-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, CP6C22DR4teRf8wRas1GHJciJ6jY0Y5Hj0Iht6mS4UHEBgG+O4TvF6for9L6hJbu YqtQNAMyKVem7CjJzRX87A== 0000701265-95-000025.txt : 19950905 0000701265-95-000025.hdr.sgml : 19950905 ACCESSION NUMBER: 0000701265-95-000025 CONFORMED SUBMISSION TYPE: N14AE24 PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19950831 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: OPPENHEIMER INTEGRITY FUNDS CENTRAL INDEX KEY: 0000701265 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 042912220 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N14AE24 SEC ACT: 1933 Act SEC FILE NUMBER: 033-62261 FILM NUMBER: 95569309 BUSINESS ADDRESS: STREET 1: 3410 S GALENA CITY: DENVER STATE: CO ZIP: 80231 BUSINESS PHONE: 3036713200 MAIL ADDRESS: STREET 2: 3410 SOUTH GALENA STREET 3RD FL CITY: DENVER STATE: CO ZIP: 80231 FORMER COMPANY: FORMER CONFORMED NAME: MASSMUTUAL INTEGRITY FUNDS DATE OF NAME CHANGE: 19910329 FORMER COMPANY: FORMER CONFORMED NAME: MASSMUTUAL LIQUID ASSETS TRUST DATE OF NAME CHANGE: 19880403 N14AE24 1 FORM N14 As filed with the Securities and Exchange Commission on August 30, 1995 Registration No. 2-76547 811-3420 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X / PRE-EFFECTIVE AMENDMENT NO. / / POST-EFFECTIVE AMENDMENT NO. / / OPPENHEIMER INTEGRITY FUNDS (Exact Name of Registrant as Specified in Charter) 3410 South Galena Street, Denver, Colorado 80231-5099 (Address of Principal Executive Offices) 212-323-0200 (Registrant's Telephone Number) Andrew J. Donohue, Esq. Executive Vice President & General Counsel Oppenheimer Management Corporation Two World Trade Center, New York, New York 10048-0203 (212) 323-0256 (Name and Address of Agent for Service) As soon as practicable after the Registration Statement becomes effective. (Approximate Date of Proposed Public Offering) It is proposed that this filing will become effective on September 29, 1995, pursuant to Rule 488. No filing fee is due because the Registrant has previously registered an indefinite number of shares under Rule 24f-2; a Rule 24f-2 notice for the year ended December 31, 1994 was filed on February 27, 1995. CONTENTS OF REGISTRATION STATEMENT This Registration Statement contains the following pages and documents: Front Cover Contents Page Cross-Reference Sheet Part A Proxy Statement for Investment Quality Income Fund, a series of Quest for Value Family of Funds and Prospectus for Oppenheimer Bond Fund Part B Statement of Additional Information Part C Other Information Signatures Exhibits FORM N-14 OPPENHEIMER INTEGRITY FUNDS Cross Reference Sheet Part A of Form N-14 Item No. Proxy Statement and Prospectus Heading and/or Title of Document - --------- ------------------------------------------------------------- - -- 1 (a) Cross Reference Sheet (b) Front Cover Page (c) * 2 (a) * (b) Table of Contents 3 (a) Comparative Fee Tables (b) Synopsis (c) Principal Risk Factors 4 (a) Synopsis; Approval of the Reorganization; Comparison between Bond Fund and the Fund; Miscellaneous (b) Approval of the Reorganization - Capitalization Table 5 (a) Registrant's Prospectus; Comparison Between Bond Fund and the Fund (b) * (c) * (d) * (e) Miscellaneous (f) Miscellaneous 6 (a) Prospectus of Investment Quality Income Fund; Annual Report of Investment Quality Income Fund; Comparison Between Bond Fund and the Fund (b) Miscellaneous (c) * (d) * 7 (a) Synopsis; Information Concerning the Meeting (b) * (c) Synopsis; Information Concerning the Meeting 8 (a) Proxy Statement (b) * 9 * Part B of Form N-14 Item No. Statement of Additional Information Heading - --------- ------------------------------------------- 10 Cover Page 11 Table of Contents 12 (a) Registrant's Statement of Additional Information (b) * (c) * 13 (a) Statement of Additional Information about Investment Quality Income Fund (b) * (c) * 14 Registrant's Statement of Additional Information; Statement of Additional Information about Investment Quality Income Fund; Annual Report of Investment Quality Income Fund at 10/31/94; Semi-Annual Report of Investment Quality Income Fund at 4/30/95; Registrant's Annual Report at 12/31/94; Semi-Annual Report of Registrant at 6/30/95 Part C of Form N-14 Item No. Other Information Heading - --------- ------------------------- 15 Indemnification 16 Exhibits 17 Undertakings _______________ * Not Applicable or negative answer SCHEDULE 14A (Rule 14a-101) INFORMATION REQUIRED IN PROXY STATEMENT SCHEDULE 14A INFORMATION Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934 (Amendment No. ) Filed by the registrant / x / Filed by a party other than the registrant / / Check the appropriate box: / X / Preliminary proxy statement / / Definitive proxy statement / / Definitive additional materials / / Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12 Oppenheimer Integrity Funds - ------------------------------------------------------------------ (Name of Registrant as Specified in Its Charter) Investment Quality Income Fund, a series of Quest for Value Family of Funds - ------------------------------------------------------------------ (Name of Person(s) Filing Proxy Statement) Payment of filing fee (Check the appropriate box): / / $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or 14a- 6(j)(2). / / $500 per each party to the controversy pursuant to Exchange Act Rule 14a-6(i)(3). / / Fee Computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11. (1) Title of each class of securities to which transaction applies: - ------------------------------------------------------------------ (2) Aggregate number of securities to which transaction applies: - ------------------------------------------------------------------ (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11:(1) - ------------------------------------------------------------------ (4) Proposed maximum aggregate value of transaction: - ------------------------------------------------------------------ / / Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. (1) Amount previously paid: - ------------------------------------------------------------------ (2) Form, schedule or registration statement no.: - ------------------------------------------------------------------ (3) Filing Party: - ------------------------------------------------------------------ (4) Date Filed: - ----------------------- (1) Set forth the amount on which the filing fee is calculated and state how it was determined. Preliminary Copy QUEST FOR VALUE FAMILY OF FUNDS INVESTMENT QUALITY INCOME FUND One World Financial Center, New York, New York 10281 1-800-232-FUND NOTICE OF SPECIAL MEETING OF SHAREHOLDERS To Be Held November 3, 1995 To the Shareholders of Investment Quality Income Fund: Notice is hereby given that a Special Meeting of the Shareholders of Investment Quality Income Fund (the "Fund"), a series of Quest for Value Family of Funds (the "Trust"), an open-end, management investment company, will be held at One World Financial Center, New York, New York 10281 on the 40th Floor, at 10:00 A.M., New York time, on November 3, 1995, and any adjournments thereof (the "Meeting"), for the following purposes: 1. To consider and vote upon approval of the Agreement and Plan of Reorganization dated as of ____, 1995 (the "Reorganization Agreement") by and among Oppenheimer Integrity Funds, on behalf of Oppenheimer Bond Fund ("Bond Fund"), the Trust, on behalf of the Fund, and Quest for Value Advisors, investment adviser to the Fund, and the transactions contemplated thereby (the "Reorganization"), including (i) the transfer of substantially all the assets of the Fund to Bond Fund in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of certain liabilities of the Fund, (ii) the distribution of such shares of Bond Fund to shareholders of the Fund in complete liquidation of the Fund, and (iii) the cancellation of the outstanding shares of the Fund (the "Proposal"); and 2. To act upon such other matters as may properly come before the Meeting. The Reorganization is more fully described in the accompanying Proxy Statement and Prospectus and a copy of the Reorganization Agreement is attached as Exhibit A thereto. Class A, Class B and Class C shareholders of record at the close of business on September 7, 1995 are entitled to notice of, and to vote at, the Meeting. Please read the Proxy Statement and Prospectus carefully before telling us, through your proxy or in person, how you wish your shares to be voted. The Board of Trustees of the Trust recommends a vote in favor of the Reorganization. WE URGE YOU TO SIGN, DATE AND MAIL THE ENCLOSED PROXY PROMPTLY. By Order of the Board of Trustees, Deborah Kaback, Secretary _________, 1995 Shareholders who do not expect to attend the Meeting are requested to indicate voting instructions on the enclosed proxy and to date, sign and return it in the accompanying postage-paid envelope. To avoid unnecessary duplicate mailings, we ask your cooperation in promptly mailing your proxy no matter how large or small your holdings may be. Preliminary Copy QUEST FOR VALUE FAMILY OF FUNDS INVESTMENT QUALITY INCOME FUND One World Financial Center, New York, New York 10281 1-800-232-FUND PROXY STATEMENT - -------------------------- OPPENHEIMER BOND FUND 3410 South Galena Street, Denver, Colorado 80231 1-800-525-7048 PROSPECTUS This Proxy Statement and Prospectus is being furnished to shareholders of Investment Quality Income Fund (the "Fund"), a series of Quest for Value Family of Funds (the "Trust"), an open-end, management investment company, in connection with the solicitation by the Board of Trustees of the Trust (the "Board") of proxies to be used at the Special Meeting of Shareholders of the Fund, to be held at One World Financial Center, New York, New York 10281 on the 40th Floor at 10:00 A.M., New York time, on November 3, 1995, and any adjournments thereof (the "Meeting"). It is expected that this Proxy Statement and Prospectus will be mailed to shareholders on or about ____, 1995. At the Meeting, shareholders of the Fund will be asked to consider and vote upon approval of the Agreement and Plan of Reorganization, dated as of _____, 1995 (the "Reorganization Agreement"), by and among Oppenheimer Integrity Funds (the "Integrity Trust"), an open-end management investment company, on behalf of Oppenheimer Bond Fund ("Bond Fund"), the Trust, on behalf of the Fund, and Quest for Value Advisors ("QVA"), investment adviser to the Fund, and the transactions contemplated by the Reorganization Agreement (the "Reorganization"). The Reorganization Agreement provides for the transfer of substantially all the assets of the Fund to Bond Fund in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of certain liabilities of the Fund, the distribution of such shares of Bond Fund to shareholders of the Fund in complete liquidation of the Fund and the cancellation of the outstanding shares of the Fund. A copy of the Reorganization Agreement is attached hereto as Exhibit A and is incorporated by reference herein. As a result of the proposed Reorganization, each Class A, Class B and Class C shareholder of the Fund will receive that number of Class A, Class B and Class C shares, respectively, of Bond Fund having an aggregate net asset value equal to the net asset value of such shareholder's shares of the Fund of that class. This transaction is being structured as a tax-free reorganization. See "Approval of the Reorganization." Bond Fund currently offers Class A, Class B and Class C shares. Class A shares are sold with a sales charge imposed at the time of purchase (certain purchases aggregating $1.0 million or more ($500,000 as to purchases by OppenheimerFunds prototype 401(k) plans) are not subject to a sales charge, but may be subject to a contingent deferred sales charge ("CDSC") if redeemed within 18 months of the date of purchase); Class B shares are sold without a front-end sales charge but may be subject to a CDSC if redeemed within six years of the date of purchase; and Class C shares are sold without a front-end sales charge but may be subject to a CDSC if not held for one year. Holders of Class A shares in the Fund will receive Class A shares of Bond Fund and no sales charge will be imposed on the Class A shares received by the Fund Class A shareholders. Holders of Class B and Class C shares in the Fund will receive Class B and Class C shares, respectively, of Bond Fund; any CDSC which is applicable to a shareholder's investment will continue to apply, and, in calculating the applicable CDSC payable upon the subsequent redemption of shares of Bond Fund the period during which a Fund shareholder held shares of the Fund will be counted. Bond Fund, formerly named "Oppenheimer Investment Grade Bond Fund," is a mutual fund that seeks a high level of current income by investing mainly in debt instruments. The Fund seeks to provide shareholders with as high a level of current income as is consistent with conservation of principal through a portfolio consisting primarily of fixed income obligations. Shareholders of the Fund should consider the differences in investment objectives and policies of Bond Fund and the Fund, including the ability of Bond Fund to invest in securities rated lower than investment grade. See "Comparison Between Bond Fund and the Fund - Comparison of Investment Objectives, Policies and Restrictions." Bond Fund has filed with the Securities and Exchange Commission (the "SEC") a Registration Statement on Form N-14 (the "Registration Statement") relating to the registration of shares of Bond Fund to be offered to the shareholders of the Fund pursuant to the Reorganization Agreement. This Proxy Statement and Prospectus relating to the Reorganization also constitutes a Prospectus of Bond Fund filed as part of such Registration Statement. Information contained or incorporated by reference herein relating to Bond Fund has been prepared by and is the responsibility of Bond Fund. Information contained or incorporated by reference herein relating to the Fund has been prepared by and is the responsibility of the Fund. This Proxy Statement and Prospectus sets forth concisely information about Bond Fund that a prospective investor should know before voting on the Reorganization. The following documents have been filed with the SEC, are incorporated herein by reference and are available without charge upon written request to Quest for Value Distributors ("QVD"), the general distributor for the Fund, at P.O. Box 3567, Church Street Station, New York, New York 10277-1296, or by calling the toll-free number for the Fund shown above: (i) a Prospectus for the Fund, dated March 1, 1995, as revised June 30, 1995; and (ii) a Statement of Additional Information about the Fund, dated March 1, 1995. The following documents have each been filed with the SEC, are incorporated herein by reference and are available without charge upon written request to the transfer and shareholder servicing agent for Bond Fund, Oppenheimer Shareholder Services ("OSS"), at P.O. Box 5270, Denver Colorado 80217, or by calling the toll-free number for Bond Fund shown above: (i) a Prospectus for Bond Fund, dated July 10, 1995, as supplemented July 14, 1995; (ii) a Statement of Additional Information about Bond Fund, dated July 10, 1995, as supplemented July 14, 1995 (the "Bond Fund Additional Statement"), which contains more detailed information about Bond Fund and its management; and (iii) a Statement of Additional Information relating to the Reorganization described in this Proxy Statement and Prospectus (the "Additional Statement"), dated ____, 1995 and filed as part of the Registration Statement. Investors are advised to read and retain this Proxy Statement and Prospectus for future reference. Shares of Bond Fund are not deposits or obligations of any bank, are not guaranteed by any bank, and are not insured by the F.D.I.C. or any other agency, and involve investment risks, including the possible loss of the principal amount invested. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED ON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. This Proxy Statement and Prospectus is dated _______, 1995. TABLE OF CONTENTS PROXY STATEMENT AND PROSPECTUS COMPARATIVE FEE TABLES SYNOPSIS Parties to the Reorganization The Reorganization Tax Consequences of the Reorganization Investment Objectives and Policies Investment Advisory and Distribution Plan Fees Purchases, Exchanges and Redemptions PRINCIPAL RISK FACTORS APPROVAL OF THE REORGANIZATION (The Proposal) Reasons for the Reorganization The Reorganization Tax Aspects of the Reorganization Capitalization Table (Unaudited) COMPARISON BETWEEN BOND FUND AND THE FUND Comparison of Investment Objectives, Policies and Restrictions Special Investment Methods Investment Restrictions Bond Fund Performance Additional Comparative Information INFORMATION CONCERNING THE MEETING General Record Date; Vote Required; Share Information Proxies Costs of the Solicitation and the Reorganization MISCELLANEOUS Financial Information Public Information OTHER BUSINESS EXHIBIT A - Agreement and Plan of Reorganization, dated as of _____, 1995, by and among Oppenheimer Integrity Funds, on behalf of Oppenheimer Bond Fund, Quest for Value Family of Funds, on behalf of Investment Quality Income Fund, and Quest for Value Advisors A-1 EXHIBIT B - Purchase Price Formula Pursuant to the Acquisition Agreement B-1 COMPARATIVE FEE TABLES Transaction Charges Shareholders pay certain expenses directly, such as sales charges and account transaction charges. The schedule of such charges for both Bond Fund and the Fund (collectively, the "funds") is substantially the same, except as noted below.
Oppenheimer Bond Fund Class A Class B Class C Maximum Sales Charge on Purchases 4.75% None None (as a % of offering price) Sales Charge on Reinvested Dividends None None None Deferred Sales Charge None(1) 5.0%(2) 1.0%(3) (as a % of the lower of the original purchase price or redemption proceeds) Exchange Fee None None None
Investment Quality Income Fund Class A Class B Class C Maximum Sales Charge on Purchases 4.75% None None (as a % of offering price) Sales Charge on Reinvested Dividends None None None Deferred Sales Charge None(1) 5.0%(2) 1.0%(3) (as a % of the lower of the original purchase price or redemption proceeds) Exchange Fee $5.00 $5.00 $5.00
(1)If you invest $1 million or more (as to Bond Fund, $500,000 for purchases by OppenheimerFunds prototype 401(k) plans) in Class A shares, although you will generally not pay an initial sales charge, you may have to pay a sales charge of up to 1.0% if you sell your shares within 18 calendar months (as to Bond Fund) or 12 calendar months (as to the Fund, with a charge of 0.50 of 1.0% assessed for redemptions in the subsequent 12-month period), in each case from the end of the calendar month during which you purchased those shares. After the Reorganization, the duration of sales charges as to such Class A shares of the Fund will be decreased from 24 months to 18 months, and the 0.50 of 1.0% charge will be assessed for redemptions in the subsequent six-month period only. (2)If you redeem Class B shares within six years of their purchase, you may have to pay a contingent deferred sales charge starting at 5.0% in the first year and declining thereafter. (3)If you redeem Class C shares within 12 months of their purchase, you may have to pay a 1.0% contingent deferred sales charge. Expenses of Bond Fund and the Fund; Pro Forma Expenses The funds each pay a variety of expenses directly for management of their assets, administration, distribution of their shares and other services, and those expenses are reflected in the net asset value per share of each of Bond Fund and the Fund. The following calculations are based on the expenses of Bond Fund and the Fund for the 12 months ended December 31, 1994 and the six months ended June 30, 1995. These amounts are shown as a percentage of the average net assets of each class of shares of the Fund and of Bond Fund for those periods. The pro forma fees reflect what the fee schedules would have been at December 31, 1994 and June 30, 1995 as if the Reorganization had occurred on either of those dates.
Oppenheimer Bond Fund 12 months ended 12/31/94 6 months ended 6/30/95 Class A Class B Class C(1) Class A Class B Class C(1) Management Fees(2) 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 12b-1 Fees 0.24% 0.96% 0.96% 0.25% 1.00% 1.00% Other Expenses 0.31% 0.33% 0.33% 0.32% 0.35% 0.35% Total Fund Operating Expenses(2) 1.30% 2.04% 2.04% 1.32% 2.10% 2.10%
Investment Quality Income Fund 12 months ended 12/31/94 6 months ended 6/30/95 Class A Class B Class C Class A Class B Class C Management Fees(3) 0.60% 0.60% 0.60% 0.60% 0.60% 0.60% 12b-1 Fees 0.40% 1.00% 1.00% 0.40% 1.00% 1.00% Other Expenses 0.61% 0.63% 0.63% 0.52% 0.52% 0.54% Total Fund Operating Expenses(3) 1.61% 2.23% 2.23% 1.52% 2.12% 2.14%
Pro Forma Combined Fund 12 months ended 12/31/94 6 months ended 6/30/95 Class A Class B Class C(1) Class A Class B Class C(1) Management Fees(2) 0.75% 0.75% 0.75% 0.75% 0.75% 0.75% 12b-1 Fees 0.24% 1.00% 1.00% 0.25% 1.00% 1.00% Other Expenses 0.31% 0.29% 0.28% 0.31% 0.31% 0.28% Total Fund Operating Expenses(2) 1.30% 2.04% 2.03% 1.31% 2.06% 2.03%
(1)Class C shares of Bond Fund were first publicly offered on July 11, 1995. "Other Expenses" shown for Class C shares of Bond Fund and the combined fund on a pro forma basis are estimates based on amounts that would have been payable if Bond Fund Class C shares had been outstanding for the 12 months ended December 31, 1994 and the six months ended June 30, 1995, respectively. (2)Management fees for Bond Fund and the pro forma combined fund have been restated in the fee table above to reflect the increased management fee rates paid by Bond Fund to its investment adviser, pursuant to a new investment advisory agreement approved by shareholders of Bond Fund at a meeting held July 10, 1995. Had this management fee not changed, "Management Fees" (i) for the twelve months ended December 31, 1994 would have been 0.50%, 0.50% and 0.50% of Class A, Class B and Class C average annual net assets, and "Total Fund Operating Expenses" would have been 1.05%, 1.79% and 1.79% of Class A, Class B and Class C average annual net assets, and (ii) for the six months ended June 30, 1995 would have been 0.49%, 0.49% and 0.49% of Class A, Class B and Class C average annual net assets, and "Total Fund Operating Expenses" would have been 1.06%, 1.84% and 1.84% of Class A, Class B and Class C average annual net assets. See "Investment Advisory and Distribution Plan Fees" below. (3)"Management Fees" and "Total Fund Operating Expenses" have been restated to reflect the terminatin, effective April 24, 1995, of a voluntary waiver by QVA of a portion of its management fee. For the 12 months ended December 31, 1994, as to Class A, Class B and Class C shares of the Fund, actual "Management Fees" were 0.30%, 0.30% and 0.30%, and actual "Total Fund Operating Expenses" were 1.31%, 1.93% and 1.93%, in each case of their respective average annual net assets. For the six months ended June 30, 1995, as to Class A, Class B and Class C shares of the Fund, actual "Management Fees" were 0.52%, 0.52% and 0.52%, and actual "Total Fund Operating Expenses" were 1.44%, 2.04% and 2.06%, in each case of their respective average annual net assets. Hypothetical Expenses To attempt to show the effect of these expenses on an investment over time, the hypotheticals shown below have been created. Assume that you make a $1,000 investment in either the Fund or Bond Fund or the new combined fund and that the annual return is 5% and that the operating expenses for each fund are the ones shown in the chart above for the 12 months ended December 31, 1994 and the six months ended June 30, 1995. If you were to redeem your shares at the end of each period shown below, your investment would incur the following expenses by the end of each period shown:
12 Months ended 12/31/94 1 year 3 years 5 years 10 years Oppenheimer Bond Fund Class A Shares $60 $87 $115 $197 Class B Shares $71 $94 $130 $200(1) Class C Shares $31 $64 $110 $237(2) Investment Quality Income Fund Class A Shares $60 $87 $116 $198 Class B Shares $70 $91 $114 $209(1) Class C Shares $30 $61 $104 $225(2) Pro Forma Combined Fund Class A Shares $60 $87 $115 $197 Class B Shares $71 $94 $130 $200(1) Class C Shares $31 $64 $109 $236(2)
If you did not redeem your investment, it would incur the following expenses:
12 months ended 12/31/94 1 year 3 years 5 years 10 years Oppenheimer Bond Fund Class A Shares $60 $87 $115 $197 Class B Shares $21 $64 $110 $200(1) Class C Shares $21 $64 $110 $237(2) Investment Quality Income Fund Class A Shares $60 $87 $116 $198 Class B Shares $20 $61 $104 $209(1) Class C Shares $20 $61 $104 $225(2) Pro Forma Combined Fund Class A Shares $60 $87 $115 $197 Class B Shares $21 $64 $110 $200(1) Class C Shares $21 $64 $109 $236(2)
If you were to redeem your shares at the end of each period shown below, your investment would incur the following expenses by the end of each period shown:
6 Months ended 6/30/95 1 year 3 years 5 years 10 years Oppenheimer Bond Fund Class A Shares $60 $87 $116 $199 Class B Shares $71 $96 $133 $205(1) Class C Shares $31 $66 $113 $243(2) Investment Quality Income Fund Class A Shares $61 $91 $122 $212 Class B Shares $71 $94 $120 $222(1) Class C Shares $31 $65 $111 $239(2) Pro Forma Combined Fund Class A Shares $60 $87 $116 $198 Class B Shares $71 $95 $131 $202(1) Class C Shares $31 $64 $109 $236(2)
If you did not redeem your investment, it would incur the following expenses:
6 months ended 6/30/95 1 year 3 years 5 years 10 years Oppenheimer Bond Fund Class A Shares $60 $87 $116 $199 Class B Shares $21 $66 $113 $205(1) Class C Shares $21 $66 $113 $243(2) Investment Quality Income Fund Class A Shares $61 $91 $122 $212 Class B Shares $21 $64 $110 $222(1) Class C Shares $21 $65 $111 $239(2) Pro Forma Combined Fund Class A Shares $60 $87 $116 $198 Class B Shares $21 $65 $111 $202(1) Class C Shares $21 $64 $109 $236(2)
(1)The Class B expenses in years seven through ten for Bond Fund and year nine and ten for the Fund are based on the Class A expenses shown above, because Bond Fund and the Fund automatically convert Class B shares into Class A shares after six years and eight years, respectively. Long-term Class B shareholders could pay the economic equivalent of more than the maximum front-end sales charge allowed under applicable regulatory requirements, because of the effect of the asset-based sales charge and contingent deferred sales charge. The automatic conversion of Class B shares to Class A shares is designed to minimize the likelihood that this will occur. (2)Because of the asset-based sales charge imposed on Class C shares of Bond Fund and the Fund, long-term shareholders of Class C shares could bear expenses that would be the economic equivalent of an amount greater than the maximum front-end sales charges permitted under applicable regulatory requirements. SYNOPSIS The following is a synopsis of certain information contained in or incorporated by reference in this Proxy Statement and Prospectus and presents key considerations for shareholders of the Fund to assist them in determining whether to approve the Reorganization. This synopsis is only a summary and is qualified in its entirety by the more detailed information contained in or incorporated by reference in this Proxy Statement and Prospectus and the Exhibits hereto. Shareholders should carefully review this Proxy Statement and Prospectus and the Exhibits hereto in their entirety and, in particular, the current Prospectus of Bond Fund which accompanies this Proxy Statement and Prospectus and is incorporated by reference herein. Parties to the Reorganization Bond Fund is a series of Oppenheimer Integrity Funds, a diversified, open-end, management investment company organized in 1982 as a multi- series Massachusetts business trust. Bond Fund is located at 3410 South Galena Street, Denver, Colorado 80231. Oppenheimer Management Corporation ("OMC") acts as investment adviser to Bond Fund. Oppenheimer Funds Distributor, Inc. ("OFDI"), a subsidiary of OMC, acts as the distributor of Bond Fund's shares. Additional information about Bond Fund is set forth below. The Fund, a diversified fund, is a series of Quest for Value Family of Funds (the "Trust"), an open-end, management investment company organized as a Massachusetts business trust in 1987. The Fund is located at One World Financial Center, New York, New York 10281. QVA acts as investment adviser to the Fund. QVD acts as the distributor of the Fund's shares. QVA and QVD are majority-owned subsidiaries of Oppenheimer Capital, an institutional investment manager. OMC is not related to Oppenheimer Capital nor its affiliate, the brokerage firm Oppenheimer & Co., Inc. Additional information about the Fund is set forth below. The Reorganization The Reorganization Agreement provides for the transfer of substantially all the assets of the Fund to Bond Fund in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of certain liabilities of the Fund. The Reorganization Agreement also provides for the distribution of shares of Bond Fund to the Fund shareholders in complete liquidation of the Fund. As a result of the Reorganization, each Fund shareholder will receive that number of full and fractional Bond Fund shares equal in value to such shareholder's pro rata interest in the net assets transferred to Bond Fund as of the Valuation Date (as hereinafter defined). Holders of Class A, Class B and Class C shares of the Fund will receive Class A, Class B and Class C shares, respectively, of Bond Fund. For further information about the Reorganization see "Approval of the Reorganization" below. For the reasons set forth below under "Approval of the Reorganization - Reasons for the Reorganization," the Board, including the trustees who are not "interested persons" of the Trust (the "Independent Trustees"), as that term is defined in the Investment Company Act of 1940, as amended (the "1940 Act"), has concluded that the Reorganization is in the best interests of the Fund and its shareholders and that the interests of existing Fund shareholders will not be diluted as a result of the Reorganization, and recommends approval of the Reorganization by Fund shareholders. The Board of Trustees of Bond Fund has also approved the Reorganization and determined that the interests of existing Bond Fund shareholders will not be diluted as a result of the Reorganization. If the Reorganization is not approved, the Fund will continue in existence and the Board will determine whether to pursue alternative actions. "Approval of the Reorganization" sets forth certain information with respect to the background of the Reorganization, including other transactions and agreements entered into, or contemplated to be entered into, by OMC, QVA and their respective affiliates. Approval of the Reorganization will require the affirmative vote of a majority of each of the Class A, Class B and Class C shares of the Fund, voting separately as a class, represented in person or by proxy at the Meeting and entitled to vote at the Meeting. See "Information Concerning the Meeting - Record Date; Vote Required; Share Information." Tax Consequences of the Reorganization As a condition to the closing of the Reorganization, the Fund and Bond Fund will have received an opinion to the effect that the Reorganization will qualify as a tax-free reorganization for Federal income tax purposes. As a result of such tax-free reorganization, no gain or loss would be recognized by the Fund, Bond Fund, or the shareholders of either fund for Federal income tax purposes. For further information about the tax consequences of the Reorganization, see "Approval of the Reorganization -Tax Aspects of the Reorganization" below. Investment Objectives and Policies As its investment objective, Bond Fund seeks a high level of current income by investing mainly in debt instruments. Under normal market conditions, Bond Fund invests at least 65% of its total assets in investment grade debt securities, U.S. Government securities, and money market instruments and may invest up to 35% of its total assets in debt securities rated less than investment grade. Investment grade debt securities are those rated in one of the four highest categories by Standard & Poor's Corporation ("S&P"), Moody's Investors Service, Inc. ("Moody's"), or another nationally-recognized rating organization. Such categories are, from highest to lowest ratings, AAA, AA, A and BBB as to S&P and Aaa, Aa, A and Baa as to Moody's. See "Comparison Between Bond Fund and the Fund" for a discussion of certain of these ratings. Securities rated less than investment grade (often called "junk bonds") are considered speculative. Although non-investment grade securities generally offer the potential for higher income than investment grade debt securities, they may be subject to greater market fluctuations and a greater risk of default because of the issuer's low creditworthiness. Prior to July 10, 1995, Bond Fund was named "Oppenheimer Investment Grade Bond Fund" and its investments were limited to investment grade bonds, U.S. Government securities and money market instruments. Bond Fund's shareholders approved the changes in Bond Fund's investment policies at a meeting held July 10, 1995 and such changes are reflected in Bond Fund's current investment policies. OMC anticipates that Bond Fund would generally invest at least 75% of its total assets in : (i) U.S. corporate bonds rated "A" or better and (ii) U.S. government and agency bonds. OMC further anticipates that Bond Fund would invest an additional 15% of its total assets in non- investment grade domestic corporate bonds and 10% of its total assets in non-investment grade foreign bonds. These anticipated investment targets, including the allocation between domestic and foreign lower- grade debt securities, are subject to fluctuation and may be changed by OMC without further notice to shareholders or amended prospectus disclosure. Bond Fund's investments may also include securities of foreign governments and companies, mortgage-backed securities, collateralized mortgage-backed obligations (CMOs), asset-backed securities, zero coupon securities, preferred stock and municipal securities. Bond Fund may also write covered calls and use certain derivative investments, including options and futures, to enhance income and may use hedging instruments to try to manage investment risks. As its investment objective, the Fund seeks as high a level of current income as is consistent with conservation of principal through a portfolio consisting primarily of fixed-income obligations. Under normal market conditions, at least 80% of the Fund's assets will be invested in corporate bonds, U.S. government securities and/or mortgage-backed debt securities rated "A" or better by Moody's or S&P or, if unrated, considered to be of comparable quality by QVA. The Fund may invest up to 20% of its assets in the lowest category of investment grade corporate bonds. Such bonds are deemed to have speculative elements. As with Bond Fund, the Fund may use hedging instruments to try to manage investment risks. Shareholders of the Fund should consider the differences in investment objectives and policies of the funds, including the ability of Bond Fund to invest in securities rated lower than investment grade. See "Comparison Between Bond Fund and the Fund -Comparison of Investment Objectives, Policies and Restrictions." Investment Advisory and Distribution Plan Fees The funds obtain investment management services from their investment advisers pursuant to the terms of their respective investment advisory agreements. The management fee is payable to the investment advisers monthly and is computed on the net asset value of each fund as of the close of business each day. Bond Fund pays a management fee which declines on additional assets as Bond Fund increases its asset base, at the annual rate of 0.75% of the first $200 million of 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 net assets over $1 billion. The management fee payable by the Fund to QVA is at an annual rate of 0.60% of net assets. Both Bond Fund and the Fund have adopted separate service and/or distribution plans pursuant to Rule 12b-1 under the 1940 Act for their respective Class A, Class B and Class C shares. Pursuant to the plans, Class A, Class B and Class C shares of Bond Fund and the Fund are authorized to reimburse (as to Class A shares of Bond Fund only) for costs incurred by, or to compensate, OFDI and QVD, respectively, in connection with the distribution of shares and the servicing of shareholder accounts that hold the fund's shares. The current maximum annual fee payable by shares of Bond Fund and the Fund pursuant to their service and/or distribution plans is (i) as to Class A shares, 0.25% (as a service fee), (ii) as to Class B shares, 1.00% (consisting of a 0.25% service fee and a 0.75% "asset-based sales charge") and (iii) as to Class C shares, 1.00% (consisting of a 0.25% service fee and a 0.75% "asset-based sales charge") respectively, of average annual net assets. Class A shares of the Fund also pay QVD a distribution fee at an annual rate of 0.15%. Class B shares of Bond Fund automatically convert to Class A shares of Bond Fund six years after the beginning of the calendar month of their purchase. Class B shares of the Fund automatically convert to Class A shares of the Fund eight years after purchase. Accordingly, Class B shareholders of the Fund pay the asset- based sales charge on their shares for a longer period than Bond Fund Class B shareholders. Purchases, Exchanges and Redemptions Purchases. Purchases of shares of Bond Fund and the Fund may be made directly through the distributor for Bond Fund or the transfer agent for the Fund, respectively, or through any dealer, broker or financial institution that has a sales agreement with the distributor for such fund (initial purchases of Fund shares must be made through such dealer, broker or institution). In addition, a shareholder of Bond Fund may purchase shares automatically from an account at a domestic bank or other financial institution under the "OppenheimerFunds AccountLink" service. Class A shares of both Bond Fund and the Fund generally are sold subject to an initial sales charge and Class B and Class C shares generally are sold without a front-end sales charge but may be subject to a CDSC upon redemption. See "Comparative Fee Tables - -- Transaction Charges" above for a complete description of such sales charges. The Class A Bond Fund shares to be issued under the Reorganization Agreement will be issued by Bond Fund at net asset value without a sales charge. The sales charge on Class A shares of Bond Fund will only affect shareholders of the Fund to the extent that they desire to make additional purchases of Class A shares of Bond Fund in addition to the shares which they will receive as a result of the Reorganization. Future dividends and capital gain distributions of Bond Fund, if any, may be reinvested without sales charge. The Class B and Class C shares of Bond Fund to be issued under the Reorganization Agreement will be issued at net asset value and will be deemed aged to the same level as the shareholder's existing Fund Class B and Class C shares. Bond Fund has undertaken that any Fund shareholders entitled to a waiver of or exemption from sales charges pursuant to the policy stated in the Fund's Prospectus dated March 1, 1995, as revised June 30, 1995, shall continue to be entitled to such waiver or exemption as a shareholder of Bond Fund (or any other Oppenheimer Fund) after the Reorganization so long as they continue to meet the applicable eligibility criteria. Exchanges. Shareholders of Bond Fund and the Fund may exchange their shares at net asset value for shares of the same class of mutual funds distributed by OFDI and QVD, respectively, subject to certain conditions. Bond Fund offers an automatic exchange plan providing for systematic exchanges from Bond Fund of a specified amount for shares of the same class of other funds within the OppenheimerFunds family. Redemptions. Class A shares of the funds may be redeemed without charge at their respective net asset values per share calculated after the redemption order is received and accepted. Certain large investments in Class A shares that were exempt from the front-end sales charge upon purchase may be subject to a CDSC upon redemption. See "Comparative Fee Tables -- Transaction Charges" above. Class B shares of the funds may be redeemed at their net asset value per share, subject to a maximum CDSC of 5.0% for redemptions occurring within six years of purchase. Class C shares of both funds may be redeemed at their net asset value per share, subject to a CDSC of 1.00% if such shares are redeemed during the first 12 months following their purchase. Shareholders of Bond Fund may reinvest redemption proceeds of Class A shares on which an initial sales charge was paid, or Class A or Class B shares on which a CDSC was paid, within six months of a redemption at net asset value in Class A shares of Bond Fund or any of numerous mutual funds within the OppenheimerFunds family. This privilege is not applicable to Class C Bond Fund shares. Shareholders of the Fund that reinvest redemption proceeds of Class A, Class B or Class C shares in another fund in the Quest Funds family within 60 days will be reinstated as a shareholder with the same privileges regarding the non- payment of sales charges that apply to exchanges. Shareholders of the funds may redeem their shares by written request or by telephone request in certain stated amounts, or they may arrange to have share redemption proceeds wired, for a fee, to a pre-designated account at a U.S. bank or other financial institution that is an automated clearing house ("ACH") member. Checkwriting privileges on Class A shares of Bond Fund are also available. Bond Fund may redeem accounts valued at less than $1,000 if the account has fallen below such stated amount for reasons other than market value fluctuations. The funds offer automatic withdrawal plans providing for systematic withdrawals of a specified amount from the fund account. PRINCIPAL RISK FACTORS In evaluating whether to approve the Reorganization and invest in Bond Fund, shareholders should carefully consider the following summary of risk factors, relating to both Bond Fund and the Fund, in addition to the other information set forth in this Proxy Statement and Prospectus. A complete description of risk factors for each fund is set forth in the documents incorporated by reference herein, including the Prospectuses of the funds and their respective Statements of Additional Information. As a general matter, Bond Fund and the Fund are intended for investors seeking high current income and not for investors seeking capital appreciation. There is no assurance that either Bond Fund or the Fund will achieve its investment objective and investment in the funds is subject to investment risks, including the possible loss of the principal invested. As described below, Bond Fund may invest a certain percentage of its assets in high-yield, lower-rated securiites. The Fund may not invest in securities that are rated below investment grade. Accordingly, investors should consider the additional