OPPENHEIMER INTERNATIONAL BOND FUND
Supplement dated May 20, 1999
to the Prospectus dated January 29, 1999
The Prospectus is changed by replacing the third paragraph of the section
entitled "How the Fund is Managed" on page 14 with the following:
|X| Portfolio Manager. The portfolio manager of the Fund is Arthur P.
Steinmetz. He became the portfolio manager on May 20, 1999, and is the person
principally responsible for the day-to-day management of the Fund's portfolio.
He is a Vice President of the Fund and Senior Vice President of the Manager. He
is an officer and portfolio manager for other Oppenheimer funds. Mr. Steinmetz
has been employed by the Manager since 1986.
May 20, 1999 PS0880.013
<PAGE>
Oppenheimer International Bond Fund
6803 South Tucson Way, Englewood, Colorado 80112
1-800-525-7048
Statement of Additional Information dated January 29, 1999, revised
May 20, 1999
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 29, 1999. It should be read together
with the Prospectus. You can obtain the Prospectus 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, or
by downloading it from the OppenheimerFunds Internet web site at
www.oppenheimerfunds.com.
Contents
Page
About the Fund
Additional Information About the Fund's Investment Policies and Risks..... 2
The Fund's Investment Policies....................................... 2
Other Investment Techniques and Strategies.......................... 7
Investment Restrictions.............................................. 27
How the Fund is Managed .................................................. 29
Organization and History............................................. 29
Trustees and Officers................................................ 31
The Manager.......................................................... 36
Brokerage Policies of the Fund............................................ 37
Distribution and Service Plans............................................ 39
Performance of the Fund................................................... 43
About Your Account
How To Buy Shares......................................................... 48
How To Sell Shares........................................................ 56
How To Exchange Shares.................................................... 62
Dividends, Capital Gains and Taxes........................................ 64
Additional Information About the Fund..................................... 66
Financial Information About the Fund
Independent Auditors' Report.............................................. 68
Financial Statements...................................................... 69
Appendix A: Ratings Definitions .......................................... A-1
Appendix B: Industry Classifications...................................... B-1
Appendix C: Special Sales Charge Arrangements and Waivers................. C-1
<PAGE>
ABOUT THE FUND
Additional Information About the Fund's Investment Policies and Risks
The investment objective, the principal investment policies and the
main risks of the Fund are described in the Prospectus. This Statement of
Additional Information contains supplemental information about those policies
and risks and the types of securities that the Fund's investment Manager,
OppenheimerFunds, Inc., can select for the Fund. Additional information is also
provided about the strategies that the Fund may use to try to achieve its
objective.
The Fund's Investment Policies. The composition of the Fund's portfolio and the
techniques and strategies that the Fund's Manager may use in selecting portfolio
securities will vary over time. The Fund is not required to use all of the
investment techniques and strategies described below at all times in seeking its
goal. It may use some of the special investment techniques and strategies at
some times or not at all.
In selecting securities for the Fund's portfolio, the Manager evaluates
the merits of particular securities primarily through the exercise of its own
investment analysis. That process may include, among other things, evaluation of
the issuer's historical operations, prospects for the industry of which the
issuer is part, the issuer's financial condition, its pending product
developments and business (and those of competitors), the effect of general
market and economic conditions on the issuer's business, and legislative
proposals that might affect the issuer.
|X| Foreign Securities. The Fund expects to invest primarily in foreign
securities. For the most part, these will be debt securities issued or
guaranteed by foreign companies or governments, including supra-national
entities. "Foreign securities" include equity and debt securities of companies
organized under the laws of countries other than the United States and debt
securities issued or guaranteed by governments other than the U.S. government or
by foreign supra-national entities. They also include securities of companies
(including those that are located in the U.S. or organized under U.S. law) that
derive a significant portion of their revenue or profits from foreign
businesses, investments or sales, or that have a significant portion of their
assets abroad. They may be traded on foreign securities exchanges or in the
foreign over-the-counter markets.
Securities of foreign issuers that are represented by American
Depository Receipts or that are listed on a U.S. securities exchange or traded
in the U.S. over-the-counter markets are not considered "foreign securities" for
the purpose of the Fund's investment allocations, because they are not subject
to many of the special considerations and risks, discussed below, that apply to
foreign securities traded and held abroad.
Because the Fund may purchase securities denominated in foreign
currencies, a change in the value of such foreign currency against the U.S.
dollar will result in a change in the amount of income the Fund has available
for distribution. Because a portion of the Fund's investment income may be
received in foreign currencies, the Fund will be required to compute its income
in U.S. dollars for distribution to shareholders, and therefore the Fund will
absorb the cost of currency
fluctuations. After the Fund has distributed income, subsequent foreign currency
losses may result in the Fund's having distributed more income in a particular
fiscal period than was available from investment income, which could result in a
return of capital to shareholders.
Investing in foreign securities offers potential benefits not available
from investing solely in securities of domestic issuers. They include the
opportunity to invest in foreign issuers that appear to offer growth potential,
or in foreign countries with economic policies or business cycles different from
those of the U.S., or to reduce fluctuations in portfolio value by taking
advantage of foreign stock markets that do not move in a manner parallel to U.S.
markets. The Fund will hold foreign currency only in connection with the
purchase or sale of foreign securities.
|_| Foreign Debt Obligations. The debt obligations of foreign
governments and entities may or may not be supported by the full faith and
credit of the foreign government. The Fund may buy securities issued by certain
"supra-national" entities, which include entities designated or supported by
governments to promote economic reconstruction or development, international
banking organizations and related government agencies. Examples are the
International Bank for Reconstruction and Development (commonly called the
"World Bank"), the Asian Development bank and the Inter-American Development
Bank.
The governmental members of these supranational entities are
"stockholders" that typically make capital contributions and may be committed to
make additional capital contributions if the entity is unable to repay its
borrowings. A supra-national entity's lending activities may be limited to a
percentage of its total capital, reserves and net income. There can be no
assurance that the constituent foreign governments will continue to be able or
willing to honor their capitalization commitments for those entities.
The Fund can invest in U.S. dollar-denominated "Brady Bonds." These
foreign debt obligations may be fixed-rate par bonds or floating-rate discount
bonds. They are generally collateralized in full as to repayment of principal at
maturity by U.S. Treasury zero coupon obligations that have the same maturity as
the Brady Bonds. Brady Bonds can be viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity.
Those uncollateralized amounts constitute what is called the "residual risk."
If there is a default on collateralized Brady Bonds resulting in
acceleration of the payment obligations of the issuer, the zero coupon U.S.
Treasury securities held as collateral for the payment of principal will not be
distributed to investors, nor will those obligations be sold to distribute the
proceeds. The collateral will be held by the collateral agent to the scheduled
maturity of the defaulted Brady Bonds. The defaulted bonds will continue to
remain outstanding, and 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. Because of the residual risk of Brady Bonds and the history of
defaults with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, Brady Bonds are considered speculative
investments.
|_| Risks of Foreign Investing. Investments in foreign
securities may offer special opportunities for investing but also present
special additional risks and considerations not typically associated with
investments in domestic securities. Some of these additional risks are: o
reduction of income by foreign taxes; o fluctuation in value of foreign
investments due to changes in currency rates or currency control regulations
(for example,
currency blockage);
o transaction charges for currency exchange;
o lack of public information about foreign issuers;
o lack of uniform accounting, auditing and financial reporting
standards in foreign countries comparable to those applicable to
domestic issuers;
o less volume on foreign exchanges than on U.S. exchanges;
o greater volatility and less liquidity on foreign markets than in the U.S.;
o less governmental regulation of foreign issuers, stock exchanges and brokers
than in the U.S.;
o greater difficulties in commencing lawsuits;
o higher brokerage commission rates than in the U.S.;
o increased risks of delays in settlement of portfolio transactions or loss of
certificates for portfolio securities;
o possibilities in some countries of expropriation, confiscatory taxation,
political, financial or social instability or adverse diplomatic developments;
and o unfavorable differences between the U.S. economy and foreign economies.
In the past, U.S. Government policies have discouraged certain
investments abroad by U.S. investors, through taxation or other restrictions,
and it is possible that such restrictions could be re-imposed.
|_| Special Risks of Emerging Markets. Emerging and developing
markets abroad may also offer special opportunities for growth investing but
have greater risks than more developed foreign markets, such as those in Europe
and Canada, Australia, New Zealand and Japan. There may be even less liquidity
in their securities markets, and settlements of purchases and sales of
securities may be subject to additional delays. They are subject to greater
risks of limitations on the repatriation of income and profits because of
currency restrictions imposed by local governments. Those countries may also be
subject to the risk of greater political and economic instability, which can
greatly affect the volatility of prices of securities in those countries. The
Manager will consider these factors when evaluating securities in these markets,
because the selection of those securities must be consistent with the Fund's
goal of preservation of principal.
|_| Risks of Conversion to Euro. On January 1, 1999, eleven
countries in the European Union have adopted the euro as their official
currency. However, their current currencies (for example, the franc, the mark,
and the lire) will also continue in use until January 1, 2002. After that date,
it is expected that only the euro will be used in those countries. A common
currency is expected to confer some benefits in those markets, by consolidating
the government debt market for those countries and reducing some currency risks
and costs. But the conversion to the new currency will affect the Fund
operationally and also has potential risks, some of which are listed below.
Among other things, the conversion will affect:
o issuers in which the Fund invests, because of changes in the competitive
environment from a consolidated currency market and greater operational costs
from converting to the new currency. This might depress securities values. o
vendors the Fund depends on to carry out its business, such as its Custodian
(which holds the foreign securities the Fund buys), the Manager (which must
price the Fund's investments to deal with the conversion to the euro) and
brokers, foreign markets and securities depositories. If they are not prepared,
there could be delays in settlements and additional costs to the Fund.
o exchange contracts and derivatives that are outstanding during the transition
to the euro. The lack of currency rate calculations between the affected
currencies and the need to update the Fund's contracts could pose extra costs to
the Fund.
The Manager is upgrading (at its expense) its computer and bookkeeping
systems to deal with the conversion. The Fund's Custodian has advised the
Manager of its plans to deal with the conversion, including how it will update
its record keeping systems and handle the redenomination of outstanding foreign
debt. The Fund's portfolio manager will also monitor the effects of the
conversion on the issuers in which the Fund invests. The possible effect of
these factors on the Fund's investments cannot be determined with certainty at
this time, but they may reduce the value of some of the Fund's holdings and
increase its operational costs.
|X| Debt Securities. The Fund can invest in a variety of debt securities to
seek its objectives. Foreign debt securities are subject to the risks of foreign
securities described above. In general, debt securities are also subject to two
additional types of risk: credit risk and interest rate risk.
|_| Credit Risks. Credit risk relates to the ability of the
issuer to meet interest or principal payments or both as they become due. In
general, lower-grade, higher-yield bonds are subject to credit risk to a greater
extent that lower-yield, higher-quality bonds.
The Fund's debt investments can include investment-grade and
non-investment-grade bonds (commonly referred to as "junk bonds").
Investment-grade bonds are bonds rated at least "Baa" by Moody's Investors
Service, Inc., at least "BBB" by Standard & Poor's Ratings Group or Duff &
Phelps, Inc., or have comparable ratings by another nationally recognized
statistical rating organization.
In making investments in debt securities, the Manager may rely
to some extent on the ratings of ratings organizations or it may use its own
research to evaluate a security's credit-worthiness. If the securities are
unrated, to be considered part of the Fund's holdings of investment-grade
securities, they must be judged by the Manager to be of comparable quality to
bonds rated as investment grade by a rating organization.
|_| Interest Rate Risks. Interest rate risk refers to the
fluctuations in value of fixed-income securities resulting from the inverse
relationship between price and yield. For example, an increase in general
interest rates will tend to reduce the market value of already-issued
fixed-income investments, and a decline in general interest rates will tend to
increase their value. In addition, debt securities with longer maturities, which
tend to have higher yields, are subject to potentially greater fluctuations in
value from changes in interest rates than obligations with shorter maturities.
Fluctuations in the market value of fixed-income securities after the
Fund buys them will not affect the interest payable on those securities, nor the
cash income from them. However, those price fluctuations will be reflected in
the valuations of the securities, and therefore the Fund's net asset values will
be affected by those fluctuations.
|_| Special Risks of Lower-Grade Securities. The Fund can
invest without limit in lower-grade debt securities, if the Manager believes it
is consistent with the Fund's objectives. Because lower-rated securities tend to
offer higher yields than investment grade securities, the Fund may invest in
lower grade securities if the Manager is trying to achieve greater income. In
some cases, the appreciation possibilities of lower-grade securities may be a
reason they are selected for the Fund's portfolio. However, these investments
will be made only when consistent with the Fund's overall goal of total return.
"Lower-grade" debt securities are those rated below "investment grade"
which means they have a rating lower than "Baa" by Moody's or lower than "BBB"
by Standard & Poor's or Duff & Phelps, or similar ratings by other rating
organizations. If they are unrated, and are determined by the Manager to be of
comparable quality to debt securities rated below investment grade, they are
considered part of the Fund's portfolio of lower-grade securities. The Fund can
invest in securities rated as low as "C" or "D" or which may be in default at
the time the Fund buys them.
Some of the special credit risks of lower-grade securities are
discussed below. There is a greater risk that the issuer may default on its
obligation to pay interest or to repay principal than in the case of investment
grade securities. The issuer's low creditworthiness may increase the potential
for its insolvency. An overall decline in values in the high yield bond market
is also more likely during a period of a general economic downturn. An economic
downturn or an increase in interest rates could severely disrupt the market for
high yield bonds, adversely affecting the values of outstanding bonds as well as
the ability of issuers to pay interest or repay principal. In the case of
foreign high yield bonds, these risks are in addition to the special risk of
foreign investing discussed in the Prospectus and in this Statement of
Additional Information.
To the extent they can be converted into stock, convertible securities
may be less subject to some of these risks than non-convertible high yield
bonds, since stock may be more liquid and less affected by some of these risk
factors.
While securities rated "Baa" by Moody's or "BBB" by Standard & Poor's
or Duff & Phelps are investment grade and are not regarded as junk bonds, those
securities may be subject to special risks, and have some speculative
characteristics. A description of the debt security ratings categories of the
principal rating organizations is included in Appendix A to this Statement of
Additional Information.
|X| Portfolio Turnover. "Portfolio turnover" describes the rate at
which the Fund traded its portfolio securities during its last fiscal year. For
example, if a fund sold all of its securities during the year, its portfolio
turnover rate would have been 100%. The Fund's portfolio turnover rate will
fluctuate from year to year, and the Fund may continue to have a portfolio
turnover rate of more than 100% annually.
Increased portfolio turnover creates higher brokerage and transaction
costs for the Fund, which may reduce its overall performance. Additionally, the
realization of capital gains from selling portfolio securities may result in
distributions of taxable long-term capital gains to shareholders, since the Fund
will normally distribute all of its capital gains realized each year, to avoid
excise taxes under the Internal Revenue Code.
Other Investment Techniques and Strategies. In seeking its objective, the Fund
may from time to time use the types of investment strategies and investments
described below. It is not required to use all of these strategies at all times,
and at times may not use them.
|X| Zero Coupon Securities. The Fund may buy zero-coupon and delayed
interest securities, and "stripped" securities. Stripped securities are debt
securities whose interest coupons are separated from the security and sold
separately. The Fund can buy different types of zero-coupon or stripped
securities, including, among others, foreign debt securities and U.S. Treasury
notes or bonds that have been stripped of their interest coupons, U.S. Treasury
bills issued without interest coupons, and certificates representing interests
in stripped securities.
Zero-coupon securities do not make periodic interest payments and are
sold at a deep discount from their face value. The buyer recognizes a rate of
return determined by the gradual appreciation of the security, which is redeemed
at face value on a specified maturity date. This discount depends on the time
remaining until maturity, as well as prevailing interest rates, the liquidity of
the security and the credit quality of the issuer. In the absence of threats to
the issuer's credit quality, the discount typically decreases as the maturity
date approaches. Some zero-coupon securities are convertible, in that they are
zero-coupon securities until a predetermined date, at which time they convert to
a security with a specified coupon rate.
Because zero-coupon securities pay no interest and compound
semi-annually at the rate fixed at the time of their issuance, their value is
generally more volatile than the value of other debt securities. Their value may
fall more dramatically than the value of interest-bearing securities when
interest rates rise. When prevailing interest rates fall, zero-coupon securities
tend to rise more rapidly in value because they have a fixed rate of return.
The Fund's investment in zero-coupon securities may cause the Fund to
recognize income and make distributions to shareholders before it receives any
cash payments on the zero-coupon investment. To generate cash to satisfy those
distribution requirements, the Fund may have to sell portfolio securities that
it otherwise might have continued to hold or to use cash flows from other
sources such as the sale of Fund shares.
|X| U.S. Government Securities. These are securities issued or
guaranteed by the U.S. Treasury or other government agencies or corporate
entities referred to as "instrumentalities." The obligations of U.S. government
agencies or instrumentalities in which the Fund may invest may or may not be
guaranteed or supported by the "full faith and credit" of the United States.
"Full faith and credit" means generally that the taxing power of the U.S.
government is pledged to the payment of interest and repayment of principal on a
security. If a security is not backed by the full faith and credit of the United
States, the owner of the security must look principally to the agency issuing
the obligation for repayment. The owner might be able to assert a claim against
the United States if the issuing agency or instrumentality does not meet its
commitment. The Fund will invest in securities of U.S. government agencies and
instrumentalities only if the Manager is satisfied that the credit risk with
respect to such instrumentality is minimal.
|_| U.S. Treasury Obligations. These include Treasury bills
(maturities of one year or less when issued), Treasury notes (maturities of from
one to ten years), and Treasury bonds (maturities of more than ten years).
Treasury securities are backed by the full faith and credit of the United States
as to timely payments of interest and repayments of principal. They also can
include U. S. Treasury securities that have been "stripped" by a Federal Reserve
Bank, zero-coupon U.S. Treasury securities described below, and Treasury
Inflation-Protection Securities ("TIPS").
|_| Obligations Issued or Guaranteed by U.S. Government
Agencies or Instrumentalities. These include direct obligations and mortgage
related securities that have different levels of credit support from the
government. Some are supported by the full faith and credit of the U.S.
government, such as Government National Mortgage Association pass-through
mortgage certificates (called "Ginnie Maes"). Some are supported by the right of
the issuer to borrow from the U.S. Treasury under certain circumstances, such as
Federal National Mortgage Association bonds ("Fannie Maes"). Others are
supported only by the credit of the entity that issued them, such as Federal
Home Loan Mortgage Corporation obligations ("Freddie Macs").
|_| Mortgage-Related U.S. Government Securities. These include interests in
pools of residential or commercial mortgages, in the form of collateralized
mortgage obligations ("CMOs") and other "pass-through" mortgage securities. CMOs
that are U.S. government securities have collateral to secure payment of
interest and principal. They may be issued in different series with different
interest rates and maturities. The collateral is either in the form of mortgage
pass-through certificates issued or guaranteed by a U.S. agency or
instrumentality or mortgage loans insured by a U.S. government agency. The Fund
can have significant amounts of its assets invested in mortgage related U.S.
government securities.
The prices and yields of CMOs are determined, in part, by assumptions
about the cash flows from the rate of payments of the underlying mortgages.
Changes in interest rates may cause the rate of expected prepayments of those
mortgages to change. In general, prepayments increase when general interest
rates fall and decrease when interest rates rise.
If prepayments of mortgages underlying a CMO occur faster than expected
when interest rates fall, the market value and yield of the CMO will be reduced.
Additionally, the Fund may have to reinvest the prepayment proceeds in other
securities paying interest at lower rates, which could reduce the Fund's yield.
When interest rates rise rapidly, if prepayments occur more slowly than
expected, a short- or medium-term CMO can in effect become a long-term security,
subject to greater fluctuations in value. These are the prepayment risks
described above and can make the prices of CMOs very volatile when interest
rates change. The prices of longer-term debt securities tend to fluctuate more
than those of shorter-term debt securities. That volatility will affect the
Fund's share prices.
|X| Commercial (Privately-Issued) Mortgage Related Securities. The Fund
may invest in commercial mortgage related securities issued by private entities.
Generally these are multi-class debt or pass through certificates secured by
mortgage loans on commercial properties. They are subject to the credit risk of
the issuer. These securities typically are structured to provide protection to
investors in senior classes from possible losses on the underlying loans. They
do so by having holders of subordinated classes take the first loss if there are
defaults on the underlying loans. They may also be protected to some extent by
guarantees, reserve funds or additional collateralization mechanisms.
|X| "Stripped" Mortgage Related Securities. The Fund may invest in
stripped mortgage-related securities that are created by segregating the cash
flows from underlying mortgage loans or mortgage securities to create two or
more new securities. Each has a specified percentage of the underlying
security's principal or interest payments. These are a form of derivative
investment.
Mortgage securities may be partially stripped so that each class
receives some interest and some principal. However, they may be completely
stripped. In that case all of the interest is distributed to holders of one type
of security, known as an "interest-only" security, or "I/O," and all of the
principal is distributed to holders of another type of security, known as a
"principal-only" security or "P/O." Strips can be created for pass through
certificates or CMOs.
The yields to maturity of I/Os and P/Os are very sensitive to principal
repayments (including prepayments) on the underlying mortgages. If the
underlying mortgages experience greater than anticipated prepayments of
principal, the Fund might not fully recoup its investment in an I/O based on
those assets. If underlying mortgages experience less than anticipated
prepayments of principal, the yield on the P/Os based on them could decline
substantially.
|X| Floating Rate and Variable Rate Obligations. Variable rate demand
obligations have a demand feature that allows the Fund to tender the obligation
to the issuer or a third party prior to its maturity. The tender may be at par
value plus accrued interest, according to the terms of the obligations.
The interest rate on a floating rate demand note is based on a stated
prevailing market rate, such as a bank's prime rate, the 91-day U.S. Treasury
Bill rate, or some other standard, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is also based
on a stated prevailing market rate but is adjusted automatically at specified
intervals of not less than one year. Generally, the changes in the interest rate
on such securities reduce the fluctuation in their market value. As interest
rates decrease or increase, the potential for capital appreciation or
depreciation is less than that for fixed-rate obligations of the same maturity.
The Manager may determine that an unrated floating rate or variable rate demand
obligation meets the Fund's quality standards by reason of being backed by a
letter of credit or guarantee issued by a bank that meets those quality
standards.
Floating rate and variable rate demand notes that have a stated
maturity in excess of one year may have features that permit the holder to
recover the principal amount of the underlying security at specified intervals
not exceeding one year and upon no more than 30 days' notice. The issuer of that
type of note normally has a corresponding right in its discretion, after a given
period, to prepay the outstanding principal amount of the note plus accrued
interest. Generally the issuer must provide a specified number of days' notice
to the holder.
|X| When-Issued and Delayed-Delivery Transactions. The Fund may invest
in securities on a "when-issued" basis and may purchase or sell securities on a
"delayed-delivery" basis. When-issued and delayed-delivery are terms that refer
to securities whose terms and indenture are available and for which a market
exists, but which are not available for immediate delivery.
When such transactions are negotiated, the price (which is generally
expressed in yield terms) is fixed at the time the commitment is made. Delivery
and payment for the securities take place at a later date (generally within 45
days of the date the offer is accepted). The securities are subject to change in
value from market fluctuations during the period until settlement. The value at
delivery may be less than the purchase price. For example, changes in interest
rates in a direction other than that expected by the Manager before settlement
will affect the value of such securities and may cause a loss to the Fund.
During the period between purchase and settlement, no payment is made by the
Fund to the issuer and no interest accrues to the Fund from the investment. No
income begins to accrue to the Fund on a when-issued security until the Fund
receives the security at settlement of the trade.
The Fund will engage in when-issued transactions to secure what the
Manager considers to be an advantageous price and yield at the time of entering
into the obligation. When the Fund enters into a when-issued or delayed-delivery
transaction, it relies on the other party to complete the transaction. Its
failure to do so may cause the Fund to lose the opportunity to obtain the
security at a price and yield the Manager considers to be advantageous.
When the Fund engages in when-issued and delayed-delivery transactions,
it does so for the purpose of acquiring or selling securities consistent with
its investment objective and policies or for delivery pursuant to options
contracts it has entered into, and not for the purpose of investment leverage.
Although the Fund will enter into delayed-delivery or when-issued purchase
transactions to acquire securities, it may dispose of a commitment prior to
settlement. If the Fund chooses to dispose of the right to acquire a when-issued
security prior to its acquisition or to dispose of its right to delivery or
receive against a forward commitment, it may incur a gain or loss.
At the time the Fund makes the commitment to purchase or sell a
security on a when-issued or delayed-delivery basis, it records the transaction
on its books and reflects the value of the security purchased in determining the
Fund's net asset value. In a sale transaction, it records the proceeds to be
received. The Fund will identify on its books liquid assets at least equal in
value to the value of the Fund's purchase commitments until the Fund pays for
the investment.
When-issued and delayed-delivery transactions can be used by the Fund
as a defensive technique to hedge 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
delayed-delivery basis to obtain the benefit of currently higher cash yields.
|X| Participation Interests. The Fund may invest in participation
interests, subject to the Fund's limitation on investments in illiquid
investments. A participation interest is an undivided interest in a loan made by
the issuing financial institution in the proportion that the buyers
participation interest bears to the total principal amount of the loan. No more
than 5% of the Fund's net assets can be invested in participation interests of
the same borrower. The issuing financial institution may have no obligation to
the Fund other than to pay the Fund the proportionate amount of the principal
and interest payments it receives.
Participation interests are primarily dependent upon the
creditworthiness of the borrowing corporation, which is obligated to make
payments of principal and interest on the loan. There is a risk that a borrower
may have difficulty making payments. If a borrower fails to pay scheduled
interest or principal payments, the Fund could experience a reduction in its
income. The value of that participation interest might also decline, which could
affect the net asset value of the Fund's shares. If the issuing financial
institution fails to perform its obligations under the participation agreement,
the Fund might incur costs and delays in realizing payment and suffer a loss of
principal and/or interest.
|X| Repurchase Agreements. The Fund may acquire securities subject to
repurchase agreements. It may do so for liquidity purposes to meet anticipated
redemptions of Fund shares, or pending the investment of the proceeds from sales
of Fund shares, or pending the settlement of portfolio securities transactions,
or for temporary defensive purposes, as described below.
In a repurchase transaction, the Fund buys a security from, and
simultaneously resells it to, an approved vendor for delivery on an agreed-upon
future date. The resale price exceeds the purchase price by an amount that
reflects an agreed-upon interest rate effective for the period during which the
repurchase agreement is in effect. Approved vendors include U.S. commercial
banks, U.S. branches of foreign banks, or broker-dealers that have been
designated as primary dealers in government securities. They must meet credit
requirements set by the Fund's Board of Trustees from time to time.
The majority of these transactions run from day to day, and delivery
pursuant to the resale typically occurs within one to five days of the purchase.
Repurchase agreements having a maturity beyond seven days are subject to the
Fund's limits on holding illiquid investments. The Fund will not enter into a
repurchase agreement that causes more than 10% of its net assets to be subject
to repurchase agreements having a maturity beyond seven days. There is no limit
on the amount of the Fund's net assets that may be subject to repurchase
agreements having maturities of seven days or less.
Repurchase agreements, considered "loans" under the Investment Company Act,
are collateralized by the underlying security. The Fund's repurchase agreements
require that at all times while the repurchase agreement is in effect, the value
of the collateral must equal or exceed the repurchase price to fully
collateralize the repayment obligation. However, if the vendor fails to pay the
resale price on the delivery date, the Fund may incur costs in disposing of the
collateral and may experience losses if there is any delay in its ability to do
so. The Manager will monitor the vendor's creditworthiness to confirm that the
vendor is financially sound and will continuously monitor the collateral's
value.
|X| Illiquid and Restricted Securities. Under the policies and
procedures established by the Fund's Board of Trustees, the Manager determines
the liquidity of certain of the Fund's investments. To enable the Fund to sell
its holdings of a restricted security not registered under the Securities Act of
1933, the Fund may have to cause those securities to be registered. The expenses
of registering restricted securities may be negotiated by the Fund with the
issuer at the time the Fund buys the securities. When the Fund must arrange
registration because the Fund wishes to sell the security, a considerable period
may elapse between the time the decision is made to sell the security and the
time the security is registered so that the Fund could sell it. The Fund would
bear the risks of any downward price fluctuation during that period.
The Fund may also acquire restricted securities through private
placements. Those securities have contractual restrictions on their public
resale. Those restrictions might limit the Fund's ability to dispose of the
securities and might lower the amount the Fund could realize upon the sale.
The Fund has limitations that apply to purchases of restricted
securities, as stated in the Prospectus. Those percentage restrictions do not
limit purchases of restricted securities that are eligible for sale to qualified
institutional purchasers under Rule 144A of the Securities Act of 1933, if those
securities have been determined to be liquid by the Manager under Board-approved
guidelines. Those guidelines take into account the trading activity for such
securities and the availability of reliable pricing information, among other
factors. If there is a lack of trading interest in a particular Rule 144A
security, the Fund's holdings of that security may be considered to be illiquid.
