse movements in the value of portfolio holdings.
When an option is written, the Fund receives a premium and becomes obligated to
sell or purchase the underlying security at a fixed price, upon exercise of the
option.
Options are valued daily based upon the last sale price on the
principal exchange on which the option is traded and unrealized appreciation or
depreciation is recorded. The Fund will realize a gain or loss upon the
expiration or closing of the option transaction. When an option is exercised,
the proceeds on sales for a written call option, the purchase cost for a written
put option, or the cost of the security for a purchased put or call option is
adjusted by the amount of premium received or paid.
Securities designated to cover outstanding call options are noted
in the Statement of Investments where applicable. Shares subject to call,
expiration date, exercise price, premium received and market value are detailed
in a footnote to the Statement of Investments. Options written are reported as a
liability in the Statement of Assets and Liabilities. Gains and losses are
reported in the Statement of Operations.
The risk in writing a call option is that the Fund gives up the
opportunity for profit if the market price of the security increases and the
option is exercised. The risk in writing a put option is that the Fund may incur
a loss if the market price of the security decreases and the option is
exercised. The risk in buying an option is that the Fund pays a premium whether
or not the option is exercised. The Fund also has the additional risk of not
being able to enter into a closing transaction if a liquid secondary market does
not exist.
Written option activity for the year ended September 30, 1997 was as follows:
<TABLE>
<CAPTION>
CALL OPTIONS PUT OPTIONS
-------------------------------------- ------------------------------------
NUMBER OF AMOUNT OF NUMBER OF AMOUNT OF
OPTIONS PREMIUMS OPTIONS PREMIUMS
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Options outstanding at
September 30, 1996 236,465,210 $ 1 ,790,304 14,230,476 $ 722,937
Options written 6,289,590,996 21,817,179 46,434,239,635 6,492,357
Options closed or expired (1,333,863,881) (14,997,877) (36,707,870,111) (6,738,997)
Options exercised (153,517,325) (7,358,043) (4,880,000,000) (265,404)
-------------- ------------ ---------------- -----------
Options outstanding at
September 30, 1997 5,038,675,000 $ 1,251,563 4,860,600,000 $ 210,893
============== ============ ================ ===========
</TABLE>
56 Oppenheimer Strategic Income Fund
<PAGE>
================================================================================
8. ILLIQUID AND RESTRICTED SECURITIES
At September 30, 1997, investments in securities included issues that are
illiquid or restricted. Restricted securities are often purchased in private
placement transactions, are not registered under the Securities Act of 1933, may
have contractual restrictions on resale, and are valued under methods approved
by the Board of Trustees as reflecting fair value. A security may be considered
illiquid if it lacks a readily-available market or if its valuation has not
changed for a certain period of time. The Fund intends to invest no more than
10% of its net assets (determined at the time of purchase and reviewed
periodically) in illiquid or restricted securities. Certain restricted
securities, eligible for resale to qualified institutional investors, are not
subject to that limit. The aggregate value of illiquid or restricted securities
subject to this limitation at September 30, 1997 was $648,184,785, which
represents 8.22% of the Fund's net assets, of which $38,306,073 is considered
restricted. Information concerning restricted securities is as follows:
<TABLE>
<CAPTION>
VALUATION
COST PER UNIT AS OF
SECURITY ACQUISITION DATE PER UNIT SEPTEMBER 30, 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BONDS
Arizona Charlie's, Inc., 12% First Mtg.
Nts., Series B, 11/15/00 11/18/93-12/9/93 100.00% 53.50%
- ---------------------------------------------------------------------------------------------------------------------
Capitol Queen & Casino, Inc., 12% First
Mtg. Nts., Series A, 11/15/00 11/18/93-12/17/93 95.98 17.50
- ---------------------------------------------------------------------------------------------------------------------
ECM Fund, L.P.I., 14% Sub. Nts., 6/10/02 4/14/92 100.00 110.25
- ---------------------------------------------------------------------------------------------------------------------
Merrill Lynch & Co., Inc., Units, 9.75%, 6/15/99 5/15/95 110.05 118.07
- ---------------------------------------------------------------------------------------------------------------------
Venezuela (Republic of) Debs., Banco
Venezuela TCI, Zero Coupon, 6.13%, 12/13/98 7/13/93-7/15/93 72.64 95.25
STOCKS AND WARRANTS
Becker Gaming, Inc. Wts., Exp. 11/00 11/18/93-12/9/93 $ 2.10 $ .25
- ---------------------------------------------------------------------------------------------------------------------
ECM Fund, L.P.I. 4/14/92 1,000.00 1,002.50
- ---------------------------------------------------------------------------------------------------------------------
Omnipoint Corp. 11/29/95 16.00 20.07
- ---------------------------------------------------------------------------------------------------------------------
Omnipoint Corp. Wts., Exp. 11/00 11/29/95 -- 20.07
- ---------------------------------------------------------------------------------------------------------------------
CGA Group Ltd., Preferred 6/17/97 25.00 25.00
- ---------------------------------------------------------------------------------------------------------------------
CGA Group Ltd. Wts. Exp. 12/49 6/17/97 -- .50
</TABLE>
57 Oppenheimer Strategic Income Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
================================================================================
9. ACQUISITION OF QUEST FOR VALUE GLOBAL INCOME FUND
On November 24, 1995, the Fund acquired all of the net assets of Quest for Value
Global Income Fund, pursuant to an Agreement and Plan of Reorganization approved
by the Quest for Value Global Income Fund shareholders on November 16, 1995. The
Fund issued 970,667, 280,096 and 36,170 shares of beneficial interest for Class
A, Class B and Class C, respectively, valued at $4,571,842, $1,322,051 and
$170,362 in exchange for the net assets, resulting in combined Class A net
assets of $3,267,253,290, Class B net assets of $2,032,945,347 and Class C net
assets of $75,252,729 on November 24, 1995. The net assets acquired included net
unrealized appreciation of $338,553. The exchange qualified as a tax-free
reorganization for federal income tax purposes.
================================================================================
10. BANK BORROWINGS
The Fund may borrow from a bank for temporary or emergency purposes including,
without limitation, funding of shareholder redemptions provided asset coverage
for borrowings exceeds 300%. The Fund has entered into an agreement which
enables it to participate with other OppenheimerFunds in an unsecured line of
credit with a bank, which permits borrowings up to $400 million, collectively.
Interest is charged to each fund, based on its borrowings, at a rate equal to
the Federal Funds Rate plus 0.35%. Borrowings are payable 30 days after such
loan is executed. The Fund also pays a commitment fee equal to its pro rata
share of the average unutilized amount of the credit facility at a rate of
0.0575% per annum.
The Fund had no borrowings outstanding during the year ended
September 30, 1997.
Appendix
Corporate 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 Information Technology 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 Wireless Services
A-1
<PAGE>
Investment Advisor
OppenheimerFunds, Inc.
Two World Trade Center
New York, New York 10048-0203
Distributor
OppenheimerFunds Distributor, Inc.
Two World Trade Center
New York, New York 10048-0203
Transfer Agent
OppenheimerFunds Services
P.O. Box 5270
Denver, Colorado 80217
1-800-525-7048
Custodian of Portfolio Securities
The Bank of New York
One Wall Street
New York, New York 10015
Independent Auditors
Deloitte & Touche LLP
555 Seventeenth Street
Denver, Colorado 80202-3942
Legal Counsel
Myer, Swanson, Adams & Wolf, P.C.
1600 Broadway
Denver, Colorado 80202