risk potential of this investment policy of Bond Fund. Investment in Debt Securities The funds both seek their investment objective through investments primarily in debt securities. Debt securities are subject to interest rate risk and credit risk. Interest rate risk relates to fluctuations in market value due to changes in prevailing interest rates. When prevailing interest rates fall, the value of already-issued debt securities generally rise. When interest rates rise, the value of already-issued debt securities generally decline. The magnitude of these fluctuations will often be greater for longer-term debt securities than shorter-term debt securities. Changes in the value of securities held by a fund means that the fund's share prices can go up or down when interest rates change, because of the effect of the change on the value of the fund's portfolio of debt securities. Credit risk relates to the ability of the issuer of a debt security to make interest or principal payments on the security as they become due. Generally, higher-yielding, lower-rated bonds are subject to greater credit risk than higher-rated bonds. Securities issued or guaranteed by the U.S. government are subject to little, if any, credit risk. Bond Fund is permitted to invest up to 35% of its total assets in debt securities rated less than investment grade or, if unrated, judged by OMC to be of comparable quality to such lower-rated debt securities (often called "junk bonds"). However, OMC anticipates that Bond Fund would generally invest no more than 25% of its total assets in non- investment grade debt securities. Such securities are speculative and involve greater risk than investment grade debt securities. They may be less liquid than higher-rated securities. If Bond Fund were forced to sell a lower-grade debt security during a period of rapidly declining prices, it might experience significant losses especially if a substantial number of other holders decide to sell at the same time. Other risks may involve the default of the issuer or price changes in the issuer's securities due to change in the issuer's financial strength or economic conditions. The Fund may not invest in non- investment grade debt although up to 20% of the Fund's assets may be invested in the lowest category of investment grade bonds, which bonds are deemed to have speculative elements. The funds may invest in mortgage-backed securities which securities are subject to prepayment risks. The effective maturity of a mortgage- backed security may be shortened by unscheduled or early payment of principal and interest on the underlying mortgages. This may result in greater price and yield volatility than traditional fixed-income securities that have a fixed maturity and interest rate. The principal that is returned may be invested in instruments having a higher or lower yield than the prepaid instruments depending on then-current market conditions. Such securities therefore may be less effective as a means of "locking in" attractive long-term interest rates and may have less potential for appreciation during period of declining interest rates than conventional bonds with comparable stated maturities. If the funds buy mortgage-backed securities at a premium, prepayments of principal and foreclosures of mortgages may result in some loss of the fund's principal investment to the extent of the premium paid. The value of mortgage-backed securities may also be affected by changes in the market's perception of the creditworthiness of the entity issuing or guaranteeing them or by changes in government regulations and tax policies. The funds may invest in collateralized mortgage obligations ("CMOs"). Investments by the Fund in CMOs must be of high quality as determined by the Board. CMOs may be issued in a variety of classes or series ("tranches"). The principal value of certain CMO tranches may be more volatile and less liquid than other types of mortgage-related securities, because of the possibility that the principal value of the CMOs may be prepaid earlier than the maturity of the CMOs as a result of prepayments of the underlying mortgage loans by the borrowers. Bond Fund may also invest in "stripped" mortgage-backed securities of CMOs. Stripped mortgage-backed securities usually have two classes. The classes receive different proportions of the interest and principal distributions on the pool of mortgage assets that act as collateral for the security. In certain cases, one class will receive all of the interest payments (and is known as an "I/O"), while the other class will receive all of the principal payments (and is known as a "P/O"). The yield to maturity on the class that receives only interest is extremely sensitive to the rate of payment of the principal on the underlying mortgages. Principal prepayments increase that sensitivity. Stripped securities that pay "interest only" are therefore subject to greater price volatility when interest rates change, and they have the additional risk that if the underlying mortgages are prepaid, the fund will lose the anticipated cash flow from the interest on the prepaid mortgages. That risk is increased when general interest rates fall, and in times of rapidly falling interest rates, the fund might receive back less than its investment in such I/Os. The value of "principal only" securities generally increases as interest rates decline and prepayment rates rise. The price of these securities is typically more volatile than that of coupon-bearing bonds of the same maturity. Foreign Securities The funds may generally invest without limit in debt securities of foreign governments and foreign companies. Some of the foreign debt securities Bond Fund may invest in, such as emerging market debt, have speculative characteristics. There are certain risks of foreign investing. For example, foreign issuers are not required to use generally-accepted accounting principles. If foreign securities are not registered for sale in the U.S. under U.S. securities laws, the issuer does not have to comply with the disclosure requirements of our laws, which are generally more stringent than foreign laws. The values of foreign securities investments will be affected by other factors, including exchange control regulations or currency blockage and possible expropriation or nationalization of assets. There are risks of changes in foreign currency values. The funds may purchase securities denominated in foreign currencies; accordingly, a change in value of a foreign currency against the U.S. dollar will result in a change in the U.S. dollar value of a fund's securities denominated in that currency. The currency rate change will also affect its income available for distribution. Although the funds' investment income from foreign securities may be received in foreign currencies, the funds will be required to absorb the cost of currency fluctuations. If a fund suffers a loss on foreign currencies after it has distributed its income during the year, the fund may find that it has distributed more income than was available from actual investment income. There may also be changes in governmental administration or economic or monetary policy in the U.S. or abroad that can affect foreign investing. In addition, it is generally more difficult to obtain court judgments outside the United States if the fund has to sue a foreign broker or issuer. Additional costs may be incurred because foreign broker commissions are generally higher than U.S. rates, and there are additional custodial costs associated with holding securities abroad. Repurchase Agreements The funds may enter into repurchase agreements of seven days or less without limit and may cause up to 10% of their respective net assets to be subject to repurchase agreements having a maturity beyond seven days. Repurchase agreements must be fully collateralized. However, if the vendor fails to pay the resale price on the delivery date, the funds may experience costs or delays in disposing of the collateral and may experience losses to the extent that the proceeds from the sale of the collateral is less than the repurchase price. Options, Futures and Interest Rate Swaps; Derivatives The funds may purchase and sell certain kinds of futures contracts and options on such contracts for hedging purposes. Bond Fund may also purchase and sell put and call options, options on broadly-based stock or bond indices and foreign currency and forward contracts and enter into interest rate swap agreements. The foregoing instruments, referred to as "hedging instruments," may be considered derivative investments. Bond Fund may also invest in certain derivative investments to enhance income. Hedging instruments and derivative investments and their special risks are described below in "Comparison Between Bond Fund and the Fund." APPROVAL OF THE REORGANIZATION (The Proposal) Background Oppenheimer Capital, in the course of a review of its business, recently concluded that it should concentrate on its core investment management business and not continue in the retail distribution of mutual funds. Oppenheimer Capital is the parent of QVA. The retail mutual fund market requires significant assets per fund to cover normal costs, significant capital, investment in new products and services, financing for Class B and Class C shares and sales support. Sometime after this determination was made, representatives of OMC approached Oppenheimer Capital about acquiring certain of its mutual fund assets. Representatives of OMC, Oppenheimer Capital, QVD and QVA held meetings beginning in April 1995. Following the negotiation of the terms of an acquisition agreement and related agreements, an acquisition agreement (the "Acquisition Agreement") was executed by OMC, Oppenheimer Capital, QVD and QVA on August 17, 1995. The Reorganization described in this Proxy Statement and Prospectus is one aspect of the overall Acquisition (as hereinafter defined) contemplated by the Acquisition Agreement described below. The consummation of the Acquisition is one condition, among others, to the closing of the Reorganization. Accordingly, unless the parties otherwise agree, the Reorganization may not be effected, despite shareholder approval, if the Acquisition does not close. In such case, the Fund will continue in existence and the Board will take such further action as it, in its discretion, deems necessary or advisable. The description of the Acquisition Agreement set forth below is a summary only. Acquisition Agreement The Acquisition Agreement contemplates the sale to OMC of substantially all the assets (the "Purchased Assets") of QVA, QVD and Oppenheimer Capital (collectively, the "Companies") relating to twelve Quest For Value mutual funds (the "Acquired Funds") and the assumption by OMC of certain liabilities of the Companies with respect to the Acquired Funds (the "Assumed Liabilities") (the foregoing, the "Acquisition"). The Acquisition Agreement contemplates that six of the Acquired Funds (including the Fund) will be reorganized with certain mutual funds currently advised by OMC (the "Reorganized Funds") and the remaining six Acquired Funds will enter into investment advisory agreements with OMC (or its designee) and OMC (or its designee) will thereupon enter into subadvisory agreements with QVA for the benefit of each such fund (the "Continuing Funds"). A condition to the obligation of OMC to close under the Acquisition Agreement (the "Acquisition Closing") is the approval of the reorganizations of the Reorganized Funds (including the Reorganization described in this Proxy Statement and Prospectus) and the approval of the investment advisory agreements and subadvisory agreements with the Continuing Funds by shareholders that have in the aggregate at least 75% of the closing net assets of all Acquired Funds. A condition to the obligation of the Companies to close under the Acquisition Agreement (which condition has been satisfied) is that the directors or trustees of the Continuing Funds and the Reorganized Funds have adopted a resolution that for a period of three years after the Acquisition Closing, at least 75% of the members of the board of each such fund will not be "interested persons" (as defined in the 1940 Act) of the investment adviser or subadviser for such fund or "interested persons" (as defined in the 1940 Act) of QVA, the predecessor investment adviser as to the Continuing Funds. The Acquisition Agreement sets forth certain other conditions to each party's obligation to close. The purchase price for the Purchased Assets will be calculated pursuant to the formula set forth on Exhibit B hereto. If the Acquisition had been consummated on July 31, 1995, QVA estimates that the purchase price would have been approximately $50 million. The actual purchase price may be lower depending upon changes in the net asset value of the Acquired Funds. The Companies have agreed not to sponsor, manage or distribute any open- end or closed-end management investment company registered under the 1940 Act or any similar law in Canada (except for certain identified investment companies or types of investment companies) and not to sell, underwrite or assist in the distribution of shares of any such funds for a period to end on the earlier of (i) the third anniversary of the date on which there is no effective sub-advisory agreement between OMC and QVA or (ii) the eighth anniversary of the Acquisition Closing. OMC and the Companies have agreed to indemnify the other for certain liabilities. Board Approval of the Reorganization At its meeting on June 22, 1995 the Board, including the Independent Trustees, unanimously approved the Reorganization and the Reorganization Agreement, determined that the Reorganization is in the best interests of the Fund and its shareholders and resolved to recommend that Fund shareholders vote for approval of the Reorganization. The Board further determined that the Reorganization would not result in dilution of the Fund's shareholders' interests. In evaluating the Reorganization, the Board requested and reviewed, with the assistance of independent legal counsel, materials furnished by OMC and QVA. These materials included financial statements as well as other written information regarding OMC and its personnel, operations and financial condition. The Board also reviewed the same type of information about QVA. Consideration was given to comparative information concerning other mutual funds with similar investment objectives to the Fund and Bond Fund, including information prepared by Lipper Analytical Services, Inc. and Management Practice Inc. The Board also considered information with respect to the relative historical performance of the funds. The Board also reviewed and discussed the terms and provisions of the investment advisory agreement pursuant to which OMC provides investment management services to Bond Fund and compared them to the existing management arrangements for the Fund as well as the management arrangements of other mutual funds, particularly with respect to the allocation of various types of expenses, levels of fees and resulting expense ratios. In reaching its determination, the Board gave careful consideration to the following factors, among others: the Reorganization would afford the shareholders of the Fund the capabilities and resources of OMC and its affiliates in the area of investment management, distribution, shareholder servicing and marketing; the ability of the shareholders of the Fund to exchange their shares for a wider variety of portfolios within the OppenheimerFunds family with differing investment objectives than are currently available to shareholders of the Fund; the terms and conditions of the Reorganization (including that there would be no sales charge imposed in effecting the Reorganization, the Reorganization was intended to qualify as a tax-free exchange and all expenses of the Reorganization would be paid by QVA and OMC in the amounts incurred by them and the respective fund); and the similarity and differences of the investment objectives, policies and methods of the Fund and Bond Fund. The Board also considered that the annual operating expenses for Bond Fund are lower, as a percentage of assets, and would be lower on a pro forma basis after giving effect to the Reorganization, than the operating expenses of the Fund, resulting in a savings to Fund shareholders. For operating expenses and other expense information relating to Bond Fund and the Fund, see "Comparative Fee Tables - Expenses of Bond Fund and the Fund; Pro Forma Expenses." Further, since Class B shares of Bond Fund automatically convert to Class A shares after six years, as compared to a conversion of Class B shares of the Fund after eight years, Class B Fund shareholders would benefit from the earlier conversion to a Class that does not bear an annual asset-based sales charge. In addition, the Board determined that the purchase, exchange and redemption procedures and privileges provided by Bond Fund are comparable to those of the Fund and that Fund shareholders currently exempt from payment of certain transaction-based sales charges will continue to be so exempt as shareholders of Bond Fund. The Bond Fund Board of Trustees, including the trustees who are not "interested persons" of Bond Fund, unanimously approved the Reorganization and the Reorganization Agreement and determined that the Reorganization is in the best interests of Bond Fund and its shareholders. The Bond Fund Board further determined that the Reorganization would not result in dilution of the Bond Fund shareholders' interests. The Bond Fund Board considered, among other things, that an increase in Bond Fund's asset base as a result of the Reorganization should benefit Bond Fund shareholders due to the economies of scale available to a larger fund. These economies of scale should result in lower costs per account for each Bond Fund shareholder through lower operating expenses and transfer agency expenses. The Reorganization The following summary of the Reorganization Agreement is qualified in its entirety by reference to the Reorganization Agreement (a copy of which is set forth in full as Exhibit A to this Proxy Statement and Prospectus). The Reorganization Agreement contemplates a reorganization under which (i) substantially all of the assets of the Fund would be transferred to Bond Fund in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of certain liabilities of the Fund, (ii) the Class A, Class B and Class C shares would be distributed among the respective Class A, Class B and Class C shareholders of the Fund in complete liquidation of the Fund and (iii) the outstanding shares of the Fund would be cancelled. Prior to the Closing Date (as hereinafter defined), the Fund will endeavor to discharge all of its liabilities and obligations when and as due prior to such date. Bond Fund will not assume any liabilities or obligations of the Fund other than those reflected on an unaudited statement of assets and liabilities of the Fund prepared as of the Valuation Date and that are agreed to by Bond Fund. In this regard, the Fund will retain a cash reserve (the "Cash Reserve") in an amount which is deemed sufficient in the discretion of the Board for the payment of (a) the Fund's expenses of liquidation and (b) the Fund's liabilities, other than those assumed by Bond Fund. The number of full and fractional Class A, Class B and Class C shares of Bond Fund to be issued to the Fund will be determined on the basis of Bond Fund's and the Fund's relative net asset values per Class A, Class B and Class C shares, respectively, computed as of the close of business of the New York Stock Exchange, Inc. on ______________, 1995 or at such time on such earlier or later date as may be mutually agreed upon in writing (the "Valuation Date"). The Closing Date for the Reorganization will be the next business day following the Valuation Date. OMC will utilize the valuation procedures set forth in the Prospectus and Statement of Additional Information of Bond Fund to determine the value of the Fund's assets to be transferred to Bond Fund pursuant to the Reorganization, the value of Bond Fund's assets and the net asset value of each class of shares of Bond Fund. Such values will be computed by OMC as of the Valuation Date in a manner consistent with its regular practice in pricing Bond Fund. The Reorganization Agreement provides for coordination between the funds as to their respective portfolios so that, on and after the Closing Date, Bond Fund will be in compliance with all of its investment policies and restrictions. The Fund will recognize capital gain or loss on any sales made pursuant to this condition. As noted in "Tax Aspects of the Reorganization" below, if the Fund realizes net gain from the sale of securities, such gain, to the extent not offset by capital loss carry-forwards, will be distributed to shareholders prior to the Closing Date and will be taxable to shareholders as capital gain. Contemporaneously with the closing, the Fund will be liquidated and the Fund will distribute or cause to be distributed pro rata to Fund shareholders of record as of the close of business on the Valuation Date the full and fractional Bond Fund shares of each class received by the Fund. Upon such liquidation all issued and outstanding shares of the Fund will be cancelled on the Fund's books and Fund shareholders will have no further rights as shareholders of the Fund. To assist the Fund in the distribution of Bond Fund shares, Bond Fund will, in accordance with a shareholder list supplied by the Fund, cause Bond Fund's transfer agent to credit and confirm an appropriate number of shares of Bond Fund to each shareholder of the Fund. Certificates for shares of Bond Fund will be issued upon written request of a former shareholder of the Fund but only for whole shares with fractional shares credited to the name of the shareholder on the books of Bond Fund. Former shareholders of the Fund who wish certificates representing their shares of Bond Fund must, after receipt of their confirmations, make a written request to Oppenheimer Shareholder Services, P.O. Box 5270, Denver, Colorado 80217. Shareholders of the Fund holding certificates representing their shares will not be required to surrender their certificates to anyone in connection with the Reorganization. After the Reorganization, however, it will be necessary for such shareholders to surrender such certificates in order to redeem, transfer or exchange any shares of Bond Fund. After the closing of the Reorganization, the Fund will not conduct any business except in connection with the winding up of its affairs. Under the Reorganization Agreement, within one year after the Closing Date, the Fund shall: either (i) transfer any remaining amount of the Cash Reserve to Bond Fund, if such remaining amount is not material (as defined below) or (ii) distribute such remaining amount to the shareholders of the Fund who were such on the Valuation Date. Such remaining amount shall be deemed to be material if the amount to be distributed, after deducting the estimated expenses of the distribution, equals or exceeds one cent per share of the number of Fund shares outstanding on the Valuation Date. The consummation of the Reorganization is subject to the conditions set forth in the Reorganization Agreement, including, without limitation, approval of the Reorganization by the Fund's shareholders. Notwithstanding approval of the Fund's shareholders, the Reorganization may be terminated at any time at or prior to the Closing Date (i) by mutual written consent of the Trust, on behalf of the Fund, and Bond Fund, (ii) by the Trust, on behalf of the Fund, or Bond Fund if the closing shall not have occurred on or before February 29, 1996 or, if later, two business days after the date of any Fund shareholder's meeting called for the purpose of approving the Reorganization which was convened prior to ____ but adjourned to a date after _______, or (iii) by the Trust, on behalf of the Fund, or Bond Fund upon a material breach by the other (and, with respect to Bond Fund, a material breach by QVA) of any representation, warranty, covenant or agreement contained therein to be performed on or prior to the Closing Date, if a condition therein expressed to be precedent to the obligations of the terminating party has not been met and it reasonably appears that it will not or cannot be met prior to the Closing Date or the Acquisition is not consummated. Termination of the Reorganization Agreement will terminate all obligations of the parties thereto (other than a confidentiality obligation of Bond Fund with respect to information relating to the Fund and the obligation of Bond Fund to return certain books and records to the Fund) without liability except, in the event of a termination pursuant to (iii) above, any party in breach (other than a breach due to the Fund's shareholders not approving the Reorganization) of the Reorganization Agreement (or the Acquisition Agreement, if applicable) will, upon demand, reimburse the non- breaching party for all reasonable out-of-pocket fees and expenses incurred in connection with the transactions contemplated by the Reorganization Agreement. Approval of the Reorganization will require the vote specified below in "Information Concerning the Meeting - Record Date; Vote Required; Share Information." If the Reorganization is not approved by the shareholders of the Fund, the trustees of the Trust will consider other possible courses of action. Tax Aspects of the Reorganization At or prior to the Closing Date, the Fund will declare a dividend in an amount large enough so that it will have declared a dividend of all of its investment company taxable income and net capital gain, if any, for the taxable period ending with its dissolution (determined without regard to any deduction for dividends paid). Such dividends will be included in the taxable income of the Fund's shareholders as ordinary income and capital gain, respectively. The exchange of the assets of the Fund for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of certain liabilities of the Fund is intended to qualify for Federal income tax purposes as a tax-free reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as amended (the "Code"). The Fund has represented to Price Waterhouse LLP, tax adviser to the Fund, that, to the Fund's best knowledge, there is no plan or intention by any Fund shareholder who owns 5% or more of the Fund's outstanding shares, and, to the Fund's best knowledge, there is no plan or intention on the part of the remaining Fund shareholders, to redeem, sell, exchange or otherwise dispose of a number of Bond Fund shares received in the transaction that would reduce the Fund shareholders' ownership of Bond Fund Class A, Class B and Class C shares to a number of shares having a value, as of the Closing Date, of less than 50% of the value of all the formerly outstanding Fund shares as of the same date. The Fund and Bond Fund have each further represented to the fact that, as of the Closing Date, the Fund and Bond Fund will qualify as regulated investment companies or will meet the diversification test of Section 368(a)(2)(F)(ii) of the Code. As a condition to the closing of the Reorganization, Bond Fund and the Fund will receive the opinion of Price Waterhouse LLP to the effect that, based on the Reorganization Agreement, the above representations, existing provisions of the Code, Treasury Regulations issued thereunder, current Revenue Rulings, Revenue Procedures and court decisions, for Federal income tax purposes: 1. The transfer of substantially all of the Fund's assets in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of certain identified liabilities of the Fund followed by the distribution by the Fund of Class A, Class B and Class C shares of Bond Fund to the Fund shareholders in exchange for their Fund shares will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code and the Fund and Bond Fund will each be a "party to the reorganization" within the meaning of Section 368(b) of the Code. 2. No gain or loss will be recognized by Bond Fund upon the receipt of the assets of the Fund solely in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of the identified liabilities of the Fund. 3. No gain or loss will be recognized by the Fund upon the transfer of the assets of the Fund to Bond Fund in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of the identified liabilities or upon the distribution of Class A, Class B and Class C shares of Bond Fund to the Fund shareholders in exchange for the Fund shares. 4. No gain or loss will be recognized by the Fund shareholders upon the exchange of the Fund shares for the Class A, Class B and Class C shares of Bond Fund. 5. The aggregate tax basis for Class A, Class B and Class C shares of Bond Fund received by each Fund shareholder pursuant to the Reorganization will be the same as the aggregate tax basis of the Fund shares held by each such Fund shareholder immediately prior to the Reorganization. 6. The holding period of Class A, Class B and Class C shares of Bond Fund to be received by each Fund shareholder will include the period during which the Fund shares surrendered in exchange therefor were held (provided such Fund shares were held as capital assets on the date of the Reorganization). 7. The tax basis of the assets of the Fund will be the same as the tax basis of such assets of the Fund immediately prior to the Reorganization. 8. The holding period of the assets of the Fund in the hands of Bond Fund will include the period during which those assets were held by the Fund. Shareholders of the Fund should consult their tax advisors regarding the effect, if any, of the Reorganization in light of their individual circumstances. Since the foregoing discussion only relates to the Federal income tax consequences of the Reorganization, shareholders of the Fund should also consult their tax advisers as to state and local tax consequences, if any, of the Reorganization. Capitalization Table (Unaudited) The table below sets forth the capitalization of Bond Fund and the Fund and indicates the pro forma combined capitalization as of June 30, 1995 as if the Reorganization had occurred on that date. Net Asset Shares Value Net Assets Outstanding Per Share Oppenheimer Bond Fund* Class A Shares $118,864,206 10,995,949 $10.81 Class B Shares 7,700,818 712,334 10.81 Investment Quality Income Fund Class A Shares 47,384,068 4,417,757 10.73 Class B Shares 10,751,740 1,002,425 10.73 Class C Shares 3,543,606 330,312 10.73 Pro Forma Combined Fund** Class A Shares 166,248,274 15,379,305 10.81 Class B Shares 18,452,558 1,706,945 10.81 Class C Shares 3,543,606 327,809 10.81 - ------------------ * Class C shares of Bond Fund were first publicly offered on July 11, 1995. Accordingly, information with respect to Class C shares of Bond Fund is not reflected in the table above. **Reflects issuance of 4,383,356 Class A shares, 994,611 Class B shares and 327,809 Class C shares of Bond Fund in a tax-free exchange for the net assets of the Fund, aggregating $47,384,068, $10,751,740 and $3,543,606 for Class A, Class B and Class C shares, respectively, of the Fund. The pro forma ratio of expenses to average annual net assets of the combined funds at June 30, 1995 would have been 1.31% with respect to Class A shares, 2.06% with respect to Class B shares and 2.03% with respect to Class C shares. COMPARISON BETWEEN BOND FUND AND THE FUND Comparative information about Bond Fund and the Fund is presented below. More complete information about Bond Fund and the Fund is set forth in their respective Prospectuses (which, as to Bond Fund, accompanies this Proxy Statement and Prospectus) and is incorporated herein by reference. To obtain additional copies, see "Miscellaneous - Public Information." Comparison of Investment Objectives, Policies and Restrictions As its investment objective, Bond Fund seeks a high level of current income by investing mainly in debt instruments. As its investment objective, the Fund seeks to provide shareholders with as high a level of current income as is consistent with conservation of principal through a portfolio consisting primarily of fixed income obligations. In seeking their investment objectives, which are fundamental policies, Bond Fund and the Fund employ the investment policies as described in detail below. Bond Fund. Under normal market conditions, Bond Fund invests at least 65% of its total assets in a diversified portfolio of investment grade fixed-income securities. These include (i) investment-grade debt securities rated BBB or above by S&P, Baa or above by Moody's or an equivalent rating category of another nationally-recognized rating organization or, if unrated, are of comparable quality as determined by OMC; (ii) securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities or obligations secured by such securities ("U.S. Government Securities"); and (iii) high-quality, short-term money market instruments. Bond Fund may invest up to 35% of its total assets in debt securities rated less than investment grade or, if unrated, judged by OMC to be of comparable quality to such lower-rated securities (collectively, "lower-grade securities"). Lower-grade securities (often called "junk bonds") are considered speculative and involve greater risk than investment grade debt securities. Lower-grade securities include securities rated BB, B, CCC, CC and D by S&P or Ba, B, Caa, Ca and C by Moody's. Bonds rated BB, B, CCC and CC by S&P are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. Bonds on which no interest is paid are rated C by S&P. Bonds rated D by S&P are in default and payment of interest and/or repayment of principal is in arrears. Bonds rated Ba or B by Moody's are judged to have speculative elements; their future is not well-assured. Bonds rated Caa by Moody's are of poor standing and may be in default; bonds rated Ca are speculative in a high degree and are often in default; bonds rated C are regarded as having extremely poor prospects of attaining any real investment standing. Prior to July 10, 1995, Bond Fund's investments were limited to investment grade bonds, U.S. Government Securities and money market instruments. Such investment policies were changed pursuant to shareholder approval on July 10, 1995. OMC anticipates that Bond Fund would generally invest at least 75% of its total assets in: (i) U.S. corporate bonds rated "A" or better and (ii) U.S. government and agency bonds. OMC further anticipates that Bond Fund would invest an additional 15% of its total assets in non- investment grade domestic corporate bonds and 10% of total assets in non-investment grade foreign bonds. These anticipated investment targets, including the allocation between domestic and foreign lower- grade debt securities, are subject to fluctuation and may be changed by OMC without further notice to shareholders or amended prospectus disclosure. When investing Bond Fund's assets, OMC considers many factors, including current developments and trends in both the economy and the financial markets. Under normal market conditions, Bond Fund's target duration will be approximately five. Duration is a measure of the anticipated rise or decline in value for a 1% change in interest rates. For example, a duration of 2 in a portfolio indicates that for every 1% rise in general interest rates, the portfolio's value would be expected to fall 2%, and vice versa. Bond Fund may invest in debt securities issued or guaranteed by foreign companies and debt securities of foreign governments or their agencies. Bond Fund is not restricted in the amount of assets that it may invest in foreign countries or in which countries. However, if Bond Fund's assets are held abroad, the countries in which they are held and the sub-custodians holding then must in most cases be approved by the Integrity Trust Board of Trustees. Bond Fund may also invest in U.S. Government Securities (including mortgage-related U.S. Government Securities that are issued or guaranteed by federal agencies or government-sponsored entities but are not supported by the full faith and credit of the U.S. Government), mortgage-backed securities, whether issued by the U.S. government or private issuers, CMOs, stripped CMOs and asset-backed securities. In addition to the foregoing, Bond Fund may invest in zero coupon securities, preferred stocks and municipal securities. The Fund. Under normal conditions, at least 80% of the Fund's assets will be invested in corporate bonds, U.S. Government Securities and/or mortgage- backed debt securities rated A or better by Moody's, or, if unrated, considered to be of comparable quality by QVA. The Fund may invest up to 20% of its assets in the lowest category of investment- grade corporate bonds, those which are rated Baa3 by Moody's or BBB by S&P or, if unrated, considered to be of comparable quality by QVA. The average maturity of the Fund's investments will vary based on market conditions. It is anticipated, however, that the average dollar weighted maturity of the Fund will be greater than 20 years. For temporary defensive purposes the Fund may invest up to 100% of its assets in various types of U.S. Government securities and high quality money market instruments. Special Investment Methods Bond Fund and the Fund may use the special investment methods summarized below. Loans of Portfolio Securities. Both Bond Fund and the Fund may lend their portfolio securities to brokers, dealers and other financial institutions, subject to certain conditions. The funds must receive collateral for the loans. Bond Fund presently does not intend to lend its portfolio securities but, if it does, the value of securities loaned is not expected to exceed 5% of the value of the total assets of Bond Fund in the coming year. The Fund may commit up to 10% of the value of its total assets to such loans, but has not entered into any to date. Repurchase Agreements. Both Bond Fund and the Fund may enter into repurchase agreements. There is no limit on the amount of either fund's net assets that may be subject to repurchase agreements of seven days or less. Neither fund will enter into a repurchase agreement that will cause more than 10% of its net assets to be subject to repurchase agreements having a maturity beyond seven days; as to Bond Fund this percentage limit may increase to 15% if certain state laws are changed or Bond Fund's shares are no longer sold in those states. This policy is fundamental as to the Fund; it is non-fundamental as to Bond Fund. Hedging. Bond Fund may purchase and sell: futures contracts that relate to foreign currencies ("forward contracts"), financial indices and interest rates; certain put and call options; and options on futures, broadly-based stock indices, bond indices and foreign currency. Bond Fund may also enter into interest rate swap agreements. The Fund may purchase or sell financial futures contracts and options on such contracts. These are all referred to as "hedging instruments." The funds do not use hedging instruments for speculative purposes. Up to 50% of Bond Fund's total assets may be subject to calls. Bond Fund will not write puts if more than 50% of its net assets would have to be segregated to cover put obligations. Bond Fund may only purchase a call or put if, after such purchase, the value of all call and put options held by Bond Fund would not exceed 5% of Bond Fund's total assets. Other limits on the use of hedging instruments are described in the funds' respective Prospectuses and Statements of Additional Information. Hedging instruments may be used to manage a fund's exposure to the possibility that the prices of its portfolio securities may decline, or to establish a position in the securities market as a temporary substitute for purchasing individual securities; to try to manage its exposure to changing interest rates; to hedge the fund's portfolio against price fluctuations; and to increase the fund's exposure to the securities market. Forward contracts are used to try to manage foreign currency risks on Bond Fund's foreign investments. Bond Fund's foreign currency options are used to try to protect against declines in the dollar value of foreign securities Bond Fund owns, or to protect against an increase in the dollar cost of buying foreign securities. Bond Fund may write covered call options to provide income for liquidity purposes, defensive reasons, or to raise cash to distribute to shareholders. The use of hedging instruments requires special skills and knowledge of investment techniques that are different than those required for normal portfolio management. If the investment adviser to a fund uses a hedging instrument at the wrong time or judges market conditions incorrectly, hedging strategies may reduce the fund's return. The fund could also experience losses if the prices of its futures and options positions were not correlated with its other investments or if it could not close out a position because of an illiquid market for the future or option. Options trading involves the payment of premiums and has special tax effects on the fund. There are also special risks in particular hedging strategies. If a covered call written by Bond Fund is exercised on an investment that has increased in value, Bond Fund will be required to sell the investment at the call price and will not be able to realize any profit if the investment has increased in value above the call price. Interest rate swaps are subject to credit risks (if the other party fails to meet its obligations) and also to interest rate risks. Bond Fund could be obligated to pay more under its swap agreements than it receives under them, as a result of interest rate changes. Derivative Investments. Bond Fund can invest in a number of different kinds of "derivative investments." Some types of derivatives may be used for hedging purposes, as described above. Bond Fund may invest in others because they offer the potential for increased income and principal value. In general, a "derivative investment" is a specially- designed investment the performance of which is linked to the performance of another investment or security, such as an option, future, index, currency or commodity. In the broadest sense, derivative investments include the hedging instruments in which the funds may invest. Other types of derivatives in which Bond Fund may invest include index-linked or commodity-linked notes, debt exchangeable for common stock, equity-linked debt securities and currency indexed securities. One risk of investing in derivative investments is that the company issuing the instrument might not pay the amount due on the maturity of the instrument. There is also the risk that the underlying investment or security might not perform the way the investment adviser expected it to perform. The performance of derivative investments may also be influenced by interest rate changes in the U.S. and abroad. All of these risks can mean that Bond Fund will realize less income than expected from its investments, or that it can lose part or all of the value of its investments, which will affect its share price. When-Issued and Delayed Delivery Transactions. The funds may purchase securities on a "when-issued" basis and may purchase or sell such securities on a "delayed