Illiquid securities include repurchase agreements maturing in more than
seven days and participation interests that do not have puts exercisable within
seven days.
|X| Forward Rolls. The Fund can enter into "forward roll" transactions
with respect to mortgage related securities. In this type of transaction, the
Fund sells a mortgage related security to a buyer and simultaneously agrees to
repurchase a similar security (the same type of security, and having the same
coupon and maturity) at a later date at a set price. The securities that are
repurchased will have the same interest rate as the securities that are sold,
but typically will be collateralized by different pools of mortgages (with
different prepayment histories) than the securities that have been sold.
Proceeds from the sale are invested in short-term instruments, such as
repurchase agreements. The income from those investments, plus the fees from the
forward roll transaction, are expected to generate income to the Fund in excess
of the yield on the securities that have been sold.
The Fund will only enter into "covered" rolls. To assure its future
payment of the purchase price, the Fund will identify on its books cash, U.S.
government securities or other high-grade debt securities in an amount equal to
the payment obligation under the roll.
These transactions have risks. During the period between the sale and
the repurchase, the Fund will not be entitled to receive interest and principal
payments on the securities that have been sold. It is possible that the market
value of the securities the Fund sells may decline below the price at which the
Fund is obligated to repurchase securities.
|X| Investments in Equity Securities. Under normal market conditions
the Fund can invest up to 35% of its assets in securities other than debt
securities, including equity securities of both foreign and U.S. companies.
However, it does not anticipate investing significant amounts of its assets in
these securities as part of its normal investment strategy. Equity securities
include common stocks, preferred stocks, rights and warrants, and securities
convertible into common stock. The Fund's investments can include stocks of
companies in any market capitalization range, if the Manager believes the
investment is consistent with the Fund's objectives of total return and income.
Certain equity securities may be selected not only for their appreciation
possibilities but because they may provide dividend income.
|_| Risks of Investing in Stocks. Stocks fluctuate in price,
and their short-term volatility at times may be great. To the extent that the
Fund invests in equity securities, the value of the Fund's portfolio will be
affected by changes in the stock markets. Market risk can affect the Fund's net
asset value per share, which will fluctuate as the values of the Fund's
portfolio securities change. The prices of individual stocks do not all move in
the same direction uniformly or at the same time. Different stock markets may
behave differently from each other.
Other factors can affect a particular stock's price, such as poor
earnings reports by the issuer, loss of major customers, major litigation
against the issuer, or changes in government regulations affecting the issuer or
its industry. The Fund can invest in securities of large companies and mid-size
companies, but may also buy stocks of small companies, which may have more
volatile stock prices than large companies.
|_| Convertible Securities. While convertible securities are a
form of debt security, in many cases their conversion feature (allowing
conversion into equity securities) causes them to be regarded more as "equity
equivalents." As a result, the rating assigned to the security has less impact
on the Manager's investment decision with respect to convertible securities than
in the case of non-convertible fixed income securities. Convertible securities
are subject to the credit risks and interest rate risks described below in "Debt
Securities."
To determine whether convertible securities should be regarded as
"equity equivalents," the Manager examines the following factors:
(1) whether, at the option of the investor, the convertible security can be
exchanged for a fixed number of shares of common stock of the issuer,
(2) whether the issuer of the convertible securities has restated its
earnings per share of common stock on a fully diluted basis
(considering the effect of conversion of the convertible
securities), and
(3) the extent to which the convertible security may be a defensive
"equity substitute," providing the ability to participate in any
appreciation in the price of the issuer's common stock.
|_| Rights and Warrants. The Fund may invest up to 5% of its
total assets in warrants or rights. That limit does not apply to warrants and
rights the Fund has acquired as part of units of securities or that are attached
to other securities that the Fund buys. The Fund does not expect that it will
have significant investments 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. Rights and warrants have no voting
rights, receive no dividends and have no rights with respect to the assets of
the issuer.
|X| Loans of Portfolio Securities. To raise cash for liquidity purposes
or income, the Fund can lend its portfolio securities to brokers, dealers and
other types of financial institutions approved by the Fund's Board of Trustees.
These loans are limited to not more than 25% of the value of the Fund's net
assets. The Fund currently does not intend to engage in loans of securities in
the coming year, but if it does so, such loans will not likely exceed 5% of the
Fund's total assets.
There are some risks in connection with securities lending. The Fund
might experience a delay in receiving additional collateral to secure a loan, or
a delay in recovery of the loaned securities if the borrower defaults. The Fund
must receive collateral for a loan. Under current applicable regulatory
requirements (which are subject to change), on each business day the loan
collateral must be at least equal to the value of the loaned securities. It must
consist of cash, bank letters of credit, securities of the U.S. Government or
its agencies or instrumentalities, 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. The terms of the letter of credit and the issuing bank both
must be satisfactory to the Fund.
When it lends securities, the Fund receives amounts equal to the
dividends or interest on loaned securities. It also receives one or more of (a)
negotiated loan fees, (b) interest on securities used as collateral, and (c)
interest on any short-term debt securities purchased with such loan collateral.
Either type of interest may be shared with the borrower. The Fund may also pay
reasonable finder's, custodian and administrative fees in connection with these
loans. The terms of the Fund's loans must meet applicable tests under the
Internal Revenue Code and must permit the Fund to reacquire loaned securities on
five days' notice or in time to vote on any important matter.
|X| Borrowing for Leverage. The Fund has the ability to borrow up to
one third of the value of its net assets from banks on an unsecured basis to
invest the borrowed funds in portfolio securities. This speculative technique is
known as "leverage." The Fund may borrow only from banks. Under current
regulatory requirements, borrowings can 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). If the
value of the Fund's assets fails to meet this 300% asset coverage requirement,
the Fund will reduce its bank debt within three days to meet the requirement. To
do so, the Fund might have to sell a portion of its investments at a
disadvantageous time.
The Fund will pay interest on these loans, and that interest expense
will raise the overall expenses of the Fund and reduce its returns. If it does
borrow, its expenses will be greater than comparable funds that do not borrow
for leverage. Additionally, the Fund's net asset value per share might fluctuate
more than that of funds that do not borrow. Currently, the Fund does not
contemplate using this technique in the next year but if it does so, it will not
likely be to a substantial degree.
|X| Asset-Backed Securities. Asset-backed securities are fractional
interests in pools of assets, typically accounts receivable or consumer loans.
They are issued by trusts or special-purpose corporations. They are similar to
mortgage-backed securities, described above, and are backed by a pool of assets
that consist of obligations of individual borrowers. The income from the pool is
passed through to the holders of participation interest in the pools. The pools
may offer a credit enhancement, such as a bank letter of credit, to try to
reduce the risks that the underlying debtors will not pay their obligations when
due. However, the enhancement, if any, might not be for the full par value of
the security. If the enhancement is exhausted and any required payments of
principal are not made, the Fund could suffer losses on its investment or delays
in receiving payment.
The value of an asset-backed security is affected by changes in the
market's perception of the asset backing the security, the creditworthiness of
the servicing agent for the loan pool, the originator of the loans, or the
financial institution providing any credit enhancement, and is also affected if
any credit enhancement has been exhausted. The risks of investing in
asset-backed securities are ultimately related to 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 may shorten the weighted average life of asset-backed securities and may
lower their return, in the same manner as in the case of mortgage-backed
securities and CMOs, described above. Unlike mortgage-backed securities,
asset-backed securities typically do not have the benefit of a security interest
in the underlying collateral.
|X| Bank Obligations and Securities That Are Secured By Them. The Fund
can invest in bank obligations, including time deposits, certificates of
deposit, and bankers' acceptances. They must be either obligations of a domestic
bank with total assets of at least $1 billion or obligations of a foreign bank
with total assets of at least U.S. $1 billion. The Fund may also invest in
instruments secured by bank obligations (for example, debt which is guaranteed
by the bank). For purposes of this policy, the term "bank" includes commercial
banks, savings banks, and savings and loan associations that may or may not be
members of the Federal Deposit Insurance Corporation.
Time deposits are non-negotiable deposits in a bank for a specified
period of time at a stated interest rate. They may or may not be subject to
withdrawal penalties. However, time deposits that are subject to withdrawal
penalties, other than those maturing in seven days or less, are subject to the
limitation on investments by the Fund in illiquid investments.
Bankers' acceptances are marketable short-term credit instruments used
to finance the import, export, transfer or storage of goods. They are deemed
"accepted" when a bank guarantees their payment at maturity.
|X| Derivatives. The Fund can invest in a variety of derivative
investments to seek income or for hedging purposes. Some derivative investments
the Fund may use are the hedging instruments described below in this Statement
of Additional Information.
Among the derivative investments the Fund can invest in are
"index-linked" or "currency-linked" notes. Principal and/or interest payments on
index-linked notes depend on the performance of an underlying index.
Currency-indexed securities are typically short-term or intermediate-term debt
securities. Their value at maturity or the rates at which they pay income are
determined by the change in value of the U.S. dollar against one or more foreign
currencies or an index. In some cases, these securities may pay an amount at
maturity based on a multiple of the amount of the relative currency movements.
This type of index security offers the potential for increased income or
principal payments but at a greater risk of loss than a typical debt security of
the same maturity and credit quality.
Other derivative investments the Fund can use include "debt
exchangeable for common stock" of an issuer or "equity-linked debt securities"
of an issuer. At maturity, the debt security is exchanged for common stock of
the issuer or it is payable in an amount based on the price of the issuer's
common stock at the time of maturity. Both alternatives present a risk that the
amount payable at maturity will be less than the principal amount of the debt
because the price of the issuer's common stock might not be as high as the
Manager expected.
|X| Hedging. Although the Fund does not anticipate the extensive use of
hedging instruments, the Fund can use hedging instruments. It is not obligated
to use them in seeking its objective. 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 could:
|_| sell futures contracts,
|_| buy puts on such futures or on securities, or
|_| write covered calls on securities or futures. Covered calls may
also be used to increase the Fund's income, but the Manager does not
expect to engage extensively in that practice.
The Fund can use hedging to establish a position in the securities
market as a temporary substitute for purchasing particular securities. In that
case the Fund wouldl normally seek to purchase the securities and then terminate
that hedging position. The Fund might also use this type of hedge to attempt to
protect against the possibility that its portfolio securities would not be fully
included in a rise in value of the market. To do so the Fund could:
|_| buy futures, or
|_| buy calls on such futures or on securities.
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. The
particular hedging instruments the Fund can use are described below. The Fund
may employ new hedging instruments and strategies when they are developed, if
those investment methods are consistent with the Fund's investment objective and
are permissible under applicable regulations governing the Fund.
|_| Futures. The Fund can buy and sell futures contracts that relate to
(1) broadly-based bond or stock indices (these are referred to as "financial
futures"), (2) commodities (these are referred to as "commodity futures"), (3)
debt securities (these are referred to as "interest rate futures"), and (4)
foreign currencies (these are referred to as "forward contracts").
A broadly-based stock index is used as the basis for trading stock
index futures. They may in some cases be based on stocks of issuers in a
particular industry or group of industries. A stock index assigns relative
values to the securities included in the index and its value fluctuates in
response to the changes in value of the underlying securities. A stock index
cannot be purchased or sold directly. Bond index futures are similar contracts
based on the future value of the basket of securities that comprise the index.
These contracts obligate the seller to deliver, and the purchaser to take, cash
to settle the futures transaction. There is no delivery made of the underlying
securities to settle the futures obligation. Either party may also settle the
transaction by entering into an offsetting contract.
An interest rate future obligates the seller to deliver (and the
purchaser to take) cash or a specified type of debt security to settle the
futures transaction. Either party could also enter into an offsetting contract
to close out the position.
The Fund can invests a portion of its assets in commodity futures
contracts. 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. The Fund may
purchase and sell commodity futures contracts, 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.
No money is paid or received by the Fund on the purchase or sale of a
future. Upon entering into a futures transaction, the Fund will be required to
deposit an initial margin payment with the futures commission merchant (the
"futures broker"). Initial margin payments will be deposited with the Fund's
Custodian bank 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 (that is, its value on the Fund's
books is changed) to reflect changes in its market value, subsequent margin
payments, called variation margin, will be paid to or by the futures broker
daily.
At any time prior to expiration of the future, the Fund may elect to
close out its position by taking an opposite position, at which time a final
determination of variation margin is made and any additional cash must be paid
by or released to the Fund. Any loss or gain on the future is then realized by
the Fund for tax purposes. All futures transactions are effected through a
clearinghouse associated with the exchange on which the contracts are traded.
|_| Put and Call Options. The Fund can buy and sell certain kinds of
put options ("puts") and call options ("calls"). The Fund can buy and sell
exchange-traded and over-the-counter put and call options, including index
options, securities options, currency options, commodities options, and options
on the other types of futures described above.
|_| Writing Covered Call Options. The Fund may write (that is,
sell) covered calls. If the Fund sells a call option, it must be covered. That
means the Fund must own the security subject to the call while the call is
outstanding, or, for certain types of calls, the call may be covered by
segregating liquid assets to enable the Fund to satisfy its obligations if the
call is exercised. Up to 50% of the Fund's total assets may be subject to calls
the Fund writes.
When the Fund writes a call on a security, it receives cash (a
premium). The Fund agrees to sell the underlying security to a purchaser of a
corresponding call on the same security during the call period at a fixed
exercise price regardless of market price changes during the call period. The
call period is usually not more than nine months. The exercise price may differ
from the market price of the underlying security. The Fund has the risk of loss
that the price of the underlying security may decline during the call period.
That risk may be offset to some extent by the premium the Fund receives. If the
value of the investment does not rise above the call price, it is likely that
the call will lapse without being exercised. In that case the Fund would keep
the cash premium and the investment.
When the Fund writes a call on an index, it receives cash (a premium).
If the buyer of the call exercises it, the Fund will pay an amount of cash equal
to the difference between the closing price of the call and the exercise price,
multiplied by a specified multiple that determines the total value of the call
for each point of difference. If the value of the underlying investment does not
rise above the call price, it is likely that the call will lapse without being
exercised. In that case, the Fund would keep the cash premium.
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 calls traded on exchanges or as to other acceptable escrow
securities. In that way, no margin will be required for such transactions. OCC
will release the securities on the expiration of the option or when the Fund
enters into a closing transaction.
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 will
establish a formula price at which the Fund will have the absolute right to
repurchase that OTC option. The formula price will 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 option is "in the money"). When the Fund writes an OTC option, it will
treat as illiquid (for purposes of its restriction on holding illiquid
securities) the mark-to-market value of any OTC option it holds, unless the
option is subject to a buy-back agreement by the executing broker.
To terminate its obligation on a call it has written, the Fund may
purchase a corresponding call in a "closing purchase transaction." The Fund will
then realize a profit or loss, depending upon whether the net of the amount of
the option transaction costs and the premium received on the call the Fund wrote
is more or less than the price of the call the Fund purchases to close out the
transaction. The Fund may realize a profit if the call expires unexercised,
because the Fund will retain the underlying security and the premium it received
when it wrote the call. Any such profits are considered short-term capital gains
for Federal income tax purposes, as are the premiums on lapsed calls. When
distributed by the Fund they are taxable as ordinary income. If the Fund cannot
effect a closing purchase transaction due to the lack of a market, it will have
to hold the callable securities until the call expires or is exercised.
The Fund may also write calls on a futures contract without owning the
futures contract or securities deliverable under the contract. To do so, at the
time the call is written, the Fund must cover the call by segregating an
equivalent dollar amount of liquid assets. The Fund will segregate additional
liquid assets if the value of the segregated assets drops below 100% of the
current value of the future. Because of this segregation requirement, in no
circumstances would the Fund's receipt of an exercise notice as to that future
require the Fund to deliver a futures contract. It would simply put the Fund in
a short futures position, which is permitted by the Fund's hedging policies.
|_| Writing Put Options. The Fund can sell put options on
securities, broadly-based securities indices, foreign currencies and futures. 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. 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
options.
If the Fund writes a put, the put must be covered by segregated liquid
assets. The premium the Fund receives from writing a put represents a profit, as
long as the price of the underlying investment remains equal to or above the
exercise price of the put. However, the Fund also assumes the obligation during
the option period to buy the underlying investment from the buyer of the put at
the exercise price, even if the value of the investment falls below the exercise
price.
If a put the Fund has written expires unexercised, the Fund realizes a
gain in the amount of the premium less the transaction costs incurred. If the
put is exercised, the Fund must fulfill its obligation to purchase the
underlying investment at the exercise price. That price will usually exceed the
market value of the investment at that time. In that case, the Fund may incur a
loss if it sells the underlying investment. That loss will be equal to the sum
of the sale price of the underlying investment and the premium received minus
the sum of the exercise price and any transaction costs the Fund incurred.
When writing a put option on a security, to secure its obligation to
pay for the underlying security the Fund will deposit in escrow liquid assets
with a value equal to or greater than the exercise price of the underlying
securities. The Fund therefore forgoes the opportunity of investing the
segregated assets or writing calls against those assets.
As long as the Fund's obligation as the put writer continues, it may be
assigned an exercise notice by the broker-dealer through which the put was sold.
That notice will require the Fund to take delivery of the underlying security
and pay 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.
That obligation terminates upon expiration of the put. It may also terminate if,
before it receives an exercise notice, the Fund effects a closing purchase
transaction by purchasing a put of the same series as it sold. Once the Fund has
been assigned an exercise notice, it cannot effect a closing purchase
transaction.
The Fund may decide to effect a closing purchase transaction to realize
a profit on an outstanding put option it has written or to prevent the
underlying security from being put. Effecting a closing purchase transaction
will also permit the Fund to write another put option on the security, or to
sell the security and use the proceeds from the sale for other investments. The
Fund will realize a profit or loss from a closing purchase transaction depending
on whether the cost of the transaction is less or more than the premium received
from writing the put option. Any profits from writing puts are considered
short-term capital gains for Federal tax purposes, and when distributed by the
Fund, are taxable as ordinary income.
|_| Purchasing Calls and Puts. The Fund can purchase calls
only on securities, broadly-based securities indices, foreign currencies and
futures. It may do so to protect against the possibility that the Fund's
portfolio will not participate in an anticipated rise in the securities market.
When the Fund buys a call (other than in a closing purchase transaction), it
pays a premium. The Fund then 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.
The Fund benefits only if it sells the call 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 for the call
and the Fund exercises the call. If the Fund does not exercise the call or sell
it (whether or not at a profit), the call will become worthless at its
expiration date. In that case the Fund will have paid the premium but lost the
right to purchase the underlying investment.
The Fund can buy puts only on securities that it owns, broadly-based
securities indices, foreign currencies and futures. When the Fund purchases a
put, it pays a premium and, except as to puts on indices, has the right to sell
the underlying investment to a seller of a put on a corresponding investment
during the put period at a fixed exercise price. Buying a put on securities or
futures the Fund owns enables the Fund to attempt to protect itself during the
put period against a decline in the value of the underlying investment below the
exercise price by selling the underlying investment at the exercise price to a
seller of a corresponding put. If the market price of the underlying investment
is equal to or above the exercise price and, as a result, the put is not
exercised or resold, the put will become worthless at its expiration date. In
that case the Fund will have paid the premium but lost the right to sell the
underlying investment. However, the Fund may sell the put prior to its
expiration. That sale may or may not be at a profit.
When the Fund purchases a call or put on an index or future, it pays a
premium, but settlement is in cash rather than by delivery of the underlying
investment to the Fund. Gain or loss depends on changes in the index in question
(and thus on price movements in the securities market generally) rather than on
price movements in individual securities or futures contracts.
The Fund may buy a call or put only if, after the purchase, the value
of all call and put options held by the Fund will not exceed 5% of the Fund's
total assets.
|_| Buying and Selling Options on Foreign Currencies. The Fund
can buy and sell calls and puts on foreign currencies. They include puts and
calls that trade on a securities or commodities exchange or in the
over-the-counter markets or are quoted by major recognized dealers in such
options. The Fund could use these calls and puts to try to protect against
declines in the dollar value of foreign securities and increases in the dollar
cost of foreign securities the Fund wants to acquire.
If the Manager anticipates a rise in the dollar value of a foreign
currency in which securities to be acquired are denominated, the increased cost
of those securities may be partially offset by purchasing calls or writing puts
on that foreign currency. If the Manager anticipates a decline in the dollar
value of a foreign currency, the decline in the dollar value of portfolio
securities denominated in that currency might be partially offset by writing
calls or purchasing puts on that foreign currency. However, the currency rates
could fluctuate in a direction adverse to the Fund's position. The Fund will
then have incurred option premium payments and transaction costs without a
corresponding benefit.
A call the Fund writes on a foreign currency 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 it can do so for additional cash consideration held in a
segregated account by its Custodian bank) upon conversion or exchange of other
foreign currency held in its portfolio.
The Fund could write a call on a foreign currency to provide a hedge
against a decline in the U.S. dollar value of a security which the Fund owns or
has the right to acquire and which is denominated in the currency underlying the
option. That decline might be one that occurs due to an expected adverse change
in the exchange rate. This is known as a "cross-hedging" strategy. In those
circumstances, the Fund covers the option by maintaining cash, U.S. government
securities or other liquid, high grade debt securities in an amount equal to the
exercise price of the option, in a segregated account with the Fund's Custodian
bank.
|_| Risks of Hedging with Options and Futures. The use of hedging
instruments requires special skills and knowledge of investment techniques that
are different than what is required for normal portfolio management. If the
Manager uses a hedging instrument at the wrong time or judges market conditions
incorrectly, hedging strategies may reduce the Fund's return. The Fund could
also experience losses if the prices of its futures and options positions were
not correlated with its other investments.
The Fund's option activities could affect its portfolio turnover rate
and brokerage commissions. The exercise of calls written by the Fund might cause
the Fund to sell related portfolio securities, thus increasing its turnover
rate. The exercise by the Fund of puts on securities will cause the sale of
underlying investments, increasing portfolio turnover. Although the decision
whether to exercise a put it holds is within the Fund's control, holding a put
might cause the Fund to sell the related investments for reasons that would not
exist in the absence of the put.
The Fund could pay a brokerage commission each time it buys a call or
put, sells a call or put, or buys or sells an underlying investment in
connection with the exercise of a call or put. Those commissions could be higher
on a relative basis than the commissions for direct purchases or sales of the
underlying investments. Premiums paid for options are small in relation to the
market value of the underlying investments. 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 investment.
If a covered call written by the Fund is exercised on an investment
that has increased in value, the Fund will be required to sell the investment at
the call price. It will not be able to realize any profit if the investment has
increased in value above the call price.
An option position may be closed out only on a market that provides
secondary trading for options of the same series, and there is no assurance that
a liquid secondary market will exist for any particular option. The Fund might
experience losses if it could not close out a position because of an illiquid
market for the future or option.
There is a risk in using short hedging by selling futures or purchasing
puts on broadly-based indices or futures to attempt to protect against declines
in the value of the Fund's portfolio securities. The risk is that the prices of
the futures or the applicable index will correlate imperfectly with the behavior
of the cash prices of the Fund's securities. For example, it is possible that
while the Fund has used hedging instruments in a short hedge, the market might
advance and the value of the securities held in the Fund's portfolio might
decline. If that occurred, the Fund would lose money on the hedging instruments
and also experience a decline in the value of its portfolio securities. However,
while this could occur for a very brief period or to a very small degree, over
time the value of a diversified portfolio of securities will tend to move in the
same direction as the indices upon which the hedging instruments are based.
The risk of imperfect correlation increases as the composition of the
Fund's portfolio diverges from the securities included in the applicable index.
To compensate for the imperfect correlation of movements in the price of the
portfolio securities being hedged and movements in the price of the hedging
instruments, the Fund might use hedging instruments in a greater dollar amount
than the dollar amount of portfolio securities being hedged. It might do so if
the historical volatility of the prices of the portfolio securities being hedged
is more than the historical volatility of the applicable index.
The ordinary spreads between prices in the cash and futures markets are
subject to distortions, due to differences in the nature of those markets.
First, all participants in the futures market are subject to margin deposit and
maintenance requirements. Rather than meeting additional margin deposit
requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures market may cause temporary
price distortions.
The Fund can use hedging instruments to establish a position in the
securities markets as a temporary substitute for the purchase of individual
securities (long hedging) by buying futures and/or calls on such futures,
broadly-based indices or on securities. It is possible that when the Fund does
so the market might decline. If the Fund then concludes not to invest in
securities because of concerns that the market might decline further 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 securities purchased.
|_| Forward Contracts. Forward contracts are foreign currency exchange
contracts. They are used to buy or sell foreign currency for future delivery at
a fixed price. The Fund uses them to "lock in" the U.S. dollar price of a
security denominated in a foreign currency that the Fund has bought or sold, or
to protect against possible losses from changes in the relative values of the
U.S. dollar and a foreign currency. The Fund limits its exposure in foreign
currency exchange contracts in a particular foreign currency to the amount of
its assets denominated in that currency or a closely-correlated currency. The
Fund may also use "cross-hedging" where the Fund hedges against changes in
currencies other than the currency in which a security it holds is denominated.
Under a forward contract, one party agrees to purchase, and another
party agrees to sell, a specific currency at a future date. That date may be any
fixed number of days from the date of the contract agreed upon by the parties.
The transaction price is set at the time the contract is entered into. These
contracts are traded in the inter-bank market conducted directly among currency
traders (usually large commercial banks) and their customers.
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 the risk of 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. Although forward contracts may reduce the risk of loss from a decline
in the value of the hedged currency, at the same time they limit any potential
gain if the value of the hedged currency increases.
When the Fund enters into a contract for the purchase or sale of a
security denominated in a foreign currency, or when it anticipates receiving
dividend payments in a foreign currency, the Fund might desire to "lock-in" the
U.S. dollar price of the security or the U.S. dollar equivalent of the dividend
payments. To do so, the Fund might enter into a forward contract for the
purchase or sale of the amount of foreign currency involved in the underlying
transaction, in a fixed amount of U.S. dollars per unit of the foreign currency.
This is called a "transaction hedge." The transaction hedge will protect the
Fund against a loss from an adverse change in 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 the payments are made or
received.
The Fund could also use forward contracts to lock in the U.S. dollar
value of portfolio positions. This is called a "position hedge." When the Fund
believes that foreign currency might suffer a substantial decline against the
U.S. dollar, it might enter into a forward contract to sell an amount of that
foreign currency approximating the value of some or all of the Fund's portfolio
securities denominated in that foreign currency. When the Fund believes that the
U.S. dollar could suffer a substantial decline against a foreign currency, it
could enter into a forward contract to buy that foreign currency for a fixed
dollar amount. Alternatively, the Fund could enter into a forward contract to
sell a different foreign currency for a fixed U.S. dollar amount if the Fund
believes that the U.S. dollar value of the foreign currency to be sold pursuant
to its 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.
That is referred to as a "cross hedge."
The Fund will cover its short positions in these cases by identifying
to its Custodian bank assets having a value equal to the aggregate amount of the
Fund's commitment under forward contracts. The Fund will not enter into forward
contracts or maintain a net exposure to such contracts if the consummation of
the contracts would obligate the Fund to deliver an amount of foreign currency
in excess of the value of the Fund's portfolio securities or other assets
denominated in that currency or another currency that is the subject of the
hedge.
However, to avoid excess transactions and transaction costs, the Fund
may maintain a net exposure to forward contracts in excess of the value of the
Fund's portfolio securities or other assets denominated in foreign currencies if
the excess amount is "covered" by liquid securities denominated in any currency.
The cover must be at least equal at all times to the amount of that excess. As
one alternative, 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. As another alternative,
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 contact price.
The precise matching of the amounts under forward contracts and the
value of the securities involved generally will not be possible because the
future value of securities denominated in foreign currencies will change as a
consequence of market movements between the date the forward contract is entered
into and the date it is sold. In some cases the Manager might decide to sell the
security and deliver foreign currency to settle the original purchase
obligation. If the market value of the security is less than the amount of
foreign currency the Fund is obligated to deliver, the Fund might have to
purchase additional foreign currency on the "spot" (that is, cash) market to
settle the security trade. If the market value of the security instead exceeds
the amount of foreign currency the Fund is obligated to deliver to settle the
trade, the Fund might have to sell on the spot market some of the foreign
currency received upon the sale of the security. There will be additional
transaction costs on the spot market in those cases.
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 to pay additional transactions costs. The use of forward
contracts in this manner might reduce the Fund's performance if there are
unanticipated changes in currency prices to a greater degree than if the Fund
had not entered into such contracts.
At or before the maturity of a forward contract requiring the Fund to
sell a currency, the Fund might sell a portfolio security and use the sale
proceeds to make delivery of the currency. In the alternative the Fund might
retain the security and offset its contractual obligation to deliver the
currency by purchasing a second contract. Under that contract the Fund will
obtain, on the same maturity date, the same amount of the currency that it is
obligated to deliver. Similarly, the Fund might close out a forward contract
requiring it to purchase a specified currency by entering into a second contract
entitling it to sell the same amount of the same currency on the maturity date
of the first contract. The Fund would realize a gain or loss as a result of
entering into such an offsetting forward contract under either circumstance. The
gain or loss will depend on the extent to which the exchange rate or rates
between the currencies involved moved between the execution dates of the first
contract and offsetting contract.