delivery" basis. These terms refer to securities that have been created and for which a market exists, but which are not available for immediate delivery or are to be delivered at a later date. There may be a risk of loss to the funds if the value of the security changes prior to the settlement date. Investment Restrictions Both Bond Fund and Fund have certain investment restrictions that, together with their respective investment objectives, are fundamental policies changeable only by shareholder approval. The investment restrictions of Bond Fund and the Fund are substantially the same except as set forth below. Bond Fund cannot (1) buy securities issued or guaranteed by any one issuer (except the U.S. Government or any of its agencies or instrumentalities) if with respect to 75% of its total assets (a) more than 5% of Bond Fund's total assets would be invested in the securities of that issuer, or (b) Bond Fund would own more than 10% of that issuer's voting securities; and (2) make loans to an officer, trustee or employee of the Integrity Trust or to any officer, director or employee of Massachusetts Mutual Life Insurance Company ("MassMutual") or to MassMutual. In accordance with certain nonfundamental policies and guidelines changeable without shareholder approval, Bond Fund may not: (A)invest for the purpose of exercising control over, or management of, any company; (B) purchase any security of a company which (including any predecessor, controlling person, general partner and guarantor) has a record of less than three years of continuous operations or relevant business experience, if such purchase would cause more than 5% of the current value of Bond Fund's assets to be invested in such companies; and (C) invest in securities of other investment companies except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, except when such purchase is a part of a plan of merger, consolidation, reorganization or acquisition. The Fund cannot: (1) invest in securities of other investment companies except in connection with a merger, consolidation, reorganization or acquisition of assets, (2) invest more than 10% of its total assets in illiquid securities including securities for which there is no readily available market, repurchase agreements which have a maturity of longer than seven days, securities subject to legal or contractual restrictions and certain over-the counter options (it is the opinion of the Wisconsin Securities Commission that investments in restricted securities in excess of 5% of a fund's total assets may be considered a speculative activity and therefore involve greater risk and increase the fund's expenses; to comply with Wisconsin's securities laws, the Fund has agreed to limit investment in restricted securities to 5% of its total assets, although the restriction is not a fundamental policy); this restriction does not apply to securities sold to "qualified institutional buyers" in accordance with Rule 144 under the Securities Act of 1933; (3) purchase more than 10% of the voting securities of any one issuer; (4) purchase more than 10% of any class of security of any issuer, with all outstanding debt securities and all preferred stock of an issuer each being considered as one class; (5) invest more than 5% of the Fund's total assets in securities of issuers having a record, together with predecessors, of less than three years of continuous operation; (6) invest in physical commodities or physical commodity contracts or speculate in financial commodity contracts, but the Fund is authorized to purchase and sell financial futures contracts and options on such futures contracts exclusively for hedging and other non-speculative purposes to the extent specified in its Prospectus; (7) purchase warrants if as a result the Fund would then have either more than 5% of its total assets (determined at the time of investment) invested in warrants or more than 2% of its total assets invested in warrants not listed on the New York or American Stock Exchange; (8) purchase securities on margin (except for such short-term loans as are necessary for the clearance of purchases of portfolio securities); (9) invest for the purpose of exercising control or management of another company; (10) issue senior securities as defined in the 1940 Act except insofar as the Fund may be deemed to have issued a senior security by reason of: (a) entering into any repurchase agreement; (b) borrowing money in accordance with restrictions described above; or (c) lending portfolio securities; and (11) with respect to 75% of its assets, invest more than 5% of the value of its total assets in the securities of any one issuer. Bond Fund Performance Bond Fund does not maintain a fixed dividend rate and there can be no assurance as to the payment of any dividends or the realization of any capital gains. In 1994, the Federal Reserve aggressively moved to raise short term interest rates in an effort to control inflation. As interest rates rose, the bond market declined. In response to the rising interest rates in the U.S., OMC reduced Bond Fund's exposure to long-term U.S. Government Treasury securities whose performance tends to lag investment-grade corporate bonds in the mid-to-late stages of economic expansion. OMC moved to position Bond Fund's assets somewhat more conservatively by increasing Bond Fund's holdings in asset-backed issues and mortgage-backed bonds which generally are more stable and predictable in periods of rising interest rates and which OMC viewed as offering high credit quality and attractive yields. While waiting for the bond market to stabilize, OMC increased Bond Fund's holdings in short-term money market securities. Included in the prospectus for Bond Fund, a copy of which accompanies this Proxy Statement and Prospectus, in the section entitled "Performance of the Fund" is a performance graph which depicts the performance of a hypothetical investment of $10,000 in Class A and Class B shares of Bond Fund held until December 31, 1994; in the case of Class A shares, since April 15, 1988 and in the case of Class B shares, from the inception of the Class on May 1, 1993, with all dividends and capital gains distributions reinvested on the reinvestment date. Class C shares were not offered during the fiscal year ended December 31, 1994, and thus no performance information about Class C shares is given. The graph reflects the deduction of the 4.75% maximum initial sales charge on Class A shares and the applicable contingent deferred sales charge on Class B shares. The graph compares the average annual total return of Class A and Class B shares of Bond Fund with the performance of Lehman Brothers Corporate Bond Index, a broad-based, unmanaged index of publicly-issued nonconvertible investment grade corporate debt of U.S. issuers, widely recognized as a measure of the U.S. fixed-rate corporate bond market. Prior to July 10, 1995, the Fund's investments were limited to investment grade bonds, U.S. Government Securities, and money market instruments. The Lehman Brothers Corporate Bond Index includes a factor for the reinvestment of interest, but does not reflect expenses or taxes. Index performance reflects the reinvestment of dividends but does not consider the effect of capital gains or transaction costs, and none of the data shows the effect of taxes. Information on Fund performance is set forth in the Fund's Annual Report as of October 31, 1994, which is incorporated herein by reference and may be obtained without charge as set forth in "Miscellaneous - Public Information." Additional Comparative Information General For a discussion of the organization and operation of Bond Fund, including brokerage practices, see "Investment Objective and Policies" and "How the Fund is Managed" in Bond Fund's current Prospectus and "Brokerage Policies of the Fund" in the Bond Fund current Statement of Additional Information. For a discussion of the organization and operation of the Fund, including brokerage practices, see "Investment Objectives of the Fund," "Investment Restrictions and Techniques," "Investment Management Agreement" and "Additional Information" in the Fund's current Prospectus. Financial Information For certain financial information about Bond Fund and the Fund, see (as to Bond Fund) "Financial Highlights" and "Performance of the Fund" in the Bond Fund current Prospectus and (as to the Fund) "Financial Highlights" in the Fund current Prospectus. Management of Bond Fund and the Fund For information about the management of Bond Fund and the Fund, including their respective Boards of Trustees, investment advisers, portfolio managers and distributors, see (as to Bond Fund) "Expenses" and "How the Fund is Managed" in the Bond Fund current Prospectus and (as to the Fund) "Investment Management Agreement," Distribution Plan," "Portfolio Transactions and Turnover" and "Additional Information" in the Fund current Prospectus. Description of Shares of Bond Fund and the Fund For a description of the classes of shares of Bond Fund and the Fund, including voting rights, restrictions on disposition and potential liability associated with their ownership, see (as to Bond Fund) "How the Fund is Managed" in the Bond Fund current Prospectus and Statement of Additional Information and (as to the Fund) "Additional Information" in the Fund current Prospectus. Dividends, Distributions and Taxes Both funds declare dividends from net investment income on each regular business day, distribute dividends monthly and distribute net long-term capital gains annually. Bond Fund distributes net short-term capital gains annually and the Fund distributes such gains quarterly. For a discussion of the policies of Bond Fund and the Fund with respect to dividends and distributions, and a discussion of the tax consequences of an investment in Bond Fund and the Fund, see (as to Bond Fund) "Dividends, Capital Gains and Taxes" in the Bond Fund current Prospectus and (as to the Fund) "Dividends and Distributions" and "Tax Status" in the Fund current Prospectus. Purchases, Redemptions and Exchanges of Shares For a discussion of how shares of Bond Fund and the Fund may be purchased, redeemed and exchanged, see (as to Bond Fund) "How to Buy Shares," "How to Sell Shares," "Exchanges of Shares," "Special Investor Services," "Service Plan for Class A Shares," "Distribution and Service Plan for Class B Shares" and "Distribution and Service Plan for Class C Shares" in the Bond Fund current Prospectus and "How to Buy Shares," "How to Redeem Shares," "Exchanging Shares" and "Additional Information" in the Fund current Prospectus. Shareholder Inquiries For a description of how shareholder inquiries should be made, see (as to Bond Fund) "How the Fund is Managed" in the Bond Fund current Prospectus and (as to the Fund) "Additional Information" in the Fund current Prospectus. INFORMATION CONCERNING THE MEETING The Meeting The Meeting will be held at One World Financial Center, New York, New York 10281 on the 40th Floor at 10:00 A.M., New York time, on November 3, 1995 and any adjournments thereof. At the Meeting, shareholders of the Fund will be asked to consider and vote upon approval of the Reorganization Agreement, and the transactions contemplated thereby, including the transfer of substantially all the assets of the Fund in exchange for Class A, Class B and Class C shares of Bond Fund and the assumption by Bond Fund of certain liabilities of the Fund, the distribution of such shares to the shareholders of the Fund in complete liquidation of the Fund and the cancellation of the outstanding shares of the Fund. Record Date; Vote Required; Share Information The Board has fixed the close of business on September 7, 1995 as the record date (the "Record Date") for the determination of shareholders entitled to notice of, and to vote at, the Meeting. The affirmative vote of a majority of each of the Class A, Class B and Class C shares of the Fund, voting separately as a class, represented in person or by proxy at the Meeting and entitled to vote at the Meeting is required for approval of the Proposal. Each shareholder will be entitled to one vote for each share and a fractional vote for each fractional share held of record at the close of business on the Record Date. Only shareholders of the Fund will vote on the Reorganization. The vote of shareholders of Bond Fund is not being solicited to approve the Reorganization Agreement. At the close of business on the Record Date, there were approximately _____________ Class A, ___________ Class B and _____________ Class C shares of the Fund issued and outstanding. The presence in person or by proxy of the holders of a majority of each of Class A, Class B and Class C shares constitutes a quorum for the transaction of business at the Meeting. As of the close of business on the Record Date, there were approximately _____________ Class A, _______________ Class B and ______________ Class C shares of Bond Fund issued and outstanding. (To the knowledge of the Fund, as of the Record Date, no person owned of record or beneficially 5% or more of the outstanding Class A, Class B or Class C Fund shares or 5% or more of the outstanding shares of the Fund.) To the knowledge of Bond Fund, as of the Record Date, no person owned of record or beneficially 5% or more of the outstanding Class A, Class B or Class C Bond Fund shares or 5% or more of the outstanding shares of Bond Fund. (As of the Record Date, the officers and Trustees of Bond Fund, and the officers and Trustees of the Trust, beneficially owned as a group less than 1% of the outstanding shares of each class of Bond Fund and the Fund, respectively, and of Bond Fund and the Fund, respectively.) In the event a quorum does not exist as to one or more classes of shares of the Fund on the date originally scheduled for the Meeting, one or more adjournments of the Meeting may be sought by the Board until such time as a quorum of the particular class or classes is present. In the event that a quorum of each class is present at the Meeting but one or more classes does not approve the Reorganization, the Reorganization will be deemed to have not been approved and the Board will consider what further action, if any, to take. Proxies The enclosed form of proxy, if properly executed and returned, will be voted (or counted as an abstention or withheld from voting) in accordance with the choices specified thereon, and will be included in determining whether there is quorum to conduct the Meeting. The proxy will be voted in favor of the Proposal unless a choice is indicated to vote against or to abstain from voting on the Proposal. Shares owned of record by broker-dealers for the benefit of their customers ("street account shares") will be voted by the broker-dealer based on instructions received from its customers. If no instructions are received, the broker-dealer may (if permitted under applicable stock exchange rules), as record holder, vote such shares on the Proposal in the same proportion as that broker-dealer votes street account shares for which voting instructions were received in time to be voted. If a shareholder executes and returns a proxy but fails to indicate how the votes should be cast, the proxy will be voted in favor of the Proposal. The proxy may be revoked at any time prior to the voting thereof by: (i) writing to the Secretary of the Trust at One World Financial Center, New York, New York 10281; (ii) attending the Meeting and voting in person; or (iii) signing and returning a new proxy (if returned and received in time to be voted). Costs of the Solicitation and the Reorganization All expenses of this solicitation, including the cost of printing and mailing this Proxy Statement and Prospectus, will be evenly apportioned between QVA and OMC. Any documents such as existing prospectuses or annual reports that are included in that mailing will be a cost of the fund issuing the document. In addition to the solicitation of proxies by mail, proxies may be solicited by officers and employees of QVA, the Trust's investment adviser, or QVA's affiliates, personally or by telephone or telegraph. In addition, QVA has retained D.F. King & Co., Inc., 77 Water Street, New York, New York 10005 to assist in the solicitation of proxies primarily by contacting shareholders by telephone and telegram for a fee not to exceed $______, plus reasonable out-of-pocket expenses. The cost for such proxy solicitor will be shared by QVA and OMC. Brokerage houses, banks and other fiduciaries may be requested to forward soliciting material to the beneficial owners of shares of the Fund and to obtain authorization for the execution of proxies. For those services, if any, they will be reimbursed by the Trust for their reasonable out-of-pocket expenses. With respect to the Reorganization, OMC and QVA will share the cost of the tax opinion. Any other out-of-pocket expenses of Bond Fund and the Fund associated with the Reorganization, including fund, accounting and transfer agent expenses, will be borne by OMC and QVA, respectively, in the amounts so incurred by the respective fund. MISCELLANEOUS Financial Information The Reorganization will be accounted for by the surviving fund in its financial statements similar to a pooling without restatement. Further financial information as to the Fund is contained in its current Prospectus, which is available without charge upon written request to Quest for Value Distributors, at P.O. Box 3567, Church Street Station, New York, New York 10277-1296, and is incorporated herein, and in its audited financial statements as of October 31, 1994, which are included in the Additional Statement. Financial information for Bond Fund is contained in its current Prospectus accompanying this Proxy Statement and Prospectus and incorporated herein, and in its audited financial statements as of December 31, 1994 which are included in the Additional Statement. Public Information Additional information about Bond Fund and the Fund is available, as applicable, in the following documents which are incorporated herein by reference: (i) Bond Fund's Prospectus dated July 10, 1995, supplemented July 14, 1995, accompanying this Proxy Statement and Prospectus and incorporated herein; (ii) the Fund's Prospectus, which may be obtained without charge by writing to QVD at the address indicated above; (iii) Bond Fund's Annual Report as of December 31, 1994 and Semi-Annual Report as of June 30, 1995, which may be obtained without charge by writing to OSS at the address on the cover of this Proxy Statement and Prospectus; and (iv) the Fund's Annual Report as of October 31, 1994, and Semi-Annual Report as of April 30, 1995 which may be obtained without charge by writing to QVD. All of the foregoing documents and the Statements of Additional Information referred to below may be obtained by calling the toll-free number for Bond Fund or the Fund, as applicable, on the cover of this Proxy Statement and Prospectus. Additional information about the following matters is contained in the Additional Statement, which incorporates by reference the Bond Fund Additional Statement, and the Fund's Prospectus dated March 1, 1995, as revised June 30, 1995, and Statement of Additional Information dated March 1, 1995: the organization and operation of Bond Fund and the Fund; more information on investment policies, practices and risks; information about Bond Fund's and the Fund's respective Boards of Trustees and their responsibilities; a further description of the services provided by Bond Fund's and the Fund's investment adviser, distributor, and transfer and shareholder servicing agent; dividend policies; tax matters; an explanation of the method of determining the offering price of the shares of Bond Fund and the Fund; purchase, redemption and exchange programs; and distribution arrangements. Bond Fund and the Fund are subject to the informational requirements of the Securities Exchange Act of 1934, as amended, and in accordance therewith, file reports and other information with the SEC. Proxy material, reports and other information about Bond Fund and the Fund which are of public record can be inspected and copied at public reference facilities maintained by the SEC in Washington, D.C. and certain of its regional offices, and copies of such materials can be obtained at prescribed rates from the Public Reference Branch, Office of Consumer Affairs and Information Services, SEC, Washington, D.C. 20549. OTHER BUSINESS Management of the Fund knows of no business other than the matters specified above which will be presented at the Meeting. Since matters not known at the time of the solicitation may come before the Meeting, the proxy as solicited confers discretionary authority with respect to such matters as properly come before the Meeting, including any adjournment or adjournments thereof, and it is the intention of the persons named as attorneys-in-fact in the proxy to vote this proxy in accordance with their judgment on such matters. By Order of the Board of Trustees Deborah Kaback, Secretary _______, 1995285 MERGE/285PROXY.5 EXHIBIT A AGREEMENT AND PLAN OF REORGANIZATION PROPOSED FORM OF AGREEMENT AND PLAN This AGREEMENT AND PLAN OF REORGANIZATION ("Agreement") is made as of this ____ day of _____, 1995, by and among Oppenheimer ______________ Fund ("Oppenheimer Fund"), a Massachusetts business trust, Quest For Value ______, a Massachusetts business trust ("Quest For Value") on behalf of the Quest For Value ___ ("Quest Portfolio"), a series of Quest For Value, and Quest For Value Advisors ("Quest Advisors"), a Delaware general partnership which serves as investment adviser to the Quest Portfolio. This Agreement is intended to be and is adopted as a "plan of reorganization", within the meaning of Treas. Reg. Section 1.368-2(g), for a reorganization under Section 368(a)(1) of the Internal Revenue Code of 1986, as amended ("Code"). The reorganization ("Reorganization") will consist of the transfer to the Oppenheimer Fund of substantially all of the assets of the Quest Portfolio in exchange for the assumption by the Oppenheimer Fund of all stated liabilities of the Quest Portfolio and the issuance by the Oppenheimer Fund of shares of beneficial interest of the Oppenheimer Fund ("shares") to be distributed, after the Closing Date (as hereinafter defined), to the shareholders of the Quest Portfolio in liquidation of the Quest Portfolio as provided herein, all upon the terms and conditions hereinafter set forth in this Agreement. To the extent necessary to effectuate the transactions contemplated by this Agreement, or as the context of representations, warranties, covenants and other agreements set forth in this Agreement may require, all references in this Agreement to the Quest Portfolio shall include Quest For Value. In consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. THE REORGANIZATION AND LIQUIDATION OF THE QUEST PORTFOLIO 1.1 Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, on the Closing Date, the Quest Portfolio will assign, deliver and otherwise transfer its assets as set forth in paragraph 1.2 ("Quest Portfolio Assets") to the Oppenheimer Fund, and the Oppenheimer Fund will in exchange therefor assume Quest Portfolio's stated liabilities on the Closing Date as set forth in paragraph 1.3 and deliver to the Quest Portfolio the number of each class of shares of the Oppenheimer Fund, including fractional Oppenheimer Fund shares, determined by dividing the value of the Quest Portfolio Assets, net of such stated liabilities, represented by shares of each class of the Quest Portfolio computed in the manner and as of the time and date set forth in paragraph 2.1, by the net asset value of each class of shares of the Oppenheimer Fund, computed in the manner and as of the time and date set forth in paragraph 2.2. Such transactions shall take place at the closing provided for in paragraph 3.1 ("Closing"). 1.2 (a) The Quest Portfolio Assets shall consist of all property and rights, including without limitation all cash, cash equivalents, securities and dividend and interest receivables owned by the Quest Portfolio, and any deferred or prepaid expenses shown as an asset on the Quest Portfolio's books on the Closing Date. Notwithstanding the foregoing, the Quest Portfolio Assets shall exclude a cash reserve (the "Cash Reserve") to be retained by the Quest Portfolio sufficient in its discretion for the payment of the expenses of the Quest Portfolio's dissolution and its liabilities, but not in excess of the amount contemplated by paragraph 7.12. (b) Promptly following the signing of this Agreement, the Quest Portfolio will provide the Oppenheimer Fund with a list of its assets as of the most reasonably practical date. On the Closing Date, the Quest Portfolio will provide the Oppenheimer Fund with a list of the Quest Portfolio Assets to be assigned, delivered and otherwise transferred to the Oppenheimer Fund and of the stated liabilities to be assumed by the Oppenheimer Fund pursuant to this Agreement. 1.3 The Quest Portfolio will endeavor to discharge of all of its liabilities and obligations when and as due prior to the Closing Date. An unaudited Statement of Assets and Liabilities of the Quest Portfolio will be prepared by the Treasurer of the Quest Portfolio, as of the Valuation Date, which Statement shall be prepared in conformity with generally accepted accounting principles consistently applied from the prior audited period. On the Closing Date, the Oppenheimer Fund shall assume such stated liabilities, expenses, costs, charges and reserves set forth on such Statement as shall be agreed to by Oppenheimer Fund. 1.4 In order for the Quest Portfolio to comply with Section 852(a)(1) of the Code and to avoid having any investment company taxable income or net capital gain (as defined in Section 852(b)(2) and 1222(11) of the Code, respectively) in the short taxable year ending with its dissolution, the Quest Portfolio will on or before the Closing Date (a) declare a dividend in an amount large enough so that it will have declared dividends of all of its investment company taxable income and net capital gain, if any, for such taxable year (determined without regard to any deduction for dividends paid) and (b) distribute such dividend. 1.5 Contemporaneously with the Closing, the Quest Portfolio will be liquidated (except for the Cash Reserve) and the Quest Portfolio will distribute or cause to be distributed the Oppenheimer Fund shares of each class received by the Quest Portfolio pursuant to paragraph 1.1 pro rata to the appropriate shareholders of record of each class determined as of the close of business on the Valuation Date as defined in paragraph 2.1. Upon such liquidation all issued and outstanding shares of the Quest Portfolio will be cancelled on the Quest Portfolio's books and the Quest Portfolio Shareholders will have no further rights as such Shareholders. The Oppenheimer Fund will not issue certificates representing the shares of the Oppenheimer Fund in connection with such exchange. 1.6 After the Closing, the Quest Portfolio shall not conduct any business except in connection with the winding up of its affairs and shall file, or make provision for filing of, all reports it is required by law to file. After the Closing, Quest For Value may be dissolved and deregistered as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act"). Within one year after the Closing, the Quest Portfolio shall (a) either pay or make provision for payment of all of its liabilities and taxes, and (b) either (i) transfer any remaining amount of the Cash Reserve to the Oppenheimer Fund, if such remaining amount (as reduced by the estimated cost of distributing it to shareholders) is not material (as defined below) or (ii) distribute such remaining amount to the shareholders of the Quest Portfolio on the Valuation Date. Such remaining amount shall be deemed to be material if the amount to be distributed, after deduction of the estimated expenses of the distribution, equals or exceeds one cent per share of the Quest Portfolio outstanding on the Valuation Date. 1.7 Copies of all books and records of or pertaining to the Quest Portfolio, including those in connection with its obligations under the 1940 Act, the Code, State blue sky laws or otherwise in connection with this Agreement, will promptly after the Closing be delivered to officers of the Oppenheimer Fund or their designee. Quest For Value and Quest Advisors shall have access to such books and records upon reasonable request during normal business hours. 2. THE CALCULATION 2.1 The value of the Quest Portfolio Assets shall be the value of such assets computed as of the close of business of the New York Stock Exchange on ___________, 1995, or at such time on such earlier or later date as may be mutually agreed upon in writing (such time and date being hereinafter called the "Valuation Date"), using the valuation procedures set forth in the Oppenheimer Fund's then current prospectus and statement of additional information. 2.2 The net asset value of each class of shares of the Oppenheimer Fund shall be the net asset value per share computed on the Valuation Date, using the valuation procedures set forth in the Oppenheimer Fund's then current prospectus and statement of additional information. 2.3 The number of each class of Oppenheimer Fund shares (including fractional shares, if any) to be issued hereunder shall be determined by dividing the value of the Quest Portfolio Assets, net of the liabilities assumed by the Oppenheimer Fund pursuant to paragraph 1.1 attributable to that class, determined in accordance with paragraph 2.1, by the net asset value of an Oppenheimer Fund share of a similar class determined in accordance with paragraph 2.2. 2.4 All computations of value shall be made by Oppenheimer Management Corporation in accordance with its regular practice in pricing the Oppenheimer Fund. The Oppenheimer Fund shall cause Oppenheimer Management Corporation to deliver to the Quest Portfolio a copy of its valuation report at the Closing. 3. CLOSING AND CLOSING DATE 3.1 The Closing Date (the "Closing Date") shall be the next business day following the Valuation Date. The Closing shall be held in a location mutually agreeable to all the parties hereto. All acts taking place at the Closing shall be deemed to take place simultaneously as of 9:00 a.m. Eastern time on the Closing Date unless otherwise agreed by the parties. 3.2 Portfolio securities held by the Quest Portfolio and represented by a certificate or written instrument shall be presented by it or on its behalf to (The Bank of New York) (Citibank, N.A.) (the "Custodian"), custodian for the Oppenheimer Fund, for examination no later than five business days preceding the Valuation Date. Such portfolio securities (together with any cash or other assets) shall be delivered by the Quest Portfolio to the Custodian for the account of the Oppenheimer Fund on or before the Closing Date in conformity with applicable custody provisions under the 1940 Act and duly endorsed in proper form for transfer in such condition as to constitute good delivery thereof in accordance with the custom of brokers. The portfolio securities shall be accompanied by all necessary federal and state stock transfer stamps or a check of the appropriate purchase price of such stamps. Portfolio securities and instruments deposited with a securities depository, as defined in Rule 17f-4 under the 1940 Act, or with a qualified foreign custodian under Rule 17f-5 of the 1940 Act shall be delivered on or before the Closing Date by book entry in accordance with customary practices of such depositories and the Custodian. The cash delivered shall be in the form of a Federal Funds wire, payable to the order of ("The Bank of New York") ("Citibank, N.A."), Custodian for Oppenheimer ______ Fund. 3.3 In the event that on the Valuation Date (a) the New York Stock Exchange shall be closed to trading or trading thereon shall be restricted or (b) trading or the reporting of trading on such Exchange or elsewhere shall be disrupted so that, in the judgment of both the Oppenheimer Fund and the Quest Portfolio, accurate appraisal of the value of the net assets of the Oppenheimer Fund or the Quest Portfolio Assets is impracticable, the Valuation Date shall be postponed until the first business day after the day when trading shall have been fully resumed without restriction or disruption and reporting shall have been restored. 3.4 The Quest Portfolio shall deliver to the Oppenheimer Fund or its designee (a) at the Closing a list, certified by its Secretary, of the names, addresses and taxpayer identification numbers of the Quest Portfolio Shareholders (as hereinafter defined) and the number of each class of outstanding Quest Portfolio shares owned by each such shareholder, all as of the Valuation Date (the "Quest Portfolio Shareholders"), and (b) as soon as practicable after the Closing all original documentation (including Internal Revenue Service forms, certificates, certifications and correspondence) relating to the Quest Portfolio Shareholders' taxpayer identification numbers and their liability for or exemption from back-up withholding. The Oppenheimer Fund shall issue and deliver to Quest Portfolio a confirmation evidencing delivery of each class of Oppenheimer Fund shares to be credited on the Closing Date to the Quest Portfolio or provide evidence reasonably satisfactory to the Quest Portfolio that such Oppenheimer Fund shares have been credited to Quest Portfolio's account on the books of the Oppenheimer Fund. At the Closing each party shall deliver to the other such bills of sale, assignments, assumption agreements, receipts or other documents as such other party or its counsel may reasonably request to effect the consummation of the transactions contemplated by the Agreement. 4. COVENANTS OF THE OPPENHEIMER FUND AND THE QUEST PORTFOLIO 4.1 The Oppenheimer Fund will operate its business in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include customary dividends and other distributions and such changes that have been approved by shareholders of the Oppenheimer Fund at a shareholders meeting prior to the Closing of which Quest Portfolio has been advised. 4.2 The Oppenheimer Fund will prepare and file with the Securities and Exchange Commission ("Commission") a registration statement on Form N-14 under the Securities Act of 1933, as amended ("1933 Act"), relating to the Oppenheimer Fund shares to be issued to the Quest Portfolio Shareholders pursuant to the Reorganization ("Registration Statement"). The Quest Portfolio will provide the Oppenheimer Fund with the Proxy Materials as described in paragraph 4.3 below, for inclusion in the Registration Statement. The Quest Portfolio will further provide the Oppenheimer Fund with such other information and documents relating to the Quest Portfolio as are reasonably necessary for the preparation of the Registration Statement. 4.3 The Quest Portfolio will call a meeting of its shareholders to consider and act upon the Reorganization, including this Agreement, and take all other action necessary to obtain approval of the transactions contemplated herein. The Quest Portfolio will prepare, with such assistance from the Oppenheimer Fund as may be mutually agreed to, the notice of meeting, form of proxy and proxy statement and prospectus (collectively "Proxy Materials") to be used in connection with such meeting provided that the Oppenheimer Fund will furnish the Quest Portfolio with a current effective prospectus relating to the Oppenheimer Fund shares for inclusion in the Proxy Materials and with such other information relating to the Oppenheimer Fund as is reasonably necessary for the preparation of the Proxy Materials. 4.4 Prior to the Closing Date, the Quest Portfolio will assist the Oppenheimer Fund in obtaining such information as the Oppenheimer Fund reasonably requests concerning the beneficial ownership of the shares of the Quest Portfolio. 4.5 Subject to the provisions of this Agreement, the Oppenheimer Fund and the Quest Portfolio will each take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the transactions contemplated by this Agreement. 4.6 As promptly as practicable, but in any case within 60 days after the Closing Date, the Quest Portfolio shall furnish or cause to be furnished to the Oppenheimer Fund, such information as the Oppenheimer Fund reasonably requests to enable the Oppenheimer Fund to determine the Quest Portfolio's earnings and profits for federal income tax purposes that will be carried over to the Oppenheimer Fund pursuant to Section 381 of the Code. 4.7 As soon after the Closing Date as is reasonably practicable, Quest for Value shall prepare and file all federal and other tax returns and reports of the Quest Portfolio required by law to be filed with respect to all periods ending on or before the Closing Date but not theretofore filed. 4.8 The Oppenheimer Fund agrees to use all reasonable efforts to obtain the approvals and authorizations required by the 1933 Act, the 1940 Act and such of the state Blue Sky and securities laws as it may deem appropriate in order to continue its operations after the Closing Date. 4.9 Until the third anniversary of the Closing Date, the Oppenheimer Fund will use its best efforts to assure that at least 75% of the Trustees of the Oppenheimer Fund will not be "interested persons" of the investment adviser for the Oppenheimer Fund or Quest Advisors, as the term "interested person" is defined by the 1940 Act. 5. REPRESENTATIONS AND WARRANTIES 5.1 The Oppenheimer Fund represents and warrants to the Quest Portfolio as follows: (a) The Oppenheimer Fund is an unincorporated voluntary association validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has the power and authority to own its properties and to carry on its business as it is now conducted; (b) The Oppenheimer Fund is a duly registered, open-end, management investment company, and its registration with the Commission as an investment company under the 1940 Act and the registration of its shares under the 1933 Act are in full force and effect; (c) All of the issued and outstanding shares of each class of the Oppenheimer Fund have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws. Shares of each class of the Oppenheimer Fund are registered in all jurisdictions in which they are required to be registered under state securities laws and other laws, and said registrations, including any periodic reports or supplemental filings, are complete and current, all fees required to be paid have been paid, and the Oppenheimer Fund is not subject to any stop order and is fully qualified to sell its shares in each state in which its shares have been registered; (d) The current prospectus and statement of additional information of the Oppenheimer Fund conform in all material respects to the applicable requirements of the 1933 Act and the 1940 Act and the regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (e) At the Closing Date, the Oppenheimer Fund will have title to the Oppenheimer Fund's assets, subject to no liens, security interests or other encumbrances except those incurred in the ordinary course of business. (f) The Oppenheimer Fund is not, and the execution, delivery and performance of this Agreement will not result, in a material violation of any provision of the Oppenheimer Fund's Declaration of Trust or By- Laws or of any material agreement, indenture, instrument, contract, lease or other undertakings to which the Oppenheimer Fund is a party or by which it is bound; (g) No material litigation or administrative proceeding or investigation of or before any court or governmental body is presently pending or, to its knowledge, threatened against the Oppenheimer Fund or any of its properties or assets, except as previously disclosed in writing to the Quest Portfolio. The Oppenheimer Fund knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body which materially and adversely affects, or is reasonably likely to materially and adversely affect, its business or its ability to consummate the transactions contemplated herein; (h) The Statement of Assets and Liabilities, Statement of Operations and Statement of Changes in Net Assets as of ___________, 199___ of the Oppenheimer Fund examined by _____________ (a copy of which has been furnished to the Quest Portfolio), fairly present, in all material respects, the financial condition of the Oppenheimer Fund as of such date in conformity with generally accepted accounting principles consistently applied, and as of such date there were no known liabilities of the Oppenheimer Fund (contingent or otherwise) not disclosed therein that would be required in conformity with generally accepted accounting principles to be disclosed therein; (i) All issued and outstanding Oppenheimer Fund shares of each class are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable with no personal liability attaching to the ownership thereof except as otherwise set forth in the current statement of additional information for the Oppenheimer Fund under "How the Fund is Managed - Organization and History;" (j) The Oppenheimer Fund has the power to enter into this Agreement and carry out its obligations hereunder. The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Oppenheimer Fund, and this Agreement constitutes a valid and binding obligation of the Oppenheimer Fund enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors rights and to general equity principles; (k) The Oppenheimer Fund shares of each class to be issued and delivered to the Quest Portfolio, for the account of the Quest Portfolio Shareholders, pursuant to the terms of this Agreement will at the Closing Date have been duly authorized and, when so issued and delivered, will be duly and validly issued Oppenheimer Fund shares, and will be fully paid and non-assessable with no personal liability attaching to the ownership thereof except as otherwise set forth in the current statement of additional information for the Oppenheimer Fund under "How the Fund is Managed - Organization and History," and no shareholder of Oppenheimer Fund will have any preemptive right or right of subscription or purchase in respect thereof; (l) Since ________, 199__, there has not been (i) any material adverse change in the Oppenheimer Fund's financial condition, assets, liabilities or business other than changes occurring in the ordinary course of business, or that have been approved by shareholders of the Oppenheimer Fund or (ii) any incurrence by the Oppenheimer Fund of any indebtedness except indebtedness incurred in the ordinary course of business. For the purposes of this subparagraph, neither a decline in net asset value per share of any class of the Oppenheimer Fund nor the redemption of Oppenheimer Fund shares by Oppenheimer Fund shareholders, shall constitute a material adverse change; (m) All material Federal and other tax returns and reports of the Oppenheimer Fund required by law to have been filed, have been filed, and all Federal and other taxes shown as due or required to be shown as due on said returns and reports have been paid or provision has been made for the payment thereof, and to the best of the Oppenheimer Fund's knowledge no such return is currently under audit and no assessment has been asserted with respect to such returns; (n) For each taxable year of its operation, the Oppenheimer Fund has met the requirements of Subchapter M of the Code for qualification and treatment as a regulated investment company and neither the execution or delivery of nor the performance of its obligations under this Agreement will adversely affect, and no other events are reasonably likely to occur which will adversely affect the ability of the Oppenheimer Fund to continue to meet the requirements of Subchapter M of the Code; (o) Since ___________, 199__, there has been no change by the Oppenheimer Fund in accounting methods, principles, or practices, including those required by generally accepted accounting principles, except as disclosed in writing to the Quest Portfolio or as set forth in the financial statements of the Oppenheimer Fund covering such period; (p) The information furnished or to be furnished by the Oppenheimer Fund for use in registration statements, proxy materials and other documents which may be necessary in connection with the transactions contemplated hereby shall be accurate and complete in all material respects and shall comply in all material respects with Federal securities and other laws and regulations applicable thereto; and (q) The Proxy Statement and Prospectus to be included in the Registration Statement (only insofar as it relates to the Oppenheimer Fund) will, on the effective date of the Registration Statement and on the Closing Date, not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which such statements were made, not materially misleading. 5.2 Quest for Value, on behalf of the Quest Portfolio, represents and warrants to the Oppenheimer Fund as follows: (a) The Quest Portfolio is a series of Quest For Value, an unincorporated voluntary association, validly existing and in good standing under the laws of the Commonwealth of Massachusetts; (b) Quest For Value is a duly registered, open-end, management investment company, its registration with the Commission as an investment company under the 1940 Act is in full force and effect and its current Prospectus and Statement of Additional Information conform in all material respects to the requirements of the 1933 Act and the 1940 Act and the regulations thereunder and do not include any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (c) All of the issued and outstanding shares of each class of the Quest Portfolio have been offered and sold in compliance in all material respects with applicable registration requirements of the 1933 Act and state securities laws. Shares of each class of the Quest Portfolio are registered in all jurisdictions in which they are required to be registered under state securities laws and other laws, and said registrations, including any periodic reports or supplemental filings, are complete and current, all fees required to be paid have been paid, and the Quest Portfolio is not subject to any stop order and is fully qualified to sell its shares in each state in which its shares have been registered; (d) The Quest Portfolio is not, and the execution, delivery and performance of this Agreement will not result, in a violation of (i) any provision of Quest For Value's Declaration of Trust or By-Laws or (ii) of any agreement, indenture, instrument, contract, lease or other undertaking to which the Quest Portfolio is a party or by which it is bound (other than any violations that individually or in the aggregate would not have a material adverse effect on the Quest Portfolio); (e) The Quest Portfolio has no material contracts or other commitments (other than this Agreement) that will be terminated with liability to it prior to or as of the Closing Date; (f) Except as otherwise disclosed in writing to and acknowledged by the Oppenheimer Fund prior to the date of this Agreement, no litigation, administrative proceeding, investigation, examination or inquiry of or before any court or governmental body is presently pending, or to its knowledge, threatened relating to the Quest Portfolio or any of its properties or assets which, if adversely determined, would materially and adversely affect its financial condition or the conduct of its business. The Quest Portfolio knows of no facts that might form the basis for the institution of such proceedings and is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects, or is likely to materially and adversely affect, its business or its ability to consummate the transactions herein contemplated; (g) The Statements of Assets and Liabilities, Statements of Operations and Statements of Changes in Net Asset of the Quest Portfolio as of ___________, 199_____, and _________________, 199__ examined by Price Waterhouse LLP (copies of which have been furnished to the Oppenheimer Fund) fairly present, in all material respects, the Quest Portfolio's financial condition as of such dates, its results of operations for such periods and changes in its net assets for such periods in conformity with generally accepted accounting principles, and as of such dates there were no known liabilities of the Quest Portfolio (contingent or otherwise) not disclosed therein that would be required in conformity with generally accepted accounting principles to be disclosed therein. All liabilities (contingent and otherwise) as of the Closing Date known to the Quest Portfolio will be set forth on the unaudited Statement of Assets and Liabilities referred to in paragraph 1.3. (h) Since the date of the most recent audited financial statements, there has not been any material adverse change in the Quest Portfolio's financial condition, assets, liabilities or business, other than changes occurring in the ordinary course of business, or any incurrence by the Quest Portfolio of indebtedness maturing more than one year from the date such indebtedness was incurred, except as otherwise disclosed in writing to and acknowledged by the Oppenheimer Fund prior to the date of this Agreement and prior to the Closing Date. All liabilities of the Quest Portfolio (contingent and otherwise) are reflected in the unaudited statement described in paragraph 1.3 above. For the purpose of this subparagraph (h), neither a decline in the Quest Portfolio's net asset value per share nor a decrease in the Quest Portfolio's size due to redemptions by Quest Portfolio shareholders shall constitute a material adverse change; (i) At the Closing Date, all federal and other tax returns and reports of the Quest Portfolio required by law to be filed on or before the Closing Date shall have been filed, there are no claims, levies, liabilities or amounts due for corporate, excise, income or other federal, state or local taxes outstanding or threatened against Quest Portfolio (other than those reflected on its most recent financial statements) and to the best of Quest For Value's knowledge there are no facts that might form the basis for such proceedings, no such return is currently under audit and no assessment has been asserted with respect to any such return; (j) For each taxable year since its inception, the Quest Portfolio has met all the requirements of Subchapter M of the Code for qualification and treatment as a "regulated investment company" as defined therein and will be in compliance with said requirements at and as of the Closing Date; (k) All issued and outstanding shares of each class of the Quest Portfolio are, and at the Closing Date will be, duly and validly issued and outstanding, fully paid and non-assessable with no personal liability attaching to the ownership thereof. All such shares of each class will, at the time of Closing, be held by the persons and in the amounts set forth in the list of shareholders submitted to the Oppenheimer Fund pursuant to paragraph 3.4. The Quest Portfolio does not have outstanding any options, warrants or other rights to subscribe for or purchase any of its shares of any class, nor is there outstanding any security convertible into any of its shares of any class except for class B shares of the Quest Portfolio which convert into class A shares of the Quest Portfolio as described in the current prospectus of the Quest Portfolio. (l) At the Closing Date, the Quest Portfolio will have title to the Quest Portfolio Assets, subject to no liens, security interests or other encumbrances, and full right, power and authority to assign, deliver and otherwise transfer the Quest Portfolio Assets hereunder, and upon delivery and payment for the Quest Portfolio Assets, the Oppenheimer Fund will acquire title thereto, subject to no restrictions on the full transfer thereof, including such restrictions as might arise under the 1933 Act; (m) Quest For Value has the power to enter into this Agreement and carry out its obligations hereunder. The execution, delivery and performance of this Agreement will have been duly authorized prior to the Closing Date by all necessary action on the part of Quest For Value, and subject to the approval of Quest Portfolio's shareholders, this Agreement constitutes a valid and binding obligation of Quest For Value, enforceable in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors rights and to general equity principles. No other consents, authorizations or approvals are necessary in connection with the performance of this Agreement. (n) On the effective date of the Registration Statement, at the time of the meeting of Quest Portfolio's shareholders and on the Closing Date, the Proxy Materials (exclusive of the currently effective Oppenheimer Fund prospectus and statement of additional information incorporated therein) will (i) comply in all material respects with the provisions of the 1933 Act, the Securities Exchange Act of 1934 ("1934 Act") and the 1940 Act and the regulations thereunder and (ii) not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statement therein, in light of the circumstances under which such statements were made, not misleading. Any other information furnished or to be furnished by Quest Portfolio for use in the Registration Statement or in any other manner that may be necessary in connection with the transactions contemplated hereby shall be accurate and complete and shall comply in all material respects with applicable federal securities and other laws and all regulations thereunder; (o) Quest Portfolio will, on or prior to the Closing Date, declare one or more dividends or other distributions to shareholders that, together with all previous dividends and other distributions to shareholders, shall have the effect of distributing to the shareholders all of its investment company taxable income and net capital gain, if any, through the Closing Date (computed without regard to any deduction for dividends paid); (p) Quest Portfolio has maintained or has caused to be maintained on its behalf all books and accounts as required of a registered investment company in compliance with the requirements of Section 31 of the 1940 Act and the Rules thereunder; (q) Quest Portfolio is not acquiring Oppenheimer Fund shares to be issued hereunder for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement; (r) As of the Closing Date no violation of applicable federal, state and local statute, law or regulation, exists that individually, or in the aggregate, would have a material adverse effect on the business or operations of Quest Portfolio; (s) As of the Closing Date the Quest Portfolio is in compliance with its investment objective(s), policies and restrictions as described in its current prospectus and statement of additional information; (t) There are no unresolved or outstanding shareholder claims or complaints related to Quest Portfolio and there will be no such claims or complaints as of the Closing Date other than as disclosed by Quest Advisors in writing to Oppenheimer Fund prior to the Closing Date; (u) Except as previously disclosed to Oppenheimer Fund in writing, and except as have been fully corrected, there have been no miscalculations of the net asset value of Quest Portfolio during the twelve-month period preceding the Closing Date and all such calculations have been done in accordance with the provisions of Rule 2a-4 under the 1940 Act. 5.3 Quest Advisors represents and warrants to the Oppenheimer Fund as follows: (a) To the best knowledge of Quest Advisors after due inquiry, as of the Closing Date no violation of applicable federal, state and local statute, law or regulation, exists that individually, or in the aggregate, would have a material adverse effect on the business or operations of Quest Portfolio. (b) To the best knowledge of Quest Advisors after due inquiry, assuming fulfillment of the conditions precedent to the consummation of the Reorganization, Quest Portfolio has the right, power, legal capacity and authority to enter into the Reorganization contemplated by this Agreement. (c) To the best knowledge of Quest Advisors after due inquiry, as of the Closing Date Quest Portfolio is in compliance with its investment objective(s), policies and restrictions as described in its current prospectus and statement of additional information. (d) To the best knowledge of Quest Advisors after due inquiry, as of the Closing Date there are no outstanding breaches by Quest Portfolio of any agreement, indenture, instrument, contract, lease or other undertaking to which it is a party, or by which it is bound (other than any breaches that individually or in the aggregate would not have a material adverse effect on the Quest Portfolio). (e) To the best knowledge of Quest Advisors upon due inquiry, there are no unresolved or outstanding shareholder claims or inquiries related to Quest Portfolio and there will be no such claims or inquiries as of the Closing Date other than as disclosed by Quest Advisors in writing to Oppenheimer Fund prior to the Closing Date. (f) Quest Advisors is not aware of any threatened or pending litigation, administrative proceeding, investigation, examination or inquiry of or before any court or governmental body relating to the Quest Portfolio or any of its properties or assets which, if adversely determined, would materially and adversely affect the Quest Portfolio's business or its ability to consummate the transactions herein contemplated. (g) Quest Advisors is not aware of any outstanding or threatened private claims or litigation relating to Quest Portfolio. Quest Advisors knows of no facts that might form the basis for such proceedings. (h) Except as previously disclosed to Oppenheimer Fund in writing, and except as have been fully corrected, there have been no miscalculations of the net asset value of Quest Portfolio during the twelve-month period preceding the Closing Date and all such calculations have been done in accordance with the provisions of Rule 2a-4 under the 1940 Act. (i) There are no claims, levies or liabilities for corporate, excise, income or other federal, state or local taxes outstanding or threatened against Quest Portfolio, other than those reflected in its most recent audited financial statements. Quest Advisors knows of no facts that might form the basis for such proceedings. (j) To the best knowledge of Quest Advisors after due inquiry, there have been no material adverse changes in Quest Portfolio's financial condition, assets, liabilities or business, other than those reflected in its most recent audited financial statements and all liabilities of Quest Portfolio (contingent and otherwise) known to Quest Advisors have been reported in writing to and accepted by Oppenheimer Fund prior to the Closing Date. A reduction in net assets due to shareowner redemptions will not be deemed to be a material adverse change. 6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE QUEST PORTFOLIO The obligations of Quest Portfolio to consummate the transactions provided for herein shall be subject, at its election, to the performance by Oppenheimer Fund of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions: 6.1 All representations and warranties of Oppenheimer Fund contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date. 6.2 Oppenheimer Fund shall have delivered to Quest Portfolio a certificate executed in Oppenheimer Fund's name by Oppenheimer Fund's President, Vice President or Secretary and, Treasurer or Assistant Treasurer, in a form reasonably satisfactory to Quest Portfolio and dated as of the Closing Date, to the effect that the representations and warranties of Oppenheimer Fund made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as Quest Portfolio shall reasonably request; 6.3 Quest Portfolio shall have received a favorable opinion from Gordon Altman Butowsky Weitzen Shalov & Wein (Myer, Swanson, Adams & Wolf), counsel to the Oppenheimer Fund, dated as of the Closing Date, in a form reasonably satisfactory to Gordon Altman Butowsky Weitzen Shalov & Wein, counsel to Quest Portfolio, covering the following points: That (a) Oppenheimer Fund is a an unincorporated voluntary association duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts, and has the power to own all of its properties and assets and to carry on its business as presently conducted (Massachusetts counsel may be relied upon in delivering such opinion); (b) Oppenheimer Fund is a duly registered, open-end, management investment company and its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by the Oppenheimer Fund and assuming due authorization, execution and delivery of this Agreement by Quest Portfolio, is a valid and binding obligation of Oppenheimer Fund enforceable against Oppenheimer Fund in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors rights and to general equity principles; (d) Oppenheimer Fund shares to be issued to Quest Portfolio shareholders as provided by this Agreement are duly authorized and upon delivery of such shares to Quest Portfolio will be validly issued and outstanding and fully paid and non- assessable (except as otherwise set forth in the current statement of additional information for the Oppenheimer Fund under "How the Fund is Managed - Organization and History") and no shareholder of Oppenheimer Fund has any preemptive rights to subscription or purchase in respect thereof (Massachusetts counsel may be relied upon in delivering such opinion); (e) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Oppenheimer Fund's Declaration of Trust and By-Laws or any provision of any material agreement (known to such counsel) to which Oppenheimer Fund is a party or by which it is bound or, to the knowledge of such counsel, result in the acceleration of any material obligation or the imposition of any material penalty under any agreement, judgment or decree to which Oppenheimer Fund is a party or by which it is bound; (f) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or any state is required for the consummation by Oppenheimer Fund of the transactions contemplated herein, except such as have been obtained under the 1933 Act , the 1934 Act and the 1940 Act and such as may be required under state securities laws; (g) only insofar as they relate to Oppenheimer Fund, the descriptions in the Proxy Materials of statutes, legal and governmental proceedings and contracts and other documents, if any, are accurate and fairly present the information required to be shown; (h) such counsel does not know of any legal or governmental proceedings, only insofar as they relate to Oppenheimer Fund, existing on or before the date of mailing of the Proxy Materials or the Closing Date that are required to be described in the Registration Statement or in any documents that are required to be filed as exhibits to the Registration Statement that are not described as required; and (i) to the best knowledge of such counsel, no material litigation or administrative proceedings or investigation of or before any court or governmental body is presently pending or overtly threatened as to Oppenheimer Fund or any of its properties or assets and Oppenheimer Fund is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects its business, other than as previously disclosed in the Registration Statement. 6.4 All proceedings taken by Oppenheimer Fund in connection with the transactions contemplated by this Agreement and all documents incidental thereto shall be satisfactory in form and substance to Quest Portfolio and its counsel, Gordon Altman Butowsky Weitzen Shalov & Wein. 6.5 As of the Closing Date, there shall be no material change in the investment objective, policies and restrictions nor any increase in the investment management fees, fees payable pursuant to Oppenheimer Fund's 12b-1 plans of distribution or sales loads of Oppenheimer Fund from those described in the Prospectus and Statement of Additional Information of Oppenheimer Fund dated _______________ except as may have been approved by shareholders of the Oppenheimer Fund. 6.6 The Cash Reserve shall not exceed 10% of the value of the net assets, nor 30% in value of the gross assets, of the Quest Portfolio at the close of business on the Valuation Date. 7. CONDITIONS PRECEDENT TO OBLIGATIONS OF OPPENHEIMER FUND The obligations of Oppenheimer Fund to complete the transactions provided for herein shall be subject, at its election, to the performance by Quest Portfolio of all the obligations to be performed by it hereunder on or before the Closing Date and, in addition thereto, the following conditions: 7.1 All representations and warranties of Quest For Value, on behalf of Quest Portfolio, and Quest Advisors contained in this Agreement shall be true and correct in all material respects as of the date hereof and, except as they may be affected by the transactions contemplated by this Agreement, as of the Closing Date with the same force and effect as if made on and as of the Closing Date; 7.2 Quest Portfolio shall have delivered to Oppenheimer Fund a statement of Quest Portfolio Assets and its liabilities, together with a list of Quest Portfolio's securities and other assets showing the respective adjusted bases and holding periods thereof for income tax purposes, as of the Closing Date, certified by the Treasurer of Quest Portfolio; 7.3 Quest Portfolio shall have delivered to Oppenheimer Fund at the Closing a letter from Price Waterhouse LLP dated the Closing Date stating that (a) such firm has performed a limited review of the federal and state income tax returns of Quest Portfolio for each of the last three taxable years and, based on such limited review, nothing came to their attention that caused them to believe that such returns did not properly reflect, in all material aspects, the federal and state income tax liabilities of Quest Portfolio for the periods covered thereby, (b) for the period ___________, 199__ to and including the Closing Date, such firm has performed a limited review (based on unaudited financial data) to ascertain the amount of applicable federal, state and local taxes and has determined that same either have been paid or reserves have been established for payment of such taxes, and, based on such limited review, nothing came to their attention that caused them to believe that the taxes paid or reserves set aside for payment of such taxes were not adequate in all material respects for the satisfaction of all federal, state and local tax liabilities for the period from ___________, 199___ to and including the Closing Date and (c) based on such limited reviews, nothing came to their attention that caused them to believe that Quest Portfolio would not qualify as a regulated investment company for federal income tax purposes for any such year or period; 7.4 Quest Portfolio shall have delivered to Oppenheimer Fund at the Closing a certificate executed in Quest For Value's name by the President, Vice President or Secretary and the Treasurer or Assistant Treasurer of Quest For Value, in form and substance satisfactory to Oppenheimer Fund and dated as of the Closing Date, to the effect that the representations and warranties of Quest for Value, on behalf of Quest Portfolio, made in this Agreement are true and correct at and as of the Closing Date, except as they may be affected by the transactions contemplated by this Agreement, and as to such other matters as Oppenheimer Fund shall reasonably request. Such a certificate shall also be delivered to Oppenheimer Fund as executed by Quest Advisors with respect to its representations and warranties made in paragraph 5.3. 7.5 Oppenheimer Fund shall have received at the Closing a favorable opinion dated as of the Closing Date of Gordon Altman Butowsky Weitzen Shalov & Wein, counsel to Quest For Value, in a form satisfactory to Gordon Altman Butowsky Weitzen Shalov & Wein (Myer, Swanson, Adams & Wolf, P.C.), counsel to Oppenheimer Fund covering the following points: That (a) Quest Portfolio is a series of Quest For Value, an unincorporated voluntary association, duly organized, validly existing and in good standing under the laws of the Commonwealth of Massachusetts and has the power to own all of its properties and assets and to carry on its business as presently conducted (Massachusetts counsel may be relied upon in delivering such opinion); (b) Quest For Value is registered as an investment company under the 1940 Act, and its registration with the Commission as an investment company under the 1940 Act is in full force and effect; (c) this Agreement has been duly authorized, executed and delivered by Quest For Value on behalf of Quest Portfolio and, assuming due authorization, execution and delivery of this Agreement by Oppenheimer Fund, is a valid and binding obligation of Quest For Value enforceable against Quest For Value in accordance with its terms, subject as to enforcement, to bankruptcy, insolvency, reorganization, moratorium and other laws relating to or affecting creditors rights and to general equity principles; (d) the execution and delivery of this Agreement did not, and the consummation of the transactions contemplated hereby will not, violate Quest For Value's Declaration of Trust or By- Laws or any provision of any material agreement (known to such counsel) to which Quest For Value is a party or by which it is bound or, to the knowledge of such counsel, result in the acceleration of any material obligation or the imposition of any material penalty under any agreement, judgment or decree to which Quest For Value is a party or by which it is bound; (e) to the knowledge of such counsel, no consent, approval, authorization or order of any court or governmental authority of the United States or any state is required for the consummation by Quest For Value of the transactions contemplated herein, except such as have been obtained under the 1933 Act, the 1934 Act and the 1940 Act and such as may be required under state securities laws; (f) only insofar as they relate to Quest For Value, the descriptions in the Proxy Materials of statutes, legal and governmental proceedings and contracts and other documents, if any, are accurate and fairly present the information required to be shown; (g) such counsel does not know of any legal or governmental proceedings, only insofar as they relate to Quest For Value, existing on or before the date of mailing the Proxy Materials or the Closing Date that are required to be described in the Registration Statement or in any documents that are required to be filed as exhibits to the Registration Statement that are not described as required; and (h) to the best knowledge of such counsel, no material litigation or administrative proceedings or investigation of or before any court or governmental body is presently pending or overtly threatened as to Quest For Value or any of its properties or assets and Quest Portfolio is not a party to or subject to the provisions of any order, decree or judgment of any court or governmental body that materially and adversely affects its business, other than as previously disclosed in the Registration Statement. 7.6 Between the date hereof and the Closing Date, Quest For Value shall provide Oppenheimer Fund and its representatives reasonable access during regular business hours and upon reasonable notice to the books and records of or relating to Quest Portfolio, including without limitation the books and records of Quest For Value, as Oppenheimer Fund may reasonably request. All such information obtained by Oppenheimer Fund and its representatives shall be held in confidence and may not be used for any purpose other than in connection with the transaction contemplated hereby. In the event that the transaction contemplated by this Agreement is not consummated, Oppenheimer Fund and its representatives will promptly return to Quest For Value all documents and copies thereof with respect to Quest Portfolio obtained from Quest For Value during the course of such investigation. 7.7 Quest For Value, on behalf of Quest Portfolio shall have delivered to Oppenheimer Fund, pursuant to paragraph 5.2(g), copies of the most recent financial statements of Quest Portfolio certified by Price Waterhouse LLP. 7.8 On the Closing Date, the Quest Portfolio Assets shall include no assets that Oppenheimer Fund, by reason of charter limitations or otherwise, may not properly acquire. 7.9 All proceedings taken by Quest For Value and Quest Portfolio in connection with the transactions contemplated by the Agreement and all documents incidental thereto shall be reasonably satisfactory in form and substance to Oppenheimer Fund and its counsel, Gordon Altman Butowsky Weitzen Shalov & Wein (Myer Swanson Adams & Wolf, P.C.). 7.10 The stated liabilities, expenses, costs, charges and reserves reflected on the unaudited Statement of Assets and Liabilities of the Quest Portfolio referred to in paragraph 1.3 shall have been agreed to by the Oppenheimer Fund. 7.11 The Registration Statement, including the Proxy Materials filed as a part thereof, shall have been approved by the Board of Trustees of the Oppenheimer Fund. 7.12 The Cash Reserve shall not exceed 10% of the value of the net assets, nor 30% in value of the gross assets, of the Quest Portfolio at the close of business on the Valuation Date. 8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF OPPENHEIMER FUND AND QUEST PORTFOLIO The obligations of Quest Portfolio and Oppenheimer Fund hereunder are each subject to the further conditions that on or before the Closing Date: 8.1 This Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of Quest Portfolio and certified copies of the resolutions evidencing such approval shall have been delivered to Oppenheimer Fund; 8.2 On the Closing Date, no action, suit or other proceeding shall be pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein; 8.3 All consents of other parties and all other consents, orders and permits of federal, state and local regulatory authorities (including those of the Commission and of state Blue Sky and securities authorities, including "no-action" positions or any exemptive orders from such federal and state authorities) deemed necessary by Oppenheimer Fund or Quest For Value on behalf of Quest Portfolio to permit consummation, in all material respects, of the transactions contemplated herein shall have been obtained, except where failure to obtain any such consent, order or permit would not involve risk of a material adverse effect on the assets or properties of Oppenheimer Fund or Quest Portfolio. 8.4 The Registration Statement on Form N-14 shall have become effective under the 1933 Act, no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act; 8.5 Quest Portfolio shall have declared and paid a dividend or dividends and/or other distributions that, together with all previous such dividends or distributions, shall have the effect of distributing to the Quest Portfolio Shareholders all of Quest Portfolio's investment company taxable income (computed without regard to any deduction for dividends paid) and all of its net capital gain (after reduction for any capital loss carry-forward and computed without regard to any deduction for dividends paid) for all taxable years ending on or before the Closing Date; and 8.6 The parties shall have received a favorable opinion from (Price Waterhouse LLP)(based on such representations as such firm shall reasonably request), addressed to Oppenheimer Fund and Quest Portfolio, which opinion may be relied upon by the shareholders of Oppenheimer Fund and Quest Portfolio, substantially to the effect that, for federal income tax purposes: (a) The transfer of substantially all of Quest Portfolio's assets in exchange for Oppenheimer Fund Shares and the assumption by Oppenheimer Fund of certain identified liabilities of Quest Portfolio followed by the distribution by Quest Portfolio of Oppenheimer Fund Shares to the Quest Portfolio Shareholders in exchange for their Quest Portfolio shares will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code and Quest Portfolio and Oppenheimer Fund will each be a "party to the reorganization" within the meaning of Section 368(b) of the Code; (b) No gain or loss will be recognized by Oppenheimer Fund upon the receipt of the assets of Quest Portfolio solely in exchange for Oppenheimer Fund Shares and the assumption by Oppenheimer Fund of the identified liabilities of Quest Portfolio; (c) No gain or loss will be recognized by Quest Portfolio or Quest For Value upon the transfer of the assets of Quest Portfolio to Oppenheimer Fund in exchange for Oppenheimer Fund Shares and the assumption by Oppenheimer Fund of the identified liabilities or upon the distribution of Oppenheimer Fund Shares to the Quest Portfolio Shareholders in exchange for the Quest Portfolio shares; (d) No gain or loss will be recognized by the Quest Portfolio Shareholders upon the exchange of the Quest Portfolio shares for the Oppenheimer Fund Shares; (e) The aggregate tax basis for Oppenheimer Fund Shares received by each Quest Portfolio Shareholder pursuant to the reorganization will be the same as the aggregate tax basis of the Quest Portfolio Shares held by each such Quest Portfolio Shareholder immediately prior to the reorganization; (f) The holding period of Oppenheimer Fund Shares to be received by each Quest Portfolio Shareholder will include the period during which the Quest Portfolio Shares surrendered in exchange therefor were held (provided such Quest Portfolio Shares were held as capital assets on the date of the Reorganization); (g) The tax basis of the assets of Quest Portfolio acquired by Oppenheimer Fund will be the same as the tax basis of such assets to Quest Portfolio immediately prior to the Reorganization; and (h) The holding period of the assets of Quest Portfolio in the hands of Oppenheimer Fund will include the period during which those assets were held by Quest Portfolio. Notwithstanding anything herein to the contrary, neither Oppenheimer Fund nor Quest Portfolio may waive the material conditions set forth in this paragraph 8.6 although the actual wording of such opinion may differ to the extent agreed to by Oppenheimer Fund and Quest Portfolio. 9. BROKERAGE FEES AND EXPENSES 9.1 Oppenheimer Fund and Quest For Value on behalf of Quest Portfolio each represents and warrants to the other that there are no brokers or finders entitled to receive any payments in connection with the transactions provided for herein. 9.2 (a) Oppenheimer Fund shall bear its expenses incurred in connection with entering into and carrying out the provisions of this Agreement, including legal, accounting and Commission registration fees and Blue Sky expenses. Quest Advisors (or a party other than Oppenheimer Fund) shall bear Quest Portfolio's expenses incurred in connection with entering into and carrying out the provisions of this Agreement, including legal and accounting fees, printing, filing and proxy solicitation expenses and portfolio transfer taxes (if any) incurred in connection with the consummation of the transactions contemplated herein. (b) In the event the transactions contemplated herein are not consummated by reason of Quest Portfolio's being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Quest Portfolio's obligations specified in this Agreement), Quest Advisor's (or a party other than Oppenheimer Fund) only obligation hereunder shall be to reimburse Oppenheimer Fund for all reasonable out-of-pocket fees and expenses incurred by Oppenheimer Fund in connection with those transactions, including legal, accounting and filing fees. (c) In the event the transactions contemplated herein are not consummated by reason of Oppenheimer Fund's being either unwilling or unable to go forward (other than by reason of the nonfulfillment or failure of any condition to Oppenheimer Fund's obligations specified in the Agreement), Oppenheimer Fund's only obligations hereunder shall be to reimburse Quest Portfolio for all reasonable out-of-pocket fees and expenses incurred by Quest Portfolio in connection with those transactions, including legal, accounting and filing fees, and to comply with the provisions of paragraph 7.6 hereof. 10. ENTIRE AGREEMENT: SURVIVAL OF WARRANTIES 10.1 Oppenheimer Fund, Quest For Value, on behalf of Quest Portfolio and Quest Advisors agree that no party has made any representation, warranty or covenant not set forth herein and that this Agreement constitutes the entire agreement between the parties. 10.2 The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated herein. 11. TERMINATION 11.1 This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the Closing: (a) by the mutual written consent of Quest For Value, on behalf of Quest Portfolio, and Oppenheimer Fund; (b) by either Oppenheimer Fund or Quest For Value, on behalf of Quest Portfolio, by notice to the other, without liability to the terminating party on account of such termination (providing the termination party is not otherwise in default or in breach of this Agreement) if the Closing shall not have occurred on or before December 31, 1995, or if later, two business days after the date of any Quest Portfolio shareowner's meeting called for the purpose of approving the Agreement which was convened prior to ___________, 199___ but adjourned to a date after ____________ 199___; or (c) by either Oppenheimer Fund or Quest For Value, on behalf of Quest Portfolio, in writing without liability to the terminating party on account of such termination (provided the terminating party is not otherwise in material default or breach of the Agreement), if (i) the other party shall fail to perform in any material respect its agreements contained herein required to be performed on or prior to the Closing Date, (ii) Quest Advisors, Quest For Value or the Quest Portfolio, or the Oppenheimer Fund, respectively, materially breaches or shall have breached any of its representations, warranties or covenants contained herein, (iii) the Quest Portfolio Shareholders fail to approve the Agreement, (iv) any other condition herein expressed to be precedent to the obligations of the terminating party has not been met and it reasonably appears that it will not or cannot be met or (v) the acquisition contemplated by that certain Acquisition Agreement (the "Acquisition Agreement") dated August __, 1995 between Oppenheimer Management Corporation, Quest Advisors, Quest for Value Distributors and Oppenheimer Capital is not consummated. 11.2 (a) Termination of this Agreement pursuant to paragraphs 11.1(a) or (b) shall terminate all obligations of the parties hereunder (other than Oppenheimer Fund's obligations under paragraph 7.6) and there shall be no liability for damages on the part of the Oppenheimer Fund, Quest Portfolio or Quest Advisors or the trustees, directors or officers of Oppenheimer Fund, Quest Portfolio or Quest Advisors, to any other party or its trustees, directors or officers. (b) Termination of this Agreement pursuant to paragraph 11.1(c) shall terminate all obligations of the parties hereunder (other than Oppenheimer Fund's obligations under paragraph 7.6) and there shall be no liability for damages on the part of Oppenheimer Fund, Quest Portfolio or Quest Advisors or the trustees, directors or officers of Oppenheimer Fund, Quest Portfolio or Quest Advisors, to any other party or its trustees, directors or officers, except that any party in breach of this Agreement (or, as to a termination pursuant to paragraph 11.1(c)(v), in breach of the Acquisition Agreement) shall, upon demand, reimburse the non-breaching party or parties for all reasonable out-of-pocket fees and expenses incurred in connection with the transactions contemplated by this Agreement, including legal, accounting and filing fees. For the purposes of this paragraph 11.2(b), the non-fulfillment of the condition set forth in paragraph 8.1 shall not be deemed a breach entitling a party to reimbursement of expenses and fees. 12. AMENDMENTS This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the authorized officers of Quest For Value, Oppenheimer Fund and Quest Advisors; provided, however, that following the meeting of Quest Portfolio's shareholders called by Quest Portfolio pursuant to paragraph 4,2, no such amendment may have the effect of changing the provisions for determining the number of Oppenheimer Fund Shares to be issued to the Quest Portfolio Shareholders under this Agreement to the detriment of such Shareholders without their further approval. 13. INDEMNIFICATION 13.1 Oppenheimer Fund will indemnify and hold harmless, Quest For Value, Quest Advisors, their trustees, directors, officers and shareholders against any and all claims to the extent such claims are based upon, arise out of or relate to any untruthful or inaccurate representations made by Oppenheimer Fund in this Agreement or any breach by Oppenheimer Fund of any warranty or any failure to perform or comply with any of its obligations, covenants, conditions or agreements set forth in this Agreement, including those set forth in paragraph 1.3. 13.2 Quest Advisors will indemnify and hold harmless Quest For Value, Oppenheimer Fund and Oppenheimer Fund's trustees, officers and shareholders against any and all claims to the extent such claims are based upon, arise out of or relate to any untruthful or inaccurate representation made by Quest For Value on behalf of Quest Portfolio or Quest Advisors in this Agreement or any breach by Quest Portfolio or Quest Advisors of any warranty or any failure by Quest Portfolio to perform or comply with any of its obligations, covenants, conditions or agreements set forth in this Agreement. 13.3 As used in this section 13, the word "claim" means any and all liabilities, obligations, losses, damages, deficiencies, demands, claims, penalties, assessments, judgments, actions, proceedings and suits of whatever kind and nature and all costs and expenses (including, without limitation, reasonable attorneys' fees). 