The costs 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 brokerage fees or commissions are
involved. Because these contracts are not traded on an exchange, the Fund must
evaluate the credit and performance risk of the counterparty under each 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
will incur costs in doing so. 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 might
offer to sell a foreign currency to the Fund at one rate, while offering a
lesser rate of exchange if the Fund desires to resell that currency to the
dealer.
|_| Interest Rate Swap Transactions. The Fund can enter into interest
rate swap agreements. In an interest rate swap, the Fund and another party
exchange their right to receive or their obligation to pay interest on a
security. For example, they might swap the right to receive floating rate
payments for fixed rate payments. The Fund can enter into swaps only on
securities that it owns. The Fund will not enter into swaps with respect to more
than 25% of its total assets. Also, the Fund will segregate liquid assets (such
as cash or U.S. government securities) to cover any amounts it could owe under
swaps that exceed the amounts it is entitled to receive, and it will adjust that
amount daily, as needed.
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 be greater than the payments it
received. Credit risk arises from the possibility that the counterparty will
default. If the counterparty 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 can enter into swap transactions with certain counterparties
pursuant to master netting agreements. A master netting agreement provides that
all swaps done between the Fund and that counterparty shall be regarded as parts
of an integral agreement. If amounts are payable on a particular date in the
same currency in respect of one or more swap transactions, the amount payable on
that date in that currency shall be the net amount. In addition, the master
netting agreement may provide that if one party defaults generally or on one
swap, the counterparty can terminate all of the swaps with that party. Under
these agreements, if a default results 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 for each swap. It is measured by 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."
|_| Regulatory Aspects of Hedging Instruments. When using futures and
options on futures, the Fund is required to operate within certain guidelines
and restrictions with respect to the use of futures as established by the
Commodities Futures Trading Commission (the "CFTC"). In particular, the Fund is
exempted from registration with the CFTC as a "commodity pool operator" if the
Fund complies with the requirements of Rule 4.5 adopted by the CFTC. The Rule
does not limit the percentage of the Fund's assets that may be used for futures
margin and related options premiums for a bona fide hedging position. However,
under the Rule, the Fund must limit its aggregate initial futures margin and
related options premiums to not more than 5% of the Fund's net assets for
hedging strategies that are not considered bona fide hedging strategies under
the Rule. Under the Rule, the Fund must also use short futures and 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 the option exchanges. The exchanges limit the maximum number of
options that may be written or held by a single investor or group of investors
acting in concert. Those limits apply regardless of whether the options were
written or purchased on the same or different exchanges or are held in one or
more accounts or through one or more different exchanges or through one or more
brokers. Thus, the number of options that the Fund may write or hold may be
affected by options written or held by other entities, including other
investment companies having the same adviser as the Fund (or an adviser that is
an affiliate of the Fund's adviser). The exchanges also impose position limits
on futures transactions. An exchange may order the liquidation of positions
found to be in violation of those limits and may impose certain other sanctions.
Under the Investment Company Act, when the Fund purchases a future, it
must maintain cash or readily marketable short-term debt instruments in an
amount equal to the market value of the securities underlying the future, less
the margin deposit applicable to it.
|_| Tax Aspects of Certain Hedging Instruments. Certain foreign
currency exchange contracts in which the Fund may invest are treated as "Section
1256 contracts" under the Internal Revenue Code. In general, gains or losses
relating to Section 1256 contracts are characterized as 60% long-term and 40%
short-term capital gains or losses under the Code. However, foreign currency
gains or losses arising from Section 1256 contracts that are forward contracts
generally are treated as ordinary income or loss. In addition, Sction 1256
contracts held by the Fund at the end of each taxable year are
"marked-to-market," and unrealized gains or losses are treated as though they
were realized. These contracts also may be marked-to-market for purposes of
determining 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 those transactions from this
marked-to-market treatment.
Certain forward contracts the Fund enters into 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 that the 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, the following gains or losses are
treated as ordinary income or loss:
(1) 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, and
(2) gains or losses attributable to fluctuations in the value of a
foreign currency between the date of acquisition of a debt
security denominated in a foreign currency or foreign currency
forward contracts and the date of disposition.
Currency gains and losses are offset against market gains and losses on
each trade before determining a net "Section 988" gain or loss under the
Internal Revenue Code for that trade, which may increase or decrease the amount
of the Fund's investment income available for distribution to its shareholders.
|X| Temporary Defensive Investments. When market conditions are unstable,
or the Manager believes it is otherwise appropriate to reduce holdings in
stocks, the Fund can invest in a variety of debt securities for defensive
purposes. The Fund can also purchase these securities for liquidity purposes to
meet cash needs due to the redemption of Fund shares, or to hold while waiting
to invest cash received from the sale of other portfolio securities. The Fund
can buy: |_| obligations issued or guaranteed by the U. S. government or its
instrumentalities or agencies, |_| commercial paper (short-term, unsecured,
promissory notes of domestic or foreign companies) rated in the three top rating
categories of a nationally recognized rating organization, |_| short-term debt
obligations of corporate issuers, rated investment grade (rated at least Baa by
Moody's Investors Service, Inc. or at least BBB by Standard & Poor's
Corporation, or a comparable rating by another rating organization), or unrated
securities judged by the Manager to have a comparable quality to rated
securities in those categories, |_| certificates of deposit and bankers'
acceptances of domestic and foreign banks having total assets in excess of $1
billion, and |_| repurchase agreements.
Short-term debt securities would normally be selected for defensive or
cash management purposes because they can normally be disposed of quickly, are
not generally subject to significant fluctuations in principal value and their
value will be less subject to interest rate risk than longer-term debt
securities.
Investment Restrictions
|X| What Are "Fundamental Policies?" Fundamental policies are those
policies that the Fund has adopted to govern its investments that can be changed
only by the vote of a "majority" of the Fund's outstanding voting securities.
Under the Investment Company Act, a "majority" vote is defined as the vote of
the holders of the lesser of:
|_| 67% or more of the shares present or represented by proxy at a shareholder
meeting, if the holders of more than 50% of the outstanding shares are present
or represented by proxy, or
|_| more than 50% of the outstanding shares.
The Fund's investment objective is a fundamental policy. Other policies
described in the Prospectus or this Statement of Additional Information are
"fundamental" only if they are identified as such. The Fund's Board of Trustees
can change non-fundamental policies without shareholder approval. However,
significant changes to investment policies will be described in supplements or
updates to the Prospectus or this Statement of Additional Information, as
appropriate. The Fund's most significant investment policies are described in
the Prospectus.
|X| Does the Fund Have Additional Fundamental Policies? The following
investment restrictions are fundamental policies of the Fund.
|_| The Fund cannot buy securities issued or guaranteed by any one
issuer if more than 5% of its total assets would be invested in securities of
that issuer or if it would then own more than 10% of that issuer's voting
securities. That restriction applies to 75% of the Fund's total assets. The
limit does not apply to securities issued by the U.S. Government or any of its
agencies or instrumentalities.
|_| The Fund cannot lend money. However, it can invest in debt
securities and enter into delayed-delivery or when-issued transactions and
forward rolls or similar securities transactions. The Fund may also lend its
portfolio securities and may enter into repurchase agreements.
|_| The Fund cannot buy or sell real estate. However, the Fund can
purchase debt securities secured by real estate or interests in real estate or
issued by companies, including real estate investment trusts, which invest in
real estate or interests in real estate.
|_| The Fund cannot underwrite securities of other companies. A
permitted exception is in case it is deemed to be an underwriter under the
Securities Act of 1933 when reselling any securities held in its own portfolio.
|_| The Fund cannot invest in the securities issued by any company for
the purpose of exercising management control of that company, except in
connection with a merger, consolidation, reorganization or acquisition of
assets.
|_| The Fund cannot invest in or hold securities of any issuer if
officers and Directors or Trustees of the Fund or the Manager individually
beneficially own more than 1/2 of 1% of the securities of that issuer and
together own more than 5% of the securities of that issuer.
|_| The Fund cannot mortgage, pledge or otherwise encumber, transfer or
assign any of its assets to secure a debt. However, this does not prohibit the
Fund from segregating its assets for premium and margin payments in connection
with any of the hedging instruments it uses.
|_| The Fund cannot buy securities on margin. However, the Fund can
make margin deposits in connection with its use of hedging instruments.
|_| The Fund cannot invest in oil, gas or other mineral exploration or
development programs or leases.
|_| The Fund cannot issue "senior securities," but this does not
prohibit certain investment activities for which assets of the Fund are
designated as segregated, or margin, collateral or escrow arrangements are
established, to cover the related obligations. Examples of those activities
include borrowing money, reverse repurchase agreements, delayed-delivery and
when-issued arrangements for portfolio securities transactions, and contracts to
buy or sell derivatives, hedging instruments, options or futures.
Unless the Prospectus or this Statement of Additional Information
states that a percentage restriction applies on an ongoing basis, it applies
only at the time the Fund makes an investment. The Fund need not sell securities
to meet the percentage limits if the value of the investment increases in
proportion to the size of the Fund.
The Fund cannot concentrate investments. That means it cannot invest
25% or more of its total assets in any one industry. The Fund will not invest
25% or more of its total assets in government securities of any one foreign
company or in debt and equity securities issued by companies organized under the
laws of any one foreign country. Obligations of the U.S. government, its
agencies and instrumentalities are not considered to be part of an "industry"
for the purposes of this policy. For purposes of the Fund's policy not to
concentrate its investments, the Fund has adopted the industry classifications
set forth in Appendix B to this Statement of Additional Information. This is not
a fundamental policy.
How the Fund is Managed
Organization and History. The Fund is an open-end, diversified management
investment company with an unlimited number of authorized shares of beneficial
interest. The Fund was organized as a Massachusetts business trust in 1995.
The Fund is governed by a Board of Trustees, which is responsible for
protecting the interests of shareholders under Massachusetts law. The Trustees
meet periodically throughout the year to oversee the Fund's activities, review
its performance, and review the actions of the Manager. Although the Fund will
not normally hold annual meetings of its shareholders, it may hold shareholder
meetings from time to time on important matters, and shareholders have the right
to call a meeting to remove a Trustee or to take other action described in the
Fund's Declaration of Trust.
|X| Classes of Shares. The Board of Trustees has the power, without
shareholder approval, to divide unissued shares of the Fund into two or more
classes. The Board has done so, and the Fund currently has three classes of
shares: Class A, Class B, and Class C. All classes invest in the same investment
portfolio. Each class of shares:
o has its own dividends and distributions,
o pays certain expenses which may be different for the different classes, o may
have a different net asset value,
o may have separate voting rights on matters in which interests of one class are
different from interests of another class, and
o votes as a class on matters that affect that class alone.
Shares are freely transferable, and each share of each class has one
vote at shareholder meetings, with fractional shares voting proportionally on
matters submitted to the vote of shareholders. Each share of the Fund represents
an interest in the Fund proportionately equal to the interest of each other
share of the same class.
The Trustees are authorized to create new series and classes of shares.
The Trustees may reclassify unissued shares of the Fund into additional series
or classes of shares. The Trustees also may divide or combine the shares of a
class into a greater or lesser number of shares without 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 at shareholder meetings.
|X| Meetings of Shareholders. As a Massachusetts business trust, the
Fund is not required to hold, and does not plan to hold, regular annual meetings
of shareholders. The Fund will hold meetings when required to do so by the
Investment Company Act or other applicable law. It will also do so 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.
If the Trustees receive a request from at least 10 shareholders 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. The shareholders making the request
must have been shareholders for at least six months and must hold shares of the
Fund valued at $25,000 or more or constituting at least 1% of the Fund's
outstanding shares, whichever is less. The Trustees may also take other action
as permitted by the Investment Company Act.
|X| Shareholder and Trustee Liability. The Fund's Declaration of Trust
contains an express disclaimer of shareholder or Trustee liability for the
Fund's obligations. It also provides for indemnification and reimbursement of
expenses out of the Fund's property for any shareholder held personally liable
for its obligations. The Declaration of Trust also states that upon request, the
Fund shall assume the defense of any claim made against a shareholder for any
act or obligation of the Fund and shall satisfy any judgment on that claim.
Massachusetts law permits a shareholder of a business trust (such as the Fund)
to be held personally liable as a "partner" under certain circumstances.
However, the risk that a Fund shareholder will incur financial loss from being
held liable as a "partner" of the Fund is limited to the relatively remote
circumstances in which the Fund would be unable to meet its obligations.
The Fund's contractual arrangements state that any person doing
business with the Fund (and each shareholder of the Fund) agrees under its
Declaration of Trust to look solely to the assets of the Fund for satisfaction
of any claim or demand that may arise out of any dealings with the Fund. The
contracts further state that the Trustees shall have no personal liability to
any such person, to the extent permitted by law.
Trustees and Officers of the Fund. The Fund's Trustees and officers and their
principal occupations and business affiliations during the past five years are
listed below. Trustees denoted with an asterisk (*) below are deemed to be
"interested persons" of the Fund under the Investment Company Act. All of the
Trustees are also trustees, directors or managing general partners of the
following Denver-based Oppenheimer funds1:
<PAGE>
Oppenheimer Cash Reserves Oppenheimer Total Return Fund, Inc.
Oppenheimer Champion Income Fund Oppenheimer Variable Account Funds
Oppenheimer Equity Income Fund Panorama Series Fund, Inc.
Oppenheimer High Yield Fund Centennial America Fund, L. P.
Oppenheimer International Bond Fund Centennial California Tax Exempt Trust
Oppenheimer Integrity Funds Centennial Government Trust
Oppenheimer Limited-Term Government
Fund Centennial Money Market Trust
Oppenheimer Main Street Funds, Inc. Centennial New York Tax Exempt Trust
Oppenheimer Municipal Fund Centennial Tax Exempt Trust
Oppenheimer Real Asset Fund The New York Tax-Exempt Income Fund, Inc.
Oppenheimer Strategic Income Fund
Ms. Macaskill and Messrs. Swain, Bishop, Wixted, Donohue, Farrar and Zack,
who are officers of the Fund, respectively hold the same offices with the other
Denver-based Oppenheimer funds. As of January 4, 1999, the Trustees and officers
of the Fund as a group owned less than 1% of the outstanding shares of the Fund.
The foregoing statement does not reflect shares held of record by an employee
benefit plan for employees of the Manager other than shares beneficially owned
under that plan by the officers of the Fund listed below. Ms. Macaskill and Mr.
Donohue, are trustees of that plan.
Robert G. Avis,* Trustee; Age: 67
One North Jefferson Ave., St. Louis, Missouri 63103
Vice Chairman of A.G. Edwards & Sons, Inc. (a broker-dealer) and A.G. Edwards,
Inc. (its parent holding company); Chairman of A.G.E. Asset Management and A.G.
Edwards Trust Company (its affiliated investment adviser and trust company,
respectively).
William A. Baker, Trustee; Age: 83
197 Desert Lakes Drive, Palm Springs, California 92264
Management Consultant.
George C. Bowen, Trustee; Age: 62
6803 South Tucson Way, Englewood, Colorado 80112
Senior Vice President (since September 1987) of the Manager; Vice President
(since June 1983) and Treasurer (since March 1985) of the Distributor; formerly
Treasurer (March 1995 - April 1999) of the Manager.
Charles Conrad, Jr., Trustee; Age: 68
1501 Quail Street, Newport Beach, CA 92660
Chairman and CEO of Universal Space Lines, Inc. (a space services management
company); formerly Vice President of McDonnell Douglas Space Systems Co. prior
to which he was associated with the National Aeronautics and Space
Administration.
Jon S. Fossel, Trustee; Age: 56
P.O. Box 44, Mead Street, Waccabuc, New York 10597
Formerly Chairman and a director of the Manager, President and a director of
Oppenheimer Acquisition Corp., Shareholder Services, Inc. and Shareholder
Financial Services, Inc.
Sam Freedman, Trustee; Age: 58
4975 Lakeshore Drive, Littleton, Colorado 80123
Formerly Chairman and Chief Executive Officer of OppenheimerFunds Services,
Chairman, Chief Executive Officer and a director of Shareholder Services, Inc.
and Shareholder Financial Services, Inc., Vice President and a director of
Oppenheimer Acquisition Corp. and a director of the Manager.
Raymond J. Kalinowski, Trustee; Age: 69
44 Portland Drive, St. Louis, Missouri 63131
Director of Wave Technologies International, Inc. (a computer products training
company).
C. Howard Kast, Trustee; Age: 76
2552 East Alameda, Denver, Colorado 80209
Formerly Managing Partner of Deloitte, Haskins & Sells (an accounting firm).
Robert M. Kirchner, Trustee; Age: 77
7500 E. Arapahoe Road, Englewood, Colorado 80112
President of The Kirchner Company (management consultants).
Bridget A. Macaskill, President and Trustee*; Age: 50
Two World Trade Center, 34th Floor, New York, New York 10048
President (since June 1991), Chief Executive Officer (since September 1995) and
a director (since December 1994) of the Manager; President and a director (since
June 1991) of HarbourView Asset Management Corp.; Chairman and a director (since
August 1994) of Shareholder Services, Inc. and (since September 1995)
Shareholder Financial Services, Inc.; President (since September 1995) and a
director (since October 1990) of Oppenheimer Acquisition Corp.; President (since
September 1995) and a director (since November 1989) of Oppenheimer Partnership
Holdings, Inc., a holding company subsidiary of the Manager; a director of
Oppenheimer Real Asset Management, Inc. (since July 1996); President and a
director (since October 1997) of OppenheimerFunds International Ltd., an
offshore fund management subsidiary of the Manager, and Oppenheimer Millennium
Funds plc; President and a director of other Oppenheimer funds; a director of
Hillsdown Holdings plc (a U.K. food company).
Ned M. Steel, Trustee; Age: 83
3416 South Race Street, Englewood, Colorado 80110
Chartered Property and Casualty Underwriter; a director of Visiting Nurse
Corporation of Colorado.
James C. Swain, Chairman, Chief Executive Officer and Trustee*; Age: 65
6803 South Tucson Way, Englewood, Colorado 80112
Vice Chairman of the Manager (since September 1988); formerly President and a
director of Centennial Asset Management Corporation, and Chairman of the Board
of Shareholder Services, Inc.
Arthur P. Steinmetz, Vice President and Portfolio Manager; Age: 40
Two World Trade Center, 34th Floor, New York, NY 10048
Senior Vice President of the Manager (since March 1993); an officer
of other Oppenheimer funds.
Andrew J. Donohue, Vice President and Secretary; Age: 48
Two World Trade Center, 34th Floor, New York, New York 10048
Executive Vice President (since January 1993), General Counsel (since October
1991) and a Director (since September 1995) of the Manager; Executive Vice
President (since September 1993) and a director (since January 1992) of the
Distributor; Executive Vice President, General Counsel and a director of
HarbourView Asset Management Corp., Shareholder Services, Inc., Shareholder
Financial Services, Inc. and Oppenheimer Partnership Holdings, Inc. (since
September 1995); President and a director of Centennial Asset Management Corp.
(since September 1995); President and a director of Oppenheimer Real Asset
Management, Inc. (since July 1996); General Counsel (since May 1996) and
Secretary (since April 1997) of Oppenheimer Acquisition Corp.; Vice President
and a Director of OppenheimerFunds International Ltd. and Oppenheimer Millennium
Funds plc (since October 1997); an officer of other Oppenheimer funds.
Brian W. Wixted, Vice President, Treasurer and Assistant Secretary; Age: 39
6803 South Tucson Way, Englewood, Colorado 80112
Senior Vice President and Treasurer (April 1999) of the Manager; Treasurer of
HarbourView Asset Management Corp., Shareholder Services, Inc., Shareholder
Financial Services, Inc. and Oppenheimer Partnership Holdings, Inc. (since April
1999); Assistant Treasurer of Oppenheimer Acquisition Corp. (since April 1999);
Assistant Secretary of Centennial Asset Management Corp. (since April 1999);
formerly President and Chief Operating Officer, Bankers Trust Company - Mutual
Fund Services Division (March 1995 - March 1999); Vice President and Chief
Financial Officer of CS First Boston Investment Management Corp. (September 1991
- - March 1995); and Vice President and Accounting Manager, Merrill Lynch Asset
Management (November 1987 - September 1991).
Robert J. Bishop, Assistant Treasurer; Age: 40
6803 South Tucson Way, Englewood, Colorado 80112
Vice President of the Manager/Mutual Fund Accounting (since May 1996); an
officer of other Oppenheimer funds; formerly an Assistant Vice President of the
Manager/Mutual Fund Accounting (April 1994-May 1996), and a Fund Controller for
the Manager.
Scott T. Farrar, Assistant Treasurer; Age: 33
6803 South Tucson Way, Englewood, Colorado 80112
Vice President of the Manager/Mutual Fund Accounting (since May 1996); Assistant
Treasurer of Oppenheimer Millennium Funds plc (since October 1997); an officer
of other Oppenheimer funds; formerly an Assistant Vice President of the
Manager/Mutual Fund Accounting (April 1994-May 1996), and a Fund Controller for
the Manager.
Robert G. Zack, Assistant Secretary; Age: 50
Two World Trade Center, 34th Floor, New York, New York 10048-0203
Senior Vice President (since May 1985) and Associate General Counsel (since May
1981) of the Manager, Assistant Secretary of Shareholder Services, Inc. (since
May 1985), and Shareholder Financial Services, Inc. (since November 1989);
Assistant Secretary (since October 1997) of Oppenheimer Millennium Funds plc and
OppenheimerFunds International Ltd.; an officer of other Oppenheimer funds.
|X| Remuneration of Trustees. The officers of the Fund and three Trustees
of the Fund (Ms. Macaskill and Messrs. Bowen and Swain) are affiliated with the
Manager and receive no salary or fee from the Fund. The remaining Trustees of
the Fund received the compensation shown below. The compensation from the Fund
was paid during its fiscal year ended September 30, 1998. The compensation from
all of the Denver-based Oppenheimer funds includes the compensation from the
Fund and represents compensation received as a director, trustee, managing
general partner or member of a committee of the Board during the calendar year
1998.
<TABLE>
<CAPTION>
Total Compensation
Trustee's Name and Other Positions Aggregate Compensation From all Denver-Based
from Fund Oppenheimer Funds 1
<S> <C> <C>
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
Robert G. Avis $234 $67,998
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
$252 $69,998
William A. Baker
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
Charles Conrad, Jr. $242 $67,998
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
Jon. S. Fossel $233 $67,496.04
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
Sam Freedman
Audit and Review Committee Member $253 $73,998
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
Raymond J. Kalinowski
Audit and Review Committee Member
$257 $73,998
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
C. Howard Kast
Audit and Review Committee Chairman
$269 $76,998
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
Robert M. Kirchner $242 $67,998
- -------------------------------------- -------------------------------------- --------------------------------------
- -------------------------------------- -------------------------------------- --------------------------------------
Ned M. Steel $234 $67,998
- -------------------------------------- -------------------------------------- --------------------------------------
</TABLE>
1. For the 1998 calendar year.
|X| Deferred Compensation Plan. The Board of Trustees has adopted a
Deferred Compensation Plan for disinterested Trustees that enables them to elect
to defer receipt of all or a portion of the annual fees they are entitled to
receive from the Fund. Under the plan, the compensation deferred by a Trustee is
periodically adjusted as though an equivalent amount had been invested in shares
of one or more Oppenheimer funds selected by the Trustee. The amount paid to the
Trustee under the plan will be determined based upon the performance of the
selected funds.
Deferral of Trustee's fees under the plan will not materially affect the
Fund's assets, liabilities and net income per share. The plan will not obligate
the fund to retain the services of any Trustee or to pay any particular level of
compensation to any Trustee. Pursuant to an Order issued by the Securities and
Exchange Commission, the Fund may invest in the funds selected by the Trustee
under the plan without shareholder approval for the limited purpose of
determining the value of the Trustee's deferred fee account.
|X| Major Shareholders. As of January 4, 1999, the only persons who
owned of record or were known by the Fund to own beneficially 5% or more of the
Fund's outstanding securities of any class were the following: Merrill Lynch,
Pierce & Smith, 4800 Deer Lake Drive, E., Floor 3, Jacksonville, Florida 32246,
which owned 1,799,870.526 Class B shares (6.35% of the Class B shares then
outstanding) and 871,868.952 Class C shares (13.22% of the Class C shares then
outstanding) for the benefit of its customers.
The Manager. The Manager is wholly-owned by Oppenheimer Acquisition Corp., a
holding company controlled by Massachusetts Mutual Life Insurance Company. 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 enforced by the
Manager.
|X| The Investment Advisory Agreement. The Manager provides investment
advisory and management services to the Fund under an investment advisory
agreement between the Manager and the Fund. The Manager selects securities for
the Fund's portfolio and handles its day-to-day business. The portfolio manager
of the Fund is employed by the Manager and is the person who is principally
responsible for the day-to-day management of the Fund's portfolio. Other members
of the Manager's Fixed-Income Portfolio Team, particularly David Negri, provide
the portfolio manager with counsel and support in managing the Fund's portfolio.
The agreement requires the Manager, at its expense, to provide the Fund
with adequate office space, facilities and equipment. It also requires the
Manager to provide and supervise the activities of all administrative and
clerical personnel required to provide effective administration for the Fund.
Those responsibilities include 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.
The Fund pays expenses not expressly assumed by the Manager under the
advisory agreement. The advisory agreement lists examples of expenses paid by
the Fund. The major categories relate to interest, taxes, brokerage commissions,
fees to certain Trustees, legal and audit expenses, custodian and transfer agent
expenses, share issuance costs, certain printing and registration costs and
non-recurring expenses, including litigation costs. The management fees paid by
the Fund to the Manager are calculated at the rates described in the Prospectus,
which are applied to the assets of the Fund as a whole. The fees are allocated
to each class of shares based upon the relative proportion of the Fund's net
assets represented by that class.
Fiscal Year ended 9/30: Management Fees Paid to OppenheimerFunds, Inc.
1996 $311,128
1997 $1,465,1811
1998 $1,978,423
1. After a reduction in the management fee in the amount of $41,927 pursuant to
a voluntary waiver of expenses by the Manager that is no longer in effect.
The investment advisory agreement states 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 investment advisory
agreement, the Manager is not liable for any loss resulting from a good faith
error or omission on its part with respect to any of its duties under the
agreement.
The agreement permits the Manager to act as investment adviser for any
other person, firm or corporation and to use the name "Oppenheimer" in
connection with other investment companies for which it may act as investment
adviser or general distributor. If the Manager shall no longer act as investment
adviser to the Fund, the Manager may withdraw the right of the Fund to use the
name "Oppenheimer" as part of its name.
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 for the Fund. The advisory agreement contains provisions relating
to the employment of broker-dealers to effect the Fund's portfolio transactions.
The Manager is authorized by the advisory agreement to employ broker-dealers,
including "affiliated" brokers, as that term is defined in the Investment
Company Act. The Manager may employ broker-dealers that the Manager thinks in
its best judgment based on all relevant factors, will implement the policy of
the Fund to obtain, at reasonable expense, the "best execution" of portfolio
transactions. "Best execution" means prompt and reliable execution at the most
favorable price obtainable. The Manager need not seek competitive commission
bidding. However, it is expected to be aware of the current rates of eligible
brokers and to minimize the commissions paid to the extent consistent with the
interests and policies of the Fund as established by its Board of Trustees.
Under the investment advisory agreement, the Manager may select brokers
(other than affiliates) that provide brokerage and/or research services for the
Fund and/or the other accounts over which the Manager or its affiliates have
investment discretion. The commissions paid to such brokers may be higher than
another qualified broker would charge, if the Manager makes a good faith
determination that the commission is fair and reasonable in relation to the
services provided. Subject to those considerations, as a factor in selecting
brokers for the Fund's portfolio transactions, the Manager may also consider
sales of shares of the Fund and other investment companies for which the Manager
or an affiliate serves as investment adviser.
Brokerage Practices Followed by the Manager. The Manager allocates brokerage for
the Fund subject to the provisions of the investment advisory agreement and the
procedures and rules described above. Generally, the Manager's portfolio traders
allocate brokerage based upon recommendations from the Manager's portfolio
managers. In certain instances, portfolio managers may directly place trades and
allocate brokerage. In either case, the Manager's executive officers supervise
the allocation of brokerage.
Transactions in securities other than those for which an exchange is the
primary market are generally done with principals or market makers. In
transactions on foreign exchanges, the Fund may be required to pay fixed
brokerage commissions and therefore would not have the benefit of negotiated
commissions available in U.S. markets. Brokerage commissions are paid primarily
for transactions in listed securities or for certain fixed-income agency
transactions in the secondary market. Otherwise brokerage commissions are paid
only if it appears likely that a better price or execution can be obtained by
doing so. In an option transaction, the Fund ordinarily uses the same broker for
the purchase or sale of the option and any transaction in the securities to
which the option relates.
Other funds advised by the Manager have investment policies similar to
those of the Fund. Those other funds may purchase or sell the same securities as
the Fund at the same time as the Fund, which could affect the supply and price
of the securities. If two or more funds advised by the Manager purchase the same
security on the same day from the same dealer, the transactions under those
combined orders are averaged as to price and allocated in accordance with the
purchase or sale orders actually placed for each account.
Most purchases of debt obligations are principal transactions at net
prices. Instead of using a broker for those transactions, the Fund normally
deals directly with the selling or purchasing principal or market maker unless
the Manager determines that a better price or execution can be obtained by using
the services of a broker. Purchases of portfolio securities from underwriters
include a commission or concession paid by the issuer to the underwriter.
Purchases from dealers include a spread between the bid and asked prices. The
Fund seeks to obtain prompt execution of these orders at the most favorable net
price.