13.4 Promptly after the receipt by any party (the "Indemnified Party"), of notice of any claim by a third party which may give rise to indemnification hereunder, the Indemnified Party shall notify the party against whom a claim for indemnification may be made hereunder (the "Indemnifying Party"), in reasonable detail of the nature and amount of the claim. The Indemnifying Party shall be entitled to assume, at its sole cost and expense (unless it is subsequently determined that the Indemnifying Party did not have the obligation to indemnify the Indemnified Party under such circumstances), and shall have sole control of the defense and settlement of such action or claim; provided, however, that: (a) the Indemnified Party shall be entitled to participate in the defense of such claim and, in connection therewith, to employ counsel at its own expense; and (b) without the prior written consent of the Indemnified Party which shall not be unreasonably withheld, the Indemnifying Party shall not consent to the entry of any judgment or enter into any settlement that requires any action other than the payment of money. In the event the Indemnifying Party elects to assume control of the defense of any such action in accordance with the foregoing provisions, (I) the Indemnifying Party shall not be liable to Indemnified Party for any legal fees, costs and expenses incurred by the Indemnified Party in connection with the defense thereof arising after the date the Indemnifying Party elects to assume control of such defense and (ii) Indemnified Party shall fully cooperate with the Indemnifying Party in such defense. If the Indemnifying Party does not assume control of the defense of such claim in accordance with the foregoing provisions, the Indemnified Party shall have the right to defend such claim, in which case the Indemnifying Party shall pay all reasonable costs and expenses of such defense plus interest on the cost of defense from the date paid at a rate equal to the prime commercial rate of interest as in effect from time to time at Citibank, N.A. The Indemnified Party shall conduct such defense in good faith and shall have the right to settle the matter with the prior written consent of the Indemnifying Party which shall not be reasonably withheld. 14. NOTICES Any notice, report, statement or demand required or permitted by any provisions of this Agreement shall be in writing and shall be given by prepaid telegraph, telecopy, certified mail or overnight express courier addressed to Oppenheimer Fund at Two World Trade Center, 34th Floor, New York, New York 10048-0203 Attention: Andrew J. Donohue with a copy to Ronald Feiman, Esq. at Gordon Altman Butowsky Weitzen Shalov & Wein, 114 West 47th Street, New York, New York 10036; (Rendle Myer, Esq. at Myer, Swanson, Adams & Wolf, P.C. 1600 Broadway, Denver, Colorado 80202 to Quest For Value at One World Financial Center, New York, New York 10281 Attention: Thomas Duggan, with a copy to Stuart Strauss, Esq. at Gordon Altman Butowsky Weitzen Shalov & Wein, 114 West 47th Street, New York, New York 10036. 15. HEADINGS: COUNTERPARTS: GOVERNING LAW: ASSIGNMENT, LIMITATION OF LIABILITY 15.1 The article and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 15.2 This Agreement may be executed in any number of counterparts, each of which shall be deemed an original. 15.3 This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 15.4 This Agreement shall bind and inure to the benefit of the parties hereto and their respective successors and assigns, but no assignment or transfer hereof or of any rights or obligations hereunder shall be made by any party without the written consent of the other parties. Except as provided in the following sentence, nothing herein expressed or implied is intended or shall be construed to confer upon or give any person, firm or corporation, other than the parties hereto and their respective successors and assigns, any rights or remedies under or by reason of this Agreement. A shareholder of Quest Portfolio who becomes a shareholder of Oppenheimer Fund on the Closing Date and continues to be a shareholder of Oppenheimer Fund, shall be entitled to the benefits and may enforce the provisions of paragraph 4.9 hereof except insofar as paragraph 4.9 relates to the election of trustees; and the persons designated in paragraphs 13.1 and 13.2 hereof shall be entitled to the benefits and may enforce the provisions of section 13 hereof. 15.5 The obligations and liabilities of Oppenheimer Fund hereunder are solely those of Oppenheimer Fund. It is expressly agreed that shareholders, trustees, nominees, officers, agents or employees of Oppenheimer Fund shall not be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Oppenheimer Fund and signed by authorized by the officers of Oppenheimer Fund acting as such, and neither such authorization by such trustees nor such execution and delivery by such officers shall be deemed to have been made by any of the, individually or to impose any liability on any of them personally. 15.6 The obligations and liabilities of the Quests For Value on behalf of Quest Portfolio hereunder are solely those of the Quest Portfolio and not of any other series of Quest For Value. It is expressly agreed that shareholders, trustees, nominees, officers, agents, or employees of Quest For Value and Quest Portfolio shall not be personally liable hereunder. The execution and delivery of this Agreement have been authorized by the trustees of Quest For Value and signed by authorized officers of Quest For Value acting as such, and neither such authorization by such trustees nor such execution and delivery by such officers shall be deemed to have been made by any of them individually or to impose any liability on any of them personally. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its duly authorized officer. OPPENHEIMER ___________________ FUND By: ________________________________ QUEST FOR VALUE _________________ By: ____________________________ QUEST FOR VALUE ADVISORS By: ____________________________ EXHIBIT B The aggregate purchase price for the Purchased Assets and Assumed Liabilities will be an amount equal to the sum of (i) the Initial Purchase Payment (as hereinafter defined) payable in cash at the Acquisition Closing, (ii) the aggregate amount of all unamortized prepaid commissions as of the business day immediately preceding the Acquisition Closing which relate to the Acquired Funds (excluding those with respect to Citibank, N.A.) payable in cash at the Acquisition Closing, (iii) the amount payable by OMC in respect of the right, title and interest of Citibank, N.A. to certain commissions, (iv) the Deferred Purchase Payment (as hereinafter defined) and (v) the aggregate amount of the Assumed Liabilities. The "Initial Purchase Payment" shall be an amount equal to the sum of (x) 225% of the Annualized Fee Amount (as hereinafter defined) of each Reorganized Fund and (y) 270% of the Annualized Fee Amount of each Continuing Fund (excluding the Quest for Value Officers Fund). The "Annualized Fee Amount" of an Acquired Fund shall equal the product of (i) such Acquired Fund's Closing Net Assets (as hereinafter defined) and (ii) the annual advisory fee payable to QVA by such Acquired Fund at the rate indicated in the most recent prospectus for such Acquired Fund at the Acquisition Closing (plus any applicable annual administrative fee) "Closing Net Assets" for an Acquired Fund shall mean the aggregate net asset value of such Acquired Fund as of the close of business on the last business date preceding the Acquisition Closing. The "Deferred Purchase Payment" shall be an amount equal to the aggregate amounts determined for all Reorganized Funds pursuant to the following formula: the Closing Payment (as hereinafter defined) times the Applicable Percentage (as hereinafter defined). The "Closing Payment" shall be the aggregate amount calculated for all Reorganized Funds pursuant to clause (x) of the Initial Purchase Payment formula. The "Applicable Percentage" shall be 100% if the Continuing Net Asset Percentage (as hereinafter defined) is 75% or more, 0% if the Continuing Net Asset Percentage is 50% or less and the percentage determined in accordance with the following formula if the Continuing Net Asset Percentage is between 75% and 50%: 100% - (4) (75% - Continuing Net Asset Percentage). The "Continuing Net Asset Percentage" shall equal the percentage obtained by dividing the Anniversary Net Assets (as hereinafter defined) by the Closing Net Assets. The "Anniversary Net Assets" shall mean the most recently determined aggregate net asset values of all Reorganized Funds as of 8:00 p.m. on the first anniversary of the Acquisition Closing of each account of the Reorganized Funds which are eligible to be included in Anniversary Net Assets in accordance with the principles set forth in the Acquisition Agreement. Preliminary Copy QUEST FOR VALUE FAMILY OF FUNDS INVESTMENT QUALITY INCOME FUND - CLASS A SHARES PROXY FOR SPECIAL SHAREHOLDERS MEETING TO BE HELD NOVEMBER 3, 1995 The undersigned shareholder of Investment Quality Income Fund (the "Fund"), a series of Quest for Value Family of Funds (the "Trust"), does hereby appoint Thomas E. Duggan and Maria Camacho, and each of them, as attorneys-in-fact and proxies of the undersigned, with full power of substitution, to attend the Special Meeting of Shareholders of the Fund to be held on November 3, 1995, at One World Financial Center, New York, New York 10281 on the 40th Floor at 10:00 A.M., New York time, and at all adjournments thereof, and to vote the shares held in the name of the undersigned on the record date for said meeting on the Proposal specified on the reverse side. Said attorneys-in-fact shall vote in accordance with their best judgment as to any other matter. PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES, WHO RECOMMENDS A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE. THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED ON THE REVERSE SIDE OR FOR IF NO CHOICE IS INDICATED. Please mark your proxy, date and sign it on the reverse side and return it promptly in the accompanying envelope, which requires no postage if mailed in the United States. The Proposal: To approve an Agreement and Plan of Reorganization dated as of _______________, 1995 by and among Oppenheimer Integrity Funds, on behalf of Oppenheimer Bond Fund, the Trust, on behalf of the Fund, and Quest for Value Advisors, and the transactions contemplated thereby, including the transfer of substantially all the assets of the Fund in exchange for Class A, Class B and Class C shares of Oppenheimer Bond Fund and the assumption by Oppenheimer Bond Fund of certain liabilities of the Fund, the distribution of such shares to the shareholders of the Fund in complete liquidation of the Fund and the cancellation of the outstanding shares of the Fund. FOR____ AGAINST____ ABSTAIN____ Dated:________________________, 1995 (Month) (Day) ______________________________ Signature(s) ______________________________ Signature(s) Please read both sides of this ballot. NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing as custodian, attorney, executor, administrator, trustee, etc., please give your full title as such. All joint owners should sign this proxy. If the account is registered in the name of a corporation, partnership or other entity, a duly authorized individual must sign on its behalf and give his or her title. Preliminary Copy QUEST FOR VALUE FAMILY OF FUNDS INVESTMENT QUALITY INCOME FUND - CLASS B SHARES PROXY FOR SPECIAL SHAREHOLDERS MEETING TO BE HELD NOVEMBER 3, 1995 The undersigned shareholder of Investment Quality Income Fund (the "Fund"), a series of Quest for Value Family of Funds (the "Trust"), does hereby appoint Thomas E. Duggan and Maria Camacho, and each of them, as attorneys-in-fact and proxies of the undersigned, with full power of substitution, to attend the Special Meeting of Shareholders of the Fund to be held on November 3, 1995, at One World Financial Center, New York, New York 10281 on the 40th Floor at 10:00 A.M., New York time, and at all adjournments thereof, and to vote the shares held in the name of the undersigned on the record date for said meeting on the Proposal specified on the reverse side. Said attorneys-in-fact shall vote in accordance with their best judgment as to any other matter. PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES, WHO RECOMMENDS A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE. THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED ON THE REVERSE SIDE OR FOR IF NO CHOICE IS INDICATED. Please mark your proxy, date and sign it on the reverse side and return it promptly in the accompanying envelope, which requires no postage if mailed in the United States. The Proposal: To approve an Agreement and Plan of Reorganization dated as of _______________, 1995 by and among Oppenheimer Integrity Funds, on behalf of Oppenheimer Bond Fund, the Trust, on behalf of the Fund, and Quest for Value Advisors, and the transactions contemplated thereby, including the transfer of substantially all the assets of the Fund in exchange for Class A, Class B and Class C shares of Oppenheimer Bond Fund and the assumption by Oppenheimer Bond Fund of certain liabilities of the Fund, the distribution of such shares to the shareholders of the Fund in complete liquidation of the Fund and the cancellation of the outstanding shares of the Fund. FOR____ AGAINST____ ABSTAIN____ Dated:________________________, 1995 (Month) (Day) ______________________________ Signature(s) ______________________________ Signature(s) Please read both sides of this ballot. NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing as custodian, attorney, executor, administrator, trustee, etc., please give your full title as such. All joint owners should sign this proxy. If the account is registered in the name of a corporation, partnership or other entity, a duly authorized individual must sign on its behalf and give his or her title. Preliminary Copy QUEST FOR VALUE FAMILY OF FUNDS INVESTMENT QUALITY INCOME FUND - CLASS C SHARES PROXY FOR SPECIAL SHAREHOLDERS MEETING TO BE HELD NOVEMBER 3, 1995 The undersigned shareholder of Investment Quality Income Fund (the "Fund"), a series of Quest for Value Family of Funds (the "Trust"), does hereby appoint Thomas E. Duggan and Maria Camacho, and each of them, as attorneys-in-fact and proxies of the undersigned, with full power of substitution, to attend the Special Meeting of Shareholders of the Fund to be held on November 3, 1995, at One World Financial Center, New York, New York 10281 on the 40th Floor at 10:00 A.M., New York time, and at all adjournments thereof, and to vote the shares held in the name of the undersigned on the record date for said meeting on the Proposal specified on the reverse side. Said attorneys-in-fact shall vote in accordance with their best judgment as to any other matter. PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES, WHO RECOMMENDS A VOTE FOR THE PROPOSAL ON THE REVERSE SIDE. THE SHARES REPRESENTED HEREBY WILL BE VOTED AS INDICATED ON THE REVERSE SIDE OR FOR IF NO CHOICE IS INDICATED. Please mark your proxy, date and sign it on the reverse side and return it promptly in the accompanying envelope, which requires no postage if mailed in the United States. The Proposal: To approve an Agreement and Plan of Reorganization dated as of _______________, 1995 by and among Oppenheimer Integrity Funds, on behalf of Oppenheimer Bond Fund, the Trust, on behalf of the Fund, and Quest for Value Advisors, and the transactions contemplated thereby, including the transfer of substantially all the assets of the Fund in exchange for Class A, Class B and Class C shares of Oppenheimer Bond Fund and the assumption by Oppenheimer Bond Fund of certain liabilities of the Fund, the distribution of such shares to the shareholders of the Fund in complete liquidation of the Fund and the cancellation of the outstanding shares of the Fund. FOR____ AGAINST____ ABSTAIN____ Dated:________________________, 1995 (Month) (Day) ______________________________ Signature(s) ______________________________ Signature(s) Please read both sides of this ballot. NOTE: PLEASE SIGN EXACTLY AS YOUR NAME(S) APPEAR HEREON. When signing as custodian, attorney, executor, administrator, trustee, etc., please give your full title as such. All joint owners should sign this proxy. If the account is registered in the name of a corporation, partnership or other entity, a duly authorized individual must sign on its behalf and give his or her title. OPPENHEIMER BOND FUND Supplement dated July 14, 1995 to the Prospectus dated July 10, 1995 The following changes are made to the Prospectus: 1. Footnote 1 under the "Shareholder Transaction Expenses" chart in "Expenses" on page 3 is changed to read as follows: 1. If you invest $1 million or more ($500,000 or more for purchases by OppenheimerFunds prototype 401(k) plans) in Class A shares, you may have to pay a sales charge of up to 1% if you sell your shares within 18 calendar months from the end of the calendar month in which you purchased those shares. See "How to Buy Shares -- Class A Shares," below. 2. The following is inserted in the first paragraph under "Investment Policies and Strategies" on page 10 after the sentence that reads, "The Fund may invest up to 35% of its total assets in debt securities rated less than investment grade or, if unrated, judged by the Manager to be of comparable quality to such lower-rated securities (collectively, "lower-grade securities"). Lower-grade securities include securities rated BB,B, CCC, CC, C and D by Standard & Poor's or Ba, B, Caa, Ca and C by Moody's. Bonds rated BB, B CCC and CC by Standard & Poor's are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. Bonds on which no interest is paid are rated C by Standard & Poor's. Bonds rated D by Standard & Poor's are in default and payment of interest and/or repayment of principal is in arrears. Bonds rated Ba or B by Moody's are judged to have speculative elements; their future is not well-assured. Bonds rated Caa by Moody's are of poor standing and may be in default; bonds rated Ca are speculative in a high degree and are often in default; bonds rated C are regarded as having extremely poor prospects of attaining any real investment standing. 3. The following is added after the paragraph titled "Zero Coupon Securities" on page 13: - Other Debt Securities. The Fund may invest in preferred stocks. Preferred stock, unlike common stock, generally offers a stated dividend rate payable from the corporations's earnings. Such preferred stock dividends may be cumulative or non- cumulative, fixed, participating, or auction rate. If interest rates rise, a fixed dividend on preferred stocks may be less attractive, causing the price of preferred stocks to decline. The rights to payment of preferred stocks are generally subordinate to rights associated with a corporation's debt securities. The Fund may also invest in municipal securities, which are debt obligations issued by states, territories and possessions of the United States and the District of Columbia and their political subdivisions, agencies and instrumentalities or multi-state agencies or authorities, the interest from which is, in the opinion of bond counsel to the issuer, exempt from Federal income tax. Interest from certain municipal securities may be subject to Federal alternative minimum tax. 4. In "How to Buy Shares," the section entitled "Class A Shares" on page 25 under "Classes of Shares" is changed to read as follows: If you buy Class A shares, you may pay an initial sales charge on investments up to $1 million (up to $500,000 for purchases by OppenheimerFunds prototype 401(k) plans). If you purchase Class A shares as part of an investment of at least $1 million ($500,000 for OppenheimerFunds prototype 401(k) plans) in shares of one or more OppenheimerFunds, you will not pay an initial sales charge, but if you sell any of those shares within 18 months of buying them, you may pay a contingent deferred sales charge. The amount of that sales charge will vary depending on the amount you invested. Sales charge rates are described in "Class A Shares" below. 5. In "How to Buy Shares," the section entitled "Which Class of Shares Should You Choose?" on page 25 is changed by adding a new final sentence to the third paragraph of that section as follows: The discussion below of the factors to consider in purchasing a particular class of shares assumes that you will purchase only one class of shares and not a combination of shares of different classes. 6. In "How to Buy Shares," the first and second paragraphs of the section "Class A Contingent Deferred Sales Charge" on page 29 is amended in its entirety to read as follows: There is no initial sales charge on purchases of Class A shares of any one or more of the OppenheimerFunds in the following cases: - purchases aggregating $1 million or more, or - purchases by an OppenheimerFunds prototype 401(k) plan that: (1) buys shares costing $500,000 or more or (2) has, at the time of purchase, 100 or more eligible participants, or (3) certifies that it projects to have annual plan purchases of $200,000 or more. Shares of any of the OppenheimerFunds that offers only one class of shares that has no designation are considered "Class A shares" for this purpose. The Distributor pays dealers of record commissions on those purchases in an amount equal to the sum of 1.0% of the first $2.5 million, plus 0.50% of the next $2.5 million, plus 0.25% of purchases over $5 million. That commission will be paid only on the amount of those purchases in excess of $1 million ($500,000 for purchases by OppenheimerFunds 401(k) prototype plans) that were not previously subject to a front-end sales charge and dealer commission. 7. In "Reduced Sales Charges for Class A Purchases" on page 30, the first sentence of the section "Right of Accumulation" is changed to read as follows: 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 jointly, or for trust or custodial accounts on behalf of your children who are minors. The first two sentences of the second paragraph of that section are revised to read as follows: Additionally, you can add together current purchases of Class A and Class B shares of the Fund and other OppenheimerFunds to reduce the sales charge rate that applies to current purchases of Class A shares. You can also count Class A and Class B shares of OppenheimerFunds 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 that investment in one of the OppenheimerFunds. 8. The first sentence of the section entitled "Letter of Intent" on page 30 is revised to read as follows: Under a Letter of Intent, if you purchase Class A shares or Class A shares and Class B shares of the Fund and other OppenheimerFunds 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. 9. In the section entitled "Waivers of Class A Sales Charges" on page 31, the following changes are made: The first sentence of the first paragraph is replaced by a new introductory paragraph set forth below and the list of circumstances describing the sales charge waivers follows a new initial sentence: - Waivers of Class A Sales Charges. The Class A sales charges are not imposed in the circumstances described below. There is an explanation of this policy in "Reduced Sales Charges" in the Statement of Additional Information. 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: The introductory phrase preceding the list of sales charge waivers in the second paragraph and subsection (d) of that paragraph are replaced by the following: 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 Class A sales charges: (d) shares purchased and paid for with the proceeds of shares redeemed in the prior 12 months 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 your shares of the Fund, and the Distributor may require evidence of your qualification for this waiver. The third paragraph of that section is revised to read as follows: Waivers of the Class A Contingent Deferred Sales Charge. The Class A contingent deferred sales charge does not apply to purchases of Class A shares at net asset value without sales charge as described in the two sections above. It is also waived if shares that would otherwise be subject to the contingent deferred sales charge are redeemed in the following cases: for retirement distributions or loans to participants or beneficiaries from qualified retirement plans, deferred compensation plans or other employee benefit plans, including OppenheimerFunds prototype 401(k) plans (these are all referred to as "Retirement Plans"); or to return excess contributions made to Retirement Plans; or to make Automatic Withdrawal Plan payments that are limited annually to no more than 12% of the original account value; or involuntary redemptions of shares by operation of law or involuntary redemptions of small accounts (see "Shareholder Account Rules and Policies," below); or if, at the time a purchase order is placed for Class A shares that would otherwise be subject to the Class A contingent deferred sales charge, the dealer agrees to accept the dealer's portion of the commission payable on the sale in installments of 1/18th of the commission per month (and no further commission will be payable if the shares are redeemed within 18 months of purchase); or for distributions from OppenheimerFunds prototype 401(k) plans for any of the following cases or 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) hardship withdrawals, as defined in the plan; (3) under a Qualified Domestic Relations Order, as defined in the Internal Revenue Code; (4) to meet the minimum distribution requirements of the Internal Revenue Code; (5) to establish "substantially equal periodic payments" as described in Section 72(t) of the Internal Revenue Code, or (6) separation from service. 10. The first paragraph of the section entitled "Waivers of Class B Sales Charge" on page 33 is amended by replacing the introductory phrase of that paragraph with the sentences below and replacing item (5) of that paragraph as follows: Waivers of Class B Sales Charge. The Class B contingent deferred sales charge will not be applied to shares purchased in certain types of transactions nor will it apply to Class B shares redeemed in certain circumstances as described below. The reasons for this policy are in "Reduced Sales Charges" in the Statement of Additional Information. Waivers for Redemptions of Shares in Certain Cases. The Class B contingent deferred sales charge will be waived for redemptions of shares in the following cases: (5) for distributions from OppenheimerFunds prototype 401(k) plans (1) for hardship withdrawals; (2) under a Qualified Domestic Relations Order, as defined in the Internal Revenue Code; (3) to meet minimum distribution requirements as defined in the Internal Revenue Code; (4) to make "substantially equal periodic payments" as described in Section 72(t) of the Internal Revenue Code; or (5) for separation from service. 11. The section titled "Waivers of Class C Sales Charge" on page 35 is replaced with the following: The Class C contingent deferred sales charge will be waived if the shareholder requests it for any of the redemptions or circumstances described above under "Waivers of Class B Sales Charge." 12. In the section entitled "Reinvestment Privilege" on page 37, the first two sentences are revised to read as follows: If you redeem some or all of your Class A or B shares of the Fund, you have up to 6 months to reinvest all or part of the redemption proceeds in Class A shares of the Fund or other OppenheimerFunds without paying a sales charge. This privilege applies to Class A shares that you purchased subject to an initial sales charge and to Class A or B shares on which you paid a contingent deferred sales charge when you redeemed them. It does not apply to Class C shares. 13. In the section entitled "Retirement Plans" on page 38, the final item in the list of plans offered by the Distributor is replaced with the following: 401(k) prototype retirement plans for businesses July 14, 1995 PS0285.003 OPPENHEIMER Bond Fund Prospectus dated July 10, 1995. Oppenheimer Bond Fund (the "Fund"), formerly named "Oppenheimer Investment Grade Bond Fund," is a mutual fund with the investment objective of seeking a high level of current income by investing mainly in debt instruments. The Fund will, under normal market conditions, invest at least 65% of its total assets in a diversified portfolio of investment grade debt securities. You should carefully review the risks associated with an investment in the Fund. Please refer to "Investment Objectives and Polices" beginning on page 10. This Prospectus explains concisely what you should know before investing in the Fund. Please read this Prospectus carefully and keep it for future reference. You can find more detailed information about the Fund in the July 10, 1995, Statement of Additional Information. For a free copy, call Oppenheimer Shareholder Services, the Fund's Transfer Agent, at 1-800-525-7048, or write to the Transfer Agent at the address on the back cover. The Statement of Additional Information has been filed with the Securities and Exchange Commission and is incorporated into this Prospectus by reference (which means that it is legally part of this Prospectus). (OppenheimerFunds logo) Shares of the Fund are not deposits or obligations of any bank, are not guaranteed by any bank, and are not insured by the F.D.I.C. or any other agency, and involve investment risks, including the possible loss of the principal amount invested. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. Contents 3 ABOUT THE FUND 5 Expenses 7 A Brief Overview of the Fund 10 Financial Highlights 19 Investment Objective and Policies 21 How the Fund is Managed 25 Performance of the Fund 25 ABOUT YOUR ACCOUNT 25 How to Buy Shares 29 Class A Shares 32 Class B Shares 35 Class C Shares 36 Special Investor Services 36 AccountLink 37 Automatic Withdrawal and Exchange Plans 37 Reinvestment Privilege 38 Retirement Plans 38 How to Sell Shares 39 By Mail 39 By Telephone 40 By Checkwriting 40 How to Exchange Shares 42 Shareholder Account Rules and Policies 43 Dividends, Capital Gains and Taxes A B O U T T H E F U N D Expenses The Fund pays a variety of expenses directly for management of its assets, administration, distribution of its shares and other services, and those expenses are subtracted from the Fund's assets to calculate the Fund's net asset value per share. All shareholders therefore pay those expenses indirectly. Shareholders pay other expenses directly, such as sales charges and shareholder transaction charges. The following tables are provided to help you understand your direct expenses of investing in the Fund and your share of the Fund's business operating expenses that you will bear indirectly. The numbers below are based on the Fund's expenses during its last fiscal year ended December 31, 1994. -- Shareholder Transaction Expenses are charges you pay when you buy or sell shares of the Fund. Please refer to "About Your Account," from pages 24 through 37 for an explanation of how and when these charges apply.
Class A Class B Class C Shares Shares Shares - ----------------------------------------------------------------- Maximum Sales Charge 4.75% None None on Purchases (as a % of offering price) - ----------------------------------------------------------------- Sales Charge on Reinvested Dividends None None None - ----------------------------------------------------------------- Deferred Sales Charge None(1) 5% in the first 1% if shares are (as a % of the lower of year, declining redeemed within the original purchase to 1% in the 12 months of price or redemption sixth year and purchase(2) proceeds) eliminated thereafter(2) - ----------------------------------------------------------------- Exchange Fee None None None
1. If you invest more than $1 million in Class A shares (more than $500,000 for purchases under the OppenheimerFunds - prototype 401(k) plans) you may have to pay a sales charge of up to 1% if you sell your shares within 18 calendar months from the end of the calendar month during which you purchased those shares. See "How to Buy Shares - Class A Shares," below. 2. See "How to Buy Shares," below, for more information on the contingent deferred sales charges. -- Annual Fund Operating Expenses are paid out of the Fund's assets and represent the Fund's expenses in operating its business. For example, the Fund pays management fees to its investment adviser, Oppenheimer Management Corporation (which is referred to in this Prospectus as the "Manager"). The rates of the Manager's fees are set forth in "How the Fund is Managed," below. The Fund has other regular expenses for services, such as transfer agent fees, custodial fees paid to the bank that holds its portfolio securities, audit fees and legal expenses. The numbers in the chart below are projections of the Fund's business expenses based on the Fund's expenses in its last fiscal year. These amounts are shown as a percentage of the average net assets of each class of the Fund's shares for that year. The management fees have been restated to reflect the Fund's new investment advisory agreement dated July 10, 1995 with Oppenheimer Management Corporation. The restated management fee rate is as if the new investment advisory agreement had been in effect during the entire fiscal year ended December 31, 1994. Had the management fee rate not changed, the actual management fee would have been 0.50% for Class A and Class B shares, and total operating expenses would have been 1.06% for Class A and 1.78% for Class B, respectively. The 12b-1 Distribution Plan Fees for Class A shares are Service Plan Fees (the maximum is 0.25% of average annual net assets of that class), and for Class B and Class C shares, the 12b-1 Distribution Plan Fees are the Distribution and Service Plan Fees (the service fee is 0.25% of average annual net assets of the class) and the asset-based sales charge of 0.75%. These Plans are discussed in greater detail in "How to Buy Shares." Class C shares were not publicly offered during the fiscal year ended December 31, 1994. The "Annual Fund Operating Expenses" as to Class C shares are estimates based on amounts that would have been payable in that period assuming that Class C shares were outstanding during such fiscal year. The actual expenses for each class of shares in future years may be more or less than the numbers in the chart, depending on a number of factors, including the actual value of the Fund's assets represented by each class of shares.
Class A Class B Class C Shares Shares Shares - ---------------------------------------------------------------------- Management Fees 0.75% 0.75% 0.75% (Restated) - ---------------------------------------------------------------------- 12b-1 Distribution Plan Fees 0.25%(1) 1.00%(2) 1.00%(2) (includes Shareholder Service Plan Fees) Other Expenses 0.31% 0.28% 0.28% - ----------------------------------------------------------------- Total Fund 1.31% 2.03% 2.03% Operating Expenses
1. Service Plan fees only 2. Includes Service Plan fees and asset-based sales charge -- Examples. To try to show the effect of these expenses on an investment over time, we have created the hypothetical examples shown below. Assume that you make a $1,000 investment in each class of shares of the Fund, the Fund's annual return is 5%, and that its operating expenses for each class are the ones shown in the chart above as restated. If you were to redeem your shares at the end of each period shown below, your investment would incur the following expenses by the end of 1, 3, 5 and 10 years: 1 year 3 years 5 years 10 years* - ----------------------------------------------------------------- Class A Shares $60 $87 $116 $198 - ---------------------------------------------------------------------- Class B Shares $71 $94 $129 $200 - ---------------------------------------------------------------------- Class C Shares $31 $64 $109 $236 If you did not redeem your investment, it would incur the following expenses: Class A Shares $60 $87 $116 $198 - ---------------------------------------------------------------------- Class B Shares $21 $64 $109 $200 - ---------------------------------------------------------------------- Class C Shares $21 $64 $109 $236 *The Class B expenses in years 7 through 10 are based on the Class A expenses shown above, because the Fund automatically converts your Class B shares into Class A shares after 6 years. Long-term Class B and Class C shareholders could pay the economic equivalent of more than the maximum front-end sales charge allowed under applicable regulations, because of the effect of the asset-based sales charge and contingent deferred sales charge. The automatic conversion of Class B shares to Class A shares is designed to minimize the likelihood that this will occur. Please refer to "How to Buy Shares - Class B Shares" for more information. These examples show the effect of expenses on an investment, but are not meant to state or predict actual or expected costs or investment returns of the Fund, all of which will vary. A Brief Overview Of The Fund Some of the important facts about the Fund are summarized below, with references to the section of this Prospectus where more complete information can be found. You should carefully read the entire Prospectus before making a decision about investing in the Fund. Keep the Prospectus for reference after you invest, particularly for information about your account, such as how to sell or exchange shares. -- What Is The Fund's Investment Objective? The Fund seeks to achieve a high level of current income by investing mainly in debt instruments. -- What Does The Fund Invest In? Under normal market conditions, the Fund invests at least 65% of its total assets in a diversified portfolio of investment grade fixed-income securities. These include (i) investment-grade debt securities rated BBB or above by Standard and Poor's Corporation or Baa or above by Moody's Investors Service, Inc. or, if unrated, are of comparable quality as determined by the Fund's Manager; (ii) securities issued or guaranteed as to principal and interest by the U.S. Government, its agencies or instrumentalities or obligations secured by such securities ("U.S. Government Securities"); and (iii) high-quality, short-term money market instruments. The Fund may invest up to 35% of its total assets in non- investment grade debt instruments. Although non-investment grade securities generally offer the potential for higher income than investment grade securities, they may be subject to greater market fluctuations and a greater risk of default because of the issuer's low creditworthiness. The Fund may also write covered calls and use certain types of securities called "derivative investments" and hedging instruments to try to manage investment risks. These investments are more fully explained in "Investment Objective and Policies" starting on page 10. Prior to July 10, 1995, the Fund's investments were limited to investment grade bonds, U.S. Government Securities, and money market instruments. The Fund's shareholders approved changes in the Fund's investment policies at a meeting held July 10, 1995. These changes are reflected in this Prospectus and Statement of Additional Information. -- Who Manages The Fund? The Fund's investment adviser (the "Manager") is Oppenheimer Management Corporation, which (including a subsidiary) manages investment company portfolios currently having over $30 billion in assets. The Fund's portfolio managers, who are primarily responsible for the selection of the Fund's securities, are David P. Negri and David A. Rosenberg. The Manager is paid a management fee by the Fund, based on its net assets. The Fund's Board of Trustees, elected by shareholders, oversees the Manager. Please refer to "How the Fund is Managed," starting on page 19 for more information about the Manager and the Manager and their fees. -- How Risky Is The Fund? All investments carry risks to some degree. The Fund's investments in fixed-income securities are subject to changes in their value and their yield from a number of factors, including changes in the general bond market and changes in interest rates. Non-investment grade securities may have speculative characteristics and be subject to a greater risk of default than investment grade securities. These changes affect the value of the Fund's investments and its share prices for each class of its shares. In the OppenheimerFunds spectrum the Fund is generally considered a moderately risky income fund, more aggressive than money market funds but less aggressive than high yield funds. While the Manager tries to reduce risks by diversifying investments, by carefully researching securities before they are purchased for the portfolio, and in some cases by using hedging techniques, there is no guarantee of success in achieving the Fund's objective and your shares may be worth more or less than their original cost when you redeem them. Please refer to "Investment Objectives and Policies" starting on page 10 for a more complete discussion of the Fund's investment risks. -- How Can I Buy Shares? You can buy shares through your dealer or financial institution, or you can purchase shares directly through the Distributor by completing an Application or by using an Automatic Investment Plan under AccountLink. Please refer to "How to Buy Shares" starting on page 25 for more details. -- Will I Pay A Sales Charge To Buy Shares? The Fund has three classes of shares. All classes have the same investment portfolio but different expenses. Class A shares are offered with a front-end sales charge, starting at 4.75%, which are reduced for larger purchases. Class B and Class C shares are offered without a front-end sales charge, but may be subject to a contingent deferred sales charge if redeemed within 6 years or 12 months of purchase, respectively. There is also an annual asset-based sales charge on Class B and Class C shares. Please review "How to Buy Shares" starting on page 25 for more details, including a discussion about factors you and your financial advisor should consider in determining which class may be appropriate for you. -- How Can I Sell My Shares? Shares can be redeemed by mail or by telephone call to the Transfer Agent on any business day, or through your dealer or by using Checkwriting. Please refer to "How to Sell Shares" starting on page 38. The Fund also offers exchange privileges to other OppenheimerFunds, described in "How to Exchange Shares" on page 40. -- How Has The Fund Performed? The Fund measures its performance by quoting its yield, average annual total return and cumulative total return, which measure historical performance. Those yields and total returns can be compared to the returns (over similar periods) of other funds. Prior to July 10, 1995, the Fund's investments were limited to investment grade bonds, U.S. Government Securities, and money market instruments. Of course, other funds may have different objectives, investments, and levels of risk. The Fund's performance can also be compared to broad market indices, which we have done on page 24. Please remember that past performance does not guarantee future results. Financial Highlights The table on the following pages presents selected financial information about the Fund, including per share data and expense ratios and other data based on the Fund's average net assets. This information has been audited by Deloitte & Touche LLP, the Fund's independent auditors, whose report on the Fund's financial statements for the fiscal year ended December 31, 1994 is included in the Statement of Additional Information. Class C shares were not offered prior to July 11, 1995. Accordingly, no information on Class C shares is reflected in the table below or in the Fund's other financial statements. The information in the table for the fiscal periods prior to 1991 was audited by the Fund's previous independent auditors.