The investment advisory agreement permits the Manager to allocate
brokerage for research services. 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. The investment research received for the commissions of
those other accounts may be useful both to the Fund and one or more of the
Manager's other accounts. Investment research may be supplied to the Manager by
a third party at the instance of a broker through which trades are placed.
Investment research services include information and analysis on
particular companies and industries as well as market or economic trends and
portfolio strategy, market quotations for portfolio evaluations, information
systems, computer hardware and similar products and services. If a research
service also assists the Manager in a non-research capacity (such as bookkeeping
or other administrative functions), then only the percentage or component that
provides assistance to the Manager in the investment decision-making process may
be paid in commission dollars.
The Board of Trustees permits the Manager to use stated commissions on
secondary fixed-income agency trades to obtain research if the broker represents
to the Manager that: (i) the trade is not from or for the broker's own
inventory, (ii) the trade was executed by the broker on an agency basis at the
stated commission, and (iii) the trade is not a riskless principal transaction.
The Board of Trustees permits the Manager to use concessions on fixed-price
offerings to obtain research, in the same manner as is permitted for agency
transactions.
The research services provided by brokers broadens the scope and
supplements the research activities of the Manager. That research provides
additional views and comparisons for consideration, and helps the Manager to
obtain market information for the valuation of securities that are either held
in the Fund's portfolio or are being considered for purchase. The Manager
provides information to the Board about the commissions paid to brokers
furnishing such services, together with the Manager's representation that the
amount of such commissions was reasonably related to the value or benefit of
such services.
Fiscal Year Ended 9/30: Total Brokerage Commissions Paid by the Fund 1
1996 $976
1997 $4,969
1998 $31,9912
1. Amounts do not include spreads or concessions on principal transactions on a
net trade basis.
2. In the fiscal year ended 9/30/98, no transactions were directed to brokers
and no commissions were paid to to broker-dealers for research services.
Distribution and Service Plans
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 different classes of shares. The Distributor is not
obligated to sell a specific number of shares. Expenses normally attributable to
sales are borne by the Distributor.
The compensation paid to (or retained by) the Distributor from the sale of
shares or on the redemption of shares during the Fund's three most recent fiscal
years is shown in the table below.
<TABLE>
<CAPTION>
Aggregate Class A Front-End Commissions on Commissions on Commissions on
Fiscal Year Front-End Sales Sales Charges Class A Shares Class B Shares Class C Shares
Ended 9/30: Charges on Class Retained by Advanced by Advanced by Advanced by
A Shares Distributor Distributor 1 Distributor 1 Distributor 1
<S> <C> <C> <C> <C> <C>
- --------------- ------------------- ------------------- -------------------- ------------------- -------------------
- --------------- ------------------- ------------------- -------------------- ------------------- -------------------
1996 $455,830 $126,085 $12,656 $1,115,490 $77,326
- --------------- ------------------- ------------------- -------------------- ------------------- -------------------
- --------------- ------------------- ------------------- -------------------- ------------------- -------------------
1997 $1,124,978 $273,182 $23,126 $3,225,657 $209,570
- --------------- ------------------- ------------------- -------------------- ------------------- -------------------
- --------------- ------------------- ------------------- -------------------- ------------------- -------------------
1998 $758,818 $197,195 $45,052 $2,036,881 $145,913
- --------------- ------------------- ------------------- -------------------- ------------------- -------------------
</TABLE>
1. The Distributor advances commission payments to dealers for certain sales
of Class A shares and for sales of Class B and Class C shares from its own
resources at the time of sale.
<TABLE>
<CAPTION>
Class A Contingent Deferred Class B Contingent Deferred Class C Contingent Deferred
Fiscal Year Sales Charges Retained by Sales Charges Retained by Sales Charges Retained by
Ended 9/30 Distributor Distributor Distributor
<S> <C> <C> <C>
- ----------------- ------------------------------- -------------------------------- ---------------------------------
- ----------------- ------------------------------- -------------------------------- ---------------------------------
1998 $29,873 $459,667 $18,589
- ----------------- ------------------------------- -------------------------------- ---------------------------------
</TABLE>
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 under
Rule 12b-1 of the Investment Company Act. Under those plans the Fund pays the
Distributor for all or a portion of its costs incurred in connection with the
distribution and/or servicing of the shares of the particular class.
Each plan has been approved by a vote of the Board of Trustees, including
a majority of the Independent Trustees2, cast in person at a meeting called for
the purpose of voting on that plan. Each plan has also been approved by the
holders of a "majority" (as defined in the Investment Company Act) of the shares
of the applicable class. The shareholder votes for the plans were cast by the
Manager as the sole initial holder of each class of shares of the Fund.
Under the plans, the Manager and the Distributor, in their sole
discretion, from time to time, may use their own resources (at no direct cost to
the Fund) to make payments to brokers, dealers or other financial institutions
for distribution and administrative services they perform. The Manager may use
its profits from the advisory fee it receives from the Fund. In their sole
discretion, the Distributor and the Manager may increase or decrease the amount
of payments they make from their own resources to plan recipients.
Unless a plan is terminated as described below, the plan continues in
effect from year to year but only if the Fund's Board of Trustees and its
Independent Trustees specifically vote annually to approve its continuance.
Approval must be by a vote cast in person at a meeting called for the purpose of
voting on continuing the plan. A plan may be terminated at any time by the vote
of a majority of the Independent Trustees or by the vote of the holders of a
"majority" (as defined in the Investment Company Act) of the outstanding shares
of that class.
The Board of Trustees and the Independent Trustees must approve all
material amendments to a plan. An amendment to increase materially the amount of
payments to be made under a plan must be approved by shareholders of the class
affected by the amendment. Because Class B shares of the Fund automatically
convert into Class A shares after six years, the Fund must obtain the approval
of both Class A and Class B shareholders for a proposed material amendment to
the Class A Plan that would materially increase payments under the Plan. That
approval must be by a "majority" (as defined in the Investment Company Act) of
the shares of each Class, voting separately by class.
While the Plans are in effect, the Treasurer of the Fund shall provide
separate written reports on the plans to the Board of Trustees at least
quarterly for its review. The Reports shall detail the amount of all payments
made under a plan, and the purpose for which the payments were made. Those
reports are subject to the review and approval of the Independent Trustees.
Each Plan states that while it is in effect, the selection and nomination
of those Trustees of the Fund who are not "interested persons" of the Fund is
committed to the discretion of the Independent Trustees. This does not prevent
the involvement of others in the selection and nomination process as long as the
final decision as to selection or nomination is approved by a majority of the
Independent Trustees.
Under the plan for a class, no payment will be made to any recipient in
any quarter in which the aggregate net asset value of all Fund shares of that
class held by the recipient for itself and its customers does not exceed a
minimum amount, if any, that may be set from time to time by a majority of the
Independent Trustees. The Board of Trustees has set no minimum amount of assets
to qualify for payments under the plans.
|_| Class A Service Plan Fees. Under the Class A service plan, the
Distributor currently uses the fees it receives from the Fund to pay brokers,
dealers and other financial institutions (they are referred to as "recipients")
for personal services and account maintenance services they provide for their
customers who hold Class A shares. The services include, among others, answering
customer inquiries about the Fund, assisting in establishing and maintaining
accounts in the Fund, making the Fund's investment plans available and providing
other services at the request of the Fund or the Distributor. While the plan
permits the Board to authorize payments to the Distributor to reimburse itself
for services under the plan, the Board has not yet done so. The Distributor
makes payments to plan recipients quarterly at an annual rate not to exceed
0.25% of the average annual net assets consisting of Class A shares held in the
accounts of the recipients or their customers.
For the fiscal period ended September 30, 1998 payments under the Class A
Plan totaled $261,481, all of which was paid by the Distributor to recipients.
That included $17,549 paid to an affiliate of the Distributor's parent company.
Any unreimbursed expenses the Distributor incurs with respect to Class A shares
in any fiscal year cannot be recovered in subsequent years. The Distributor may
not use payments received under the Class A Plan to pay any of its interest
expenses, carrying charges, or other financial costs, or allocation of overhead.
|_| Class B and Class C Service and Distribution Plan Fees. Under each
plan, service fees and distribution fees are computed on the average of the net
asset value of shares in the respective class, determined as of the close of
each regular business day during the period. The Class B and Class C plans
provide 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 under the plan during the period for which the fee is paid. The types
of services that Recipients provide are similar to the services provided under
the Class A service plan, described above.
The Class B and the Class C Plans permit the Distributor to retain both
the asset-based sales charges and the service fees or to pay recipients the
service fee on a quarterly basis, without payment in advance. However, the
Distributor currently intends to pay the service fee to recipients in advance
for the first year after the shares are purchased. After the first year shares
are outstanding, the Distributor makes service fee payments quarterly on those
shares. The advance payment is based on the net asset value of shares sold.
Shares purchased by exchange do not qualify for the advance service fee payment.
If Class B or Class C shares are redeemed during the first year after their
purchase, the recipient of the service fees on those shares will be obligated to
repay the Distributor a pro rata portion of the advance payment of the service
fee made on those shares.
The Distributor retains the asset-based sales charge on Class B shares.
The Distributor retains the asset-based sales charge on Class C shares during
the first year the shares are outstanding. It pays the asset-based sales charge
as an ongoing commission to the recipient on Class C shares outstanding for a
year or more. If a dealer has a special agreement with the Distributor, the
Distributor will pay the Class B and/or Class C service fee and the asset-based
sales charge to the dealer quarterly in lieu of paying the sales commissions and
service fee in advance at the time of purchase.
The asset-based sales charges on Class B and Class C shares allow
investors to buy shares without a front-end sales charge while allowing the
Distributor to compensate dealers that sell those shares. The Fund pays the
asset-based sales charges to the Distributor for its services rendered in
distributing Class B and Class C shares. The payments are made to the
Distributor in recognition that the Distributor:
o pays sales commissions to authorized brokers and dealers at the time of sale
and pays service fees as described above,
o may finance payment of sales commissions and/or the advance of the service fee
payment to recipients under the plans, or may provide such financing from its
own resources or from the resources of an affiliate,
o employs personnel to support distribution of Class B and Class C shares, and
o bears the costs of sales literature, advertising and prospectuses
(other than those furnished to current shareholders) and state "blue
sky" registration fees and certain other distribution expenses.
For the fiscal period ended September 30, 1998, payments under the Class B
plan totaled $1,287,968 (including $5,333 paid to an affiliate of the
Distributor's parent). The Distributor retained $1,121,715 of the total amount.
For the fiscal period ended September 30, 1998, payments under the Class C plan
totaled $293,391, (including $1,830 paid to an affiliate of the Distributor's
parent). The Distributor retained $193,024 of the total amount.
The Distributor's actual expenses in selling Class B and Class C shares
may be more than the payments it receives from the contingent deferred sales
charges collected on redeemed shares and from the Fund under the plans. As of
September 30, 1998, the Distributor had incurred unreimbursed expenses under the
Class B plan in the amount of $5,581,385 (equal to 4.65% of the Fund's net
assets represented by Class B shares on that date) and unreimbursed expenses
under the Class C plan of $492,685 (equal to 1.78% of the Fund's net assets
represented by Class C shares on that date). If either the Class B or the Class
C plan is terminated by the Fund, the Board of Trustees may allow the Fund to
continue payments of the asset-based sales charge to the Distributor for
distributing shares before the plan was terminated.
All payments under the Class B and the Class C plans are subject to the
limitations imposed by the Conduct Rules of the National Association of
Securities Dealers, Inc. on payments of asset-based sales charges and service
fees.
Performance of the Fund
Explanation of Performance Terminology. The Fund uses a variety of terms to
illustrate its performance. These terms include "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."
An explanation of how yields and total returns are calculated is set forth
below. The charts below show the Fund's performance as of the Fund's most recent
fiscal year end. You can obtain current performance information by calling the
Fund's Transfer Agent at 1-800-525-7048 or by visiting the OppenheimerFunds
Internet web site at http://www.oppenheimerfunds.com.
The Fund's illustrations of its performance data in advertisements must
comply with rules of the Securities and Exchange Commission. Those rules
describe the types of performance data that may be used and how it is to be
calculated. In general, any advertisement by the Fund of its performance data
must include the average annual total returns for the advertised class of shares
of the Fund. Those returns must be shown for the 1, 5 and 10-year periods (or
the life of the class, if less) ending as of the most recently ended calendar
quarter prior to the publication of the advertisement (or its submission for
publication). Certain types of yields may also be shown, provided that they are
accompanied by standardized average annual total returns.
Use of standardized performance calculations 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 the
Fund's performance information as a basis for comparison with other investments:
|_| Yields and total returns measure the performance of a hypothetical
account in the Fund over various periods and do not show the performance of each
shareholder's account. Your account's performance will vary from the model
performance data if your dividends are received in cash, or you buy or sell
shares during the period, or you bought your shares at a different time and
price than the shares used in the model.
|_| The Fund's performance returns do not reflect the effect of taxes
on dividends and capital gains distributions.
|_| An investment in the Fund is not insured by the FDIC or any other
government agency.
|_| The principal value of the Fund's shares, and its yields and total
returns are not guaranteed and normally will fluctuate on a daily basis.
|_| When an investor's shares are redeemed, they may be worth more or
less than their original cost.
|_| Yields and total returns for any given past period represent
historical performance information and are not, and should not be considered, a
prediction of future yields or returns.
The performance of each class of shares is shown separately, because
the performance of each class of shares will usually be different. That is
because of the different kinds of expenses each class bears. The yields and
total returns of each class of shares of the Fund are affected by market
conditions, the quality of the Fund's investments, the maturity of those
investments, the types of investments the Fund holds, and its operating expenses
that are allocated to the particular class.
|X| Yields. The Fund uses a variety of different yields to illustrate
its current returns. Each class of shares calculates its yield separately
because of the different expenses that affect each class.
|_| Standardized Yield. The "standardized yield" (sometimes
referred to just 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.
Standardized yield is calculated using the following formula set forth
in rules adopted by the Securities and Exchange Commission, designed to assure
uniformity in the way that all funds calculate their yields:
a-b 6
Standardized Yield = 2 [ (--- + 1) - 1]
cd
The symbols above represent the following factors:
a = dividends and interest earned during the 30-day period.
b = expenses accrued for the period (net of any expense assumptions).
c = the average daily number of shares of that class outstanding
during the 30-day period that were entitled to receive dividends.
d = the maximum offering price per share of that class on the last
day of the period, adjusted for undistributed net investment
income.
The standardized yield for a particular 30-day period may differ from
the yield for other periods. The SEC formula assumes that the standardized yield
for a 30-day period occurs at a constant rate for a six-month period and is
annualized at the end of the six-month period. Additionally, because each class
of shares is subject to different expenses, it is likely that the standardized
yields of the Fund's classes of shares will differ for any 30-day period.
|_| Dividend Yield. The Fund may quote a "dividend yield" for
each class of its shares. Dividend yield is based on the dividends paid on a
class of shares during the actual dividend period. To calculate dividend yield,
the dividends of a class declared during a stated 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 Fund's Yields for the 30-Day Periods Ended 9/30/98
Standardized Yield Dividend Yield
Class of Shares
<TABLE>
<CAPTION>
Without After Without After
Sales Sales Sales Sales
Charge Charge Charge Charge
<S> <C> <C> <C> <C>
---------------- ------------------- ---------------------- ---------------------- ------------------------------
---------------- ------------------- ---------------------- ---------------------- ------------------------------
Class A 13.57% 12.90% 12.15% 11.56%
---------------- ------------------- ---------------------- ---------------------- ------------------------------
---------------- ------------------- ---------------------- ---------------------- ------------------------------
Class B 12.83% N/A 11.44% N/A
---------------- ------------------- ---------------------- ---------------------- ------------------------------
---------------- ------------------- ---------------------- ---------------------- ------------------------------
Class C 12.80% N/A 11.44% N/A
---------------- ------------------- ---------------------- ---------------------- ------------------------------
</TABLE>
|X| Total Return Information. There are different types of "total
returns" to measure the Fund's performance. Total return is the change in value
of a hypothetical investment in the Fund over a given period, assuming that all
dividends and capital gains distributions are reinvested in additional shares
and that the investment is redeemed at the end of the period. Because of
differences in expenses for each class of shares, the total returns for each
class are separately measured. The cumulative total return measures the change
in value over the entire period (for example, ten years). An average annual
total return shows the average rate of return for each year in a period that
would produce the cumulative total return over the entire period. However,
average annual total returns do not show actual year-by-year performance. The
Fund uses standardized calculations for its total returns as prescribed by the
SEC. The methodology is discussed below.
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 without sales charge,
as described below). For Class B shares, payment of the applicable contingent
deferred sales charge is applied, depending on the period for which the return
is shown: 5.0% in the first year, 4.0% in the second year, 3.0% in the third and
fourth years, 2.0% in the fifth year, 1.0% in the sixth year and none
thereafter. For Class C shares, the 1% contingent deferred sales charge is
deducted for returns for the 1-year period.
|_| Average Annual Total Return. 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" in the formula) to achieve an
Ending Redeemable Value ("ERV" in the formula) of that investment, according to
the following formula:
( ) 1/n
( ERV ) - 1 = Average Annual Total Return
( ------ )
P
|_| Cumulative Total Return. The "cumulative total return"
calculation measures the change in value of a hypothetical investment of $1,000
over an entire period of years. Its calculation uses some of the same factors as
average annual total return, but it does not average the rate of return on an
annual basis. Cumulative total return is determined as follows:
ERV - P
------- = Total Return
P
|_| Total Returns at Net Asset Value. From time to time the
Fund may also quote a cumulative or an average annual total return "at net asset
value" (without deducting sales charges) for Class A, Class B or Class C shares.
Each is based on the difference in net asset value per share at the beginning
and the end of the period for a hypothetical investment in that class of shares
(without considering front-end or contingent deferred sales charges) and takes
into consideration the reinvestment of dividends and capital gains
distributions.
The Fund's Total Returns for the Periods Ended 9/30/98
Cumulative Total Average Annual Total Returns
Class of Returns (Life of Class)
Shares
1-Year Life-of-Class
<TABLE>
<CAPTION>
After Without After Without After Without
Sales Sales Sales Sales Sales Sales Charge
Charge Charge Charge Charge Charge
<S> <C> <C> <C> <C> <C> <C>
- -------------- ------------ ------------ ------------ ------------ ------------ -------------
- -------------- ------------ ------------ ------------ ------------ ------------ -------------
Class A 15.91% 21.69% -16.65% -12.50% 4.59%1 6.15%1
- -------------- ------------ ------------ ------------ ------------ ------------ -------------
- -------------- ------------ ------------ ------------ ------------ ------------ -------------
Class B 15.94% 18.52% -17.08% -13.16% 4.59%2 5.30%2
- -------------- ------------ ------------ ------------ ------------ ------------ -------------
- -------------- ------------ ------------ ------------ ------------ ------------ -------------
Class C 18.53% 18.53% -13.94% -13.16% 5.30%3 5.30%3
- -------------- ------------ ------------ ------------ ------------ ------------ -------------
</TABLE>
1. Inception of Class A: 6/15/95
2. Inception of Class B: 6/15/95
3. Inception of Class C: 6/15/95
Other Performance Comparisons. The Fund compares its performance annually to
that of an appropriate broadly-based market index in its Annual Report to
shareholders. You can obtain that information by contacting the Transfer Agent
at the addresses or telephone numbers shown on the cover of this Statement of
Additional Information. The Fund may also compare its performance to that of
other investments, including other mutual funds, or use rankings of its
performance by independent ranking entities. Examples of these performance
comparisons are set forth below.
|X| Lipper Rankings. From time to time the Fund may publish the ranking
of the performance of its classes of shares by Lipper Analytical Services, Inc.
Lipper is 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. Lipper currently ranks the Fund's performance against all
other international income funds. The Lipper performance rankings are based on
total returns that include the reinvestment of capital gain distributions and
income dividends but do not take sales charges or taxes into consideration.
Lipper also publishes "peer-group" indices of the performance of all mutual
funds in a category that it monitors and averages of the performance of the
funds in particular categories.
|X| Morningstar Rankings. From time to time the Fund may publish the
star ranking of the performance of its classes of 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. The Fund is ranked among taxable
bond funds.
Morningstar star rankings are based on risk-adjusted total investment
return. Investment return measures a fund's (or class's) one-, three-, five- and
ten-year average annual total returns depending on the inception of the fund or
class) in excess of 90-day U.S. Treasury bill returns after considering the
fund's sales charges and expenses. Risk measures a fund's (or class's)
performance below 90-day U.S. Treasury bill returns. Risk and investment return
are combined to produce star rankings reflecting performance relative to the
average fund in a fund's category. Five stars is the "highest" ranking (top 10%
of funds in a category), four stars is "above average" (next 22.5%), three stars
is "average" (next 35%), two stars is "below average" (next 22.5%) and one star
is "lowest" (bottom 10%). The current star ranking is the fund's (or class's)
3-year ranking or its combined 3- and 5-year ranking (weighted 60%/40%
respectively), or its combined 3-, 5-, and 10-year ranking (weighted 40%, 30%
and 30%, respectively), depending on the inception date 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 based on Morningstar's
classification of the fund's investments and investment style, rather than how a
fund defines its investment objective. Morningstar's four broad categories
(domestic equity, international equity, municipal bond and taxable bond) are
each further subdivided into categories based on types of investments and
investment styles. Those comparisons by Morningstar are based on the same risk
and return measurements as its star rankings but do not consider the effect of
sales charges.
|X| Performance Rankings and Comparisons by Other Entities and
Publications. From time to time the Fund may include in its advertisements and
sales literature performance information about the Fund cited in newspapers and
other periodicals such as The New York Times, The Wall Street Journal, Barron's,
or similar publications. That information may include performance quotations
from other sources, including Lipper and Morningstar. The performance of the
Fund's classes of shares may be compared in publications to the performance of
various market indices or other investments, and averages, performance rankings
or other benchmarks prepared by recognized mutual fund statistical services.
Investors may also wish to compare the returns on the Fund's share
classes to the return on fixed-income investments available from banks and
thrift institutions. Those include certificates of deposit, ordinary
interest-paying checking and savings accounts, and other forms of fixed or
variable time deposits, and various other instruments such as Treasury bills.
However, the Fund's returns and share price are not guaranteed or insured by the
FDIC or any other agency and will fluctuate daily, while bank depository
obligations may be insured by the FDIC and may provide fixed rates of return.
Repayment of principal and payment of interest on Treasury securities is backed
by the full faith and credit of the U.S. government.
From time to time, the Fund may publish rankings or ratings of the
Manager or Transfer Agent, and of the investor services provided by them to
shareholders of the Oppenheimer funds, other than performance rankings of the
Oppenheimer funds themselves. Those ratings or rankings of shareholder and
investor services by third parties may include comparisons of their services to
those provided by other mutual fund families selected by the rating or ranking
services. They may be based upon the opinions of the rating or ranking service
itself, using its research or judgment, or based upon surveys of investors,
brokers, shareholders or others.
ABOUT YOUR ACCOUNT
How to Buy Shares
Additional information is presented below about the methods that can be
used to buy shares of the Fund. Appendix C contains more information about the
special sales charge arrangements offered by the Fund, and the circumstances in
which sales charges may be reduced or waived for certain classes of investors.
AccountLink. When shares are purchased through AccountLink, each purchase must
be at least $25. Shares will be purchased on the regular business day the
Distributor is instructed to initiate the Automated Clearing House ("ACH")
transfer to buy the shares. Dividends will begin to accrue on shares purchased
with the proceeds of ACH transfers on the business day the Fund receives Federal
Funds for the purchase through the ACH system before the close of The New York
Stock Exchange. The Exchange normally closes at 4:00 P.M., but may close earlier
on certain days. If Federal Funds are received on a business day after the close
of the Exchange, the shares will be purchased and dividends will begin to accrue
on the next regular business day. The proceeds of ACH transfers are normally
received by the Fund 3 days after the transfers are initiated. The Distributor
and the Fund are not responsible for any delays in purchasing shares resulting
from delays in ACH transmissions.
Reduced Sales Charges. As discussed in the Prospectus, a reduced sales charge
rate may be obtained for Class A shares under Right of Accumulation and Letters
of Intent because of the economies of sales efforts and reduction in expenses
realized by the Distributor, dealers and brokers making such sales. No sales
charge is imposed in certain other circumstances described in Appendix C to this
Statement of Additional Information because the Distributor or dealer or broker
incurs little or no selling expenses.
|X| Right of Accumulation. To qualify for the lower sales charge rates
that apply to larger purchases of Class A shares, you and your spouse can add
together:
|_| Class A and Class B shares you purchase for your individual
accounts, or for your joint accounts, or for trust or
custodial accounts on behalf of your children who are minors,
and
|_| current purchases of Class A and Class B shares of the Fund
and other Oppenheimer funds to reduce the sales charge rate
that applies to current purchases of Class A shares, and
|_| Class A and Class B shares of Oppenheimer funds you previously
purchased subject to an initial or contingent deferred sales
charge to reduce the sales charge rate for current purchases
of Class A shares, provided that you still hold your
investment in one of the Oppenheimer funds.
A fiduciary can count all shares purchased for a trust, estate or other
fiduciary account (including one or more employee benefit plans of the same
employer) that has multiple accounts. The Distributor will add the value, at
current offering price, of the shares you previously purchased and currently own
to the value of current purchases to determine the sales charge rate that
applies. The reduced sales charge will apply only to current purchases. You must
request it when you buy shares.
|X| The Oppenheimer Funds. The Oppenheimer funds are those mutual funds for
which the Distributor acts as the distributor or the sub-distributor and
currently include the following:
Oppenheimer Bond Fund Oppenheimer Limited-Term Government Fund
Oppenheimer Capital Appreciation
Fund Oppenheimer Main Street California
Municipal Fund
Oppenheimer California Municipal
Fund Oppenheimer Main Street Growth & Income Fund
Oppenheimer Champion Income Fund Oppenheimer MidCap Fund
Oppenheimer Convertible Securities
Fund Oppenheimer Multiple Strategies Fund
Oppenheimer Developing
Markets Fund Oppenheimer Municipal Bond Fund
Oppenheimer Disciplined Allocation
Fund Oppenheimer New York Municipal Fund
Oppenheimer Disciplined Value
Fund Oppenheimer New Jersey Municipal Fund
Oppenheimer Discovery Fund Oppenheimer Pennsylvania Municipal Fund
Oppenheimer Enterprise Fund Oppenheimer Quest Balanced Value Fund
Oppenheimer Equity Income Fund Oppenheimer Quest Capital Value Fund, Inc.
Oppenheimer Florida Municipal
Fund Oppenheimer Quest Global Value Fund, Inc.
Oppenheimer Global Fund Oppenheimer Quest Opportunity Value Fund
Oppenheimer Global Growth
& Income Fund Oppenheimer Quest Small Cap Value Fund
Oppenheimer Gold & Special
Minerals Fund Oppenheimer Quest Value Fund, Inc.
Oppenheimer Growth Fund Oppenheimer Real Asset Fund
Oppenheimer High Yield Fund Oppenheimer Strategic Income Fund
Oppenheimer Insured Municipal
Fund Oppenheimer Total Return Fund, Inc.
Oppenheimer Intermediate
Municipal Fund Oppenheimer U.S. Government Trust
Oppenheimer International
Bond Fund Oppenheimer World Bond Fund
Oppenheimer International
Growth Fund Limited-Term New York Municipal Fund
Oppenheimer International
Small Company Fund Rochester Fund Municipals
Oppenheimer Large Cap Growth Fund
and the following money market funds:
Centennial America Fund, L. P. Centennial New York Tax Exempt Trust
Centennial California Tax Exempt Trust Centennial Tax Exempt Trust
Centennial Government Trust Oppenheimer Cash Reserves
Centennial Money Market Trust Oppenheimer Money Market Fund, Inc.
There is an initial sales charge on the purchase of Class A shares of
each of the Oppenheimer funds except the money market funds. Under certain
circumstances described in this Statement of Additional Information, redemption
proceeds of certain money market fund shares may be subject to a contingent
deferred sales charge.
Letters of Intent. Under a Letter of Intent, if you purchase Class A shares or
Class A and Class B shares of the Fund and other Oppenheimer funds during a
13-month period, you can reduce the sales charge rate that applies to your
purchases of Class A shares. The total amount of your intended purchases of both
Class A and Class B shares will determine the reduced sales charge rate for the
Class A shares purchased during that period. You can include purchases made up
to 90 days before the date of the Letter.
A Letter of Intent is an investor's statement in writing to the
Distributor of the intention to purchase Class A shares or Class A and Class B
shares of the Fund (and other Oppenheimer funds) during a 13-month period (the
"Letter of Intent period"). At the investor's request, this may include
purchases made up to 90 days prior to the date of the Letter. The Letter states
the investor's intention to make the aggregate amount of purchases of shares
which, when added to the investor's holdings of shares of those funds, will
equal or exceed the amount specified in the Letter. Purchases made by
reinvestment of dividends or distributions of capital gains and purchases made
at net asset value without sales charge do not count toward satisfying the
amount of the Letter.
A Letter enables an investor to count the Class A and Class B shares
purchased under the Letter to obtain the reduced sales charge rate on purchases
of Class A shares of the Fund (and other Oppenheimer funds) that applies under
the Right of Accumulation to current purchases of Class A shares. Each purchase
of Class A shares under the Letter will be made at the offering price (including
the sales charge) that applies to a single lump-sum purchase of shares in the
amount intended to be purchased under the Letter.
In submitting a Letter, the investor makes no commitment to purchase
shares. However, 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. That amount is described in "Terms of
Escrow," below (those terms may be amended by the Distributor 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 a Letter of Intent. If those terms are amended, as they may be from time to
time by the Fund, the investor agrees to be bound by the amended terms and that
those amendments will apply automatically to existing Letters of Intent.
If the total eligible purchases made during the Letter of Intent period
do not equal or exceed the intended purchase amount, the commissions previously
paid to the dealer of record for the account and the amount of sales charge
retained by the Distributor will be adjusted to the rates applicable to actual
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 Prospectus, the sales
charges paid will be adjusted to the lower rate. That adjustment will be made
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.
The Transfer Agent will not hold shares in escrow for purchases of
shares of the Fund and other Oppenheimer funds by OppenheimerFunds prototype
401(k) plans under a Letter of Intent. If the intended purchase amount under a
Letter of Intent 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.
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.
|X| 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 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 total minimum investment 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. That sales charge
adjustment will apply to any shares redeemed prior to the completion of the
Letter. If the 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
by exchange of either (1) Class A shares of one of the other Oppenheimer funds
that were acquired subject to a Class A initial or contingent deferred sales
charge or (2) 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 to buy shares directly
from a bank account, you must enclose a check (minimum $25) for the initial
purchase with your application. Shares purchased by Asset Builder Plan payments
from bank accounts are subject to the redemption restrictions for recent
purchases described in the Prospectus. Asset Builder Plans also enable
shareholders of Oppenheimer Cash Reserves to use their fund account to make
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 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.
Before initiating Asset Builder payments, obtain a prospectus of the
selected fund(s) from the Distributor or your financial advisor and request an
application from the Distributor, complete it and return it. 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. The Transfer Agent
requires a reasonable period (approximately 15 days) after receipt of such
instructions to implement them. The Fund reserves the right to amend, suspend,
or discontinue offering Asset Builder plans at any time without prior notice.
Retirement Plans. Certain types of Retirement Plans are entitled to purchase
shares of the Fund without sales charge or at reduced sales charge rates, as
described in Appendix C to this Statement of Additional Information. Certain
special sales charge arrangements described in that Appendix apply to retirement
plans whose records are maintained on a daily valuation basis by Merrill Lynch
Pierce Fenner & Smith, Inc. or an independent record keeper that has a contract
or special arrangement with Merrill Lynch. If on the date the plan sponsor
signed the Merrill Lynch record keeping service agreement the plan has less than
$3 million in assets (other than assets invested in money market funds) invested
in applicable investments, then the retirement plan may purchase only Class B
shares of the Oppenheimer funds. Any retirement plans in that category that
currently invest in Class B shares of the Fund will have their Class B shares
converted to Class A shares of the Fund when the plan's applicable investments
reach $5 million.
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.
Classes of Shares. Each class of shares of the Fund represents an interest in
the same portfolio of investments of the Fund. However, each class has different
shareholder privileges and features. The net income attributable to Class B or
Class C shares and the dividends payable on Class B or Class C shares will be
reduced by incremental expenses borne solely by that class. Those expenses
include the asset-based sales charges to which Class B and Class C are subject.
The availability of different classes of shares permits an investor to
choose the method of purchasing shares that is more appropriate for the
investor. That may depend on the amount of the purchase, the length of time the
investor expects to hold shares, and other relevant circumstances. Class A
shares normally are sold subject to an initial sales charge. While Class B and
Class C shares have no initial sales charge, the purpose of the deferred sales
charge and asset-based sales charge on Class B and Class C shares is the same as
that of the initial sales charge on Class A shares - to compensate the
Distributor and brokers, dealers and financial institutions that sell shares of
the Fund. A salesperson who is entitled to receive compensation from his or her
firm for selling Fund shares may receive different levels of compensation for
selling one class of shares than another.
The Distributor will not accept any order in the amount of $500,000 or
more for Class B shares or $1 million or more for Class C shares on behalf of a
single investor (not including dealer "street name" or omnibus accounts). That
is because generally it will be more advantageous for that investor to purchase
Class A shares of the Fund.
|X| Class B Conversion. The conversion of Class B shares to Class A
shares after six years is subject to the continuing availability of a private
letter ruling from the Internal Revenue Service, or an opinion of counsel or tax
adviser, to the effect that the conversion of Class B shares does not constitute
a taxable event for the shareholder under Federal income tax law. If such a
revenue ruling or opinion is no longer available, the automatic conversion
feature may be suspended, in which event no further conversions of Class B
shares would occur while such suspension remained in effect. Altough 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 shareholder, and absent
such exchange, Class B shares might continue to be subject to the asset-based
sales charge for longer than six years.
|X| Allocation of Expenses. The Fund pays expenses related to its daily
operations, such as custodian fees, Trustees' fees, transfer agency fees, legal
fees and auditing costs. Those expenses are paid out of the Fund's assets and
are not paid directly by shareholders. However, those expenses reduce the net
asset value of shares, and therefore are indirectly borne by shareholders
through their investment.
The methodology for calculating the net asset value, dividends and
distributions of the Fund's share classes recognizes two types of expenses.
General expenses that do not pertain specifically to any one class are allocated
pro rata to the shares of all classes. The allocation is based on the percentage
of the Fund's total assets that is represented by the assets of each class, and
then equally to each outstanding share within a given class. Such general
expenses include management fees, legal, bookkeeping and audit fees, printing
and mailing costs of shareholder reports, Prospectuses, Statements of Additional
Information and other materials for current shareholders, fees to unaffiliated
Trustees, custodian expenses, share issuance costs, organization and start-up
costs, interest, taxes and brokerage commissions, and non-recurring expenses,
such as litigation costs.
Other expenses that are directly attributable to a particular class are
allocated equally to each outstanding share within that class. Examples of such
expenses include distribution and service plan (12b-1) fees, transfer and
shareholder servicing agent fees and expenses, and shareholder meeting expenses
(to the extent that such expenses pertain only to a specific class).
Determination of Net Asset Values Per Share. The net asset values per share of
each class of shares of the Fund are determined as of the close of business of
The New York Stock Exchange on each day that the Exchange is open. The
calculation is done by dividing the value of the Fund's net assets attributable
to a class by the number of shares of that class that are outstanding. The
Exchange normally closes at 4:00 P.M., New York time, but may close earlier on
some other days (for example, in case of weather emergencies or on days falling
before a holiday). The Exchange's most recent annual announcement (which is
subject to change) states that it will close on New Year's Day, Presidents' Day,
Martin Luther King, Jr. Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day. It may also close on other days.
Dealers other than Exchange members may conduct trading in certain
securities on days on which the Exchange is closed (including weekends and
holidays) or after 4:00 P.M. on a regular business day. The Fund's net asset
values will not be calculated on those days, and the values of some of the
Fund's portfolio securities may change significantly on those days, when
shareholders may not purchase or redeem shares. Additionally, trading on
European and Asian stock exchanges and over-the-counter markets normally is
completed before the close of The New York Stock Exchange.
Changes in the values of securities traded on foreign exchanges or
markets as a result of events that occur after the prices of those securities
are determined, but before the close of The New York Stock Exchange, will not be
reflected in the Fund's calculation of its net asset values that day unless the
Manager determines that the event is likely to effect a material change in the
value of the security. The Manager may make that determination, under procedures
established by the Board.
|X| Securities Valuation. The Fund's Board of Trustees has established
procedures for the valuation of the Fund's securities. In general those
procedures are as follows:
|_| Equity securities traded on a U.S. securities exchange or on NASDAQ are
valued as follows:
(1) if last sale information is regularly reported, they are valued at the
last reported sale price on the principal exchange on which they are traded or
on NASDAQ, as applicable, on that day, or (2) if last sale information is not
available on a valuation date, they are valued 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, at the closing "bid" price on
the valuation date. |_| Equity securities traded on a foreign securities
exchange generally are valued in one of the following ways: (1) at the last sale
price available to the pricing service approved by the Board of Trustees, or (2)
at the last sale price obtained by the Manager from the report of the principal
exchange on which the security is traded at its last trading session on or
immediately before the valuation date, or
(3) at the mean between the "bid" and "asked" prices obtained from the
principal exchange on which the security is traded or, on the basis of
reasonable inquiry, from two market makers in the security.
|_| Long-term debt securities having a remaining maturity in excess of
60 days are valued based on the mean between the "bid" and "asked" prices
determined by a portfolio pricing service approved by the Fund's Board of
Trustees or obtained by the Manager from two active market makers in the
security on the basis of reasonable inquiry.
|_| The following securities are valued at the mean between the "bid" and
"asked" prices determined by a pricing service approved by the Fund's Board of
Trustees or obtained by the Manager from two active market makers in the
security on the basis of reasonable inquiry: (1) debt instruments that have a
maturity of more than 397 days when issued, (2) debt instruments that had a
maturity of 397 days or less when issued and have a remaining maturity of more
than 60 days, and (3) non-money market debt instruments that had a maturity of
397 days or less when issued and which have a remaining maturity of 60 days or
less.
|_| The following securities are valued at cost, adjusted for
amortization of premiums and accretion of discounts: (1) money market debt
securities held by a non-money market fund that had a maturity of less than 397
days when issued that have
a remaining maturity of 60 days or less, and
(2) debt instruments held by a money market fund that have a remaining maturity
of 397 days or less. |_| 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, a 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).
In the case of U.S. government securities, mortgage-backed securities,
corporate bonds and foreign government securities, when last sale information is
not generally available, the Manager may use pricing services approved by the
Board of Trustees. The pricing service may use "matrix" comparisons to the
prices for comparable instruments on the basis of quality, yield and maturity.
Other special factors may be involved (such as the tax-exempt status of the
interest paid by municipal securities). The Manager will monitor the accuracy of
the pricing services. That monitoring may include comparing prices used for
portfolio valuation to actual sales prices of selected securities.
The closing prices in the London foreign exchange market on a
particular business day that are provided to the Manager by a bank, dealer or
pricing service that the Manager has determined to be reliable are used to value
foreign currency, including forward contracts, and to convert to U.S. dollars
securities that are denominated in foreign currency.
Puts, calls, and futures are valued at the last sale price on the
principal exchange on which they are traded or on NASDAQ, as applicable, as
determined by a pricing service approved by the Board of Trustees or by the
Manager. If there were no sales that day, they shall be valued at 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. If not, the 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 by the mean between "bid" and
"asked" prices obtained by the Manager from two active market makers. In certain
cases that may be at the "bid" price if no "asked" price is available.
When the Fund writes an option, an amount equal to the premium received
is included in the Fund's Statement of Assets and Liabilities as an asset. An
equivalent credit is included in the liability section. The 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 or put written by the Fund
is exercised, the proceeds are increased by the premium received. If a call or
put written by the Fund expires, the Fund has a gain in the amount of the
premium. If the Fund enters into a closing purchase transaction, it will have a
gain or loss, depending on whether the premium received was more or less than
the cost of the closing transaction. If the Fund exercises a put it holds, the
amount the Fund receives on its sale of the underlying investment is reduced by
the amount of premium paid by the Fund.
How to Sell Shares
Information on how to sell shares of the Fund is stated in the
Prospectus. The information below provides additional information about the
procedures and conditions for redeeming shares.
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.
In choosing to take advantage of the Checkwriting privilege, by signing
the Account Application or by completing a Checkwriting card, each individual
who signs:
(1) for individual accounts, represents that they are the
registered owner(s) of the shares of the Fund in that account; (2)
for accounts for corporations, partnerships, trusts and other
entities, represents that they are an officer, general partner,
trustee or other fiduciary or agent, as applicable, duly
authorized to act on behalf of the registered owner(s); (3)
authorizes the Fund, its Transfer Agent and any bank through which
the Fund's drafts (checks) are payable to pay all checks drawn on
the Fund account of such person(s) and to redeem a sufficient
amount of shares from that account to cover payment of each check;
(4) specifically acknowledges that if they choose to permit checks
to be honored if there is 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 the account, even if that account
is registered in the names of more than one person or more than
one authorized signature appears on the Checkwriting card or the
Application, as applicable; (5) understands that the Checkwriting
privilege may be terminated or amended at any time by the Fund
and/or the Fund's bank; and (6) acknowledges and agrees that
neither the Fund nor its bank shall incur any liability for that
amendment or termination of checkwriting privileges or for
redeeming shares to pay checks reasonably believed by them to be
genuine, or for returning or not paying checks that have not been
accepted for any reason.
Reinvestment Privilege. Within six months of a redemption, a shareholder may
reinvest all or part of the redemption proceeds of:
|_| Class A shares purchased subject to an initial sales charge or
Class A shares on which a contingent deferred sales charge was paid, or
|_| Class B shares that were subject to the Class B contingent deferred
sales charge when redeemed.
The reinvestment may be made without sales charge only in Class A
shares of the Fund or any of the other Oppenheimer funds into which shares of
the Fund are exchangeable as described in "How to Exchange Shares" below.
Reinvestment will be at the net asset value next computed after the Transfer
Agent receives the reinvestment order. The shareholder must ask the Transfer
Agent for that privilege at the time of reinvestment. This privilege does not
apply to Class C shares. The Fund may amend, suspend or cease offering this
reinvestment privilege at any time as to shares redeemed after the date of such
amendment, suspension or cessation.
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.
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.
The Fund has elected to be governed by Rule 18f-1 under the Investment
Company Act. Under that rule, 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 Fund will value securities used to pay redemptions in
kind using the same method the Fund uses to value its portfolio securities
described above under "Determination of Net Asset Values Per Share." That
valuation will be made as of the time the redemption price is determined.
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 will not cause the involuntary redemption of shares in an
account if the aggregate net asset value of such shares has fallen below the
stated minimum solely as a result of market fluctuations. If the Board exercises
this right, it may also fix the requirements for any notice to be given to the
shareholders in question (not less than 30 days). The Board may alternatively
set requirements for the shareholder to increase the investment, or set other
terms and conditions so that the shares would not be involuntarily redeemed.
Transfers of Shares. A transfer of shares to a different registration is not an
event that triggers the payment of sales charges. Therefore, 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. It does not matter
whether the transfer occurs by absolute assignment, gift or bequest, as long as
it does not involve, directly or indirectly, a public sale of the shares. When
shares subject to a contingent deferred sales charge are transferred, the
transferred shares will remain subject to the contingent deferred sales charge.
It will be calculated as if the transferee shareholder had acquired the
transferred shares in the same manner and at the same time as the transferring
shareholder.
If less than all shares held in an account are transferred, and some
but not all shares in the account would be subject to a contingent deferred
sales charge if redeemed at the time of transfer, the priorities described in
the Prospectus under "How to Buy Shares" for the imposition of the Class B or
Class C contingent deferred sales charge will be followed in determining the
order in which shares are transferred.
Distributions From Retirement Plans. Requests for distributions from
OppenheimerFunds-sponsored IRAs, 403(b)(7) custodial plans, 401(k) plans or
pension or profit-sharing plans should be addressed to "Trustee,
OppenheimerFunds Retirement Plans," c/o the Transfer Agent at its address listed
in "How To Sell Shares" in the Prospectus or on the back cover of this Statement
of Additional Information. The request must
(1) state the reason for the distribution;
(2) state the owner's awareness of tax penalties if the distribution is
premature; and
(3) conform to the requirements of the plan and the Fund's other redemption
requirements.
Participants (other than self-employed persons) in
OppenheimerFunds-sponsored pension or profit-sharing plans with shares of the
Fund held in the name of the plan or its fiduciary may not directly request
redemption of their accounts. The plan administrator or fiduciary 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 and submitted to the
Transfer Agent 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, 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. Shareholders should contact their
broker or dealer to arrange this type of redemption. The repurchase price per
share will be the net asset value next computed after the Distributor receives
an order placed by the dealer or broker. However, 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, the Exchange closes at 4:00 P.M., but
may do so earlier on some days. Additionally, the order must have been
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. The signature(s) of the registered owners on the
redemption documents must be guaranteed as described in the Prospectus.
Automatic Withdrawal and Exchange Plans. Investors owning shares of the Fund
valued at $5,000 or more can authorize the Transfer Agent to redeem shares
(having a value of at least $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. Payments must also be sent to the address of record for
the account and the address must not have 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
Account Application or by signature-guaranteed instructions sent to the Transfer
Agent. Shares are normally redeemed pursuant to an Automatic Withdrawal Plan
three business days before the payment transmittal date you select in the
Account Application. If a contingent deferred sales charge applies to the
redemption, the amount of the check or payment will be reduced accordingly.
The Fund cannot guarantee receipt of a payment on the date requested.
The Fund reserves the right to amend, suspend or discontinue offering these
plans at any time without prior notice. Because of the sales charge assessed on
Class A share purchases, shareholders should not make regular additional Class A
share purchases while participating in an Automatic Withdrawal Plan. Class B and
Class C shareholders should not establish withdrawal plans, because of the
imposition of the contingent deferred sales charge on such withdrawals (except
where the contingent deferred sales charge is waived as described in Appendix C
to this Statement of Additional Information).
By requesting an Automatic Withdrawal or Exchange Plan, the shareholder
agrees to the terms and conditions that apply to such plans, as stated below.
These provisions may be amended from time to time by the Fund and/or the
Distributor. When adopted, any amendments will automatically apply to existing
Plans.
|X| Automatic Exchange Plans. Shareholders can authorize the Transfer
Agent 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.
Instructions should be provided on the OppenheimerFunds Application or
signature-guaranteed instructions. Exchanges made under these plans are subject
to the restrictions that apply to exchanges as set forth in "How to Exchange
Shares" in the Prospectus and below in this Statement of Additional Information.
|X| Automatic Withdrawal Plans. Fund shares will be redeemed as
necessary to meet withdrawal payments. Shares acquired without a sales charge
will be redeemed first. 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 these plans should not be considered as a yield or income on your
investment.
The Transfer Agent will administer the investor's Automatic Withdrawal
Plan as agent for the shareholder(s) (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 not taken by the Transfer Agent in good faith to administer the
Plan. Share certificates will not be issued for shares of the Fund purchased for
and held under the Plan, but the Transfer Agent will credit all such shares to
the account of the Planholder on the records of the Fund. Any share certificates
held by a Planholder may be surrendered unendorsed to the Transfer Agent with
the Plan application so that the shares represented by the certificate may be
held under the Plan.
For accounts subject to Automatic Withdrawal Plans, distributions of
capital gains must be reinvested in shares of the Fund, which will be done at
net asset value without a sales charge. Dividends on shares held in the account
may be paid in cash or reinvested.
Shares will be redeemed to make withdrawal payments at the net asset
value per share determined on the redemption date. Checks or AccountLink
payments representing the proceeds of Plan withdrawals will normally be
transmitted three business days prior to the date selected for receipt of the
payment, according to the choice specified in writing by the Planholder. Receipt
of payment on the date selected cannot be guaranteed.
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 after 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 to redeem all, or any part of, the
shares held under the Plan. That notice must be in proper form in accordance
with the requirements of the then-current Prospectus of the Fund. In that case,
the Transfer Agent will redeem the number of shares requested at the net asset
value per share in effect and will mail a check for the proceeds to the
Planholder.
The Planholder may terminate a Plan at any time by writing to the
Transfer Agent. The Fund may also give directions to the Transfer Agent to
terminate a Plan. The Transfer Agent will also terminate a Plan upon its receipt
of evidence satisfactory to it that the Planholder has died or is legally
incapacitated. Upon termination of a Plan by the Transfer Agent or the Fund,
shares that have not been redeemed will be held in uncertificated form in the
name of the Planholder. The account will continue as a dividend-reinvestment,
uncertificated account unless and until proper instructions are received from
the Planholder, his or her executor or guardian, or another authorized person.
To use shares held under the Plan as collateral for a debt, the
Planholder may request issuance of a portion of the shares in certificated form.
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. 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 Oppenheimer funds
that have a single class without a class designation are deemed "Class A" shares
for this purpose. You can obtain a current list showing which funds offer which
classes by calling the Distributor at 1-800-525-7048.
|_| All of the Oppenheimer funds currently offer Class A, B and C
shares except Oppenheimer Money Market Fund, Inc., Centennial Money Market
Trust, Centennial Tax Exempt Trust, Centennial Government Trust, Centennial New
York Tax Exempt Trust, Centennial California Tax Exempt Trust, and Centennial
America Fund, L.P., which only offer Class A shares.
|_| Oppenheimer Main Street California Municipal Fund currently offers
only 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.
|_| Class Y shares of Oppenheimer Real Asset Fund may not be exchanged
for shares of any other Fund.
Class A shares of Oppenheimer funds may be exchanged at net asset value
for shares of any money market fund offered by the Distributor. 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. They may also be used to purchase shares of Oppenheimer funds subject to
a contingent deferred sales charge.
Shares of Oppenheimer Money Market Fund, Inc. purchased with the
redemption proceeds of shares of other mutual funds (other than funds managed by
the Manager or its subsidiaries) redeemed within the 30 days 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. 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. If requested, they must
supply proof of entitlement to this privilege.
For accounts established on or before March 8, 1996 holding Class M
shares of Oppenheimer Convertible Securities Fund, Class M shares can be
exchanged only for Class A shares of other Oppenheimer funds. Exchanges to Class
M shares of Oppenheimer Convertible Securities Fund are permitted from Class A
shares of Oppenheimer Money Market Fund, Inc. or Oppenheimer Cash Reserves that
were acquired by exchange of Class M shares. No other exchanges may be made to
Class M shares.
Shares of the Fund acquired by reinvestment of dividends or
distributions from any of the other Oppenheimer funds or from any unit
investment trust for which reinvestment arrangements have been made with the
Distributor may be exchanged at net asset value for shares of any of the
Oppenheimer funds.
|X| How Exchanges Affect Contingent Deferred Sales Charges. No
contingent deferred sales charge is imposed on exchanges of shares of any class
purchased subject to a contingent deferred sales charge. However, when Class A
shares acquired by exchange of Class A shares of other Oppenheimer funds
purchased subject to a Class A contingent deferred sales charge are redeemed
within 18 months of the end of the calendar month of the initial purchase of the
exchanged Class A shares, the Class A contingent deferred sales charge is
imposed on the redeemed shares. The Class B contingent deferred sales charge is
imposed on Class B shares acquired by exchange if they are redeemed within 6
years of the initial purchase of the exchanged Class B shares. The Class C
contingent deferred sales charge is imposed on Class C shares acquired by
exchange if they are redeemed within 12 months of the initial purchase of the
exchanged Class C shares.
When Class B or Class C shares are redeemed to effect an exchange, the
priorities described in "How To Buy Shares" in the Prospectus for the imposition
of the Class B or the Class C contingent deferred sales charge will be followed
in determining the order in which the shares are exchanged. Before exchanging
shares, shareholders should take into account how the exchange may affect 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 which class of shares they wish to exchange.
|X| Limits on Multiple Exchange Orders. 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.
|X| Telephone Exchange Requests. When exchanging shares by telephone, a
shareholder must have an existing account in the fund to which the exchange is
to be made. Otherwise, the investors must obtain a Prospectus of that fund
before the exchange request may be submitted. For full or partial exchanges of
an account made by telephone, any special account features such as Asset Builder
Plans and Automatic Withdrawal Plans 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.
|X| Processing 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 Fund may refuse the
request.
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.
The different Oppenheimer funds available for exchange have different
investment objectives, policies and risks. A shareholder should assure that the
fund selected is appropriate for his or her investment and should be aware of
the tax consequences of an exchange. For federal income tax purposes, an
exchange transaction is treated as a redemption of shares of one fund and a
purchase of shares of another. "Reinvestment Privilege," above, discusses some
of the tax consequences of reinvestment of redemption proceeds in such cases.
The Fund, the Distributor, and the Transfer Agent are unable to provide
investment, tax or legal advice to a shareholder in connection with an exchange
request or any other investment transaction.
Dividends, Capital Gains and Taxes
Dividends and Distributions. Dividends will be payable on shares held of record
at the time of the previous determination of net asset value, or as otherwise
described in "How to Buy Shares." Daily dividends will not be declared or paid
on newly purchased shares until such time as Federal Funds (funds credited to a
member bank's account at the Federal Reserve Bank) are available from the
purchase payment for such shares. Normally, purchase checks received from
investors are converted to Federal Funds on the next business day. Shares
purchased through dealers or brokers normally are paid for by the third business
day following the placement of the purchase order.
Shares redeemed through the regular redemption procedure will be paid
dividends through and including the day on which the redemption request is
received by the Transfer Agent in proper form. Dividends will be declared on
shares repurchased by a dealer or broker for three business days following the
trade date (that is, up 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.
The Fund's practice of attempting to pay dividends on Class A shares at
a constant level requires the Manager to monitor the Fund's portfolio and, if
necessary, to select higher-yielding securities when it is deemed appropriate to
seek income at the level needed to meet the target. Those securities must be
within the Fund's investment parameters, however. The Fund expects to pay
dividends at a targeted level from its net investment income and other
distributable income without any impact on the net asset values per share.
The Fund has no fixed dividend rate for Class B and Class C shares, and
the rate can change for Class A shares. There can be no assurance as to the
payment of any dividends or the realization of any capital gains. The dividends
and distributions paid by a class of shares will 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. Dividends are
calculated in the same manner, at the same time, and on the same day for each
class of shares. However, dividends on Class B and Class C shares are expected
to be lower than dividends on Class A shares. That is because of the effect of
the asset-based sales charge on Class B and Class C shares. Those dividends will
also differ in amount as a consequence of any difference in the net asset values
of the different classes of shares.
Dividends, distributions and 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.
Reinvestment will be made 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. Unclaimed accounts may be subject to state escheatment
laws, and the Fund and the Transfer Agent will not be liable to shareholders or
their representatives for compliance with those laws in good faith.
Tax Status of the Fund's Dividends and Distributions. The Federal tax treatment
of the Fund's dividends and capital gains distributions is briefly highlighted
in the Prospectus.
Special provisions of the Internal Revenue Code govern the eligibility
of the Fund's dividends for the dividends-received deduction for corporate
shareholders. Long-term capital gains distributions are not eligible for the
deduction. The amount of dividends paid by the Fund that may qualify for the
deduction is limited to the aggregate amount of qualifying dividends that the
Fund derives from portfolio investments that the Fund has held for a minimum
period, usually 46 days. A corporate shareholder will not be eligible for the
deduction on dividends paid on Fund shares held for 45 days or less. To the
extent the Fund's dividends are derived from gross income from option premiums,
interest income or short-term gains from the sale of securities or dividends
from foreign corporations, those dividends will not qualify for the deduction.
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.
If it does not, the Fund must pay an excise tax on the amounts not distributed.
It is presently anticipated that the Fund will meet those requirements. However,
the Board of Trustees and the Manager might determine in a particular year that
it would be in the best interests 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 Fund intends to qualify as a "regulated investment company" under
the Internal Revenue Code (although it reserves the right not to qualify). That
qualification enables the Fund to "pass through" its income and realized capital
gains to shareholders without having to pay tax on them. This avoids a double
tax on that income and capital gains, since shareholders normally will be taxed
on the dividends and capital gains they receive from the Fund (unless the Fund's
shares are held in a retirement account or the shareholder is otherwise exempt
from tax). 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. The Internal Revenue Code contains a
number of complex tests relating to qualification which the Fund might not meet
in any particular year. If it did not so qualify, the Fund would be treated for
tax purposes as an ordinary corporation and receive no tax deduction for
payments made to shareholders.
If prior distributions made by the Fund must be re-characterized as a
non-taxable return of capital at the end of the fiscal year as a result of the
effect of the Fund's investment policies, they will be identified as such in
notices sent to shareholders.
Dividend Reinvestment in Another Fund. Shareholders of the Fund may elect to
reinvest all dividends and/or capital gains distributions in shares of the same
class of any of the other Oppenheimer funds listed above. Reinvestment will be
made without sales charge at the net asset value per share in effect at the
close of business on the payable date of the dividend or distribution. To elect
this option, the shareholder must notify the Transfer Agent in writing and must
have an existing account in the fund selected for reinvestment. Otherwise the
shareholder first must obtain a prospectus for that fund and an application from
the Distributor to establish an account. Dividends and/or distributions from
shares of certain other Oppenheimer funds (other than Oppenheimer Cash Reserves)
may be invested in shares of this Fund on the same basis.
Additional Information About the Fund
The Distributor. The Fund's shares are sold through dealers, brokers and other
financial institutions that have a sales agreement with OppenheimerFunds
Distributor, Inc., a subsidiary of the Manager that acts as the Fund's
Distributor. The Distributor also distributes shares of the other Oppenheimer
funds and is sub-distributor for funds managed by a subsidiary of the Manager.
The Transfer Agent. OppenheimerFunds Services, the Fund's Transfer Agent, is a
division of the Manager. It is responsible for maintaining the Fund's
shareholder registry and shareholder accounting records, and for paying
dividends and distributions to shareholders. It also handles shareholder
servicing and administrative functions. It acts on an "at-cost" basis. It also
acts as shareholder servicing agent for the other Oppenheimer funds.
Shareholders should direct inquiries about their accounts to the Transfer Agent
at the address and toll-free numbers shown on the back cover.