----------------------------------------------------------------------------------- Financial Highlights ----------------------------------------------------------------------------------- Class A ----------------------------------------------------------------------------------- Eleven Months Ended Year Ended December 31, Dec. 31, 1994 1993 1992 1991(3) 1990 1989 1988(2) ========================================================== ========================================================== Per Share Operating Data: Net asset value, beginning of period $11.12 $10.74 $10.80 $ 9.86 $10.29 $10.12 $10.55 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .65 .69 .75 .82 .88(4) .92 .93 Net realized and unrealized gain (loss) on investments (1.08) .40 (.05) .90 (.43) .19 (.36) ------- ------- ------- ------- ------ ------- ------- Total income (loss) from investment operations (.43) 1.09 .70 1.72 .45 1.11 .57 - ------------------------------------------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (.65) (.71) (.76) (.78) (.88) (.94) (1.00) Dividends in excess of net investment income (.03) -- -- -- -- -- -- ------- ------- ------- ------- ------ ------- ------- Total dividends to shareholders (.68) (.71) (.76) (.78) (.88) (.94) (1.00) - ------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.01 $ 11.12 $ 10.74 $ 10.80 $ 9.86 $ 10.29 $ 10.12 ======= ======= ======= ======= ====== ======= ======= ========================================================== ========================================================== Total Return, at Net Asset Value(5) (3.87)% 10.30% 6.77% 18.28% 4.74% 11.31% 4.48% ========================================================== ========================================================== Ratios/Supplemental Data: Net assets, end of period (in thousands) $96,640 $110,759 $106,290 $90,623 $87,021 $96,380 $102,293 - ------------------------------------------------------------------------------------------------------------------- Average net assets (in thousands) $102,168 $111,702 $ 98,672 $86,471 $ 90,065 $100,891 $111,264 - ------------------------------------------------------------------------------------------------------------------- Number of shares outstanding at end of period (in thousands) 9,653 9,963 9,899 8,390 8,829 9,369 10,108 - ------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 6.25% 6.20% 7.00% 8.02% 8.85% 8.85% 8.75% Expenses 1.06% 1.06% 1.10% 1.23% 1.24%(4) 1.14% 1.05% - ------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(7) 70.3% 110.1% 116.4% 97.1% 80.4% 41.3% 45.0%
------------------------------------------------------------------------ Financial Highlights (continued) ------------------------------------------------------------------------ Class A (continued) Class B -------------------------------------------------------------- -------- Year Period Ended Ended Year Ended January 31, Dec. 31, Dec. 31, 1988(2) 1987(2) 1986(2) 1985(2) 1994 1993(1) ========================================================== ============================================= Per Share Operating Data: Net asset value, beginning of period $ 11.30 $ 11.16 $ 10.91 $ 11.00 $ 11.11 $ 11.10 - ------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income 1.09 1.16 1.22 1.27 .58 .40 Net realized and unrealized gain (loss) on investments (.55) .22 .35 (.04) (1.08) .03 ------- ------- ------- ------- ------- ------- Total income (loss) from investment operations .54 1.38 1.57 1.23 (.50) .43 - ------------------------------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (1.29) (1.24) (1.32) (1.32) (.57) (.42) Dividends in excess of net investment income -- -- -- -- (.03) -- ------- ------- ------- ------- ------- ------- Total dividends to shareholders (1.29) (1.24) (1.32) (1.32) (.60) (.42) - ------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.55 $ 11.30 $ 11.16 $ 10.91 $ 10.01 $ 11.11 ======= ======= ======= ======= ======= ======= ========================================================== ============================================= Total Return, at Net Asset Value(5) N/A N/A N/A N/A (4.53)% 3.91% ========================================================== ============================================= Ratios/Supplemental Data: Net assets, end of period (in thousands) $118,568 $125,513 $121,979 $117,293 $3,451 $1,809 - ------------------------------------------------------------------------------------------------------- Average net assets (in thousands) $118,724 $123,045 $118,253 $111,235 $2,747 $ 922 - ------------------------------------------------------------------------------------------------------- Number of shares outstanding at end of period (in thousands) 11,234 11,103 10,930 10,751 345 163 - ------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 10.28% 10.45% 11.26% 12.21% 5.53% 4.80%(6) Expenses .98% .93% .97% 1.01% 1.78% 1.90%(6) - ------------------------------------------------------------------------------------------------------- Portfolio turnover rate(7) 19.5% 59.8% 36.5% 76.7% 70.3% 110.1%
Investment Objective and Policies Objective. The Fund seeks a high level of current income by investing mainly in debt instruments. Investment Policies and Strategies. Under normal market conditions, the Fund invests at least 65% of its total assets in investment grade debt securities, U.S. Government Securities, and money market instruments. Investment-grade debt securities are those rated in one of the four highest categories by Standard & Poor's Corporation, Moody's Investors Service, Inc., Fitch Investors Service, Inc. or other nationally-recognized rating organization. A description of these rating categories is included as an Appendix to the Fund's Statement of Additional Information. Debt securities (often referred to as "fixed-income securities") are used by issuers to borrow money from investors. The issuer promises to pay the investor interest at a fixed or variable rate, and to pay back the amount it borrowed (the "principal") at maturity. Some debt securities, such as zero coupon bonds (discussed below) do not pay current interest. The Fund may invest up to 35% of its total assets in debt securities rated less than investment grade or, if unrated, judged by the Manager to be of comparable quality to such lower-rated securities (collectively, "lower-grade securities"). Lower-grade securities (often called "junk bonds") are considered speculative and involve greater risk. They may be less liquid than higher-rated securities. If the Fund were forced to sell a lower-grade debt security during a period of rapidly-declining prices, it might experience significant losses especially if a substantial number of other holders decide to sell at the same time. Other risks may involve the default of the issuer or price changes in the issuer's securities due to changes in the issuer's financial strength or economic conditions. The Fund is not obligated to dispose of securities when issuers are in default or if the rating of the security is reduced. These risks are discussed in more detail in the Statement of Additional Information. The Manager anticipates that the Fund would generally invest at least 75% of its total assets in: (i) U.S. corporate bonds rated "A" or better and (ii) U.S. government and agency bonds. The Manager further anticipates that the Fund would invest an additional 15% of its total assets in non-investment grade domestic corporate bonds and 10% of its total assets in non-investment grade foreign bonds. These anticipated investment targets, including the allocation between domestic and foreign lower-grade debt securities, are subject to fluctuation and may be changed by the Manager without further notice to shareholders or amended prospectus disclosure. Under normal market conditions, the Fund's target duration will be approximately five. Duration is a measure of the anticipated rise or decline in value for a 1% change in interest rates. For example, a duration of 2 in a portfolio indicates that for every 1% rise in general interest rates, the portfolio's value would be expected to fall 2%, and vice versa. When investing the Fund's assets, the Manager considers many factors, including current developments and trends in both the economy and the financial markets. The Fund may try to hedge against losses in the value of its portfolio of securities by using hedging strategies described below. The Manager may employ special investment techniques, also described below. Additional information about the securities the Fund may invest in, the hedging strategies the Fund may employ and the special investment techniques may be found under the same headings in the Statement of Additional Information. -- Interest Rate Risks. In addition to credit risks, described below, debt securities are subject to changes in their value due to changes in prevailing interest rates. When prevailing interest rates fall, the values of already-issued debt securities generally rise. When interest rates rise, the values of already-issued debt securities generally decline. The magnitude of these fluctuations will often be greater for longer-term debt securities than shorter-term debt securities. Changes in the value of securities held by the Fund mean that the Fund's share prices can go up or down when interest rates change, because of the effect of the change on the value of the Fund's portfolio of debt securities. -- Credit Risks. Debt securities are also subject to credit risks. Credit risk relates to the ability of the issuer of a debt security to make interest or principal payments on the security as they become due. Generally, higher-yielding, lower-rated bonds (which the Fund may hold) are subject to greater credit risk than higher-rated bonds. Securities issued or guaranteed by the U.S. Government are subject to little, if any, credit risk. While the Manager may rely to some extent on credit ratings by nationally recognized rating agencies, such as Standard & Poor's or Moody's, in evaluating the credit risk of securities selected for the Fund's portfolio, it may also use its own research and analysis. However, many factors affect an issuer's ability to make timely payments, and there can be no assurance that the credit risks of a particular security will not change over time. -- Can the Fund's Investment Objective and Policies Change? The Fund has an investment objective, which is described above, as well as investment policies it follows to try to achieve its objective. Additionally, the Fund uses certain investment techniques and strategies in carrying out those investment policies. The Fund's investment policies and techniques are not "fundamental" unless this Prospectus or the Statement of Additional Information says that a particular policy is "fundamental." The Fund's investment objective is a fundamental policy. Fundamental policies are those that cannot be changed without the approval of a "majority" of the Fund's outstanding voting shares. The term "majority" is defined in the Investment Company Act to be a particular percentage of outstanding voting shares (and this term is explained in the Statement of Additional Information). The Fund's Board of Trustees may change non-fundamental policies without shareholder approval, although significant changes will be described in amendments to this Prospectus. -- U.S. Government Securities. Certain U.S. Government Securities, including U.S. Treasury bills, notes and bonds, and mortgage participation certificates guaranteed by Government National Mortgage Association ("Ginnie Mae") are supported by the full faith and credit of the U.S. government, which in general terms means that the U.S. Treasury stands behind the obligation to pay principal and interest. Ginnie Mae certificates are one type of mortgage-related U.S. Government Security the Fund invests in. Other mortgage-related U.S. Government Securities the Fund invests in that are issued or guaranteed by federal agencies or government-sponsored entities are not supported by the full faith and credit of the U.S. government. Those securities include obligations supported by the right of the issuer to borrow from the U.S. Treasury, such as obligations of Federal Home Loan Mortgage Corporation ("Freddie Mac"), obligations supported only by the credit of the instrumentality, such as Federal National Mortgage Association ("Fannie Mae") and obligations supported by the discretionary authority of the U.S. Government to repurchase certain obligations of U.S. Government agencies or instrumentalities such as the Federal Land Banks and the Federal Home Loan Banks. Other U.S. Government Securities the Fund invests in are collateralized mortgage obligations ("CMOs"). The value of U.S. Government Securities will fluctuate depending on prevailing interest rates. Because the yields on U.S. Government Securities are generally lower than on corporate debt securities, when the Fund holds U.S. Government Securities it may attempt to increase the income it can earn from them by writing covered call options against them, when market conditions are appropriate. Writing covered calls is explained below, under "Other Investment Techniques and Strategies." -- Short-Term Debt Securities. The high quality, short-term money market instruments in which the Fund may invest include U.S. Treasury and agency obligations; commercial paper (short-term, unsecured, negotiable promissory notes of a domestic or foreign company); short- term obligations of corporate issuers; bank participation certificates; and certificates of deposit and bankers' acceptances (time drafts drawn on commercial banks usually in connection with international transactions) of banks and savings and loan associations. -- Mortgage-Backed Securities and CMOs. Certain mortgage-backed securities, whether issued by the U.S. government or by private issuers, "pass-through" to investors the interest and principal payments generated by a pool of mortgages assembled for sale by government agencies. Pass-through mortgage-backed securities entail the risk that principal may be repaid at any time because of prepayments on the underlying mortgages. That may result in greater price and yield volatility than traditional fixed-income securities that have a fixed maturity and interest rate. The Fund may also invest in collateralized mortgage-backed obligations (referred to as "CMOs"), which generally are obligations fully collateralized by a portfolio of mortgages or mortgage-related securities. Payment of the interest and principal generated by the pool of mortgages is passed through to the holders as the payments are received. CMOs are issued with a variety of classes or series which have different maturities. Certain CMOs may be more volatile and less liquid than other types of mortgage-related securities, because of the possibility of the prepayment of principal due to prepayments on the underlying mortgage loans. The Fund may also invest in CMOs that are "stripped." That means that the security is divided into two parts, one of which receives some or all of the principal payments (and is known as a "P/O") and the other which receives some or all of the interest (and is known as an "I/O"). P/Os and I/Os are generally referred to as "derivative investments," discussed further below. The yield to maturity on the class that receives only interest is extremely sensitive to the rate of payment of the principal on the underlying mortgages. Principal prepayments increase that sensitivity. Stripped securities that pay "interest only" are therefore subject to greater price volatility when interest rates change, and they have the additional risk that if the underlying mortgages are prepaid, the Fund will lose the anticipated cash flow from the interest on the prepaid mortgages. That risk is increased when general interest rates fall, and in times of rapidly falling interest rates, the Fund might receive back less than its investment. The value of "principal only" securities generally increases as interest rates decline and prepayment rates rise. The price of these securities is typically more volatile than that of coupon-bearing bonds of the same maturity. Private-issuer stripped securities are generally purchased and sold by institutional investors through investment banking firms. At present, established trading markets have not yet developed for these securities. Therefore, most private-issuer stripped securities may be deemed "illiquid." If the Fund holds illiquid stripped securities, the amount it can hold will be subject to the Fund's investment policy limiting investments in illiquid securities to 10% of the Fund's net assets. The Fund may also enter into "forward roll" transactions with mortgage-backed securities. The Fund sells mortgage-backed securities it holds to banks or other buyers and simultaneously agrees to repurchase a similar security from that party at a later date at an agreed-upon price. Forward rolls are considered to be a borrowing. The Fund is required to place liquid assets in a segregated account with its custodian bank in an amount equal to its obligation under the forward roll. The main risk of this investment strategy is risk of default by the counterparty. -- Asset-Backed Securities. The Fund may invest in "asset-backed" securities. These represent interests in pools of consumer loans and other trade receivables, similar to mortgage-backed securities. They are issued by trusts and "special purpose corporations." They are backed by a pool of assets, such as credit card or auto loan receivables, which are the obligations of a number of different parties. The income from the underlying pool is passed through to holders, such as the Fund. These securities may be supported by a credit enhancement, such as a letter of credit, a guarantee or a preference right. However, the extent of the credit enhancement may be different for different securities and generally applies to only a fraction of the security's value. These securities present special risks. For example, in the case of credit card receivables, the issuer of the security may have no security interest in the related collateral. - Zero Coupon Securities. These securities, which may be issued by the U.S. government, its agencies or instrumentalities or by private issuers, are purchased at a substantial discount from their face value. They are subject to greater fluctuations in market value as interest rates change than debt securities that pay interest periodically. Interest accrues on zero coupon bonds even though cash is not actually received. -- Securities of Foreign Governments and Companies. The Fund may invest in debt securities issued or guaranteed by foreign companies, and debt securities of foreign governments or their agencies. These foreign securities may include debt obligations such as government bonds, debentures issued by companies, as well as notes. Some of these debt securities may have variable interest rates or "floating" interest rates that change in different market conditions. Those changes will affect the income the Fund receives. These securities are described in more detail in the Statement of Additional Information. The Fund is not restricted in the amount of its assets it may invest in foreign countries or in which countries. However, if the Fund's assets are held abroad, the countries in which they are held and the sub-custodians holding them must in most cases be approved by the Trust's Board of Trustees. Foreign securities have special risks. There are certain risks of holding foreign securities. The first is the risk of changes in foreign currency values. Because the Fund may purchase securities denominated in foreign currencies, a change in the value of a foreign currency against the U.S. dollar will result in a change in the U.S. dollar value of the Fund's securities denominated in that currency. The currency rate change will also affect its income available for distribution. Although the Fund's investment income from foreign securities may be received in foreign currencies, the Fund will be required to distribute its income in U.S. dollars. Therefore, the Fund will absorb the cost of currency fluctuations. If the Fund suffers losses on foreign currencies after it has distributed its income during the year, the Fund may find that it has distributed more income than was available from actual investment income. That could result in a return of capital to shareholders. There are other risks of foreign investing. For example, foreign issuers are not required to use generally-accepted accounting principles. If foreign securities are not registered for sale in the U.S. under U.S. securities laws, the issuer does not have to comply with the disclosure requirements of our laws, which are generally more stringent than foreign laws. The values of foreign securities investments will be affected by other factors, including exchange control regulations or currency blockage and possible expropriation or nationalization of assets. There may also be changes in governmental administration or economic or monetary policy in the U.S. or abroad that can affect foreign investing. In addition, it is generally more difficult to obtain court judgments outside the United States if the Fund has to sue a foreign broker or issuer. Additional costs may be incurred because foreign broker commissions are generally higher than U.S. rates, and there are additional custodial costs associated with holding securities abroad. -- Portfolio Turnover. A change in the securities held by the Fund is known as "portfolio turnover." While it is a policy of the Fund generally not to engage in trading for short-term gains, portfolio changes will be made without regard to the length of time a security has been held or whether a sale would result in a profit or loss, if in the Manager's judgment, such transactions are advisable in light of the circumstances of a particular company or within a particular industry or in light of market, economic or financial conditions. High portfolio turnover may affect the ability of the Fund to qualify as a "regulated investment company" under the Internal Revenue Code for tax deductions for dividends and capital gains distributions the Fund pays to shareholders. Portfolio turnover affects brokerage costs, dealer markups and other transaction costs, and results in the Fund's realization of capital gains or losses for tax purposes. See "Financial Highlights" above, "Dividends, Capital Gains and Taxes" below and "Brokerage Policies of the Fund" in the Statement of Additional Information. Other Investment Techniques and Strategies. The Fund may also use the investment techniques and strategies described below. These techniques involve certain risks. The Statement of Additional Information contains more information about these practices, including limitations on their use that are designed to reduce some of the risks. -- Hedging. The Fund may purchase and sell certain kinds of futures contracts, put and call options, forward contracts, and options on futures, broadly-based stock or bond indices and foreign currency, or enter into interest rate swap agreements. These are all referred to as "hedging instruments." The Fund does not use hedging instruments for speculative purposes, and has limits on the use of them, described below. The Fund may buy and sell options, futures and forward contracts for a number of purposes. It may do so to try to manage its exposure to the possibility that the prices of its portfolio securities may decline, or to establish a position in the securities market as a temporary substitute for purchasing individual securities. It may do so to try to manage its exposure to changing interest rates. Some of these strategies, such as selling futures, buying puts and writing covered calls, hedge the Fund's portfolio against price fluctuations. Other hedging strategies, such as buying futures and call options and writing puts, tend to increase the Fund's exposure to the securities market. Forward contacts are used to try to manage foreign currency risks on the Fund's foreign investments. Foreign currency options are used to try to protect against declines in the dollar value of foreign securities the Fund owns, or to protect against an increase in the dollar cost of buying foreign securities. Writing covered call options may also provide income to the Fund for liquidity purposes, defensive reasons, or to raise cash to distribute to shareholders. -Futures. The Fund may buy and sell futures contracts that relate to (1) foreign currencies (these are Forward Contracts), (2) financial indices, such as U.S. or foreign government securities indices, corporate debt securities indices or equity securities indices (these are referred to as Financial Futures), and (3) interest rates (these are referred to as Interest Rate Futures). These types of Futures are described in "Hedging" in the Statement of Additional Information. -Put and Call Options. The Fund may buy and sell certain kinds of put options (puts) and call options (calls). The Fund may buy calls on securities, indices, foreign currencies, or Futures, or to terminate its obligation on a call the Fund previously wrote. The Fund may write (that is, sell) call options on securities, indices, foreign currencies or Futures, but only if they are "covered." That means the Fund must own the security subject to the call while the call is outstanding or segregate appropriate liquid assets. Calls on Futures must be covered by securities or other liquid assets the Fund owns and segregates to enable it to satisfy its obligations if the call is exercised. When the Fund writes a call, it receives cash (called a premium). The call gives the buyer the ability to buy the investment on which the call was written from the Fund at the call price during the period in which the call may be exercised. If the value of the investment does not rise above the call price, it is likely that the call will lapse without being exercised, while the Fund keeps the cash premium (and the investment). Up to 50% of the Fund's total assets may be subject to calls. The Fund may purchase put options. Buying a put on an investment gives the Fund the right to sell the investment at a set price to a seller of a put on that investment. The Fund may buy puts that relate to securities, indices, Futures, or foreign currencies. The Fund may buy a put on security whether or not the Fund owns the particular security in its portfolio. The Fund may sell a put on securities, indices, Futures, or foreign currencies, but only if the puts are covered by segregated liquid assets. The Fund will not write puts if more than 50% of the Fund's net assets would have to be segregated to cover put obligations. A call or put may be purchased 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. The Fund may buy and sell put and call options that are traded on U.S. or foreign securities or commodity exchanges or are traded in the over-the-counter markets. In the case of foreign currency options, they may be quoted by major recognized dealers in those options. Options traded in the over-the-counter market may be "illiquid," and therefore may be subject to the Fund's restrictions on illiquid investments. -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 try to "lock in" the U.S. dollar price of a security denominated in a foreign currency that the Fund has purchased or sold, or to protect against possible losses from changes in the relative value of the U.S. dollar and a foreign 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. -Interest Rate Swaps. In an interest rate swap, the Fund and another party exchange their right to receive, or their obligation to pay, interest on a security. For example, they may swap a right to receive floating rate interest payments for fixed rate payments. The Fund enters into swaps only on securities it owns. The Fund may not enter into swaps with respect to more than 25% of its total assets. The Fund will segregate liquid assets (such as cash or U.S. Government securities) to cover any amounts it could owe under swaps that exceed the amounts it is entitled to receive, and it will adjust that amount daily, as needed. -Hedging instruments can be volatile investments and may involve special risks. The use of hedging instruments requires special skills and knowledge of investment techniques that are different from 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 or if it could not close out a position because of an illiquid market for the future or option. Options trading involves the payment of premiums and has special tax effects on the Fund. There are also special risks in particular hedging strategies. For example, 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 and will not be able to realize any profit if the investment has increased in value above the call price. In writing puts, there is a risk that the Fund may be required to buy the underlying security at a disadvantageous price. The use of Forward Contracts may reduce the gain that would otherwise result from a change in the relationship between the U.S. dollar and a foreign currency. Interest rate swaps are subject to the risk that the other party will fail to meet its obligations (or that the underlying issuer will fail to pay on time), as well as interest rate risks. The Fund could be obligated to pay more under its swap agreements than it receives under them, as a result of interest rate changes. These risks are described in greater detail in the Statement of Additional Information. -- Short Sales "Against-the-Box". The Fund may not sell securities short except in collateralized transactions referred to as short sales "against-the-box. No more than 15% of the Fund's net assets will be held as collateral for such short sales at any one time. -- Non-Concentration. The Fund shall not invest 25% or more of its total assets in any industry; however, for the purposes of this restriction, obligations of the U.S. government, its agencies or instrumentalities are not considered to be part of any single industry. -- When-Issued and Delayed Delivery Transactions. The Fund may purchase securities on a "when-issued" basis and may purchase or sell such securities on a "delayed delivery" basis. These terms refer to securities that have been created and for which a market exists, but which are not available for immediate delivery or are to be delivered at a later date. There may be a risk of loss to the Fund if the value of the security changes prior to the settlement date. -- Repurchase Agreements. The Fund may enter into repurchase agreements. In a repurchase transaction, the Fund buys a security and simultaneously sells it to the vendor for delivery at a future date. Repurchase agreements must be fully collateralized. However, if the vendor fails to pay the resale price on the delivery date, the Fund may incur costs in disposing of the collateral and may experience losses if there is any delay in its ability to do so. The Fund will not enter into a repurchase agreement that will cause more than 10% of the Fund's net assets to be subject to repurchase agreements maturing in more than seven days. There is no limit on the amount of the Fund's net assets that may be subject to repurchase agreements of seven days or less. See the Statement of Additional Information for more details. -- Illiquid and Restricted Securities. Under the policies established by the Fund's Board of Trustees, the Manager determines the liquidity of certain of the Fund's investments. Investments may be illiquid because of the absence of an active trading market, making it difficult to value them or dispose of them promptly at an acceptable price. A restricted security is one that has a contractual restriction on its resale or which cannot be sold publicly until it is registered under the Securities Act of 1933. The Fund will not invest more than 10% of its net assets in illiquid or restricted securities (that limit may increase to 15% if certain state laws are changed or the Fund's shares are no longer sold in those states). The Fund's percentage limitation on these investments does not apply to certain restricted securities that are eligible for resale to qualified institutional purchasers. -- Loans of Portfolio Securities. The Fund may lend its portfolio securities to brokers, dealers and other financial institutions. The Fund must receive collateral for a loan. These loans are limited to not more than 25% of the value of the Fund's total assets and are subject to other conditions described in the Statement of Additional Information. The Fund presently does not intend to lend its portfolio securities, but if it does, the value of securities loaned is not expected to exceed 5% of the value of the Fund's total assets in the coming year. -- Derivative Investments. In general, a "derivative investment" is a specially designed investment whose performance is linked to the performance of another investment or security, such as an option, future, index, currency or commodity. The Fund may not purchase or sell physical commodities; however, the Fund may purchase and sell foreign currency in hedging transactions. This shall not prevent the Fund from buying or selling options and futures contracts or from investing in securities or other instruments backed by physical commodities. Derivative investments used by the Fund are used in some cases for hedging purposes and in other cases to seek income. In the broadest sense, exchange-traded options and futures contracts (discussed in "Hedging," above) may be considered "derivative investments." The Fund may invest in different types of derivatives. "Index- linked" or "commodity-linked" notes are debt securities of companies that call for interest payments and/or payment on the maturity of the note in different terms than the typical note where the borrower agrees to pay a fixed sum on the maturity of the note. Principal and/or interest payments on an index-linked note depend on the performance of one or more market indices, such as the S & P 500 Index or a weighted index of commodity futures, such as crude oil, gasoline and natural gas. The Fund may invest in "debt exchangeable for common stock" of an issuer or "equity-linked" debt securities of an issuer. At maturity, the principal amount of the debt security is exchanged for common stock of the issuer or is payable in an amount based on the issuer's common stock price at the time of maturity. In either case there is a risk that the amount payable at maturity will be less than the expected principal amount of the debt. The Fund may also invest in currency-indexed securities. Typically, these are short-term or intermediate-term debt securities having a value at maturity, and/or an interest rate, determined by reference to one or more foreign currencies. The currency-indexed securities purchased by the Fund may make payments based on a formula. The payment of principal or periodic interest may be calculated as a multiple of the movement of one currency against another currency, or against an index. These investments may entail increased risk to principal and increased price volatility. There are special risks in investing in derivative investments. The company issuing the instrument may fail to pay the amount due on the maturity of the instrument. Also, the underlying investment or security might not perform the way the Manager expected it to perform. Markets, underlying securities and indices may move in a direction not anticipated by the Manager. Performance of derivative investments may also be influenced by interest rate and stock market changes in the U.S. and abroad. All of this can mean that the Fund will realize less principal or income from the investment than expected. Certain derivative investments held by the Fund may be illiquid. Please refer to "Illiquid and Restricted Securities." Other Investment Restrictions. The Fund has other investment restrictions which are fundamental policies. Under these fundamental policies, the Fund cannot do any of the following: (1) make short sales except for sales "against the box"; (2) borrow money or enter into reverse repurchase agreements, except that the Fund may borrow money from banks and enter into reverse repurchase agreements as a temporary measure for extraordinary or emergency purposes (but not for the purpose of making investments), provided that the aggregate amount of all such borrowings and commitments under such agreements does not, at the time of borrowing or of entering into such an agreement, exceed 10% of the Fund's total assets taken at current market value; the Fund will not purchase additional portfolio securities at any time that the aggregate amount of its borrowings and its commitments under reverse repurchase agreements exceeds 5% of the Fund's net assets (for purposes of this restriction, entering into portfolio lending agreements shall not be deemed to constitute borrowing money); (3) concentrate its investments in any particular industry except that it may invest up to 25% of the value of its total assets in the securities of issuers in any one industry (of the utility companies, gas, electric, water and telephone will each be considered as a separate industry); and (4) buy securities issued or guaranteed by any one issuer (except the U.S. Government or any of its agencies or instrumentalities) if with respect to 75% of its total assets (a) more than 5% of the Fund's total assets would be invested in the securities of that issuer, or (b) the Fund would own more than 10% of that issuer's voting securities. All of the percentage restrictions described above and elsewhere in this Prospectus and the Statement of Additional Information apply only at the time the Fund purchases a security, and the Fund need not dispose of a security merely because the size of the Fund's assets has changed or the security has increased in value relative to the size of the Fund. There are other fundamental policies discussed in the Statement of Additional Information. How the Fund is Managed Organization and History. Oppenheimer Integrity Funds (the "Trust") was organized in 1982 as a multi-series Massachusetts business trust and the Fund is a series of that Trust. That Trust is an open-end, diversified management investment company, with an unlimited number of authorized shares of beneficial interest. The Fund is one of two series of the Trust. Each of the two series of the Trust issues its own shares, has its own investment portfolio, and its own assets and liabilities. 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. "Trustees and Officers of the Fund" in the Statement of Additional Information names the Trustees and provides more information about them and the officers of the Fund. Although the Fund is not required by law to hold annual meetings, it may hold shareholder meetings from time to time on important matters, and shareholders have the right to call a meeting to remove a Trustee or to take other action described in the Trust's Declaration of Trust. The Board of Trustees has the power, without shareholder approval, to divide unissued shares of the Fund into two or more classes. The Board has done so, and the Fund currently has three classes of shares, Class A, Class B and Class C. Each class invests in the same investment portfolio. Each class has its own dividends and distributions, and pays certain expenses which may be different for the different classes. Each class may have a different net asset value. Each share has one vote at shareholder meetings, with fractional shares voting proportionally. Only shares of a particular class vote together on matters that affect that class alone. Shares are freely transferrable. The Manager and Its Affiliates. Since March 28, 1991, the Fund has been managed by the Manager, which handles its day-to-day business. The Manager carries out its duties, subject to the policies established by the Board of Trustees, under an investment advisory agreement which states the Manager's responsibilities and its fees. The Agreement sets forth the fees paid by the Fund to the Manager and describes the expenses that the Fund is responsible to pay to conduct its business. Prior to July 10, 1995, the Manager had contracted with Massachusetts Mutual Life Insurance Company ("MassMutual") to act as the Fund's Sub- Adviser. The Sub-Adviser was responsible for choosing the Fund's investments. The Manager, not the Fund, paid the Sub-Adviser. Effective July 10, 1995, the Sub-Advisory Agreement between the Manager and MassMutual terminated and the Manager is responsible for selecting the Fund's investments as well as for its day to day business, pursuant to an investment advisory agreement dated July 10, 1995. The Manager has operated as an investment adviser since 1959. The Manager (including a subsidiary) currently manages investment companies, including other OppenheimerFunds, with assets of more than $30 billion as of March 31, 1995, and with more than 2.4 million shareholder accounts. The Manager is owned by Oppenheimer Acquisition Corp., a holding company that is owned in part by senior officers of the Manager and controlled by Massachusetts Mutual Life Insurance Company (the "Manager"). -- Portfolio Manager. David P. Negri and David A. Rosenberg are Vice Presidents and Portfolio Managers of the Fund. Since July 10, 1995, they have been the individuals principally responsible for the day-to-day management of the Fund's portfolio. Mr. Negri and Mr. Rosenberg is each a Vice President of the Manager. They each serve as officers and portfolio managers of other OppenheimerFunds. For more information about the Fund's other officers and Trustees, see "Trustees and Officers of the Fund" in the Statement of Additional Information. -- Fees and Expenses. Under the investment advisory agreement dated July 10, 1995 with the Manager, the Fund pays the Manager the following annual fees, which decline on additional assets as the Fund grows: 0.75% of the first $200 million of the Fund's average annual net assets, 0.72% of the next $200 million, 0.69% of the next $200 million, 0.66% of the next $200 million, 0.60% of the next $200 million, and 0.50% of net assets in excess of $1 billion. The Fund's management fee for its last fiscal year, restated to reflect the new investment advisory agreement, was 0.75% of average annual net assets for both its Class A and Class B shares, as set forth in the "Annual Fund Operating Expenses" chart on page 4. Class C shares were not publicly offered prior to July 11, 1995. The Fund pays expenses related to its daily operations, such as custodian fees, Trustees' fees, transfer agency fees, legal and auditing costs. Those expenses are paid out of the Fund's assets and are not paid directly by shareholders. However, those expenses reduce the net asset value of shares, and therefore are indirectly borne by shareholders through their investment. More information about the investment advisory agreement and the other expenses paid by the Fund is contained in the Statement of Additional Information. There is also information about the Fund's brokerage policies and practices in "Brokerage Policies of the Fund" in the Statement of Additional Information. That section discusses how brokers and dealers are selected for the Fund's portfolio transactions. Because the Fund purchases most of its portfolio securities directly from the sellers and not through brokers, it incurs relatively little expense for brokerage. When deciding which brokers to use, the Manager is permitted by the advisory agreement to consider whether brokers have sold shares of the Fund or any other funds for which the Manager or its affiliates serve as investment adviser. -- The Distributor. The Fund's shares are sold through dealers and brokers that have a sales agreement with Oppenheimer Funds Distributor, Inc., a subsidiary of the Manager that acts as the Fund's Distributor. The Distributor also distributes the shares of other mutual funds managed by the Manager (the "OppenheimerFunds") and is sub-distributor for funds managed by a subsidiary of the Manager. -- The Transfer Agent. The Fund's transfer agent is Oppenheimer Shareholder Services, a division of the Manager, which acts as the shareholder servicing agent for the Fund and the other OppenheimerFunds on an "at-cost" basis. Shareholders should direct inquiries about their accounts to the Transfer Agent at the address and toll-free numbers shown below in this Prospectus and on the back cover. Performance of the Fund Explanation of Performance Terminology. The Fund uses the terms "cumulative total return," "average annual total return" and "yield" to illustrate its performance. The performance of each class of shares is shown separately, because the performance of each class of shares will usually be different, as a result of the different kinds of expenses each class bears. This performance information may be useful to help you see how well your investment has done and to compare it to other funds or market indices, as we have done below. It is important to understand that the Fund's total return and yield represent past performance and should not be considered to be predictions of future returns or performance. This performance data is described below, but more detailed information about how total returns and yields are calculated is contained in the Statement of Additional Information, which also contains information about other ways to measure and compare the Fund's performance. The Fund's investment performance will vary over time, depending on market conditions, the composition of the portfolio, expenses and which class of shares you purchase. -- Total Returns. There are different types of total returns used to measure the Fund's performance. Total return is the change in value of a hypothetical investment in the Fund over a given period, assuming that all dividends and capital gains distributions are reinvested in additional shares. The cumulative total return measures the change in value over the entire period (for example, ten years). An average annual total return shows the average rate of return for each year in a period that would produce the cumulative total return over the entire period. However, average annual total returns do not show the Fund's actual year-by-year performance. When total returns are quoted for Class A shares, they normally include the payment of the maximum initial sales charge. When total returns are shown for Class B and Class C shares, they include the applicable contingent deferred sales charge. Total returns may also be quoted "at net asset value," without including the sales charge, and those returns would be reduced if sales charges were deducted. -- Yield. Each class of shares calculates its yield by dividing the annualized net investment income per share on the portfolio during a 30-day period by the maximum offering price on the last day of the period. The yield of each class will differ because of the different expenses of each class of shares. The yield data represents a hypothetical investment return on the portfolio, and does not measure an investment return based on dividends actually paid to shareholders. To show that return, a dividend yield may be calculated. Dividend yield is calculated by dividing the dividends of a class derived from net investment income during a stated period by the maximum offering price on the last day of the period. Yields and dividend yields for Class A shares reflect the deduction of the maximum initial sales charge, but may also be shown based on the Fund's net asset value per share. Yields for Class B and Class C shares do not reflect the deduction of the contingent deferred sales charge. How Has the Fund Performed? Below is a discussion by the Manager of the Fund's performance during its last fiscal year ended December 31, 1994, followed by a graphical comparison of the Fund's performance to an appropriate broad-based market index. -- Management's Discussion of Performance. In 1994, the Federal Reserve aggressively moved to raise short term interest rates in an effort to control inflation. As interest rates rose, the bond market declined. In response to the rising interest rates in the U.S., the Manager reduced the Fund's exposure to long-term U.S. Government Treasury securities whose performance tends to lag investment-grade corporate bonds in the mid-to-late stages of economic expansion. The Manager moved to position the Fund's assets somewhat more conservatively by increasing its holdings in asset-backed issues and mortgage-backed bonds which generally are more stable and predictable in periods of rising interest rates and which the Manager viewed as offering high credit quality and attractive yields. While waiting for the bond market to stabilize, the Manager increased the Fund's holdings in short-term money market securities. -- Comparing the Fund's Performance to the Market. The chart below shows the performance of a hypothetical $10,000 investment in each class of shares of the Fund held until December 31, 1994; in the case of Class A shares, from the inception of the class on April 15, 1988, and in the case of Class B shares, from the inception of the class on May 1, 1993. Class C shares were not offered during the fiscal year ended December 31, 1994, and thus no performance information about Class C shares is given. The performance of each class of the Fund's shares is compared to the performance of the Lehman Brothers Corporate Bond Index, a broad- based, unmanaged index of publicly-issued nonconvertible investment grade corporate debt of U.S. issuers, widely recognized as a measure of the U.S. fixed-rate corporate bond market. Prior to July 10, 1995, the Fund's investments were limited to investment grade bonds, U.S. Government Securities, and money market instruments. The Lehman Brothers Corporate Bond Index includes a factor for the reinvestment of interest, but does not reflect expenses or taxes. Index performance reflects the reinvestment of dividends but does not consider the effect of capital gains or transaction costs, and none of the data below shows the effect of taxes. Also, the Fund's performance reflects the effect of Fund business and operating expenses. While index comparisons may be useful to provide a benchmark for the Fund's performance, it must be noted that the Fund's investments are not limited to the securities in any one index. Moreover, the index performance data does not reflect any assessment of the risk of the investments included in the index. Class A Shares Comparison of Change in Value of $10,000 Hypothetical Investments in: Oppenheimer Investment Grade Bond Fund (Class A) and Lehman Brothers Corporate Bond Index [graph] Average Annual Total Return of Class A Shares of the Fund at 12/31/941 1 Year 5 Years Life - --------------------------------------------------------------------- - -8.43% 5.97% 6.79% Class B Shares Comparison of Change in Value of $10,000 Hypothetical Investments in: Oppenheimer Investment Grade Bond Fund (Class B) and Lehman Brothers Corporate Bond Index [graph] Average Annual Total Return of Class B Shares of the Fund at 12/31/942 1 Year Life - -------------------------------------------------------------------- - -9.03% -2.67% 1The inception date of the Fund (Class A shares) was 4/15/88. The average annual total returns and the ending account value in the graph reflect reinvestment of all dividends and capital gains distributions and are shown net of the applicable 4.75% maximum initial sales charge. 