The Custodian. The Bank of New York is the Custodian of the Fund's assets. The
Custodian's responsibilities include safeguarding and controlling the Fund's
portfolio securities and handling the delivery of such securities to and from
the Fund. It will be the practice of the Fund to deal with the Custodian in a
manner uninfluenced by any banking relationship the Custodian may have with the
Manager and its affiliates. The Fund's cash balances with the custodian in
excess of $100,000 are not protected by Federal deposit insurance. Those
uninsured balances at times may be substantial. Independent Auditors. Deloitte &
Touche LLP are the independent auditors of the Fund. They audit the Fund's
financial statements and perform other related audit services. They also act as
auditors for the Manager and for certain other funds advised by the Manager and
its affiliates.
INDEPENDENT AUDITORS' REPORT
===============================================================================
The Board of Trustees and Shareholders of
Oppenheimer International Bond Fund:
We have audited the accompanying statement of assets and liabilities, including
the statement of investments, of Oppenheimer International Bond Fund as of
September 30, 1998, the related statement of operations for the year then
ended, and the statements of changes in net assets for the years ended
September 30, 1998 and 1997, and the financial highlights for the period June
15, 1995, to September 30, 1998. 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, 1998, 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
International Bond Fund at September 30, 1998, 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.
DELOITTE & TOUCHE LLP
Denver, Colorado
October 28, 1998
<PAGE>
STATEMENT OF INVESTMENTS September 30, 1998
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
========================================================================================================================
<S> <C> <C>
FOREIGN GOVERNMENT OBLIGATIONS--56.6%
- ------------------------------------------------------------------------------------------------------------------------
ARGENTINA--4.2%
Argentina (Republic of):
Bonds, Bonos de Consolidacion de Deudas, Series I, 2.974%, 4/1/07(2) (ARP) 8,915,676 $ 5,117,623
Nts., 9.15%, 11/30/02(2) (9) 4,060,000 3,582,950
- ------------------------------------------------------------------------------------------------------------------------
Banco Hipotecario Nacional (Argentina)
Medium-Term Nts., 10.625%, 8/7/06 600,000 522,000
- ------------------------------------------------------------------------------------------------------------------------
Buenos Aires (Province of) Bonds, Series PBA1, 2.974%, 4/1/07(2) (ARP) 2,125,041 1,061,586
-----------
10,284,159
- ------------------------------------------------------------------------------------------------------------------------
BRAZIL--1.6%
Banco Nac de Desen Econo Bonds, 10.30%, 6/16/08(2) (4) 2,820,000 1,952,850
- ------------------------------------------------------------------------------------------------------------------------
Banco Nac de Desen Econo Nts., 10.80%, 6/16/08(2) 2,730,000 1,890,525
-----------
3,843,375
- ------------------------------------------------------------------------------------------------------------------------
BULGARIA--1.5%
Bulgaria (Republic of):
Disc. Bonds, Tranche A, 6.688%, 7/28/24(2) 660,000 424,875
Front-Loaded Interest Reduction Bearer Bonds,
Tranche A, 2.50%, 7/28/12(5) 6,850,000 3,296,563
-----------
3,721,438
- ------------------------------------------------------------------------------------------------------------------------
CANADA--1.2%
Canada (Government of) Bonds, 10.25%, 12/1/98(CAD) 4,360,000 2,881,142
- ------------------------------------------------------------------------------------------------------------------------
COSTA RICA--0.1%
Banco Central Costa Rica Interest Claim Bonds, Series A,
6.568%, 5/21/05(2) 132,525 129,212
- ------------------------------------------------------------------------------------------------------------------------
Banco Central of Costa Rica Interest Claim Bonds, Series B,
6.568%, 5/21/05(2) 71,575 69,697
-----------
198,909
- ------------------------------------------------------------------------------------------------------------------------
CROATIA--0.5%
Croatia (Government of) Bonds, Series B, 6.563%, 7/31/06(2) 1,755,271 1,215,525
- ------------------------------------------------------------------------------------------------------------------------
DENMARK--2.2%
Denmark (Kingdom of) Bonds:
7%, 12/15/04(DKK) 16,580,000 2,955,176
8%, 5/15/03(DKK) 13,720,000 2,479,312
-----------
5,434,488
- ------------------------------------------------------------------------------------------------------------------------
FRANCE--1.2%
France (Government of) Bonds, Obligations Assimilables du Tresor
Coupon Strip, Series OC08, Zero Coupon, 4.83%, 10/25/08(6) (FRF) 25,060,000 2,976,165
</TABLE>
15 Oppenheimer International Bond Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
GERMANY--2.6%
Germany (Republic of):
Bonds, 6.25%, 4/26/06(DEM) 5,755,000 $ 3,951,205
Nts., Series 96, 3.50%, 12/18/98(DEM) 4,000,000 2,393,269
------------
6,344,474
- ------------------------------------------------------------------------------------------------------------------------
GREAT BRITAIN--2.4%
United Kingdom Treasury Bonds, 6.75%, 11/26/04(GBP) 3,160,000 5,851,745
- ------------------------------------------------------------------------------------------------------------------------
INDONESIA--1.0%
Perusahaan Listr, 17%, 8/21/01(7) (IDR) 2,000,000,000 105,140
- ------------------------------------------------------------------------------------------------------------------------
PT Bank Negara Indonesia Sr. Nts., 7.625%, 2/15/07(8) 5,653,000 2,331,863
- ------------------------------------------------------------------------------------------------------------------------
PT Hutama Karya Promissory Nts., Zero Coupon, 4/9/99(7) (11) (IDR) 5,000,000,000 116,822
------------
2,553,825
- ------------------------------------------------------------------------------------------------------------------------
ITALY--5.7%
Italy (Republic of) Treasury Bonds, Buoni del
Tesoro Poliennali, 8.50%, 1/1/04(ITL) 19,000,000,000 13,880,480
- ------------------------------------------------------------------------------------------------------------------------
IVORY COAST--4.4%
Ivory Coast (Government of) Past Due Interest Bonds:
2%, 3/29/18(5) 7,000,000 1,487,500
2%, 3/29/18(2) (4) 16,865,000 4,595,713
Series 20 yr., 2%, 3/29/18(5) 3,960,000 1,079,100
Series F, 1.90%, 3/29/18(5) (FRF) 84,920,000 3,598,433
------------
10,760,746
- ------------------------------------------------------------------------------------------------------------------------
JORDAN--3.0%
Hashemite (Kingdom of Jordan):
Bonds, Series DEF, 5%, 12/23/23(5) 8,190,000 4,279,275
Disc. Bonds, 6.563%, 12/23/23(2) 5,250,000 2,953,125
------------
7,232,400
- ------------------------------------------------------------------------------------------------------------------------
KOREA, REPUBLIC OF (SOUTH)--4.1%
Export-Import Bank of Korea Unsec. Unsub. Bonds, 7.125%, 9/20/01 3,600,000 2,799,000
- ------------------------------------------------------------------------------------------------------------------------
Industrial Bank of Korea Unsec. Unsub. Nts.,
Series 1BR, 2.80%, 7/5/01(7) (JPY) 446,900,000 2,520,051
- ------------------------------------------------------------------------------------------------------------------------
Korea (Republic of) Nts.:
8.031%, 4/7/99(2) (7) 1,000,000 944,375
8.281%, 4/8/00(2) (7) 2,920,000 2,580,550
- ------------------------------------------------------------------------------------------------------------------------
Korea Electric Power Nts., 7%, 10/1/02(9) 1,520,000 1,202,954
------------
10,046,930
- ------------------------------------------------------------------------------------------------------------------------
MEXICO--1.1%
Mexican Williams Bonds, 6.25%, 11/15/08(2) (7) 500,000 410,000
- ------------------------------------------------------------------------------------------------------------------------
Petroleos Mexicanos Debs., 14.50%, 3/31/06(GBP) 1,280,000 2,349,255
------------
2,759,255
</TABLE>
16 Oppenheimer International Bond Fund
<PAGE>
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NEW ZEALAND--1.1%
New Zealand (Government of) Bonds, 10%, 3/15/02(NZD) 4,920,000 $ 2,795,716
- ------------------------------------------------------------------------------------------------------------------------
NIGERIA--1.8%
Central Bank of Nigeria Gtd. Bonds, Series WW, 6.25%, 11/15/20 4,000,000 2,290,000
- ------------------------------------------------------------------------------------------------------------------------
Nigeria (Federal Republic of) Promissory Nts., Series RC,
5.092%, 1/5/10 3,839,768 2,038,579
------------
4,328,579
- ------------------------------------------------------------------------------------------------------------------------
NORWAY--2.7%
Norway (Government of) Bonds, 9.50%, 10/31/02(NOK) 43,710,000 6,715,434
- ------------------------------------------------------------------------------------------------------------------------
PERU--2.3%
Peru (Republic of):
Front-Loaded Interest Reduction Bonds, 3.25%, 3/7/17(2) 2,630,000 1,190,075
Sr. Nts., Zero Coupon, 4.53%, 2/28/16(6) 11,801,797 4,524,809
------------
5,714,884
- ------------------------------------------------------------------------------------------------------------------------
PHILIPPINES--0.5%
Philippines (Republic of) Debs., 6.563%, 12/1/09(2) 1,858,400 1,305,526
- ------------------------------------------------------------------------------------------------------------------------
POLAND--0.5%
Poland (Republic of) Treasury Bills, Series 26, Zero Coupon,
12.64%, 2/10/99(6) (PLZ) 4,400,000 1,162,981
- ------------------------------------------------------------------------------------------------------------------------
RUSSIA--0.4%
City of St. Petersburg Unsec. Nts., 9.50%, 6/18/02 1,700,000 340,000
- ------------------------------------------------------------------------------------------------------------------------
Russia (Government of) Unsec. Unsub. Bonds, 8.75%, 10/3/02(7) 3,570,000 714,000
------------
1,054,000
- ------------------------------------------------------------------------------------------------------------------------
SPAIN--6.7%
Spain (Kingdom of) Gtd. Bonds, Bonos y Obligacion del Estado:
6%, 1/31/29(ESP) 953,260,000 7,263,603
6.75%, 4/15/00(ESP) 480,600,000 3,542,718
10%, 2/28/05(ESP) 604,550,000 5,669,105
------------
16,475,426
- ------------------------------------------------------------------------------------------------------------------------
TURKEY--3.1%
Turkey (Republic of) Treasury Bills, Zero Coupon:
78.52%, 2/3/99(6) (TRL) 1,065,760,000,000 2,823,266
79.74%, 1/27/99(6) (TRL) 1,044,300,000,000 3,068,338
83.91%, 11/4/98(6) (TRL) 497,400,000,000 1,628,189
------------
7,519,793
- ------------------------------------------------------------------------------------------------------------------------
VIETNAM--0.7%
Vietnam (Government of) Bonds, 3%, 3/12/28(2) 7,095,000 1,720,538
------------
Total Foreign Government Obligations (Cost $156,255,093) 138,777,933
</TABLE>
17 Oppenheimer International Bond Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
FACE MARKET VALUE
AMOUNT(1) SEE NOTE 1
========================================================================================================================
<S> <C> <C>
LOAN PARTICIPATIONS--5.2%
- ------------------------------------------------------------------------------------------------------------------------
Algeria (Republic of) Reprofiled Debt Loan Participation Nts.:
Tranche 1, 6.375%, 9/4/06(2) $ 8,634,363 $ 4,101,323
Tranche A, 1.438%, 9/4/06(2) (JPY) 56,945,454 156,386
Tranche A, 2.125%, 3/4/00(2) (JPY) 28,472,727 140,748
Tranche A, 7.188%, 3/4/00(2) 3,865,181 2,850,572
- ------------------------------------------------------------------------------------------------------------------------
Algeria (Republic of) Unrestructured Nts., 6.615%, 1/22/01(7) (JPY) 476,833,318 2,374,563
- ------------------------------------------------------------------------------------------------------------------------
Jamaica (Government of) 1990 Refinancing Agreement Nts.,
Tranche A, 6.50%, 10/16/00(2) (7) 89,999 81,675
- ------------------------------------------------------------------------------------------------------------------------
Trinidad & Tobago Loan Participation Agreement:
Tranche A, 1.807%, 9/30/00(2) (7) (JPY) 116,909,091 697,773
Tranche B, 1.807%, 9/30/00(2) (7) (JPY) 389,658,566 2,325,681
----------
Total Loan Participations (Cost $17,023,742) 12,728,721
========================================================================================================================
CORPORATE BONDS AND NOTES--8.2%
- ------------------------------------------------------------------------------------------------------------------------
Bakrie Investindo, Zero Coupon Promissory Nts.:
3/16/99(7) (11) (IDR) 5,990,000,000 139,953
7/10/98(7) (11) (IDR) 2,000,000,000 46,729
- ------------------------------------------------------------------------------------------------------------------------
Cellular Communications International, Inc.,
0%/9.50% Bonds, 4/1/05(3) (9) (10) (XEU) 1,340,000 1,143,964
- ------------------------------------------------------------------------------------------------------------------------
Empresa Electric Del Norte, 10.50% Sr. Debs., 6/15/05(7) 890,000 609,650
- ------------------------------------------------------------------------------------------------------------------------
European Bank Reconstruction & Development, Zero Coupon
Sr. Unsub. Nts., Series EMTN, 13.59%, 12/31/18(6) (ZAR) 96,550,000 903,101
- ------------------------------------------------------------------------------------------------------------------------
Federal National Mortgage Assn., 6.875% Sr. Unsec. Nts., 6/7/02(GBP) 3,250,000 5,685,299
- ------------------------------------------------------------------------------------------------------------------------
Industrial Finance Corp. (Thailand), 6.875% Sr. Nts., 4/1/03(4) 1,940,000 1,411,752
- ------------------------------------------------------------------------------------------------------------------------
Internacional de Ceramica SA:
9.75% Unsec. Unsub. Nts., 8/1/02(3) (4) (9) 700,000 469,000
9.75% Unsec. Unsub. Nts., 8/1/02 750,000 502,500
- ------------------------------------------------------------------------------------------------------------------------
Mechala Group Jamaica Ltd., 12% Bonds, 2/15/02(7) (8) 250,000 163,125
- ------------------------------------------------------------------------------------------------------------------------
Netia Holdings BV, 0%/11% Sr. Disc. Nts., 11/1/07(10) (DEM) 1,300,000 351,960
- ------------------------------------------------------------------------------------------------------------------------
NTL, Inc., 9.50% Sr. Unsub. Nts., Series REGS, 4/1/08(GBP) 580,000 813,164
- ------------------------------------------------------------------------------------------------------------------------
Ongko International Finance Co. BV, 10.50% Gtd. Nts., 3/29/04(4) (11) 365,000 20,075
- ------------------------------------------------------------------------------------------------------------------------
PT Polysindo Eka Perkasa:
Zero Coupon Nts., Series 2, 7/15/98(7) (11) (IDR) 4,107,500,000 38,388
Zero Coupon Promissory Nts., 7/28/98(7) (11) 1,000,000 100,000
Zero Coupon Promissory Nts., 7/14/98(7) (11) 500,000 50,000
Zero Coupon Promissory Nts., 3/16/99(7) (11) (IDR) 3,000,000,000 28,037
Zero Coupon Promissory Nts., 7/10/98(7) (11) (IDR) 2,000,000,000 18,692
- ------------------------------------------------------------------------------------------------------------------------
Reliance Industries Ltd., 10.50% Bonds, 8/6/46(4) 1,937,000 1,488,978
- ------------------------------------------------------------------------------------------------------------------------
Shaw Communications, Inc., 8.54% Debs., 9/30/27(9) CAD 2,000,000 1,342,281
- ------------------------------------------------------------------------------------------------------------------------
Snap Ltd., 11.50% Sec. Bonds, 1/29/09(DEM) 7,562,499 3,665,067
- ------------------------------------------------------------------------------------------------------------------------
TAG Heuer International SA, 12% Sr. Sub. Nts., 12/15/05(7) (9) 70,000 82,558
- ------------------------------------------------------------------------------------------------------------------------
Trizec Hahn Corp., 7.45% Sr. Unsec. Debs., 6/1/04(CAD) 1,600,000 1,038,226
----------
Total Corporate Bonds and Notes (Cost $27,627,274) 20,112,499
</TABLE>
18 Oppenheimer International Bond Fund
<PAGE>
<TABLE>
<CAPTION>
MARKET VALUE
SHARES SEE NOTE 1
========================================================================================================================
<S> <C> <C>
COMMON STOCKS--0.0%
- ------------------------------------------------------------------------------------------------------------------------
Air New Zealand Ltd., Cl. B (Cost $394,974) 145,000 $ 114,780
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT(1)
========================================================================================================================
<S> <C> <C>
STRUCTURED INSTRUMENTS--14.3%
- ------------------------------------------------------------------------------------------------------------------------
Citibank, Argentine Peso Linked Nts., 10.75%, 10/30/98 $ 2,800,000 2,798,880
- ------------------------------------------------------------------------------------------------------------------------
Citibank, Greek Drachma Linked Nts., 11.30%, 11/30/98 1,400,000 1,405,040
- ------------------------------------------------------------------------------------------------------------------------
Deutsche Morgan Grenfell, GKO Linked Nts.,
Zero Coupon, 5/19/99(7) (11) (RUR) 14,515,000 181,154
- ------------------------------------------------------------------------------------------------------------------------
Hong Kong & Shanghai Banking Corp. Linked Receipt Nts.,
Linked to the Korean Exchange Bank Floating Rate Nts.
due 12/23/29, Zero Coupon, 13.25%, 12/28/99(6) 2,900,000 2,431,650
- ------------------------------------------------------------------------------------------------------------------------
J.P. Morgan & Co., Inc., Turkish Lira Linked Nts., 84%, 10/2/98 7,200,000 7,200,684
- ------------------------------------------------------------------------------------------------------------------------
Korea Development Bank, Industrial Bank Finance Linked Nts.,
Zero Coupon, 11.50%, 3/5/99(6)(7) 1,350,000 1,352,025
- ------------------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc.:
Argentine Peso Linked Nts., 15%, 10/23/98 2,820,881 2,824,040
Russian S-Account Credit Linked Nts., Zero Coupon, 1/20/99(7) (11)(RUR) 11,515,000 427,472
- ------------------------------------------------------------------------------------------------------------------------
Standard Chartered Bank:
Chinese Renminbi Currency Linked Nts.:
9.50%, 11/5/98 2,820,000 2,820,000
10%, 11/4/98 2,820,000 2,814,642
New Taiwan Dollar/Japanese Yen Linked Nts., 23.50%, 10/2/98 1,405,000 1,370,718
Philippines Peso/Japanese Yen Linked Nts.:
20.25%, 11/9/98 1,420,000 1,311,370
22.20%, 10/13/98 487,000 448,965
22.25%, 10/13/98 1,705,000 1,576,955
22.70%, 10/21/98 610,000 563,579
22.83%, 1/19/99 1,410,000 1,299,597
Thai Baht/Japanese Yen Linked Nts.:
21.70%, 11/9/98 1,400,000 1,372,420
23.80%, 11/4/98 1,400,000 1,396,780
27.30%, 11/13/98 1,400,000 1,402,100
------------
Total Structured Instruments (Cost $37,531,109) 34,998,071
</TABLE>
19 Oppenheimer International Bond Fund
<PAGE>
STATEMENT OF INVESTMENTS (Continued)
<TABLE>
<CAPTION>
MARKET VALUE
DATE STRIKE CONTRACTS SEE NOTE 1
================================================================================================================================
<S> <C> <C> <C> <C>
CALL OPTIONS PURCHASED--0.0%
- --------------------------------------------------------------------------------------------------------------------------------
British Pound Sterling/German Mark Call Opt. 10/98 2.899(GBP/DEM) 3,955,000 $ 93,065
- --------------------------------------------------------------------------------------------------------------------------------
Russia (Government of) Principal Loan
Debs., Series 24 yr.:
6.625%, 12/15/20 Call Opt. 11/98 22.000% 2,810 --
6.625%, 12/15/20 Call Opt. 11/98 33.500 2,820 --
6.625%, 12/15/20 Call Opt. 11/98 38.875 5,630 --
------------
Total Call Options Purchased (Cost $529,900) 93,065
================================================================================================================================
PUT OPTIONS PURCHASED--0.9%
- --------------------------------------------------------------------------------------------------------------------------------
Brazilian Real Put Opt. 12/98 1.24(BRR) 2,810,000 153,426
- --------------------------------------------------------------------------------------------------------------------------------
Brazilian Real Put Opt. 4/99 1.285(BRR) 5,360,000 793,548
- --------------------------------------------------------------------------------------------------------------------------------
British Pound Sterling/German Mark Put Opt. 11/98 2.80(GBP/DEM) 3,335,000 86,710
- --------------------------------------------------------------------------------------------------------------------------------
Hong Kong Dollar Put Opt. 3/99 7.96(HKD) 44,714,000 92,683
- --------------------------------------------------------------------------------------------------------------------------------
Japanese Yen Put Opt. 12/98 137(JPY) 1,918,000,000 501,883
- --------------------------------------------------------------------------------------------------------------------------------
Standard & Poor's 500 Index Futures,
11/98 Put Opt. 11/98 $1,025 35 456,750
------------
Total Put Options Purchased (Cost $1,209,979) 2,085,000
</TABLE>
<TABLE>
<CAPTION>
FACE
AMOUNT (1)
================================================================================================================================
<S> <C> <C>
REPURCHASE AGREEMENTS--12.8%
- --------------------------------------------------------------------------------------------------------------------------------
Repurchase agreement with J.P. Morgan Securities, Inc., 5.40%, dated
9/30/98, to be repurchased at $31,304,695 on 10/1/98, collateralized by
U.S. Treasury Bonds, 6.25%-10.625%, 8/15/15-8/15/25, with a value
of $29,743,076, and U.S. Treasury Nts., 5.625%, 5/15/08, with a value
of $2,487,117 (Cost $31,300,000) $31,300,000 31,300,000
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS, AT VALUE (COST $271,872,071) 98.0% 240,210,069
- --------------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS NET OF LIABILITIES 2.0 4,827,997
----------- ------------
NET ASSETS 100.0% $245,038,066
=========== ============
</TABLE>
20 Oppenheimer International Bond Fund
<PAGE>
- -------------------------------------------------------------------------------
1. Face amount is reported in U.S. Dollars, except for those denoted in the
following currencies:
ARP--Argentine Peso ITL--Italian Lira
BRR--Brazilian Real JPY--Japanese Yen
CAD--Canadian Dollar NOK--Norwegian Krone
DEM--German Mark NZD--New Zealand Dollar
DKK--Danish Krone PLZ--Polish Zloty
ESP--Spanish Peseta RUR--Russian Ruble
FRF--French Franc TRL--Turkish Lira
GBP--British Pound Sterling XEU--European Currency Units
HKD--Hong Kong Dollar ZAR--South African Rand
IDR--Indonesian Rupiah
2. Represents the current interest rate for a variable rate security.
3. A sufficient amount of securities has been designated to cover outstanding
forward foreign currency exchange contracts. See Note 5 of Notes to Financial
Statements.
4. 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 $9,938,368 or 4.06% of the Fund's net
assets as of September 30, 1998.
5. Represents the current interest rate for an increasing rate security.
6. For zero coupon bonds, the interest rate shown is the effective yield on the
date of purchase.
7. Identifies issues considered to be illiquid or restricted--See Note 8 of
Notes to Financial Statements.
8. Securities with an aggregate market value of $1,917,488 are held in
collateralized accounts to cover initial margin requirements on open futures
sales contracts. See Note 6 of Notes to Financial Statements.
9. A sufficient amount of liquid assets has been designated to cover
outstanding 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>
Brazilian Real Call Option 5,360,000 4/6/99 1.218(BRR) $ 58,960 $ 47,972
- -----------------------------------------------------------------------------------------------------------------------
Brazilian Real Put Option 5,360,000 4/6/99 1.414(BRR) 122,207 644,004
- -----------------------------------------------------------------------------------------------------------------------
British Pound Sterling Call Option 3,290,000 12/30/98 0.589(GBP) 83,895 85,540
- -----------------------------------------------------------------------------------------------------------------------
British Pound Sterling/German
Mark Call Option 3,955,000 10/1/98 2.92(GBP/DEM) 49,975 --
- -----------------------------------------------------------------------------------------------------------------------
British Pound Sterling/German
Mark Call Option 3,335,000 11/13/98 2.90(GBP/DEM) 34,418 35,685
- -----------------------------------------------------------------------------------------------------------------------
Japanese Yen Call Option 1,767,500,000 12/18/98 126.25(JPY) 177,100 167,647
- -----------------------------------------------------------------------------------------------------------------------
Japanese Yen Put Option 2,100,000,000 12/18/98 150.00(JPY) 53,899 88,683
- -----------------------------------------------------------------------------------------------------------------------
Russia (Government of) Principal
Loan Debs., Series 24 yr., 6.625%,
12/15/20 Put Option $2,820 11/9/98 29.50% 142,410 657,060
-------- ----------
$722,864 $1,726,591
======== ==========
</TABLE>
10. Denotes a step bond: a zero coupon bond that converts to a fixed or
variable interest rate at a designated future date.
11. Non-income producing--issuer is in default.
See accompanying Notes to Financial Statements.
21 Oppenheimer International Bond Fund
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES September 30, 1998
<TABLE>
==========================================================================================================
<S> <C>
ASSETS
Investments, at value (cost $271,872,071)--see accompanying statement $240,210,069
- ----------------------------------------------------------------------------------------------------------
Cash 2,390,066
- ----------------------------------------------------------------------------------------------------------
Unrealized appreciation on forward foreign currency exchange contracts--Note 5 640,820
- ----------------------------------------------------------------------------------------------------------
Receivables:
Investments sold 23,975,521
Interest and principal paydowns 4,521,014
Shares of beneficial interest sold 1,274,547
Closed forward foreign currency exchange contracts 369,355
Daily variation on futures contracts--Note 6 39,994
- ----------------------------------------------------------------------------------------------------------
Deferred organization costs--Note 1 5,228
- ----------------------------------------------------------------------------------------------------------
Other 13,310
-----------
Total assets 273,439,924
==========================================================================================================
LIABILITIES
Unrealized depreciation on forward foreign currency
exchange contracts--Note 5 772,323
- ----------------------------------------------------------------------------------------------------------
Options written, at value (premiums received $722,864)--see
accompanying statement--Note 7 1,726,591
- ----------------------------------------------------------------------------------------------------------
Payables and other liabilities:
Investments purchased 23,485,950
Dividends 1,000,278
Closed forward foreign currency exchange contracts 704,299
Shares of beneficial interest redeemed 379,518
Distribution and service plan fees 162,999
Transfer and shareholder servicing agent fees 51,702
Shareholder reports 49,358
Other 68,840
----------
Total liabilities 28,401,858
==========================================================================================================
NET ASSETS $245,038,066
============
==========================================================================================================
COMPOSITION OF NET ASSETS
Paid-in capital $306,789,887
- ----------------------------------------------------------------------------------------------------------
Undistributed net investment income 1,061,401
- ----------------------------------------------------------------------------------------------------------
Accumulated net realized loss on investments and
foreign currency transactions (30,686,813)
- ----------------------------------------------------------------------------------------------------------
Net unrealized depreciation on investments and translation of
assets and liabilities denominated in foreign currencies (32,126,409)
------------
Net assets $245,038,066
============
</TABLE>
22 Oppenheimer International Bond 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
$97,404,045 and 22,544,112 shares of beneficial interest outstanding) $4.32
Maximum offering price per share (net asset value plus sales charge of
4.75% of offering price) $4.54
- -------------------------------------------------------------------------------------------------------------
Class B Shares:
Net asset value, redemption price (excludes applicable contingent deferred
sales charge) and offering price per share (based on net assets of $119,997,680
and 27,840,326 shares of beneficial interest outstanding) $4.31
- -------------------------------------------------------------------------------------------------------------
Class C Shares:
Net asset value, redemption price (excludes applicable contingent deferred
sales charge) and offering price per share (based on net assets of $27,636,341
and 6,414,811 shares of beneficial interest outstanding) $4.31
See accompanying Notes to Financial Statements.
</TABLE>
23 Oppenheimer International Bond Fund
<PAGE>
STATEMENT OF OPERATIONS For the Year Ended September 30, 1998
<TABLE>
<S> <C>
==========================================================================================================
INVESTMENT INCOME
Interest (net of foreign withholding taxes of $703,296) $ 32,824,616
- ----------------------------------------------------------------------------------------------------------
Dividends (net of foreign withholding taxes of $5,114) 23,038
----------
Total income 32,847,654
==========================================================================================================
EXPENSES
Management fees--Note 4 1,978,423
- ----------------------------------------------------------------------------------------------------------
Distribution and service plan fees--Note 4:
Class A 261,481
Class B 1,287,968
Class C 293,391
- ----------------------------------------------------------------------------------------------------------
Transfer and shareholder servicing agent fees--Note 4 390,395
- ----------------------------------------------------------------------------------------------------------
Custodian fees and expenses 122,264
- ----------------------------------------------------------------------------------------------------------
Shareholder reports 109,437
- ----------------------------------------------------------------------------------------------------------
Legal, auditing and other professional fees 17,617
- ----------------------------------------------------------------------------------------------------------
Registration and filing fees 12,579
- ----------------------------------------------------------------------------------------------------------
Trustees' fees and expenses 2,216
- ----------------------------------------------------------------------------------------------------------
Other 26,308
----------
Total expenses 4,502,079
==========================================================================================================
NET INVESTMENT INCOME 28,345,575
==========================================================================================================
REALIZED AND UNREALIZED LOSS
Net realized loss on:
Investments (20,968,555)
Closing of futures contracts (1,301,855)
Foreign currency transactions (9,802,511)
----------
Net realized loss (32,072,921)
- ----------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation or depreciation on:
Investments (31,094,487)
Translation of assets and liabilities denominated in foreign currencies (2,298,928)
----------
Net change (33,393,415)
----------
Net realized and unrealized loss (65,466,336)
==========================================================================================================
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS $(37,120,761)
============
</TABLE>
See accompanying Notes to Financial Statements.
24 Oppenheimer International Bond Fund
<PAGE>
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED ENDED SEPTEMBER 30,
1998 1997
======================================================================================================
<S> <C> <C>
OPERATIONS
Net investment income $ 28,345,575 $ 17,455,425
- ------------------------------------------------------------------------------------------------------
Net realized gain (loss) (32,072,921) 2,229,190
- ------------------------------------------------------------------------------------------------------
Net change in unrealized appreciation or depreciation (33,393,415) (660,295)
------------ ------------
Net increase (decrease) in net assets resulting from operations (37,120,761) 19,024,320
======================================================================================================
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
Dividends from net investment income:
Class A (11,278,509) (8,439,637)
Class B (12,501,126) (7,638,040)
Class C (2,851,020) (1,735,744)
- ------------------------------------------------------------------------------------------------------
Distributions from net realized gain:
Class A (464,690) (703,789)
Class B (544,637) (644,945)
Class C (123,007) (147,671)
======================================================================================================
BENEFICIAL INTEREST TRANSACTIONS
Net increase in net assets resulting from beneficial
interest transactions--Note 2:
Class A 8,857,621 62,811,767
Class B 28,481,664 77,812,810
Class C 6,178,227 18,447,362
======================================================================================================
NET ASSETS
Total increase (decrease) (21,366,238) 158,786,433
- ------------------------------------------------------------------------------------------------------
Beginning of period 266,404,304 107,617,871
--------------- ------------
End of period (including undistributed net investment
income of $1,061,401 for the period ended 9/30/98) $245,038,066 $266,404,304
=============== ============
</TABLE>
See accompanying Notes to Financial Statements.
25 Oppenheimer International Bond Fund
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
1998 1997 1996 1995(1)
=========================================================================================================================
<S> <C> <C> <C> <C>
PER SHARE OPERATING DATA
Net asset value, beginning of period $5.51 $5.49 $5.10 $5.00
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) from investment operations:
Net investment income .56 .52 .52 .15
Net realized and unrealized gain (loss) (1.20) .08 .40 .10
----- ----- ----- -----
Total income (loss) from investment operations (.64) .60 .92 .25
- -------------------------------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (.53) (.53) (.53) (.15)
Distributions from net realized gain (.02) (.05) -- --
----- ----- ----- -----
Total dividends and distributions to shareholders (.55) (.58) (.53) (.15)
- -------------------------------------------------------------------------------------------------------------------------
Net asset value, end of period $4.32 $5.51 $5.49 $5.10
===== ===== ===== =====
=========================================================================================================================
TOTAL RETURN, AT NET ASSET VALUE(2) (12.50)% 11.33% 18.82% 5.13%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in thousands) $ 97,404 $114,847 $52,128 $3,984
- -------------------------------------------------------------------------------------------------------------------------
Average net assets (in thousands) $108,264 $ 89,112 $19,817 $2,566
- -------------------------------------------------------------------------------------------------------------------------
Ratios to average net assets:
Net investment income 11.09% 9.24% 9.60% 9.94%(3)
Expenses, before voluntary reimbursement
by the Manager 1.24% 1.28% 1.59% 1.59%(3)
Expenses, net of voluntary reimbursement
by the Manager N/A N/A 1.49% 0.41%(3)
- -------------------------------------------------------------------------------------------------------------------------
Portfolio turnover rate(4) 446.1% 280.1% 273.3% 122.0%
</TABLE>
1. For the period from June 15, 1995 (commencement of operations) to September
30, 1995.
2. Assumes a hypothetical initial investment on the business day before the
first day of the fiscal period (or commencement of operations), 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.
3. Annualized.
26 Oppenheimer International Bond Fund
<PAGE>
<TABLE>
<CAPTION>
CLASS B CLASS C
- ------------------------------------------------ -----------------------------------------------
YEAR ENDED SEPTEMBER 30, YEAR ENDED SEPTEMBER 30,
1998 1997 1996 1995(1) 1998 1997 1996 1995(1)
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
$5.50 $5.48 $5.10 $5.00 $5.50 $5.48 $5.09 $5.00
- -------------------------------------------------------------------------------------------------------------------------
.52 .48 .48 .14 .52 .48 .48 .14
(1.20) .07 .39 .10 (1.20) .07 .39 .09
----- ----- ----- ----- ----- ----- ----- -----
(.68) .55 .87 .24 (.68) .55 .87 .23
- -------------------------------------------------------------------------------------------------------------------------
(.49) (.48) (.49) (.14) (.49) (.48) (.48) (.14)
(.02) (.05) -- -- (.02) (.05) -- --
----- ----- ----- ----- ----- ----- ----- -----
(.51) (.53) (.49) (.14) (.51) (.53) (.48) (.14)
- -------------------------------------------------------------------------------------------------------------------------
$4.31 $5.50 $5.48 $5.10 $4.31 $5.50 $5.48 $5.09
===== ===== ===== ===== ===== ===== ===== =====
=========================================================================================================================
(13.16)% 10.52% 17.71% 4.92% (13.16)% 10.52% 17.92% 4.73%
=========================================================================================================================
$119,998 $122,874 $45,207 $3,238 $27,636 $28,684 $10,282 $ 201
- -------------------------------------------------------------------------------------------------------------------------
$128,789 $ 87,557 $17,891 $1,125 $29,336 $19,883 $ 4,039 $ 97
- -------------------------------------------------------------------------------------------------------------------------
10.33% 8.57% 8.81% 9.20%(3) 10.33% 8.62% 8.76% 9.36%(3)
2.00% 2.04% 2.36% 2.21%(3) 2.00% 2.04% 2.36% 2.26%(3)
N/A N/A 2.26% 0.89%(3) N/A N/A 2.25% 0.85%(3)
- -------------------------------------------------------------------------------------------------------------------------
446.1% 280.1% 273.3% 122.0% 446.1% 280.1% 273.3% 122.0%
</TABLE>
4. The lesser of purchases or sales of portfolio securities for a period,
divided by the monthly average of the market value of portfolio securities
owned during the period. Securities with a maturity or expiration date at the
time of acquisition of one year or less are excluded from the calculation.
Purchases and sales of investment securities (excluding short-term securities)
for the period ended September 30, 1998 were $866,084,106 and $851,580,023,
respectively.
See accompanying Notes to Financial Statements.
27 Oppenheimer International Bond Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS
===============================================================================
1. SIGNIFICANT ACCOUNTING POLICIES
Oppenheimer International Bond Fund (the Fund) is a registered investment
company organized as a Massachusetts Business Trust with a single series of the
same name. The Fund is registered as a diversified, open-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's investment objective is to seek total return primarily from foreign debt
securities. 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 that class and exclusive voting rights with respect to matters
affecting that 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 an
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.
28 Oppenheimer International Bond Fund
<PAGE>
===============================================================================
STRUCTURED NOTES. The Fund invests in foreign currency-linked structured notes
whereby the market value and redemption price are linked to foreign currency
exchange rates. The Fund also invests in index-linked notes whereby the
principal and/or interest payment depend on one or more market indices. The
structured notes may be leveraged, which increases the notes' volatility
relative to the face of the security. Fluctuations in values of the securities
are recorded as unrealized gains and losses in the accompanying financial
statements. During the year ended September 30, 1998, the market value of these
securities comprised an average of 12% of the Fund's net assets, and resulted
in realized and unrealized losses of $15,519,664.
- -------------------------------------------------------------------------------
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. As of September 30, 1998,
securities with an aggregate market value of $1,167,322 representing 0.48% 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 into an insolvency proceeding, realization of the value
of the collateral by the Fund may be delayed or limited.
- -------------------------------------------------------------------------------
ALLOCATION OF INCOME, EXPENSES, GAINS AND LOSSES. Income, expenses (other than
those attributable to a specific class), 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.
29 Oppenheimer International Bond Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
===============================================================================
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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. As of September 30, 1998,
the Fund had available for federal income tax purposes an unused capital loss
carryover of approximately $2,105,000 expiring in 2006.
- -------------------------------------------------------------------------------
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.
- -------------------------------------------------------------------------------
ORGANIZATION COSTS. The Manager advanced $14,488 for organization and start-up
costs of the Fund. Such expenses are being amortized over a five-year period
from the date operations commenced. In the event that all or part of the
Manager's initial investment in shares of the Fund is withdrawn during the
amortization period, the redemption proceeds will be reduced to reimburse the
Fund for any unamortized expenses, in the same ratio as the number of shares
redeemed bears to the number of initial shares outstanding at the time of such
redemption.
- -------------------------------------------------------------------------------
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 the
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, 1998, amounts have been
reclassified to reflect a decrease in paid-in capital of $9,868, a decrease in
undistributed net investment income of $653,519, and a decrease in accumulated
net realized loss on investments of $663,387.
30 Oppenheimer International Bond Fund
<PAGE>
===============================================================================
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. 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, 1998 YEAR ENDED SEPTEMBER 30, 1997
----------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A:
Sold 11,871,238 $ 60,193,894 18,015,830 $ 99,555,234
Dividends and
distributions reinvested 1,567,641 7,767,951 1,145,316 6,327,582
Redeemed (11,744,939) (59,104,224) (7,805,542) (43,071,049)
----------- ------------ ---------- ------------
Net increase 1,693,940 $ 8,857,621 11,355,604 $ 62,811,767
=========== ============ ========== ============
- ----------------------------------------------------------------------------------------------------------
Class B:
Sold 12,461,105 $ 62,756,778 18,551,946 $102,345,548
Dividends and
distributions reinvested 1,334,005 6,596,728 868,156 4,783,353
Redeemed (8,302,252) (40,871,842) (5,318,785) (29,316,091)
----------- ------------ ---------- ------------
Net increase 5,492,858 $ 28,481,664 14,101,317 $ 77,812,810
=========== ============ ========== ============
- ----------------------------------------------------------------------------------------------------------
Class C:
Sold 3,210,030 $ 16,168,643 4,180,150 $ 23,070,240
Dividends and
distributions reinvested 387,861 1,917,981 235,688 1,298,290
Redeemed (2,401,923) (11,908,397) (1,073,077) (5,921,168)
----------- ------------ ---------- ------------
Net increase 1,195,968 $ 6,178,227 3,342,761 $ 18,447,362
=========== ============ ========== ============
</TABLE>
31 Oppenheimer International Bond Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
===============================================================================
3. UNREALIZED GAINS AND LOSSES ON INVESTMENTS
As of September 30, 1998, net unrealized depreciation on investments and
options written of $32,665,730 was composed of gross appreciation of
$6,507,875, and gross depreciation of $39,173,605.
===============================================================================
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 an annual fee of 0.75% of
the first $200 million of 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. The Fund's management fee for the year ended September 30, 1998 was
0.74% of average annual net assets for Class A, Class B and Class C shares.
For the year ended September 30, 1998, commissions (sales charges paid
by investors) on sales of Class A shares totaled $758,818, of which $197,195
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 $2,036,881 and $145,913, respectively, of which $51,677
and $1,297, respectively, was paid to an affiliated broker/dealer for Class B
and Class C shares. During the year ended September 30, 1998, OFDI received
contingent deferred sales charges of $459,667 and $18,589, 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 other Oppenheimer
funds. OFS's total costs of providing such services are allocated ratably to
these funds.
32 Oppenheimer International Bond Fund
<PAGE>
===============================================================================
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 maintenance of accounts of their customers
that hold Class A shares. During the year ended September 30, 1998, OFDI paid
$17,549 to an affiliated broker/dealer as reimbursement for Class A personal
service and maintenance expenses.
The Fund has adopted Distribution and Service Plans for Class B and
Class C shares to compensate OFDI for its costs in distributing Class B and
Class C shares and servicing accounts. Under the Plans, the Fund pays OFDI an
annual asset-based sales charge of 0.75% per year on Class B and Class C shares
for its services rendered in distributing Class B and 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 B and Class C shares.
Each fee is computed on the average annual net assets of Class B or Class C
shares, determined as of the close of each regular business day. During the
year ended September 30, 1998, OFDI paid $5,333 and $1,830, respectively, to an
affiliated broker/dealer as compensation for Class B and Class C personal
service and maintenance expenses and retained $1,121,715 and $193,024,
respectively, as compensation for Class B and Class C sales commissions and
service fee advances, as well as financing costs. If either 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, 1998, OFDI had incurred excess distribution
and servicing costs of $5,581,385 for Class B and $492,685 for Class C.
===============================================================================
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.
33 Oppenheimer International Bond Fund
<PAGE>
NOTES TO FINANCIAL STATEMENTS (Continued)
===============================================================================
5. FORWARD CONTRACTS (CONTINUED)
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 designated 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.
As of September 30, 1998, the Fund had outstanding forward contracts as
follows:
<TABLE>
<CAPTION>
VALUATION
CONTRACT AS OF
EXPIRATION AMOUNT SEPTEMBER UNREALIZED UNREALIZED
DATES (000'S) 30, 1998 APPRECIATION DEPRECIATION
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CONTRACTS TO PURCHASE
- ---------------------
Danish Krone (DKK) 10/1/98 17,932 DKK $ 2,821,716 $ 7,525 $ --
German Mark (DEM) 10/26/98-
11/17/98 17,504 DEM 10,518,903 494,287 --
Polish Zloty (PLZ) 10/1/98 4,153 PLZ 1,162,202 -- 3,597
-------- --------
501,812 3,597
-------- --------
CONTRACTS TO SELL
- -----------------
Brazilian Real (BRR) 11/16/98-
3/4/99 11,522 BRR 8,648,209 -- 388,118
Canadian Dollar (CAD) 10/5/98 8,460 CAD 5,533,692 53,222 --
German Mark (DEM) 10/1/98-
11/24/98 5,243 DEM 3,137,637 -- 30,460
Hungary Forints (HUF) 10/1/98 294,600 HUF 1,347,668 -- 6,137
New Zealand Dollar (NZD) 10/5/98 5,505 NZD 2,758,097 85,786 --
Norwegian Krone (NOK) 10/26/98 47,830 NOK 6,449,322 -- 267,419
South African Rand (ZAR) 10/5/98 6,610 ZAR 1,121,487 -- 76,592
-------- --------
139,008 768,726
-------- --------
Total Unrealized Appreciation and Depreciation $640,820 $772,323
======== ========
</TABLE>
34 Oppenheimer International Bond 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.
As of September 30, 1998, the Fund had outstanding futures contracts as
follows:
<TABLE>
<CAPTION>
NUMBER OF VALUATION AS OF UNREALIZED
EXPIRATION DATE CONTRACTS SEPTEMBER 30, 1998 DEPRECIATION
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CONTRACTS TO PURCHASE
- ---------------------
German Mark 12/98 79 $5,937,838 $398,950
United Kingdom Gilt 12/98 8 1,576,638 52,478
--------
$451,428
========
</TABLE>
35 Oppenheimer International Bond 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, 1998, 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 as of
September 30, 1997 29,590,450 $ 208,406 42,960,000 $ 79,011
Options written 8,085,760,845 1,815,995 7,318,836,969 2,277,972
Options closed or expired (6,326,339,235) (1,408,071) (2,455,369,149) (1,692,828)
Options exercised (5,572,060) (211,982) (2,801,065,000) (345,639)
-------------- ----------- --------------- -----------
Options outstanding as of
September 30, 1998 1,783,440,000 $ 404,348 2,105,362,820 $ 318,516
============== =========== =============== ===========
</TABLE>
36 Oppenheimer International Bond Fund
<PAGE>
===============================================================================
8. ILLIQUID AND RESTRICTED SECURITIES
As of September 30, 1998, 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 as of September 30, 1998, was $16,108,413 which
represents 6.57% of the Fund's net assets.
===============================================================================
9. 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 Oppenheimer funds 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, 1998.
Appendix A
RATINGS DEFINITIONS
Below are summaries of the rating definitions used by the nationally-recognized
rating agencies listed below. Those ratings represent the opinion of the agency
as to the credit quality of issues that they rate. The summaries below are based
upon publicly-available information provided by the rating organizations.
Moody's Investors Service, Inc.
Long-Term (Taxable) Bond Ratings
Aaa: Bonds rated Aaa are judged to be the best quality. They carry the smallest
degree of investment risk. Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, the changes that can be expected are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group, they comprise what are generally known as high-grade bonds.
They are rated lower than the best bonds because margins of protection may not
be as large as with Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which make the
long-term risks appear somewhat larger than those of Aaa securities.
A: Bonds rated A possess many favorable investment attributes and are to be
considered as upper-medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium grade obligations; that is, they are
neither highly protected nor poorly secured. Interest payments and principal
security appear adequate for the present but certain protective elements may be
lacking or may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and have speculative
characteristics as well.
Ba: Bonds rated Ba are judged to have speculative elements. Their future cannot
be considered well-assured. Often the protection of interest and principal
payments may be very moderate and not well safeguarded during both good and bad
times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing and may be in default or there may be
present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations which are speculative in a high degree
and are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest class of rated bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier "1" indicates that the
obligation ranks in the higher end of its category; the modifier "2" indicates a
mid-range ranking and the modifier "3" indicates a ranking in the lower end of
the category.
Short-Term Ratings - Taxable Debt
These ratings apply to the ability of issuers to repay punctually senior debt
obligations having an original maturity not exceeding one year:
Prime-1: Issuer has a superior ability for repayment of senior short-term debt
obligations.
Prime-2: Issuer has a strong ability for repayment of senior short-term debt
obligations. Earnings trends and coverage, while sound, may be subject to
variation. Capitalization characteristics, while appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Prime-3: Issuer has an acceptable ability for repayment of senior short-term
obligations. The effect of industry characteristics and market compositions may
be more pronounced. Variability in earnings and profitability may result in
changes in the level of debt protection measurements and may require relatively
high financial leverage. Adequate alternate liquidity is maintained.
Not Prime: Issuer does not fall within any Prime rating category.
Standard & Poor's Rating Services
Long-Term Credit Ratings
AAA: Bonds rated "AAA" have the highest rating assigned by Standard & Poor's.
The obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: Bonds rated "AA" differ from the highest rated obligations only in small
degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: Bonds rated "A" are somewhat more susceptible to adverse effects of changes
in circumstances and economic conditions than obligations in higher-rated
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is still strong.
BBB: Bonds rated BBB exhibit adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity of the obligor to meet its financial commitment on the
obligation.
Bonds rated BB, B, CCC, CC and C are regarded as having significant speculative
characteristics. BB indicates the least degree of speculation and C the highest.
While such obligations will likely have some quality and protective
characteristics, these may be outweighed by large uncertainties or major
exposures to adverse conditions.
BB: Bonds rated BB are less vulnerable to nonpayment than other speculative
issues. However, these face major uncertainties or exposure to adverse business,
financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B: A bond rated B is more vulnerable to nonpayment than an obligation rated BB,
but the obligor currently has the capacity to meet its financial commitment on
the obligation.
CCC: A bond rated CCC is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may used where a bankruptcy petition has been filed or similar
action has been taken, but payments on this obligation are being continued.
D: Bonds rated D are in default. Payments on the obligation are not being made
on the date due.
The ratings from AA to CCC may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating categories. The
"r" symbol is attached to the ratings of instruments with significant noncredit
risks.
Short-Term Issue Credit Ratings
A-1: Rated in the highest category. The obligor's capacity to meet its financial
commitment on the obligation is strong. Within this category, a plus (+) sign
designation indicates the issuer's capacity to meet its financial obligation is
very strong.
A-2: Obligation is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rating
categories. However, the obligor's capacity to meet its financial commitment on
the obligation is satisfactory.
A-3: Exhibits adequate protection parameters. However, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity of the obligor to meet its financial commitment on the obligation.
B: Regarded as having significant speculative characteristics. The obligor
currently has the capacity to meet its financial commitment on the obligation.
However, it faces major ongoing uncertainties which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
C: Currently vulnerable to nonpayment and is dependent upon favorable business,
financial, and economic conditions for the obligor to meet its financial
commitment on the obligation.
D: In payment default. Payments on the obligation have not been made on the due
date. The rating may also be used if a bankruptcy petition has been filed or
similar actions jeopardize payments on the obligation.
Fitch IBCA, Inc.
International Long-Term Credit Ratings
Investment Grade:
AAA: Highest Credit Quality. "AAA" ratings denote the lowest expectation of
credit risk. They are assigned only in the case of exceptionally strong capacity
for timely payment of financial commitments. This capacity is highly unlikely to
be adversely affected by foreseeable events.
AA: Very High Credit Quality. "AA" ratings denote a very low expectation of
credit risk. They indicate a very strong capacity for timely payment of
financial commitments. This capacity is not significantly vulnerable to
foreseeable events.
A: High Credit Quality. "A" ratings denote a low expectation of credit risk. The
capacity for timely payment of financial commitments is considered strong. This
capacity may, nevertheless, be more vulnerable to changes in circumstances or in
economic conditions than is the case for higher ratings.
BBB: Good Credit Quality. "BBB" ratings indicate that there is currently a low
expectation of credit risk. The capacity for timely payment of financial
commitments is considered adequate, but adverse changes in circumstances and in
economic conditions are more likely to impair this capacity. This is the lowest
investment-grade category.
Speculative Grade:
BB: Speculative. "BB" ratings indicate that there is a possibility of credit
risk developing, particularly as the result of adverse economic change over
time. However, business or financial alternatives may be available to allow
financial commitments to be met.
B: Highly Speculative. "B" ratings indicate that significant credit risk is
present, but a limited margin of safety remains. Financial commitments are
currently being met. However, capacity for continued payment is contingent upon
a sustained, favorable business and economic environment.
CCC, CC C: High Default Risk. Default is a real possibility. Capacity for
meeting financial commitments is solely reliant upon sustained, favorable
business or economic developments. A "CC" rating indicates that default of some
kind appears probable. "C" ratings signal imminent default.
DDD, DD, and D: Default. Securities are not meeting current obligations and are
extremely speculative. "DDD" designates the highest potential for recovery of
amounts outstanding on any securities involved.
Plus (+) and minus (-) signs may be appended to a rating symbol to denote
relative status within the rating category. Plus and minus signs are not added
to the "AAA" category or to categories below "CCC."
International Short-Term Credit Ratings
F1: Highest credit quality. Strongest capacity for timely payment. May have an
added "+" to denote exceptionally strong credit feature.
F2: Good credit quality. A satisfactory capacity for timely payment, but the
margin of safety is not as great as in higher ratings.
F3: Fair credit quality. Capacity for timely payment is adequate. However,
near-term adverse changes could result in a reduction to non-investment grade.
B: Speculative. Minimal capacity for timely payment, plus vulnerability to
near-term adverse changes in financial and economic conditions.
C: High default risk. Default is a real possibility, Capacity for meeting
financial commitments is solely reliant upon a sustained, favorable business and
economic environment.
D: Default. Denotes actual or imminent payment default.
Duff & Phelps Credit Rating Co. Ratings
Long-Term Debt and Preferred Stock
AAA: Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt.
AA+, AA, AA-: High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions.
A+, A & A-: Protection factors are average but adequate. However, risk factors
are more variable in periods of greater economic stress.
BBB+, BBB & BBB-: Below average protection factors but still considered
sufficient for prudent investment. Considerable variability in risk during
economic cycles.
BB+, BB & BB-: Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions. Overall quality may move up or down frequently within the
category.
B+, B & B-: Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher of
lower rating grade.
CCC: Well below investment-grade securities. Considerable uncertainty exists as
to timely payment of principal, interest or preferred dividends. Protection
factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments.
DD: Defaulted debt obligations. Issuer failed to meet scheduled principal and/or
interest payments.
DP: Preferred stock with dividend arrearages.
Short-Term Debt:
High Grade:
D-1+: Highest certainty of timely payment. Safety is just below risk-free U.S.
Treasury short-term debt.
D-1: Very high certainty of timely payment. Risk factors are minor.
D-1-: High certainty of timely payment. Risk factors are very small.
Good Grade:
D-2: Good certainty of timely payment. Risk factors are small.
Satisfactory Grade:
D-3: Satisfactory liquidity and other protection factors qualify issues as to
investment grade. Risk factors are larger and subject to more variation.
Nevertheless, timely payment is expected.
Non-Investment Grade:
D-4: Speculative investment characteristics. Liquidity is not sufficient to
insure against disruption in debt service.
Default:
D-5: Issuer failed to meet scheduled principal and/or interest payments.
<PAGE>
B-1
Appendix B
Industry Classifications
Aerospace/Defense Food and Drug Retailers
Air Transportation Gas Utilities
Asset-Backed Health Care/Drugs
Auto Parts and Equipment Health Care/Supplies & Services
Automotive Homebuilders/Real Estate
Bank Holding Companies Hotel/Gaming
Banks Industrial Services
Beverages Information Technology
Broadcasting Insurance
Broker-Dealers Leasing & Factoring
Building Materials Leisure
Cable Television Manufacturing
Chemicals Metals/Mining
Commercial Finance Nondurable Household Goods
Communication Equipment Office Equipment
Computer Hardware Oil - Domestic
Computer Software Oil - International
Conglomerates Paper
Consumer Finance Photography
Consumer Services Publishing
Containers Railroads & Truckers
Convenience Stores Restaurants
Department Stores Savings & Loans
Diversified Financial Shipping
Diversified Media Special Purpose Financial
Drug Wholesalers Specialty Printing
Durable Household Goods Specialty Retailing
Education Steel
Electric Utilities Telecommunications - Long Distance
Electrical Equipment Telephone - Utility
Electronics Textile, Apparel & Home Furnishings
Energy Services Tobacco
Entertainment/Film Trucks and Parts
Environmental Wireless Services
Food
<PAGE>
C-11
Appendix C
OppenheimerFunds Special Sales Charge Arrangements and Waivers
In certain cases, the initial sales charge that applies to purchases of
Class A shares1 of the Oppenheimer funds or the contingent deferred sales charge
that may apply to Class A, Class B or Class C shares may be waived. That is
because of the economies of sales efforts realized by OppenheimerFunds
Distributor, Inc., (referred to in this document as the "Distributor"), or by
dealers or other financial institutions that offer those shares to certain
classes of investors.
Not all waivers apply to all funds. For example, waivers relating to
Retirement Plans do not apply to Oppenheimer municipal funds, because shares of
those funds are not available for purchase by or on behalf of retirement plans.
Other waivers apply only to shareholders of certain funds that were merged into
or became Oppenheimer funds.
For the purposes of some of the waivers described below and in the
Prospectus and Statement of Additional Information of the applicable Oppenheimer
funds, the term "Retirement Plan" refers to the following types of plans:
(1) plans qualified under Sections 401(a) or 401(k) of the Internal Revenue
Code,
(2) non-qualified deferred compensation plans,
(3) employee benefit plans2
(4) Group Retirement Plans3
(5) 403(b)(7) custodial plan accounts
(6) Individual Retirement Accounts ("IRAs"), including traditional IRAs, Roth
IRAs, SEP-IRAs, SARSEPs or SIMPLE plans
The interpretation of these provisions as to the applicability of a
special arrangement or waiver in a particular case is in the sole discretion of
the Distributor or the transfer agent (referred to in this document as the
"Transfer Agent") of the particular Oppenheimer fund. These waivers and special
arrangements may be amended or terminated at any time by a particular fund, the
Distributor, and/or OppenheimerFunds, Inc. (referred to in this document as the
"Manager").
Waivers that apply at the time shares are redeemed must be
requested by the shareholder and/or dealer in the redemption
request. -------------- 1. Certain waivers also apply to Class M.
shares of Oppenheimer Convertible Securities Fund.
2. An "employee benefit plan" means any plan or arrangement, whether or not it
is "qualified" under the Internal Revenue Code, under which Class A shares
of an Oppenheimer fund or funds are purchased by a fiduciary or other
administrator for the account of participants who are employees of a single
employer or of affiliated employers. These may include, for example,
medical savings accounts, payroll deduction plans or similar plans. The
fund accounts must be registered in the name of the fiduciary or
administrator purchasing the shares for the benefit of participants in the
plan.
3. The term "Group Retirement Plan" means any qualified or non-qualified
retirement plan for employees of a corporation or 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 has made
special arrangements with the Distributor and all members of the group
participating in (or who are eligible to participate in) the plan purchase Class
A shares of an Oppenheimer fund or funds through a single investment dealer,
broker or other financial institution designated by the group. Such plans
include 457 plans, SEP-IRAs, SARSEPs, SIMPLE plans and 403(b) plans other than
plans for public school employees. The term "Group Retirement Plan" also
includes qualified retirement plans and non-qualified deferred compensation
plans and IRAs that purchase Class A shares of an Oppenheimer fund or funds
through a single investment dealer, broker or other financial institution that
has made special arrangements with the Distributor enabling those plans to
purchase Class A shares at net asset value but subject to the Class A contingent
deferred sales charge.