2Class B shares of the Fund were first publicly offered on 5/1/93. The average annual total returns reflect reinvestment of all dividends and capital gains distributions are shown net of the applicable 5% and 4% contingent deferred sales charges, respectively, for the 1-year period and life-of-the-class. The ending account value in the graph is net of the applicable 4% contingent deferred sales charge. Past performance is not predictive of future performance. Graphs are not drawn to same scale. A B O U T Y O U R A C C O U N T How to Buy Shares Classes of Shares. The Fund offers investors three different classes of shares. The different classes of shares represent investments in the same portfolio of securities but are subject to different expenses and will likely have different share prices. -- Class A Shares. When you buy Class A shares, you pay an initial sales charge on investments up to $1 million. However, for purchase under the OppenheimerFunds - prototype 401(k) plans, you pay an initial sales charge on investments up to $500,000. If you purchase Class A shares as part of an investment of at least $1 million ($500,000 for purchases under the OppenheimerFunds - prototype 401(k) plans) in Class A shares of one or more OppenheimerFunds, you will not pay an initial sales charge but if you sell any of those shares within 18 months after your purchase, you may pay a contingent deferred sales charge, which will vary depending on the amount you invested. Sales charges are described below in "Class A Shares". -- Class B Shares. When you buy Class B shares, you pay no sales charge at the time of purchase, but if you sell your shares within six years, you will normally pay a contingent deferred sales charge that varies depending on how long you own your shares. It is described below in "Class B Shares". -- Class C Shares. When you buy Class C shares, you pay no sales charge at the time of purchase, but if you sell your shares within 12 months of buying them, you will normally pay a contingent deferred sales charge of 1%. Please refer to "Class C Shares," below. Which Class of Shares Should You Choose? Once you decide that the Fund is an appropriate investment for you, deciding which class of shares is best suited to your needs depends on a number of factors which you should discuss with your financial advisor. The Fund's operating costs that apply to a class of shares and the effect of the different types of sales charges on your investment will vary your investment results over time. The most important factors are how much you plan to invest, how long you plan to hold your investment, and whether you anticipate exchanging your shares for shares of other OppenheimerFunds (not all of which offer Class B or Class C shares). If your goals and objectives change over time and you plan to purchase additional shares, you should re-evaluate those factors to see if you should consider another class of shares. In the following discussion, to help provide you and your financial advisor with a framework in which to choose a class, we have made some assumptions using a hypothetical investment in the Fund. We used the sales charge rates that apply to each class, and considered the effect of the asset-based sales charges on Class B and Class C expenses (which will affect your investment return). For the sake of comparison, we have assumed that there is a 10% rate of appreciation in your investment each year. Of course, the actual performance of your investment cannot be predicted and will vary, based on the Fund's actual investment returns, and the operating expenses borne by each class of shares, and which class of shares you invest in. The factors discussed below are not intended to be investment advice, guidelines or recommendations, because each investor's financial considerations are different. The assumptions we have made in assessing the factors to consider in purchasing a particular class of shares assume that you will purchase only one class of shares, and not a combination of shares of different classes. -- How Long Do You Expect To Hold Your Investment? While future financial needs cannot be predicted with certainty, knowing how long you expect to hold your investment will assist you in selecting the appropriate class of shares. The effect of the sales charge over time, using our assumptions, will generally depend on the amount invested. The effect of class-based expenses will also depend on how much you invest. Investing for the Short Term. If you have a short term investment horizon (that is, you plan to hold your shares less than six years), you should probably consider purchasing Class C shares rather than Class A or Class B shares. This is because there is no initial sales charge on Class C shares, and the contingent deferred sales charge does not apply to amounts you sell after holding them one year. However, if you plan to invest more than $250,000 for a period of less than six years, Class C shares might not be as advantageous as Class A shares. This is because the annual asset-based sales charge on Class C shares (and the contingent deferred sales charge that applies if you redeem Class C shares within one year of purchase) might have a greater economic impact on your account during that period than the reduced initial Class A sales charge rate available for larger purchases of Class A shares. And for most Class B investors who invest $500,000 or more, and for most Class C investors who invest $1 million or more, in most cases Class A shares will be the most advantageous choice, no matter how long you intend to hold your shares. For that reason, the Distributor normally will not accept purchase orders of $500,000 or more of Class B shares or purchase orders of $1 million or more of Class C shares from a single investor. Investing for the Longer Term. If you are investing for the longer term, for example, for retirement, and do not expect to need access to your money for six years or more, Class A shares will likely be more advantageous than Class B or Class C shares. This is because of the effect of expected lower expenses for Class A shares and the reduced initial sales charges available for larger investments in Class A shares under the Fund's Right of Accumulation. Class B shares may be appropriate for smaller investments held for the longer term because there is no initial sales charge on Class B shares, and Class B shares held six years following their purchase convert into Class A shares. Of course all of these examples are based on approximations of the effect of current sales charges and expenses on a hypothetical investment over time, using the assumed annual performance return stated above, and you should analyze your options carefully. -- Are There Differences in Account Features That Matter to You? Because some account features may not be available to Class B and Class C shareholders, you should carefully review how you plan to use your investment account before deciding which class of shares to buy. For example, share certificates are not available for Class B or Class C shares and if you are considering using your shares as collateral for a loan, that may be a factor to consider. Additionally, the dividends payable to Class B and Class C shareholders will be reduced by the additional expenses borne solely by the respective class, such as the asset-based sales charge, as described below and in the Statement of Additional Information. -- How Does It Affect Payments To My Broker? A salesperson, such as a broker, or any other person who is entitled to receive compensation for selling Fund shares may receive different compensation for selling one class than another class. It is important that investors understand that the purpose of the Class B and Class C contingent deferred sales charge and asset-based sales charge for Class B and Class C shares is the same as the purpose of the front-end sales charge on sales of Class A shares: to compensate the Distributor for commissions it pays to dealers and financial institutions for selling shares. -- How Much Must You Invest? You can open a Fund account with a minimum initial investment of $1,000 and make additional investments at any time with as little as $25. There are reduced minimum investments under special investment plans: -- With Asset Builder Plans, Automatic Exchange Plans, 403(b)(7) custodial plans and military allotment plans, you can make initial and subsequent investments of as little as $25; purchases of at least $25 can be made by telephone through AccountLink. -- Under pension and profit-sharing plans and Individual Retirement Accounts (IRAs), you can make an initial investment of as little as $250 (if your IRA is established under an Asset Builder Plan, the $25 minimum applies), and subsequent investments may be as little as $25. -- There is no minimum investment requirement if you are buying shares by reinvesting dividends from the Fund or other OppenheimerFunds (a list of them appears in the Statement of Additional Information, or you can ask your dealer or call the Transfer Agent), or by reinvesting distributions from unit investment trusts that have made arrangements with the Distributor. -- How Are Shares Purchased? You can buy shares several ways -- through any dealer, broker or financial institution that has a sales agreement with the Distributor, or directly through the Distributor, or automatically from your bank account through an Asset Builder Plan under the OppenheimerFunds AccountLink service. When you buy shares, be sure to specify Class A, Class B or Class C shares. If you do not choose, your investment will be made in Class A shares. -- Buying Shares Through Your Dealer. Your dealer will place your order with the Distributor on your behalf. -- Buying Shares Through the Distributor. Complete an OppenheimerFunds New Account Application and return it with a check payable to "Oppenheimer Funds Distributor, Inc." Mail it to P.O. Box 5270, Denver, Colorado 80217. If you don't list a dealer on the application, the Distributor will act as your agent in buying the shares. However, we recommend that you discuss your investment first with a financial advisor, to be sure it is appropriate for you. -- Buying Shares Through OppenheimerFunds AccountLink. You can use AccountLink to link your Fund account with an account at a U.S. bank or other financial institution that is an Automated Clearing House (ACH) member. You can then transmit funds electronically to purchase shares, or to have the Transfer Agent send redemption proceeds, or transmit dividends and distributions to your bank account. Shares are purchased for your account by AccountLink on the regular business day the Distributor is instructed by you to initiate the ACH transfer to buy shares. You can provide those instructions automatically, under an Asset Builder Plan, described below, or by telephone instructions using OppenheimerFunds PhoneLink, also described below. You should request AccountLink privileges on the application or dealer settlement instructions used to establish your account. Please refer to "AccountLink," below for more details. -- Asset Builder Plans. You may purchase shares of the Fund (and up to four other OppenheimerFunds) automatically each month from your account at a bank or other financial institution under an Asset Builder Plan with AccountLink. Details are on the Application and in the Statement of Additional Information. -- At What Price Are Shares Sold? Shares are sold at the price based on the net asset value (and any initial sales charge that applies) that is next determined after the Distributor receives the purchase order in Denver. In most cases, to enable you to receive that day's offering price, the Distributor must receive your order by the time of day The New York Stock Exchange closes, which is normally 4:00 P.M., New York time, but may be earlier on some days (all references to time in this Prospectus mean "New York time."). The net asset value of each class of shares is determined as of the close of The New York Stock Exchange on each day the Exchange is open (which is a "regular business day"). If you buy shares through a dealer, the dealer must receive your order by the close of The New York Stock Exchange on a regular business day and transmit it to the Distributor so that it is received before the Distributor's close of business that day, which is normally 5:00 P.M. The Distributor may reject any purchase order for the Fund's shares, in its sole discretion. Class A Shares. Class A shares are sold at their offering price, which is normally net asset value plus an initial sales charge. However, in some cases, described below, purchases are not subject to an initial sales charge, and the offering price will be the net asset value. In some cases, reduced sales charges may be available, as described below. Out of the amount you invest, the Fund receives the net asset value for your account. The sales charge varies depending on the amount of your purchase. A portion of the sales charge may be retained by the Distributor and a portion allocated to your dealer as commission. The current sales charge rates and commissions paid to dealers and brokers are as follows:
Front-End Front-End Sales Charge Sales Charge Commission as a as a as Percentage Percentage Percentage of Offering of Amount of Offering Amount of Purchase Price Invested Price - ---------------------------------------------------------------------- Less than $50,000 4.75% 4.98% 4.00% - ---------------------------------------------------------------------- $50,000 or more but 4.50% 4.71% 3.75% less than $100,000 - ---------------------------------------------------------------------- $100,000 or more but 3.50% 3.63% 2.75% less than $250,000 - ---------------------------------------------------------------------- $250,000 or more but 2.50% 2.56% 2.00% less than $500,000 - ---------------------------------------------------------------------- $500,000 or more but 2.00% 2.04% 1.60% less than $1 million
4 The Distributor reserves the right to reallow the entire commission to dealers. If that occurs, the dealer may be considered an "underwriter" under Federal securities laws. -- Class A Contingent Deferred Sales Charge. There is no initial sales charge on purchases of Class A shares of any one or more OppenheimerFunds aggregating $1 million or more (shares of the Fund and other OppenheimerFunds that offer only one class of shares that has no class designation are considered "Class A shares" for this purpose). Class A shares purchased in connection with the OppenheimerFunds- prototype 401(k) plans will not be subject to an initial sales charge if: (i) the plan purchases shares of one or more Oppenheimer funds in an amount aggregating $500,000 or more, (ii) the plan has, at the time of purchase, 100 or more employees eligible to participate in the plan, or (iii) the plan certifies that it will have projected annual contributions to the plan of $200,000 or more. The Distributor pays dealers of record commissions on such purchases in an amount equal to the sum of 1.0% of the first $2.5 million, plus 0.50% of the next $2.5 million, plus 0.25% of share purchases over $5 million. That commission will be paid only on the amount of those purchases in excess of $1 million ($500,000 for purchases under the OppenheimerFunds - prototype 401(k) plans) that were not previously subject to a front-end sales charge and dealer commission. If you redeem any of those shares within 18 months of the end of the calendar month of their purchase, a contingent deferred sales charge (called the "Class A contingent deferred sales charge") will be deducted from the redemption proceeds. That sales charge will be equal to 1.0% of the aggregate net asset value of either (1) the redeemed shares (not including shares purchased by reinvestment of dividends or capital gain distributions) or (2) the original cost of the shares, whichever is less. However, the Class A contingent deferred sales charge will not exceed the aggregate amount of the commissions the Distributor paid to your dealer on all Class A shares of all OppenheimerFunds you purchased subject to the Class A contingent deferred sales charge. In determining whether a contingent deferred sales charge is payable, the Fund will first redeem shares that are not subject to the sales charge, including shares purchased by reinvestment of dividends and capital gains, and then will redeem other shares in the order that you purchased them. The Class A contingent deferred sales charge is waived in certain cases described in "Waivers of Class A Sales Charges" below. No Class A contingent deferred sales charge is charged on exchanges of shares under the Fund's Exchange Privilege (described below). However, if the shares acquired by exchange are redeemed within 18 months of the end of the calendar month of the purchase of the exchanged shares, the contingent deferred sales charge will apply. -- Special Arrangements With Dealers. The Distributor may advance up to 13 months' commissions to dealers that have established special arrangements with the Distributor for Asset Builder Plans for their clients. Dealers whose sales of Class A shares of OppenheimerFunds (other than money market funds) under OppenheimerFunds-sponsored 403(b)(7) custodial plans exceed $5 million per year (calculated per quarter), will receive monthly one-half of the Distributor's retained commissions on those sales, and if those sales exceed $10 million per year, those dealers will receive the Distributor's entire retained commission on those sales. Reduced Sales Charges for Class A Share Purchases. You may be eligible to buy Class A shares at reduced sales charge rates in one or more of the following ways: -- Right of Accumulation. To qualify for the lower sales charge rates that apply to larger purchases of Class A shares, you and your spouse can add together Class A and, effective on or about August 1, 1995, Class B shares you purchase for your own accounts, for your joint accounts, or on behalf of your children who are minors, under trust or custodial accounts. A fiduciary can count all shares purchased for a trust, estate or other fiduciary account (including one or more employee benefit plans of the same employer) that has multiple accounts. Additionally, you can add together current purchases of Class A and, effective on or about August 1, 1995, Class B shares of the Fund and other OppenheimerFunds to reduce the sales charge rate that applies to current purchases of Class A shares. You can also count Class A and, effective August 1, 1995, Class B shares of OppenheimerFunds 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 OppenheimerFunds. The value of those shares will be based on the greater of the amount you paid for the shares or their current value (at offering price). The OppenheimerFunds are listed in "Reduced Sales Charges" in the Statement of Additional Information, or a list can be obtained from the Transfer Agent. The reduced sales charge will apply only to current purchases and must be requested when you buy your shares. -- Letter of Intent. Under a Letter of Intent, you may purchase Class A, and effective on or about August 1, 1995, Class B shares of the Fund and other OppenheimerFunds during a 13-month period, and the reduced Class A sales charge rate that applies will be the Class A sales charge rate that applies to the total amount of the intended purchases will be the sales charge rate for Class A shares purchased during that period. This can include purchases made up to 90 days before the date of the Letter. More information is contained in the Application and in "Reduced Sales Charges" in the Statement of Additional Information. -- Waivers of Class A Sales Charges. No sales charge is imposed on sales of Class A shares to the following investors: (1) the Manager or its affiliates; (2) present or former officers, directors, trustees and employees (and their "immediate families" as defined in "Reduced Sales Charges" in the Statement of Additional Information) of the Fund, the Manager and its affiliates, and retirement plans established by them for their employees; (3) registered management investment companies, or separate accounts of insurance companies having an agreement with the Manager or the Distributor for that purpose; (4) dealers or brokers that have a sales agreement with the Distributor, if they purchase shares for their own accounts or for retirement plans for their employees; (5) employees and registered representatives (and their spouses) of dealers or brokers described above or financial institutions that have entered into sales arrangements with such dealers or brokers (and are identified to the Distributor) or with the Distributor; the purchaser must certify to the Distributor at the time of purchase that the purchase is for the purchaser's own account (or for the benefit of such employee's spouse or minor children); (6) dealers, brokers or registered investment advisers that have entered into an agreement with the Distributor providing specifically for the use of shares of the Fund in particular investment products made available to their clients; or (7) dealers, brokers 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. Additionally, no sales charge is imposed on shares that are (a) issued in plans of reorganization, such as mergers, asset acquisitions and exchange offers, to which the Fund is a party, (b) purchased by the reinvestment of loan repayments by a participant in a retirement plan for which the Manager or its affiliates acts as sponsor, (c) purchased by the reinvestment of dividends or other distributions reinvested from the Fund or other OppenheimerFunds (other than Oppenheimer Cash Reserves) or unit investment trusts for which reinvestment arrangements have been made with the Distributor, or (d) purchased and paid for with the proceeds of shares redeemed in the prior 12 months from a mutual fund on which an initial sales charge or contingent deferred sales charge was paid (other than a fund managed by the Manager or any of its affiliates); this waiver must be requested when the purchase order is placed for your shares of the Fund and the Distributor may require evidence of your qualification for the waiver. There is a further discussion of this policy in "Reduced Sales Charges" in the Statement of Additional Information. The Class A contingent deferred sales charge is also waived if shares are redeemed in the following cases: (1) for retirement distributions or loans to participants or beneficiaries from qualified retirement plans, deferred compensation plans or other employee benefit plans including the OppenheimerFunds - prototype 401(k) plans ("Retirement Plans"), (2) to return excess contributions made to Retirement Plans, (3) to make Automatic Withdrawal Plan payments that are limited to no more than 12% of the original account value annually, (4) involuntary redemptions of shares by operation of law or under the procedures set forth in the Fund's Declaration of Trust or adopted by the Board of Trustees, (5) Class A shares that would otherwise be subject to the Class A contingent deferred sales charge are redeemed, but at the time the purchase order for your shares was placed, the dealer agreed to accept the dealer's portion of the commission payable on the sale in installments of 1/18th of the commission per month (and that no further commission would be payable if the shares were redeemed within 18 months of purchase), or (6) in connection with the OppenheimerFunds-prototype 401(k) plans: (i) following the death or disability (as defined in the Internal Revenue Code) of the participant or beneficiary (the death or disability must have occurred after the account was established); (ii) hardship withdrawals; (iii) distributions pursuant to a Qualified Domestic Relations Order, as defined in the Code; (iv) minimum distributions as required by section 401(a)(9) of the Code; (v) substantially equal periodic payments as described in Section 72(t) of the Code, and (vi) separation from service. -- Service Plan for Class A Shares. The Fund has adopted a Service Plan for Class A shares to reimburse the Distributor for a portion of its costs incurred in connection with the personal service and maintenance of accounts that hold Class A shares. Reimbursement is made quarterly at an annual rate that may not exceed 0.25% of the average annual net asset value of Class A shares of the Fund. The Distributor uses all of those fees to compensate dealers, brokers, banks and other financial institutions quarterly for providing personal service and maintenance of accounts of their customers that hold Class A shares and to reimburse itself (if the Fund's Board of Trustees authorizes such reimbursements, which it has not yet done) for its other expenditures under the Plan. Services to be provided include, among others, answering customer inquiries about the Fund, assisting in establishing and maintaining accounts in the Fund, making the Fund's investment plans available and providing other services at the request of the Fund or the Distributor. Payments are made by the Distributor quarterly at an annual rate not to exceed 0.25% of the average annual net asset value of Class A shares held in accounts of the dealer or its customers. The payments under the Plan increase the annual expenses of Class A shares. For more details, please refer to "Distribution and Service Plans" in the Statement of Additional Information. Class B Shares. Class B shares are sold at net asset value per share without an initial sales charge. However, if Class B shares are redeemed within 6 years of their purchase, a contingent deferred sales charge will be deducted from the redemption proceeds. That sales charge will not apply to shares purchased by the reinvestment of dividends or capital gains distributions. The charge will be assessed on the lesser of the net asset value of the shares at the time of redemption or the original purchase price. The contingent deferred sales charge is not imposed on the amount of your account value represented by the increase in net asset value over the initial purchase price (including increases due to the reinvestment of dividends and capital gains distributions). The Class B contingent deferred sales charge is paid to the Distributor to reimburse its expenses of providing distribution-related services to the Fund in connection with the sale of Class B shares. To determine whether the contingent deferred sales charge applies to a redemption, the Fund redeems shares in the following order: (1) shares acquired by reinvestment of dividends and capital gains distributions, (2) shares held for over 6 years, and (3) shares held the longest during the 6-year period. The amount of the contingent deferred sales charge will depend on the number of years since you invested and the dollar amount being redeemed, according to the following schedule:
Contingent Deferred Sales Charge Beginning of Month in which On Redemptions in That Year Purchase Order Was Accepted (As % of Amount Subject to Charge) - ---------------------------------------------------------------------- 0 - 1 5.0% 1 - 2 4.0% 2 - 3 3.0% 3 - 4 3.0% 4 - 5 2.0% 5 - 6 1.0% 6 and following None
In the table, a "year" is a 12-month period. All purchases are considered to have been made on the first regular business day of the month in which the purchase was made. -- Waivers of Class B Sales Charge. The Class B contingent deferred sales charge will be waived if the shareholder requests it for any of the following redemptions: (1) to make distributions to participants or beneficiaries from Retirement Plans, if the distributions are made (a) under an Automatic Withdrawal Plan after the participant reaches age 59-1/2, as long as the payments are no more than 10% of the account value annually (measured from the date the Transfer Agent receives the request), or (b) following the death or disability (as defined in the Internal Revenue Code) of the participant or beneficiary which occurred after the account was opened; (2) redemptions from accounts other than Retirement Plans following the death or disability of the shareholder (the disability must have occurred after the account was established and you must provide evidence of a determination of disability by the Social Security Administration), (3) to make returns of excess contributions to Retirement Plans, (4) to make distributions from IRAs (including SEP-IRAs and SAR/SEP accounts) before the participant is age 59-1/2, and distributions from 403(b)(7) custodial plans or pension or profit sharing plans before the participant is age 59-1/2 but only after the participant has separated from service, if the distributions are made in substantially equal periodic payments over the life (or life expectancy) of the participant or the joint lives (or joint life and last survivor expectancy) of the participant and the participant's designated beneficiary (and the distributions must comply with other requirements for such distributions under the Internal Revenue Code and may not exceed 10% of the account value annually, measured from the date the Transfer Agent receives the request), or (5) in connection with the OppenheimerFunds-prototype 401(k) plans: (i) hardship withdrawals; (ii) distributions pursuant to a Qualified Domestic Relations Order, as defined in the Code; (iii) minimum distributions as required by section 401(a)(9) of the Code; (iv) substantially equal periodic payments as described in Section 72(t) of the Code, and (v) separation from service. The contingent deferred sales charge is also waived on Class B shares in the following cases: (i) shares sold to the Manager or its affiliates; (ii) shares sold to registered management investment companies or separate accounts of insurance companies having an agreement with the Manager or the Distributor for that purpose; (iii) shares issued in plans of reorganization to which the Fund is a party; or (iv) shares redeemed in involuntary redemptions as described below. Further details about this policy are contained in "Reduced Sales Charges" in the Statement of Additional Information. -- Automatic Conversion of Class B Shares. 72 months after you purchase Class B shares, those shares will automatically convert to Class A shares. This conversion feature relieves Class B shareholders of the asset-based sales charge that applies to Class B shares under the Class B Distribution and Service Plan, described below. The conversion is based on the relative net asset value of the two classes, and no sales load or other charge is imposed. When Class B shares convert, any other Class B shares that were acquired by the reinvestment of dividends and distributions on the converted shares will also convert to Class A shares. The conversion feature is subject to the continued availability of a tax ruling described in "Alternative Sales Arrangements - Class A and Class B Shares" in the Statement of Additional Information. -- Distribution and Service Plan for Class B Shares. The Fund has adopted a "compensation type" Distribution and Service Plan for Class B shares to compensate the Distributor for its services in distributing Class B shares and servicing accounts. Under the Plan, the Fund pays the Distributor an annual "asset-based sales charge" of 0.75% per year on Class B shares that are outstanding for 6 years or less. The Distributor also receives a service fee of 0.25% per year. Both fees are computed on the average annual net asset value of Class B shares, determined as of the close of each regular business day. The asset- based sales charge allows investors to buy Class B shares without a front-end sales charge while allowing the Distributor to compensate dealers that sell Class B shares. The Distributor uses the service fee to compensate dealers for providing personal services for accounts that hold Class B shares. Those services are similar to those provided under the Class A Service Plan, described above. The asset-based sales charge and service fees increase Class B expenses by 1.00% of average net assets per year. The Distributor pays the 0.25% service fee to dealers in advance for the first year after Class B shares have been sold by the dealer. After the shares have been held for a year, the Distributor pays the fee on a quarterly basis. The Distributor pays sales commissions of 3.75% of the purchase price to dealers from its own resources at the time of sale. The Distributor retains the asset-based sales charge (and the first year's service fee). If the Plan is terminated by the Fund, the Board of Trustees may allow the Fund to continue payments of the service fee and/or the asset-based sales charge to the Distributor. Class C Shares. Class C shares are sold at net asset value per share without an initial sales charge. However, if Class C shares are redeemed within 12 months of their purchase, a contingent deferred sales charge of 1.0% will be deducted from the redemption proceeds. That sales charge will not apply to shares purchased by the reinvestment of dividends or capital gains distributions. The charge will be assessed on the lesser of the net asset value of the shares at the time of redemption or the original purchase price. The contingent deferred sales charge is not imposed on the amount of your account value represented by the increase in net asset value over the initial purchase price (including increases due to the reinvestment of dividends and capital gains distributions). The Class C contingent deferred sales charge is paid to the Distributor to reimburse its expenses of providing distribution-related services to the Fund in connection with the sale of Class C shares. To determine whether the contingent deferred sales charge applies to a redemption, the Fund redeems shares in the following order: (1) shares acquired by reinvestment of dividends and capital gains distributions, (2) shares held for over 12 months, and (3) shares held the longest during the 12-month period. -- Waivers of Class C Sales Charge. The Class C contingent deferred sales charge will be waived if the shareholder requests it for any of the following redemptions: (1) distributions to participants or beneficiaries from Retirement Plans, if the distributions are made (a) under an Automatic Withdrawal Plan after the participant reaches age 59-1/2, as long as the payments are no more than 10% of the account value annually (measured from the date the Transfer Agent receives the request), or (b) following the death or disability (as defined in the Internal Revenue Code) of the participant or beneficiary; (2) redemptions from accounts other than Retirement Plans following the death or disability of the shareholder (the disability must have occurred after the account was established and you must provide evidence of a determination of disability by the Social Security Administration), (3) returns of excess contributions to Retirement Plans or (4) distributions from IRAs (including SEP-IRAs and SAR/SEP accounts) before the participant is age 59 1/2, and distributions from 403(b)(7) custodial plans or pension or profit sharing plans before the participant is age 59 1/2 but only after the participant has separated from service, if the distributions are made in substantially equal periodic payments over the life (or life expectancy) of the participant or the joint lives (or joint life and last survivor expectancy) of the participant and the participant's designated beneficiary (and the distributions must comply with other requirements for such distributions under the Internal Revenue Code and may not exceed 10% of the account value annually, measured from the date the Transfer Agent receives the request). The contingent deferred sales charge is also waived on Class C shares in the following cases: (i) shares sold to the Manager or its affiliates; (ii) shares sold to registered management investment companies or separate accounts of insurance companies having an agreement with the Manager or the Distributor for that purpose; (iii) shares issued in plans of reorganization to which the Fund is a party; or (iv) shares redeemed in involuntary redemptions as described above. Further details about this policy are contained in "Reduced Sales Charges" in the Statement of Additional Information. -- Distribution and Service Plan for Class C Shares. The Fund has adopted a "compensation type" Distribution and Service Plan for Class C shares to compensate the Distributor for its services in distributing Class C shares and servicing accounts. Under the Plan, the Fund pays the Distributor an annual "asset-based sales charge" of 0.75% per year on Class C shares. The Distributor also receives a service fee of 0.25% per year. Both fees are computed on the average annual net assets of Class C shares, determined as of the close of each regular business day. The asset-based sales charge allows investors to buy Class C shares without a front-end sales charge while allowing the Distributor to compensate dealers that sell Class C shares. The Distributor uses the service fee to compensate dealers for providing personal services for accounts that hold Class C shares. Those services are similar to those provided under the Class A Service Plan, described above. The asset-based sales charge and service fees increase Class C expenses by 1.00% of average net assets per year. The Distributor pays the 0.25% service fee to dealers in advance for the first year after Class C shares have been sold by the dealer. After the shares have been held for a year, the Distributor pays the fee on a quarterly basis. The Distributor pays sales commissions of 0.75% of the purchase price to dealers from its own resources at the time of sale. The Distributor retains the asset-based sales charge during the first year shares are outstanding. The Distributor plans to pay the asset-based sales charge as an ongoing commission to the dealer on Class C shares that have been outstanding for a year or more. If the Plan is terminated by the Fund, the Board of Trustees may allow the Fund to continue payments of the service fee and/or the asset-based sales charge to the Distributor. Special Investor Services AccountLink. OppenheimerFunds AccountLink links your Fund account to your account at your bank or other financial institution to enable you to send money electronically between those accounts to perform a number of types of account transactions. These include purchases of shares by telephone (either through a service representative or by PhoneLink, described below), automatic investments under Asset Builder Plans, and sending dividends and distributions or Automatic Withdrawal Plan payments directly to your bank account. Please refer to the Application for details or call the Transfer Agent for more information. AccountLink privileges should be requested on the Application you use to buy shares, or on your dealer's settlement instructions if you buy your shares through your dealer. After your account is established, you can request AccountLink privileges on signature-guaranteed instructions to the Transfer Agent. AccountLink privileges will apply to each shareholder listed in the registration on your account as well as to your dealer representative of record unless and until the Transfer Agent receives written instructions terminating or changing those privileges. After you establish AccountLink for your account, any change of bank account information must be made by signature-guaranteed instructions to the Transfer Agent signed by all shareholders who own the account. -- Using AccountLink to Buy Shares. Purchases may be made by telephone only after your account has been established. To purchase shares in amounts up to $250,000 through a telephone representative, call the Distributor at 1-800-852-8457. The purchase payment will be debited from your bank account. -- PhoneLink. PhoneLink is the OppenheimerFunds automated telephone system that enables shareholders to perform a number of account transactions automatically using a touch-tone phone. PhoneLink may be used on already-established Fund accounts after you obtain a Personal Identification Number (PIN), by calling the special PhoneLink number: 1-800-533-3310. - Purchasing Shares. You may purchase shares in amounts up to $100,000 by phone, by calling 1-800-533-3310. You must have established AccountLink privileges to link your bank account with the Fund, to pay for these purchases. - Exchanging Shares. With the OppenheimerFunds Exchange Privilege, described below, you can exchange shares automatically by phone from your Fund account to another OppenheimerFunds account you have already established by calling the special PhoneLink number. Please refer to "How to Exchange Shares," below, for details. - Selling Shares. You can redeem shares by telephone automatically by calling the PhoneLink number and the Fund will send the proceeds directly to your AccountLink bank account. Please refer to "How to Sell Shares," below for details. Automatic Withdrawal and Exchange Plans. The Fund has several plans that enable you to sell shares automatically or exchange them to another OppenheimerFunds account on a regular basis: -- Automatic Withdrawal Plans. If your Fund account is worth $5,000 or more, you can establish an Automatic Withdrawal Plan to receive payments of at least $50 on a monthly, quarterly, semi-annual or annual basis. The checks may be sent to you or sent automatically to your bank account on AccountLink. You may even set up certain types of withdrawals of up to $1,500 per month by telephone. You should consult the Application and Statement of Additional Information for more details. -- Automatic Exchange Plans. You can authorize the Transfer Agent automatically to exchange an amount you establish in advance for shares of up to five other OppenheimerFunds on a monthly, quarterly, semi- annual or annual basis under an Automatic Exchange Plan. The minimum purchase for each OppenheimerFunds account is $25. These exchanges are subject to the terms of the Exchange Privilege, described below. Reinvestment Privilege. If you redeem some or all of your Fund shares, you have up to 6 months to reinvest all or part of the redemption proceeds in Class A shares of the Fund or other OppenheimerFunds without paying sales charge. This privilege applies only to redemptions of Class A shares or to redemptions of Class B shares of the Fund that you purchased by reinvesting dividends or distributions or on which you paid a contingent deferred sales charge when you redeemed them. You must be sure to ask the Distributor for this privilege when you send your payment. Please consult the Statement of Additional Information for more details. Retirement Plans. Fund shares are available as an investment for your retirement plans. If you participate in a plan sponsored by your employer, the plan trustee or administrator must make the purchase of shares for your retirement plan account. The Distributor offers a number of different retirement plans that can be used by individuals and employers: - Individual Retirement Accounts including rollover IRAs, for individuals and their spouses - 403(b)(7) Custodial Plans for employees of eligible tax-exempt organizations, such as schools, hospitals and charitable organizations - SEP-IRAs (Simplified Employee Pension Plans) for small business owners or people with income from self-employment, including SARSEP- IRAs - Pension and Profit-Sharing Plans for self-employed persons and other employers - 401(k) Plan for small business owners Please call the Distributor for the OppenheimerFunds plan documents, which contain important information and applications. How to Sell Shares You can arrange to take money out of your account on any regular business day by selling (redeeming) some or all of your shares. Your shares will be sold at the next net asset value calculated after your order is received and accepted by the Transfer Agent. The Fund offers you a number of ways to sell your shares: in writing, by using the Fund's Checkwriting privilege or by telephone. You can also set up Automatic Withdrawal Plans to redeem shares on a regular basis, as described above. If you have questions about any of these procedures, and especially if you are redeeming shares in a special situation, such as due to the death of the owner, or from a retirement plan, please call the Transfer Agent first, at 1-800-525-7048, for assistance. -- Retirement Accounts. To sell shares in an OppenheimerFunds retirement account in your name, call the Transfer Agent for a distribution request form. There are special income tax withholding requirements for distributions from retirement plans and you must submit a withholding form with your request to avoid delay. If your retirement plan account is held for you by your employer, you must arrange for the distribution request to be sent by the plan administrator or trustee. There are additional details in the Statement of Additional Information. -- Certain Requests Require a Signature Guarantee. To protect you and the Fund from fraud, certain redemption requests must be in writing and must include a signature guarantee in the following