I. Applicability of Class A Contingent Deferred Sales Charges in Certain Cases
Purchases of Class A Shares of Oppenheimer Funds That Are Not Subject to Initial
Sales Charge but May Be Subject to the Class A Contingent Deferred Sales Charge
(unless a waiver applies).
There is no initial sales charge on purchases of Class A shares of any
of the Oppenheimer funds in the cases listed below. However, these purchases may
be subject to the Class A contingent deferred sales charge if redeemed within 18
months of the end of the calendar month of their purchase, as described in the
Prospectus (unless a waiver described elsewhere in this Appendix applies to the
redemption). Additionally, on shares purchased under these waivers that are
subject to the Class A contingent deferred sales charge, the Distributor will
pay the applicable commission described in the Prospectus under "Class A
Contingent Deferred Sales Charge."3 This waiver provision applies to:
|_| Purchases of Class A shares aggregating $1 million or more.
|_| Purchases by a Retirement Plan (other than an IRA or 403(b)(7)
custodial plan) that: (1) buys shares costing $500,000 or more, or (2) has,
at the time of purchase, 100 or more eligible employees or total plan
assets of $500,000 or more, or (3) certifies to the Distributor that it
projects to have annual plan purchases of $200,000 or more.
|_| Purchases by an OppenheimerFunds-sponsored Rollover IRA, if the
purchases are made: (1) through a broker, dealer, bank or registered
investment adviser that has made special arrangements with the Distributor
for those purchases, or (2) by a direct rollover of a distribution from a
qualified Retirement Plan if the administrator of that Plan has made
special arrangements with the Distributor for those purchases.
|_| Purchases of Class A shares by Retirement Plans that have any of the
following record-keeping arrangements: (1) The record keeping is performed
by Merrill Lynch Pierce Fenner & Smith, Inc. ("Merrill Lynch") on a daily
valuation basis for the Retirement Plan. On the date the plan sponsor signs
the record-keeping service agreement with Merrill Lynch, the Plan must have
$3 million or more of its assets invested in (a) mutual funds, other than
those advised or managed by Merrill Lynch Asset Management, L.P. ("MLAM"),
that are made available under a Service Agreement between Merrill Lynch and
the mutual fund's principal underwriter or distributor, and (b) funds
advised or managed by MLAM (the funds described in (a) and (b) are referred
to as "Applicable Investments"). (2) The record keeping for the Retirement
Plan is performed on a daily valuation basis by a 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
record keeping service agreement with Merrill Lynch, the Plan must have $3
million or more of its assets (excluding assets invested in money market
funds) invested in Applicable Investments. (3) The record keeping for a
Retirement Plan is handled under a service agreement with Merrill Lynch and
on the date the plan sponsor signs that agreement, the Plan has 500 or more
eligible employees (as determined by the Merrill Lynch plan conversion
manager). |_| Purchases by a Retirement Plan whose record keeper had a
cost-allocation agreement with the Transfer Agent on or before May 1, 1999.
II. Waivers of Class A Sales Charges of Oppenheimer Funds
A. Waivers of Initial and Contingent Deferred Sales Charges for Certain
Purchasers.
Class A shares purchased by the following investors are not subject to any Class
A sales charges (and no commissions are paid by the Distributor on such
purchases):
|_| The Manager or its affiliates.
|_| Present or former officers, directors, trustees and employees (and
their "immediate families") of the Fund, the Manager and its
affiliates, and retirement plans established by them for their
employees. The term "immediate family" refers to one's spouse,
children, grandchildren, grandparents, parents, parents-in-law,
brothers and sisters, sons- and daughters-in-law, a sibling's
spouse, a spouse's siblings, aunts, uncles, nieces and nephews;
relatives by virtue of a remarriage (step-children, step-parents,
etc.) are included.
|_| Registered management investment companies, or separate accounts
of insurance companies having an agreement with the Manager or the
Distributor for that purpose.
|_| Dealers or brokers that have a sales agreement with the
Distributor, if they purchase shares for their own accounts or for
retirement plans for their employees.
|_| Employees and registered representatives (and their spouses) of
dealers or brokers described above or financial institutions that
have entered into sales arrangements with such dealers or brokers
(and which are identified as such to the Distributor) or with the
Distributor. The purchaser must certify to the Distributor at the
time of purchase that the purchase is for the purchaser's own
account (or for the benefit of such employee's spouse or minor
children).
|_| Dealers, brokers, banks or registered investment advisors that
have entered into an agreement with the Distributor providing
specifically for the use of shares of the Fund in particular
investment products made available to their clients. Those clients
may be charged a transaction fee by their dealer, broker, bank or
advisor for the purchase or sale of Fund shares.
|_| Investment advisors and financial planners who have entered into
an agreement for this purpose with the Distributor and who charge
an advisory, consulting or other fee for their services and buy
shares for their own accounts or the accounts of their clients.
|_| "Rabbi trusts" that buy shares for their own accounts, if the
purchases are made through a broker or agent or other financial
intermediary that has made special arrangements with the
Distributor for those purchases.
|_| Clients of investment advisors or financial planners (that have
entered into an agreement for this purpose with the Distributor)
who buy shares for their own accounts may also purchase shares
without sales charge but only if their accounts are linked to a
master account of their investment advisor or financial planner on
the books and records of the broker, agent or financial
intermediary with which the Distributor has made such special
arrangements . Each of these investors may be charged a fee by the
broker, agent or financial intermediary for purchasing shares.
|_| Directors, trustees, officers or full-time employees of OpCap
Advisors or its affiliates, their relatives or any trust, pension,
profit sharing or other benefit plan which beneficially owns
shares for those persons.
|_| Accounts for which Oppenheimer Capital (or its successor) is the
investment advisor (the Distributor must be advised of this
arrangement) and persons who are directors or trustees of the
company or trust which is the beneficial owner of such accounts.
|_| A unit investment trust that has entered into an appropriate agreement
with the Distributor.
|_| Dealers, brokers, banks, or registered investment advisers that
have entered into an agreement with the Distributor to sell shares
to defined contribution employee retirement plans for which the
dealer, broker or investment adviser provides administration
services.
|_| Retirement Plans and deferred compensation plans and trusts used
to fund those plans (including, for example, plans qualified or
created under sections 401(a), 401(k), 403(b) or 457 of the
Internal Revenue Code), in each case if those purchases are made
through a broker, agent or other financial intermediary that has
made special arrangements with the Distributor for those
purchases.
|_| A TRAC-2000 401(k) plan (sponsored by the former Quest for Value
Advisors) whose Class B or Class C shares of a Former Quest for
Value Fund were exchanged for Class A shares of that Fund due to
the termination of the Class B and Class C TRAC-2000 program on
November 24, 1995.
|_| A qualified Retirement Plan that had agreed with the former Quest
for Value Advisors to purchase shares of any of the Former Quest
for Value Funds at net asset value, with such shares to be held
through DCXchange, a sub-transfer agency mutual fund
clearinghouse, if that arrangement was consummated and share
purchases commenced by December 31, 1996.
B. Waivers of Initial and Contingent Deferred Sales Charges in Certain
Transactions.
Class A shares issued or purchased in the following transactions are not subject
to sales charges (and no commissions are paid by the Distributor on such
purchases):
|_| Shares issued in plans of reorganization, such as mergers, asset
acquisitions and exchange offers, to which the Fund is a party.
|_| Shares purchased by the reinvestment of dividends or other
distributions reinvested from the Fund or other Oppenheimer funds (other
than Oppenheimer Cash Reserves) or unit investment trusts for which
reinvestment arrangements have been made with the Distributor.
|_| Shares purchased through a broker-dealer that has entered into a
special agreement with the Distributor to allow the broker's customers to
purchase and pay for shares of Oppenheimer funds using the proceeds of
shares redeemed in the prior 30 days from a mutual fund (other than a fund
managed by the Manager or any of its subsidiaries) on which an initial
sales charge or contingent deferred sales charge was paid. This waiver also
applies to shares purchased by exchange of shares of Oppenheimer Money
Market Fund, Inc. that were purchased and paid for in this manner. This
waiver must be requested when the purchase order is placed for shares of
the Fund, and the Distributor may require evidence of qualification for
this waiver.
|_| Shares purchased with the proceeds of maturing principal units of any
Qualified Unit Investment Liquid Trust Series.
|_| Shares purchased by the reinvestment of loan repayments by a
participant in a Retirement Plan for which the Manager or an affiliate acts
as sponsor.
C. Waivers of the Class A Contingent Deferred Sales Charge for Certain
Redemptions.
The Class A contingent deferred sales charge is also waived if shares that would
otherwise be subject to the contingent deferred sales charge are redeemed in the
following cases:
|_| To make Automatic Withdrawal Plan payments that are limited annually to
no more than 12% of the account value measured at the time the Plan is
established, adjusted annually.
|_| Involuntary redemptions of shares by operation of law or involuntary
redemptions of small accounts (please refer to "Shareholder Account Rules
and Policies," in the applicable fund Prospectus).
|_| For distributions from Retirement Plans, deferred compensation
plans or other employee benefit plans for any of the following
purposes:
(1) Following the death or disability (as defined in the Internal
Revenue Code) of the participant or beneficiary. The death or
disability must occur after the participant's account was
established.
(2) To return excess contributions.
(3) To return contributions made due to a mistake of fact.
(4) Hardship withdrawals, as defined in the plan.4
(5) Under a Qualified Domestic Relations Order, as defined in the Internal
Revenue Code, or, in the case of an IRA, a divorce or separation agreement
described in Section 71(b) of the Internal Revenue Code.
(6) To meet the minimum distribution requirements of the Internal Revenue Code.
(7) To make "substantially equal periodic payments" as described in
Section 72(t) of the Internal Revenue Code.
(8) For loans to participants or beneficiaries.
(9) Separation from service.
(10)Participant-directed redemptions to purchase shares of a mutual
fund (other than a fund managed by the Manager or a subsidiary of the
Manager) if the plan has made special arrangements with the
Distributor.
(11)Plan termination or "in-service distributions," if the redemption
proceeds are rolled over directly to an OppenheimerFunds-sponsored
IRA.
|_| For distributions from Retirement Plans having 500 or more
eligible employees, except distributions due to termination of all of
the Oppenheimer funds as an investment option under the Plan.
|_| For distributions from 401(k) plans sponsored by broker-dealers
that have entered into a special agreement with the Distributor
allowing this waiver.
III. Waivers of Class B and Class C Sales Charges of Oppenheimer Funds
The Class B and Class C contingent deferred sales charges will not be applied to
shares purchased in certain types of transactions or redeemed in certain
circumstances described below.
A. Waivers for Redemptions in Certain Cases.
The Class B and Class C contingent deferred sales charges will be waived for
redemptions of shares in the following cases: |_| Shares redeemed involuntarily,
as described in "Shareholder Account Rules and Policies," in the applicable
Prospectus. |_| Redemptions from accounts other than Retirement Plans following
the death or disability of the last surviving shareholder,
including a trustee of a grantor trust or revocable living trust
for which the trustee is also the sole beneficiary. The death or
disability must have occurred after the account was established,
and for disability you must provide evidence of a determination of
disability by the Social Security Administration.
|_| Distributions from accounts for which the broker-dealer of record
has entered into a special agreement with the Distributor allowing
this waiver.
|_| Redemptions of Class B shares 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.
|_| Redemptions of Class C shares of Oppenheimer U.S. Government Trust
from accounts of clients of financial institutions that have
entered into a special arrangement with the Distributor for this
purpose.
|_| Redemptions requested in writing by a Retirement Plan sponsor of
Class C shares of an Oppenheimer fund in amounts of $1 million or
more held by the Retirement Plan for more than one year, if the
redemption proceeds are invested in Class A shares of one or more
Oppenheimer funds.
|_| Distributions from Retirement Plans or other employee benefit
plans for any of the following purposes:
(1) Following the death or disability (as defined in the
Internal Revenue Code) of the participant or beneficiary.
The death or disability must occur after the
participant's account was established in an Oppenheimer
fund.
(2) To return excess contributions made to a participant's account. (3) To
return contributions made due to a mistake of fact. (4) To make hardship
withdrawals, as defined in the plan.6
(5) To make distributions required under a Qualified Domestic
Relations Order or, in the case of an IRA, a divorce or
separation agreement described in Section 71(b) of the
Internal Revenue Code.
(6) To meet the minimum distribution requirements of the Internal Revenue Code.
(7) To make "substantially equal periodic payments" as described in Section
72(t) of the Internal Revenue Code. (8) For loans to participants or
beneficiaries.7 (9) On account of the participant's separation from service.8
(10) Participant-directed redemptions to purchase shares of a mutual fund (other
than a fund managed by the Manager or a
subsidiary of the Manager) offered as an investment
option in a Retirement Plan if the plan has made special
arrangements with the Distributor.
(11) Distributions made on account of a plan termination or
"in-service" distributions," if the redemption proceeds
are rolled over directly to an OppenheimerFunds-sponsored
IRA.
(12) Distributions from Retirement Plans having 500 or more
eligible employees, but excluding distributions made
because of the Plan's elimination as investment options
under the Plan of all of the Oppenheimer funds that had
been offered.
(13) For distributions from a participant's account under an
Automatic Withdrawal Plan after the participant reaches
age 59 1/2, as long as the aggregate value of the
distributions does not exceed 10% of the account's value
annually (measured from the establishment of the
Automatic Withdrawal Plan).
B. Waivers for Shares Sold or Issued in Certain Transactions.
The contingent deferred sales charge is also waived on Class B and Class C
shares sold or issued in the following cases: |_| Shares sold to the Manager or
its affiliates. |_| Shares sold to registered management investment companies or
separate accounts of insurance companies having an agreement
with the Manager or the Distributor for that purpose.
|_| Shares issued in plans of reorganization to which the Fund is a party.
<PAGE>
IV. Special Sales Charge Arrangements for Shareholders of Certain
Oppenheimer Funds Who Were Shareholders of Former Quest for Value
Funds
The initial and contingent deferred sales charge rates and waivers for Class A,
Class B and Class C shares described in the Prospectus or Statement of
Additional Information of the Oppenheimer funds are modified as described below
for certain persons who were shareholders of the former Quest for Value Funds.
To be eligible, those persons must have been shareholders on November 24, 1995,
when OppenheimerFunds, Inc. became the investment advisor to those former Quest
for Value Funds. Those funds include:
Oppenheimer Quest Value Fund, Inc.
Oppenheimer Quest Small Cap Value Fund
Oppenheimer Quest Balanced Value Fund
Oppenheimer Quest Global Value Fund
Oppenheimer Quest Opportunity Value Fund
These arrangements also apply to shareholders of the following funds
when they merged (were reorganized) into various Oppenheimer funds on November
24, 1995:
Quest for Value U.S. Government Income Fund
Quest for Value New York Tax-Exempt Fund
Quest for Value Investment Quality Income Fund
Quest for Value National Tax-Exempt Fund
Quest for Value Global Income Fund
Quest for Value California Tax-Exempt Fund
All of the funds listed above are referred to in this Appendix as the
"Former Quest for Value Funds." The waivers of initial and contingent deferred
sales charges described in this Appendix apply to shares of an Oppenheimer fund
that are either: |_| acquired by such shareholder pursuant to an exchange of
shares of an Oppenheimer fund that was one of the Former Quest for
Value Funds or
|_| purchased by such shareholder by exchange of shares of another
Oppenheimer fund that were acquired pursuant to the merger of any
of the Former Quest for Value Funds into that other Oppenheimer
fund on November 24, 1995.
A. Reductions or Waivers of Class A Sales Charges.
|X| Reduced Class A Initial Sales Charge Rates for Certain Former
Quest for Value Funds Shareholders.
Purchases by Groups and Associations. The following table sets forth the initial
sales charge rates for Class A shares purchased by members of "Associations"
formed for any purpose other than the purchase of securities. The rates in the
table apply if that Association purchased shares of any of the Former Quest for
Value Funds or received a proposal to purchase such shares from OCC Distributors
prior to November 24, 1995.
<TABLE>
<CAPTION>
Number of Eligible Employees Initial Sales Charge as a Initial Sales Charge as a Commission as % of
or Members % of Offering Price % of Net Amount Invested Offering Price
<S> <C> <C> <C>
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
9 or Fewer 2.50% 2.56% 2.00%
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
At least 10 but not more 2.00% 2.04% 1.60%
than 49
- ------------------------------ ---------------------------- ---------------------------- ----------------------------
</TABLE>
For purchases by Associations having 50 or more eligible employees or
members, there is no initial sales charge on purchases of Class A shares, but
those shares are subject to the Class A contingent deferred sales charge
described in the applicable fund's Prospectus.
Purchases made under this arrangement qualify for the lower of either
the sales charge rate in the table based on the number of members of an
Association, or the sales charge rate that applies under the Right of
Accumulation described in the applicable fund's Prospectus and Statement of
Additional Information. Individuals who qualify under this arrangement for
reduced sales charge rates as members of Associations also may purchase shares
for their individual or custodial accounts at these reduced sales charge rates,
upon request to the Distributor.
|X| Waiver of Class A Sales Charges for Certain Shareholders. Class A
shares purchased by the following investors are not subject to any Class A
initial or contingent deferred sales charges: |_| Shareholders who were
shareholders of the AMA Family of Funds on February 28, 1991 and who acquired
shares of any of the Former Quest for Value Funds by merger of a portfolio of
the AMA Family of Funds.
|_| Shareholders who acquired shares of any Former Quest for Value
Fund by merger of any of the portfolios of the Unified Funds.
|X| Waiver of Class A Contingent Deferred Sales Charge in Certain
Transactions. The Class A contingent deferred sales charge will not apply to
redemptions of Class A shares purchased by the following investors who were
shareholders of any Former Quest for Value Fund:
Investors who purchased Class A shares from a dealer that is or was not
permitted to receive a sales load or redemption fee imposed on a shareholder
with whom that dealer has a fiduciary relationship, under the Employee
Retirement Income Security Act of 1974 and regulations adopted under that law.
B. Class A, Class B and Class C Contingent Deferred Sales Charge Waivers.
|X| Waivers for Redemptions of Shares Purchased Prior to March 6, 1995.
In the following cases, the contingent deferred sales charge will be waived for
redemptions of Class A, Class B or Class C shares of an Oppenheimer fund. The
shares must have been acquired by the merger of a Former Quest for Value Fund
into the fund or by exchange from an Oppenheimer fund that was a Former Quest
for Value Fund or into which such fund merged. Those shares must have been
purchased prior to March 6, 1995 in connection with: |_| withdrawals under an
automatic withdrawal plan holding only either Class B or Class C shares if the
annual withdrawal does
not exceed 10% of the initial value of the account, and
|_| liquidation of a shareholder's account if the aggregate net asset
value of shares held in the account is less than the required
minimum value of such accounts.
|X| Waivers for Redemptions of Shares Purchased on or After March 6,
1995 but Prior to November 24, 1995. In the following cases, the contingent
deferred sales charge will be waived for redemptions of Class A, Class B or
Class C shares of an Oppenheimer fund. The shares must have been acquired by the
merger of a Former Quest for Value Fund into the fund or by exchange from an
Oppenheimer fund that was a Former Quest For Value Fund or into which such
Former Quest for Value Fund merged. Those shares must have been purchased on or
after March 6, 1995, but prior to November 24, 1995: |_| redemptions following
the death or disability of the shareholder(s) (as evidenced by a determination
of total disability by
the U.S. Social Security Administration);
|_| withdrawals under an automatic withdrawal plan (but only for Class
B or Class C shares) where the annual withdrawals do not exceed
10% of the initial value of the account; and
|_| liquidation of a shareholder's account if the aggregate net asset
value of shares held in the account is less than the required
minimum account value.
A shareholder's account will be credited with the amount of any
contingent deferred sales charge paid on the redemption of any Class A, Class B
or Class C shares of the Oppenheimer fund described in this section if the
proceeds are invested in the same Class of shares in that fund or another
Oppenheimer fund within 90 days after redemption.
V. Special Sales Charge Arrangements for Shareholders of Certain
Oppenheimer Funds Who Were Shareholders of Connecticut Mutual
Investment Accounts, Inc.
The initial and contingent deferred sale charge rates and waivers for Class A
and Class B shares described in the respective Prospectus (or this Appendix) of
the following Oppenheimer funds (each is referred to as a "Fund" in this
section):
o Oppenheimer U. S. Government Trust,
o Oppenheimer Bond Fund,
o Oppenheimer Disciplined Value Fund and
o Oppenheimer Disciplined Allocation Fund
are modified as described below for those Fund shareholders who were
shareholders of the following funds (referred to as the "Former Connecticut
Mutual Funds") on March 1, 1996, when OppenheimerFunds, Inc. became the
investment adviser to the Former Connecticut Mutual Funds:
Connecticut Mutual Liquid Account
Connecticut Mutual Total Return Account
Connecticut Mutual Government Securities Account
CMIA LifeSpan Capital Appreciation Account
Connecticut Mutual Income Account
CMIA LifeSpan Balanced Account
Connecticut Mutual Growth Account
CMIA Diversified Income Account
A. Prior Class A CDSC and Class A Sales Charge Waivers.
? Class A Contingent Deferred Sales Charge. Certain shareholders of a
Fund and the other Former Connecticut Mutual Funds are entitled to continue to
make additional purchases of Class A shares at net asset value without a Class A
initial sales charge, but subject to the Class A contingent deferred sales
charge that was in effect prior to March 18, 1996 (the "prior Class A CDSC").
Under the prior Class A CDSC, if any of those shares are redeemed within one
year of purchase, they will be assessed a 1% contingent deferred sales charge on
an amount equal to the current market value or the original purchase price of
the shares sold, whichever is smaller (in such redemptions, any shares not
subject to the prior Class A CDSC will be redeemed first).
Those shareholders who are eligible for the prior Class A CDSC are:
(1) persons whose purchases of Class A shares of a Fund and other
Former Connecticut Mutual Funds were $500,000 prior to March 18,
1996, as a result of direct purchases or purchases pursuant to the
Fund's policies on Combined Purchases or Rights of Accumulation,
who still hold those shares in that Fund or other Former
Connecticut Mutual Funds, and
(2) persons whose intended purchases under a Statement of Intention
entered into prior to March 18, 1996, with the former general
distributor of the Former Connecticut Mutual Funds to purchase
shares valued at $500,000 or more over a 13-month period entitled
those persons to purchase shares at net asset value without being
subject to the Class A initial sales charge.
Any of the Class A shares of a Fund and the other Former Connecticut
Mutual Funds that were purchased at net asset value prior to March 18,
1996, remain subject to the prior Class A CDSC, or if any additional
shares are purchased by those shareholders at net asset value pursuant to
this arrangement they will be subject to the prior Class A CDSC.
? Class A Sales Charge Waivers. Additional Class A shares of a Fund may
be purchased without a sales charge, by a person who was in one (or more) of the
categories below and acquired Class A shares prior to March 18, 1996, and still
holds Class A shares:
(1)
<PAGE>
any purchaser, provided the total initial amount invested in the Fund
or any one or more of the Former Connecticut Mutual Funds totaled
$500,000 or more, including investments made pursuant to the Combined
Purchases, Statement of Intention and Rights of Accumulation features
available at the time of the initial purchase and such investment is
still held in one or more of the Former Connecticut Mutual Funds or a
Fund into which such Fund merged;
(2) any participant in a qualified plan, provided that the total
initial amount invested by the plan in the Fund or any one or
more of the Former Connecticut Mutual Funds totaled $500,000 or
more;
(3) Directors of the Fund or any one or more of the Former Connecticut Mutual
Funds and members of their immediate families; (4) employee benefit plans
sponsored by Connecticut Mutual Financial Services, L.L.C. ("CMFS"), the prior
distributor of the
Former Connecticut Mutual Funds, and its affiliated companies;
(5) one or more members of a group of at least 1,000 persons (and
persons who are retirees from such group) engaged in a common
business, profession, civic or charitable endeavor or other
activity, and the spouses and minor dependent children of such
persons, pursuant to a marketing program between CMFS and such
group; and
(6) an institution acting as a fiduciary on behalf of an individual or
individuals, if such institution was directly compensated by the
individual(s) for recommending the purchase of the shares of the
Fund or any one or more of the Former Connecticut Mutual Funds,
provided the institution had an agreement with CMFS.
Purchases of Class A shares made pursuant to (1) and (2) above may be
subject to the Class A CDSC of the Former Connecticut Mutual Funds described
above.
Additionally, Class A shares of a Fund may be purchased without a sales
charge by any holder of a variable annuity contract issued in New York State by
Connecticut Mutual Life Insurance Company through the Panorama Separate Account
which is beyond the applicable surrender charge period and which was used to
fund a qualified plan, if that holder exchanges the variable annuity contract
proceeds to buy Class A shares of the Fund.
B. Class A and Class B Contingent Deferred Sales Charge Waivers.
In addition to the waivers set forth in the Prospectus and in
this Appendix, above, the contingent deferred sales charge will
be waived for redemptions of Class A and Class B shares of a Fund
and exchanges of Class A or Class B shares of a Fund into Class A
or Class B shares of a Former Connecticut Mutual Fund provided
that the Class A or Class B shares of the Fund to be redeemed or
exchanged were (i) acquired prior to March 18, 1996 or (ii) were
acquired by exchange from an Oppenheimer fund that was a Former
Connecticut Mutual Fund. Additionally, the shares of such Former
Connecticut Mutual Fund must have been purchased prior to March
18, 1996: (1) by the estate of a deceased shareholder; (2) upon
the disability of a shareholder, as defined in Section 72(m)(7)
of the Internal Revenue Code; (3) for retirement distributions
(or loans) to participants or beneficiaries from retirement plans
qualified under Sections 401(a) or 403(b)(7)of the Code, or from
IRAs, deferred compensation plans created under Section 457 of
the Code, or other employee benefit plans; (4) as tax-free
returns of excess contributions to such retirement or employee
benefit plans;
(5) in whole or in part, in connection with shares sold to any state,
county, or city, or any instrumentality, department, authority, or
agency thereof, that is prohibited by applicable investment laws
from paying a sales charge or commission in connection with the
purchase of shares of any registered investment management
company;
(6) in connection with the redemption of shares of the Fund due to a
combination with another investment company by virtue of a merger,
acquisition or similar reorganization transaction;
(7) in connection with the Fund's right to involuntarily redeem or liquidate the
Fund; (8)
<PAGE>
in connection with automatic redemptions of Class A shares and Class
B shares in certain retirement plan accounts pursuant to an
Automatic Withdrawal Plan but limited to no more than 12% of the
original value annually; or
(9) as involuntary redemptions of shares by operation of law, or under
procedures set forth in the Fund's Articles of Incorporation, or
as adopted by the Board of Directors of the Fund.
VI. Special Reduced Sales Charge for Former Shareholders of
Advance America Funds, Inc.
Shareholders of Oppenheimer Municipal Bond Fund, Oppenheimer U.S. Government
Trust, Oppenheimer Strategic Income Fund and Oppenheimer Equity Income Fund who
acquired (and still hold) shares of those funds as a result of the
reorganization of series of Advance America Funds, Inc. into those Oppenheimer
funds on October 18, 1991, and who held shares of Advance America Funds, Inc. on
March 30, 1990, may purchase Class A shares of those four Oppenheimer funds at a
maximum sales charge rate of 4.50%.
VII. Sales Charge Waivers on Purchases of Class M Shares of
Oppenheimer Convertible Securities Fund
Oppenheimer Convertible Securities Fund (referred to as the "Fund" in this
section) may sell Class M shares at net asset value without any initial sales
charge to the classes of investors listed below who, prior to March 11, 1996,
owned shares of the Fund's then-existing Class A and were permitted to purchase
those shares at net asset value without sales charge:
|_| the Manager and its affiliates,
|_| present or former officers, directors, trustees and employees (and
their "immediate families" as defined in the Fund's Statement of
Additional Information) of the Fund, the Manager and its
affiliates, and retirement plans established by them or the prior
investment advisor of the Fund for their employees,
|_| registered management investment companies or separate accounts of
insurance companies that had an agreement with the Fund's prior
investment advisor or distributor for that purpose,
|_| dealers or brokers that have a sales agreement with the
Distributor, if they purchase shares for their own accounts or for
retirement plans for their employees,
|_| employees and registered representatives (and their spouses) of
dealers or brokers described in the preceding section or financial
institutions that have entered into sales arrangements with those
dealers or brokers (and whose identity is made known to the
Distributor) or with the Distributor, but only if the purchaser
certifies to the Distributor at the time of purchase that the
purchaser meets these qualifications,
|_| dealers, brokers, or registered investment advisors that had
entered into an agreement with the Distributor or the prior
distributor of the Fund specifically providing for the use of
Class M shares of the Fund in specific investment products made
available to their clients, and
|_| dealers, brokers or registered investment advisors that had
entered into an agreement with the Distributor or prior
distributor of the Fund's shares to sell shares to defined
contribution employee retirement plans for which the dealer,
broker, or investment advisor provides administrative services.
<PAGE>
Oppenheimer International Bond Fund
Internet Web Site:
www.oppenheimerfunds.com
Investment Adviser
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 Bank
The Bank of New York
One Wall Street
New York, New York 10015
Independent Auditors
Deloitte & Touche LLP
555 Seventeenth Street
Denver, Colorado 80202
Legal Counsel
Myer, Swanson, Adams & Wolf, P.C.
1600 Broadway
Denver, Colorado 80202