situations (there may be other situations also requiring a signature guarantee): - You wish to redeem more than $50,000 worth of shares and receive a check - A redemption check is not payable to all shareholders listed on the account statement - A redemption check is not sent to the address of record on your statement - Shares are being transferred to a Fund account with a different owner or name - Shares are redeemed by someone other than the owners (such as an Executor) -- Where Can I Have My Signature Guaranteed? The Transfer Agent will accept a guarantee of your signature by a number of financial institutions, including: a U.S. bank, trust company, credit union or savings association, or by a foreign bank that has a U.S. correspondent bank, or by a U.S. registered dealer or broker in securities, municipal securities or government securities, or by a U.S. national securities exchange, a registered securities association or a clearing agency. If you are signing on behalf of a corporation, partnership or other business, or as a fiduciary, you must also include your title in the signature. Selling Shares by Mail. Write a "letter of instructions" that includes: - Your name - The Fund's name - Your Fund account number (from your account statement) - The dollar amount or number of shares to be redeemed - Any special payment instructions - Any share certificates for the shares you are selling - The signatures of all registered owners exactly as the account is registered, and - Any special requirements or documents requested by the Transfer Agent to assure proper authorization of the person asking to sell shares. Use the following address for requests by mail: Oppenheimer Shareholder Services P.O. Box 5270, Denver, Colorado 80217 Send Courier or Express Mail requests to: Oppenheimer Shareholder Services 10200 E. Girard Avenue, Building D Denver, Colorado 80231 Selling Shares by Telephone. You and your dealer representative of record may also sell your shares by telephone. To receive the redemption price on a regular business day, your call must be received by the Transfer Agent by the close of The New York Stock Exchange that day, which is normally 4:00 P.M., but may be earlier on some days. Shares held in an OppenheimerFunds retirement plan or under a share certificate may not be redeemed by telephone. - To redeem shares through a service representative, call 1-800- 852-8457 - To redeem shares automatically on PhoneLink, call 1-800-533-3310 Whichever method you use, you may have a check sent to the address on the account statement, or, if you have linked your Fund account to your bank account on AccountLink, you may have the proceeds wired to that bank account. -- Telephone Redemptions Paid by Check. Up to $50,000 may be redeemed by telephone, once in any 7-day period. The check must be payable to all owners of record of the shares and must be sent to the address on the account. This service is not available within 30 days of changing the address on an account. -- Telephone Redemptions Through AccountLink. There are no dollar limits on telephone redemption proceeds sent to a bank account designated when you establish AccountLink. Normally the ACH wire to your bank is initiated on the business day after the redemption. You do not receive dividends on the proceeds of the shares you redeemed while they are waiting to be wired. Checkwriting. To be able to write checks against your Fund account, you may request that privilege on your account Application or you can contact the Transfer Agent for signature cards, which must be signed (with a signature guarantee) by all owners of the account and returned to the Transfer Agent so that checks can be sent to you to use. Shareholders with joint accounts can elect in writing to have checks paid over the signature of one owner. - Checks can be written to the order of whomever you wish, but may not be cashed at the Fund's bank or custodian. - Checkwriting privileges are not available for accounts holding Class B or Class C shares, or Class A shares that are subject to a contingent deferred sales charge. - Checks must be written for at least $100. - Checks cannot be paid if they are written for more than your account value. Remember: your shares fluctuate in value and you should not write a check close to the total account value. - You may not write a check that would require the Fund to redeem shares that were purchased by check or Asset Builder Plan payments within the prior 10 days. - Don't use your checks if you changed your Fund account number. Selling Shares Through Your Dealer. The Distributor has made arrangements to repurchase Fund shares from dealers and brokers on behalf of their customers. Brokers or dealers may charge for that service. Please refer to "Special Arrangements For Repurchase of Shares From Dealers And Brokers" in the Statement of Additional Information for more details. How to Exchange Shares Shares of the Fund may be exchanged for shares of certain OppenheimerFunds at net asset value per share at the time of exchange, without sales charge. To exchange shares, you must meet several conditions: - Shares of the fund selected for exchange must be available for sale in your state of residence - The prospectuses of this Fund and the fund whose shares you want to buy must offer the exchange privilege - You must hold the shares you buy when you establish your account for at least 7 days before you can exchange them; after the account is open 7 days, you can exchange shares every regular business day - You must meet the minimum purchase requirements for the fund you purchase by exchange - Before exchanging into a fund, you should obtain and read its prospectus Shares of a particular class may be exchanged only for shares of the same class in the other OppenheimerFunds. For example, you can exchange Class A shares of this Fund only for Class A shares of another fund. At present, not all of the OppenheimerFunds offer the same classes of shares. If a fund has only one class of shares that does not have a class designation, they are "Class A" shares for exchange purposes. Certain OppenheimerFunds offer Class A, Class B and/or Class C shares, and a list can be obtained by calling the Distributor at 1- 800-525-7048. In some cases, sales charges may be imposed on exchange transactions. Please refer to "How to Exchange Shares" in the Statement of Additional Information for more details. Exchanges may be requested in writing or by telephone: -- Written Exchange Requests. Submit an OppenheimerFunds Exchange Request form, signed by all owners of the account. Send it to the Transfer Agent at the addresses listed in "How to Sell Shares." -- Telephone Exchange Requests. Telephone exchange requests may be made either by calling a service representative at 1-800-852-8457 or by using PhoneLink for automated exchanges, by calling 1-800-533-3310. Telephone exchanges may be made only between accounts that are registered with the same names and address. Shares held under certificates may not be exchanged by telephone. You can find a list of eligible OppenheimerFunds currently available for exchanges in the Statement of Additional Information or obtain their names by calling a service representative at 1-800-525- 7048. Exchanges of shares involve a redemption of the shares of the fund you own and a purchase of shares of the other fund. There are certain exchange policies you should be aware of: - Shares are normally redeemed from one fund and purchased from the other fund in the exchange transaction on the same regular business day on which the Transfer Agent receives an exchange request that is in proper form by the close of The New York Stock Exchange that day, which is normally 4:00 P.M., but may be earlier on some days. However, either fund may delay the purchase of shares of the fund you are exchanging into if it determines it would be disadvantaged by a same- day transfer of the proceeds to buy shares. For example, the receipt of multiple exchange requests from a dealer in a "market-timing" strategy might require the disposition of securities at a time or price disadvantageous to the Fund. - Because excessive trading can hurt fund performance and harm shareholders, the Fund reserves the right to refuse any exchange request that will disadvantage it, or to refuse multiple exchange requests submitted by a shareholder or dealer. - The Fund may amend, suspend or terminate the exchange privilege at any time. Although the Fund will attempt to provide you notice whenever it is reasonably able to do so, it may impose these changes at any time. - If the Transfer Agent cannot exchange all the shares you request because of a restriction cited above, only the shares eligible for exchange will be exchanged. Shareholder Account Rules and Policies -- Net Asset Value Per Share is determined for each class of shares as of the close of The New York Stock Exchange on each regular business day by dividing the value of the Fund's net assets attributable to a class by the number of shares of that class that are outstanding. The Fund's Board of Trustees has established procedures to value the Fund's securities to determine net asset value. In general, securities values are based on market value. There are special procedures for valuing illiquid and restricted securities, obligations for which market values cannot be readily obtained, and call options and hedging instruments. These procedures are described more completely in the Statement of Additional Information. -- The offering of shares may be suspended during any period in which the determination of net asset value is suspended, and the offering may be suspended by the Board of Trustees at any time the Board believes it is in the Fund's best interest to do so. -- Telephone Transaction Privileges for purchases, redemptions or exchanges may be modified, suspended or terminated by the Fund at any time. If an account has more than one owner, the Fund and the Transfer Agent may rely on the instructions of any one owner. Telephone privileges apply to each owner of the account and the dealer representative of record for the account unless and until the Transfer Agent receives cancellation instructions from an owner of the account. -- The Transfer Agent will record any telephone calls to verify data concerning transactions and has adopted other procedures to confirm that telephone instructions are genuine, by requiring callers to provide tax identification numbers and other account data or by using PINs, and by confirming such transactions in writing. If the Transfer Agent does not use reasonable procedures it may be liable for losses due to unauthorized transactions, but otherwise neither it nor the Fund will be liable for losses or expenses arising out of telephone instructions reasonably believed to be genuine. If you are unable to reach the Transfer Agent during periods of unusual market activity, you may not be able to complete a telephone transaction and should consider placing your order by mail. -- Redemption or transfer requests will not be honored until the Transfer Agent receives all required documents in proper form. From time to time, the Transfer Agent in its discretion may waive certain of the requirements for redemptions stated in this Prospectus. -- Dealers that can perform account transactions for their clients by participating in NETWORKING through the National Securities Clearing Corporation are responsible for obtaining their clients' permission to perform those transactions and are responsible to their clients who are shareholders of the Fund if the dealer performs any transaction erroneously or improperly. -- The redemption price for shares will vary from day to day because the value of the securities in the Fund's portfolio fluctuates, and the redemption price, which is the net asset value per share, will normally be different for Class A, Class B and Class C shares. Therefore, the redemption value of your shares may be more or less than their original cost. -- Payment for redeemed shares is made ordinarily in cash and forwarded by check or through AccountLink (as elected by the shareholder under the redemption procedures described above) within 7 days after the Transfer Agent receives redemption instructions in proper form, except under unusual circumstances determined by the Securities and Exchange Commission delaying or suspending such payments. Payment will be forwarded within 3 business days for accounts registered in the name of a broker-dealer. The Transfer Agent may delay forwarding a check or processing a payment via AccountLink for recently purchased shares, but only until the purchase payment has cleared. That delay may be as much as 10 days from the date the shares were purchased. That delay may be avoided if you purchase shares by certified check or arrange to have your bank provide telephone or written assurance to the Transfer Agent that your purchase payment has cleared. -- Involuntary redemptions of small accounts may be made by the Fund if the account value has fallen below $1,000 for reasons other than the fact that the market value of shares has dropped, and in some cases involuntary redemptions may be made to repay the Distributor for losses from the cancellation of share purchase orders. -- Under unusual circumstances shares of the Fund may be redeemed "in kind," which means that the redemption proceeds will be paid with securities from the Fund's portfolio. Please refer to "How to Sell Shares" in the Statement of Additional Information for more details. -- "Backup Withholding" of Federal income tax may be applied at the rate of 31% from dividends, distributions and redemption proceeds (including exchanges) if you fail to furnish the Fund a certified Social Security or Employer Identification Number when you sign your application, or if you violate Internal Revenue Service regulations on tax reporting of income. -- The Fund does not charge a redemption fee, but if your dealer or broker handles your redemption, they may charge a fee. That fee can be avoided by redeeming your Fund shares directly through the Transfer Agent. Under the circumstances described in "How To Buy Shares," you may be subject to a contingent deferred sales charges when redeeming certain Class A, Class B or Class C shares. -- To avoid sending duplicate copies of materials to households, the Fund will mail only one copy of each annual and semi-annual report to shareholders having the same last name address on the Fund's records. However, each shareholder may call the Transfer Agent at 1- 800-525-7048 to ask that copies of those materials be sent personally to that shareholder. Dividends, Capital Gains and Taxes Dividends. The Fund declares dividends separately for Class A, Class B and Class C shares from net investment income on each regular business day and pays those dividends to shareholders monthly. Normally, dividends are paid on the last business day of every month, but the Board of Trustees can change that date. Distributions may be made monthly from any net short-term capital gains the Fund realizes in selling securities. It is expected that distributions paid with respect to Class A shares will generally be higher than for Class B or Class C shares because expenses allocable to Class B and Class C shares will generally be higher. From time to time, Fund may adopt the practice, to the extent consistent with the amount of the Fund's net investment income and other distributable income, of attempting to pay dividends on Class A shares at a constant level, although the amount of such dividends may be subject to change 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 that Class. A practice of attempting to pay dividends on Class A shares at a constant level would require the Manager, consistent with the Fund's investment objective and investment restrictions, to monitor the Fund's portfolio and select higher yielding securities when deemed appropriate to maintain necessary net investment income levels. If the Fund, from time to time, seeks to pay dividends on Class A shares at a target level, the Fund anticipates it would pay dividends at the targeted dividend level from net investment income and other distributable income without any impact on the Fund's Class A net asset value per share. The Board of Trustees could change the Fund's targeted dividend level at any time, without prior notice to shareholders. The Fund would not otherwise have a fixed dividend rate. Regardless, there can be no assurance as to the payment of any dividends or the realization of any capital gains. Capital Gains. The Fund may make distributions annually in December out of any net short-term or long-term capital gains, and the Fund may make supplemental distributions of dividends and capital gains following the end of its fiscal year. Long-term capital gains will be separately identified in the tax information the Fund sends you after the end of the year. Short-term capital gains are treated as dividends for tax purposes. There can be no assurance that the Fund will pay any capital gains distributions in a particular year. Distribution Options. When you open your account, specify on your application how you want to receive your distributions. For OppenheimerFunds retirement accounts, all distributions are reinvested. For other accounts, you have four options: -- Reinvest All Distributions in the Fund. You can elect to reinvest all dividends and long-term capital gains distributions in additional shares of the Fund. -- Reinvest Long-Term Capital Gains Only. You can elect to reinvest long-term capital gains in the Fund while receiving dividends by check or sent to your bank account on AccountLink. -- Receive All Distributions in Cash. You can elect to receive a check for all dividends and long-term capital gains distributions or have them sent to your bank on AccountLink. -- Reinvest Your Distributions in Another OppenheimerFunds Account. You can reinvest all distributions in another OppenheimerFunds account you have established. Taxes. If your account is not a tax-deferred retirement account, you should be aware of the following tax implications of investing in the Fund. Long-term capital gains are taxable as long-term capital gains when distributed to shareholders. It does not matter how long you hold your shares. Dividends paid from short-term capital gains and net investment income are taxable as ordinary income. Distributions are subject to federal income tax and may be subject to state or local taxes. Your distributions are taxable when paid, whether you reinvest them in additional shares or take them in cash. Every year the Fund will send you and the IRS a statement showing the amount of each taxable distribution you received in the previous year. -- "Buying a Dividend": When a fund goes ex-dividend, its share price is reduced by the amount of the distribution. If you buy shares on or just before the ex-dividend date, or just before the Fund declares a capital gains distribution, you will pay the full price for the shares and then receive a portion of the price back as a taxable dividend or capital gain. -- Taxes on Transactions: Share redemptions, including redemptions for exchanges, are subject to capital gains tax. A capital gain or loss is the difference between the price you paid for the shares and the price you received when you sold them. -- Returns of Capital: In certain cases distributions made by the Fund may be considered a non-taxable return of capital to shareholders. If that occurs, it will be identified in notices to shareholders. A non-taxable return of capital may reduce your tax basis in your Fund shares. This information is only a summary of certain federal tax information about your investment. More information is contained in the Statement of Additional Information, and in addition you should consult with your tax adviser about the effect of an investment in the Fund on your particular tax situation. APPENDIX TO PROSPECTUS OF OPPENHEIMER INVESTMENT GRADE BOND FUND Graphic material included in Prospectus of Oppenheimer Bond Fund: "Comparison of Total Return of Oppenheimer Bond Fund and The Lehman Brothers Corporate Bond Index - Change in Value of a $10,000 Hypothetical Investment" Linear graphs will be included in the Prospectus of Oppenheimer Bond Fund (the "Fund") depicting the initial account value and subsequent account value of a hypothetical $10,000 in the Fund. In the case of the Fund's Class A shares, that graph will cover each of the Fund's fiscal years since the inception of the class on April 15, 1988 through December 31, 1995 and in the case of Class B shares the graph will cover the period from the inception of the class on May 1, 1993 through December 31, 1994. The graphs will compare such values with the same investments over the same time periods with The Lehman Brothers Corporate Bond Index. Set forth below are the relevant data points that will appear on the linear graphs. Additional information with respect to the foregoing, including a description of The Lehman Brothers Corporate Bond Index, is set forth in the Prospectus under "Performance of the Fund -- Comparing the Fund's Performance to the Market"
Lehman Brothers Fiscal Year Oppenheimer Corporate (Period) Ended Bond Fund A Bond Index 04/15/88 $9,525 $10,000 12/31/88 $9,952 $10,368 12/31/89 $11,077 $11,885 12/31/90 $11,602 $12,759 12/31/91 $13,723 $15,170 12/31/92 $14,653 $16,392 12/31/93 $16,163 $18,310 12/31/94 $15,538 $17,530 Lehman Brothers Fiscal Year Oppenheimer Corporate (Period) Ended Bond Fund B(1) Bond Index 05/01/93 $10,000 $10,000 12/31/93 $10,391 $10,503 12/31/94 $9,559 $10,056
- ---------------------- (1) Class B shares of the Fund were first publicly offered on May 1, 1993. Oppenheimer Bond Fund 3410 South Galena Street Denver, Colorado 80231 1-800-525-7048 Investment Adviser Oppenheimer Management Corporation Two World Trade Center New York, New York 10048-0203 Distributor Oppenheimer Funds Distributor, Inc. Two World Trade Center New York, New York 10048-0203 Transfer and Shareholder Servicing Agent Oppenheimer Shareholder Services P.O. Box 5270 Denver, Colorado 80217 1-800-525-7048 Custodian of Portfolio Securities The Bank of New York One Wall Street New York, New York 10015 Independent Auditors Deloitte & Touche LLP 1560 Broadway Denver, Colorado 80202 Legal Counsel Myer, Swanson Adams & Wolf, P.C. 1600 Broadway Denver, Colorado 80202 No dealer, broker, salesperson or any other person has been authorized to give any information or to make any representations other than those contained in this Prospectus or the Statement of Additional Information, and if given or made, such information and representations must not be relied upon as having been authorized by the Fund, Oppenheimer Management Corporation, Oppenheimer Funds Distributor, Inc., Massachusetts Mutual Life Insurance Company, or any affiliate thereof. This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby in any state to any person to whom it is unlawful to make such offer in such state. PR0285.001.0595 *Printed on recycled paper OPPENHEIMER INTEGRITY FUNDS 3410 SOUTH GALENA STREET, DENVER, COLORADO 80231-5099 1-800-525-7048 PART B STATEMENT OF ADDITIONAL INFORMATION September __, 1995 ___________________________________ This Statement of Additional Information of Oppenheimer Integrity Funds consists of this cover page and the following documents: 1. Statement of Additional Information of Oppenheimer Bond Fund dated July 10, 1995, supplemented July 14, 1995, filed herewith and incorporated herein by reference. 2. Oppenheimer Bond Fund's Annual Report as of December 31, 1994 and its Semi-Annual Report as of June 30, 1995, filed herewith and incorporated herein by reference. 3. Prospectus of Investment Quality Income Fund dated March 1, 1995, as revised June 30, 1995, filed herewith and incorporated herein by reference. 4. Statement of Additional Information of Investment Quality Income Fund dated March 1, 1995, filed herewith and incorporated herein by reference. 5. Investment Quality Income Fund's Annual Report as of October 31, 1994 and its Semi-Annual Report as of April 30, 1995, filed herewith and incorporated herein by reference. 6. Pro Forma Financial Statements, filed herewith and incorporated herein by reference This Statement of Additional Information (the "Additional Statement") is not a Prospectus. This Additional Statement should be read in conjunction with the Proxy Statement and Prospectus, which may be obtained by written request to Oppenheimer Shareholder Services ("OSS"), P.O. Box 5270, Denver, Colorado 80217, or by calling OSS at the toll-free number shown above. OPPENHEIMER BOND FUND Supplement dated July 14, 1995 to the Statement of Additional Information dated July 10, 1995 The Statement of Additional Information is amended as follows: 1. In the section entitled "Letters of Intent" on page 41, the first three sentences of the first paragraph in that section are replaced by the following: A Letter of Intent (referred to as a "Letter") is an investor's statement in writing to the Distributor of the intention to purchase Class A shares or Class A and Class B shares of the Fund (and other OppenheimerFunds) during a 13-month period (the "Letter of Intent period"), which may, at the investor's request, include purchases made up to 90 days prior to the date of the Letter. The Letter states the investor's intention to make the aggregate amount of purchases of shares which, when added to the investor's holdings of shares of those funds, will equal or exceed the amount specified in the Letter. Purchases made by reinvestment of dividends or distributions of capital gains and purchases made at net asset value without sales charge do not count toward satisfying the amount of the Letter. A Letter enables an investor to count the Class A and Class B shares purchased under the Letter to obtain the reduced sales charge rate on purchases of Class A shares of the Fund (and other OppenheimerFunds) that applies under the Right of Accumulation to current purchases of Class A shares. 2. In the section entitled "Letters of Intent" on page 41, a new third paragraph is added as follows: For purchases of shares of the Fund and other OppenheimerFunds by OppenheimerFunds prototype 401(k) plans under a Letter of Intent, the Transfer Agent will not hold shares in escrow. If the intended purchase amount under the Letter entered into by an OppenheimerFunds prototype 401(k) plan is not purchased by the plan by the end of the Letter of Intent period, there will be no adjustment of commissions paid to the broker-dealer or financial institution of record for accounts held in the name of that plan. 3. In the section entitled "Terms of Escrow that Apply to Letters of Intent" on page 42, item 5 of that section is replaced by the following: 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 acquired subject to a contingent deferred sales charge, and (c) Class A or B shares acquired in exchange for either (i) Class A shares of one of the other OppenheimerFunds that were acquired subject to a Class A initial or contingent deferred sales charge or (ii) Class B shares of one of the other OppenheimerFunds that were acquired subject to a contingent deferred sales charge. 4. In the section entitled "Distributions from Retirement Plans" on page 45, the phrase "401(k) plans" is added after "403(b)(7) custodial plans" in the first sentence, and the third sentence of that section is revised to read as follows: Participants (other than self-employed persons maintaining a plan account in their own name) in OppenheimerFunds-sponsored prototype pension, profit-sharing or 401(k) plans may not directly redeem or exchange shares held for their account under those plans. 5. In the section entitled "Special Arrangements for Repurchase of Shares from Dealers and Brokers" on page 45, the last sentence of that section is revised to read as follows: 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 the required redemption documents in proper form, with the signature(s) of the registered owners guaranteed on the redemption document as described in the Prospectus. 6. In the section entitled "How To Exchange Shares" on page 47, the second full paragraph is changed by adding new third and fourth sentences as follows: However, shares of Oppenheimer Money Market Fund, Inc. purchased with the redemption proceeds of shares of other mutual funds (other than funds managed by the Manager or its subsidiaries) redeemed within the 12 months prior to that purchase may subsequently be exchanged for shares of other OppenheimerFunds without being subject to an initial or contingent deferred sales charge, whichever is applicable. To qualify for that privilege, the investor or the investor's dealer must notify the Distributor of eligibility for this privilege at the time the shares of Oppenheimer Money Market Fund, Inc. are purchased, and, if requested, must supply proof of entitlement to this privilege. July 14, 1995 PX0285.002 OPPENHEIMER BOND FUND 3410 South Galena Street, Denver, Colorado 80231 1-800-525-7048 Statement of Additional Information dated July 10, 1995. This Statement of Additional Information of Oppenheimer Bond Fund is not a Prospectus. This document contains additional information about the Fund and supplements information in the Prospectus dated July 10, 1995. It should be read together with the Prospectus which may be obtained by writing to the Fund's Transfer Agent, Oppenheimer Shareholder Services, at P.O. Box 5270, Denver, Colorado 80217 or by calling the Transfer Agent at the toll-free number shown above.
Contents Page About the Fund Investment Objective and Policies 2 Investment Policies and Strategies 2 Other Investment Techniques and Strategies 8 Other Investment Restrictions 20 How the Fund is Managed 21 Organization and History 21 Trustees and Officers of the Fund 22 The Manager and Its Affiliates 26 Brokerage Policies of the Fund 28 Performance of the Fund 30 Distribution and Service Plans 34 About Your Account How to Buy Shares 37 How to Sell Shares 43 How to Exchange Shares 47 Dividends, Capital Gains and Taxes 50 Additional Information About the Fund 51 Financial Information About the Fund Independent Auditors' Report 52 Financial Statements 53 Appendix A: Description of Securities Ratings A-1 Appendix B: Industry Classification B-1
ABOUT THE FUND Investment Objective And Policies Investment Policies and Strategies. The investment objectives and policies of the Fund are discussed in the Prospectus. Set forth below is supplemental information about those policies, and the types of securities in which the Fund invests as well as the strategies the Fund may use to try to achieve its objective. Certain capitalized terms used in this Statement of Additional Information are defined in the Prospectus. -- Debt Securities. All debt securities are subject to two types of risk: credit risk and interest rate risk (these are in addition to other investment risks that may affect a particular security). - Credit Risk. Credit risk relates to the ability of the issuer to meet interest or principal payments or both as they become due. Generally, higher yielding bonds are subject to credit risk to a greater extent than higher quality bonds. - Interest Rate Risk. Interest rate risk refers to the fluctuations in value of fixed-income securities resulting solely from the inverse relationship between price and yield of outstanding fixed-income securities. An increase in interest rates will generally reduce the market value of fixed-income investments, and a decline in interest rates will tend to increase their value. In addition, debt securities with longer maturities, which tend to produce higher yields, are subject to potentially greater capital appreciation and depreciation than obligations with shorter maturities. Fluctuations in the market value of fixed-income securities subsequent to their acquisition will not affect the interest payable on those securities, and thus the cash income from such securities, but will be reflected in the valuations of those securities used to compute the Fund's net asset values. - Commercial Paper. The Fund's commercial paper investments, in addition to those described in the Prospectus, include the following: Variable Amount Master Demand Notes. Master demand notes are corporate obligations which permit the investment of fluctuating amounts by the Fund at varying rates of interest pursuant to direct arrangements between the Fund, as lender, and the borrower. They permit daily changes in the amounts borrowed. The Fund has the right to increase the amount under the note at any time up to the full amount provided by the note agreement, or to decrease the amount, and the borrower may prepay up to the full amount of the note without penalty. These notes may or may not be backed by bank letters of credit. Because these notes are direct lending arrangements between the lender and borrower, it is not generally contemplated that they will be traded. There is no secondary market for these notes, although they are redeemable (and thus immediately repayable by the borrower) at principal amount, plus accrued interest, at any time. Accordingly, the Fund's right to redeem such notes is dependent upon the ability of the borrower to pay principal and interest on demand. The Fund has no limitations on the type of issuer from whom these notes will be purchased; however, in connection with such purchases and on an ongoing basis, the Manager will consider the earning power, cash flow and other liquidity ratios of the issuer, and its ability to pay principal and interest on demand, including a situation in which all holders of such notes made demand simultaneously. Investments in master demand notes are subject to the limitation on investments by the Fund in illiquid securities, described in the Prospectus. Floating Rate/Variable Rate Notes. Some of the notes the Fund may purchase may have variable or floating interest rates. Variable rates are adjustable at stated periodic intervals; floating rates are automatically adjusted according to a specified market rate for such investments, such as the percentage of the prime rate of a bank, or the 91-day U.S. Treasury Bill rate. Such obligations may be secured by bank letters of credit or other credit support arrangements. - Participation Interests. The Fund may invest in participation interests, subject to the limitation, described in "Illiquid and Restricted Securities" in the Prospectus on investments by the Fund in illiquid investments. Participation interests provide the Fund an undivided interest in a loan made by the issuing financial institution in the proportion that the Fund's participation interest bears to the total principal amount of the loan. No more than 5% of the Fund's net assets can be invested in participation interests of the same borrowers. 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, and there is a risk that such borrowers may have difficulty making payments. In the event the borrower fails to pay scheduled interest or principal payments, the Fund could experience a reduction in its income and might experience a decline in the value of that participation interest and in the net asset value of its shares. In the event of a failure by the financial institution to perform its obligation in connection with the participation agreement, the Fund might incur certain costs and delays in realizing payment or may suffer a loss of principal and/or interest. - Bank Obligations and Instruments Secured Thereby. The bank obligations the Fund may invest in include time deposits, certificates of deposit, and bankers' acceptances if they are: (i) obligations of a domestic bank with total assets of at least $1 billion or (ii) obligations of a foreign bank with total assets of at least U.S. $1 billion. The Fund may also invest in instruments secured by such obligations (e.g., debt which is guaranteed by the bank). For purposes of this section, the term "bank" includes commercial banks, savings banks, and savings and loan associations which 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, whether or not subject to withdrawal penalties. However, time deposits, other than those maturing in seven days or less, that are subject to withdrawal penalties are subject to the limitation on investments by the Fund in illiquid investments, set forth in the Prospectus under "Illiquid and Restricted Securities." Banker's 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. - Securities of Foreign Governments and Companies. As stated in the Prospectus, the Fund may invest in debt obligations (which may be dominated in U.S. dollars or non-U.S. currencies) issued or guaranteed by foreign corporations, certain supranational entities (described below) and foreign governments or their agencies or instrumentalities. The percentage of the Fund's assets that will be allocated to foreign securities will vary from time to time depending on, among other things, the relative yields of foreign and U.S. securities, the economies of foreign countries, the condition of such countries' financial markets, the interest rate climate of such countries and the relationship of such countries' currency to the U.S. dollar. The Manager will consider an issuer's affiliation, if any, with a foreign government as one of the factors in determining whether to purchase any particular foreign security. These factors are judged on the basis of fundamental economic criteria (e.g., relative inflation levels and trends, growth rate forecasts, balance of payments status, and economic policies) as well as technical and political data. The Fund's portfolio of foreign securities may include those of a number of foreign countries or, depending upon market conditions, those of a single country. Investments in foreign securities offer potential benefits not available from investments solely in securities of domestic issuers, by offering the opportunity to invest in foreign issuers that appear to offer growth potential, or in foreign countries with economic policies or business cycles different from those of the U.S., or to reduce fluctuations in portfolio value by taking advantage of foreign bond or other markets that do not move in a manner parallel to U.S. markets. From time to time, U.S. government policies have discouraged certain investments abroad by U.S. investors, through taxation or other restrictions, and it is possible that such restrictions could be reimposed. Securities of foreign issuers that are represented by American depository receipts, or that are listed on a U.S. securities exchange, or are traded in the U.S. over-the-counter market are not considered "foreign securities," because they are not subject to many of the special considerations and risks (discussed below) that apply to foreign securities traded and held abroad. If the Fund's securities are held abroad, the countries in which such securities may be held and the sub- custodians holding must be, in most cases, approved by the Fund's Board of Trustees under applicable SEC rules. The obligations of foreign governmental entities may or may not be supported by the full faith and credit of a foreign government. Obligations of "supranational entities" include those of international organizations designated or supported by governmental entities to promote economic reconstruction or development and of international banking institutions and related government agencies. Examples include the International Bank for Reconstruction and Development (the "World Bank"), the European Coal and Steel Community, the Asian Development Bank and the Inter-American Development Bank. The governmental members, or "stockholders," of these entities usually make initial capital contributions to the supranational entity and in many cases are committed to make additional capital contributions if the supranational entity is unable to repay its borrowings. Each supranational entity's lending activities are limited to a percentage of its total capital (including "callable capital" contributed by members at the entity's call), reserves and net income. There is no assurance that foreign governments will be able or willing to honor their commitments. Investing in foreign securities involves considerations and possible risks not typically associated with investing in securities in the U.S. The values of foreign securities will be affected by changes in currency rates or exchange control regulations or currency blockage, application of foreign tax laws, including withholding taxes, changes in governmental administration or economic or monetary policy (in the U.S. or abroad) or changed circumstances in dealings between nations. There may be a lack of public information about foreign issuers. Foreign countries may not have financial reporting, accounting and auditing standards comparable to those that apply to U.S. issuers. Costs will be incurred in connection with conversions between various currencies. Foreign brokerage commissions are generally higher than commissions in the U.S., and foreign securities markets may be less liquid, more volatile and less subject to governmental regulation than in the U.S. They may have increased delays in settling portfolio transactions. Investments in foreign countries could be affected by other factors not generally thought to be present in the U.S., including expropriation or nationalization, confiscatory taxation and potential difficulties in enforcing contractual obligations, and could be subject to extended settlement periods. Because the Fund may purchase securities denominated in foreign currencies, a change in the value of any such currency against the U.S. dollar will result in a change in the U.S. dollar value of the Fund's assets and its income available for distribution. In addition, although a portion of the Fund's investment income may be received or realized in foreign currencies, the Fund will be required to compute and distribute its income in U.S. dollars, and absorb the cost of currency fluctuations. The Fund may engage in foreign currency exchange transactions for hedging purposes to protect against changes in future exchange rates. See "Other Investment Techniques and Strategies - Hedging," below. The values of foreign investments and the investment income derived from them may also be affected unfavorably by changes in currency exchange control regulations. Although the Fund will invest only in securities denominated in foreign currencies that at the time of investment do not have significant government-imposed restrictions on conversion into U.S. dollars, there can be no assurance against subsequent imposition of currency controls. In addition, the values of foreign securities will fluctuate in response to a variety of factors, including changes in U.S. and foreign interest rates. -- U.S. Government Securities. U.S. Government Securities are debt obligations issued or guaranteed by the U.S. Government or one of its agencies or instrumentalities, and include "zero coupon" Treasury securities and mortgage-backed securities and CMOs. - Mortgage-Backed Securities. These securities represent participation interests in pools of residential mortgage loans which are guaranteed by agencies or instrumentalities of the U.S. Government. Such securities differ from conventional debt securities which generally provide for periodic payment of interest in fixed or determinable amounts (usually semi-annually) with principal payments at maturity or specified call dates. Some mortgage-backed securities in which the Fund may invest may be backed by the full faith and credit of the U.S. Treasury (e.g., direct pass-through certificates of Government National Mortgage Association); some are supported by the right of the issuer to borrow from the U.S. Government (e.g., obligations of Federal Home Loan Mortgage Corporation); and some are backed by only the credit of the issuer itself. Those guarantees do not extend to the value of or yield of the mortgage- backed securities themselves or to the net asset value of the Fund's shares. Any of these government agencies may also issue collateralized mortgage-backed obligations ("CMOs"), discussed below. The yield on mortgage-backed securities is based on the average expected life of the underlying pool of mortgage loans. The actual life of any particular pool will be shortened by any unscheduled or early payments of principal and interest. Principal prepayments generally result from the sale of the underlying property or the refinancing or foreclosure of underlying mortgages. The occurrence of prepayments is affected by a wide range of economic, demographic and social factors and, accordingly, it is not possible to predict accurately the average life of a particular pool. Yield on such pools is usually computed by using the historical record of prepayments for that pool, or, in the case of newly- issued mortgages, the prepayment history of similar pools. The actual prepayment experience of a pool of mortgage loans may cause the yield realized by the Fund to differ from the yield calculated on the basis of the expected average life of the pool. Prepayments tend to increase during periods of falling interest rates, while during periods of rising interest rates prepayments will most likely decline. When prevailing interest rates rise, the value of a pass- through security may decrease as do the values of other debt securities, but, when prevailing interest rates decline, the value of a pass-through security is not likely to rise to the extent that the value of other debt securities rise, because of the prepayment feature of pass-through securities. The Fund's reinvestment of scheduled principal payments and unscheduled prepayments it receives may occur at times when available investments offer higher or lower rates than the original investment, thus affecting the yield of the Fund. Monthly interest payments received by the Fund have a compounding effect which may increase the yield to the Fund more than debt obligations that pay interest semi-annually. Because of those factors, mortgage-backed securities may be less effective than Treasury bonds of similar maturity at maintaining yields during periods of declining interest rates. The Fund may purchase mortgage-backed securities at par, at a premium or at a discount. Accelerated prepayments adversely affect yields for pass-through securities purchased at a premium (i.e., at a price in excess of their principal amount) and may involve additional risk of loss of principal because the premium may not have been fully amortized at the time the obligation is repaid. The opposite is true for pass-through securities purchased at a discount. The Fund may invest in "stripped" mortgage backed securities, in which the principal and interest portions of the security are separated and sold. Stripped mortgage-backed securities usually have at least two classes each of which receives different proportions of interest and principal distributions on the underlying pool of mortgage assets. One common variety of stripped mortgage-backed security has one class that receives some of the interest and most of the principal, while the other class receives most of the interest and remainder of the principal. In some cases, one class will receive all of the interest (the "interest-only" or "IO" class), while the other class will receive all of the principal (the "principal-only" or "PO" class). Interest only securities are extremely sensitive to interest rate changes, and prepayments of principal on the underlying mortgage assets. An increase in principal payments or prepayments will reduce the income available to the IO security. In other types of CMOs, the underlying principal payments may apply to various classes in a particular order, and therefore the value of certain classes or "tranches" of such securities may be more volatile than the value of the pool as a whole, and losses may be more severe than on other classes. Mortgage-backed securities may be less effective than debt obligations of similar maturity at maintaining yields during periods of declining interest rates. As new types of mortgage-related securities are developed and offered to investors, the Manager will, subject to the direction of the Board of Trustees and consistent with the Fund's investment objective and policies, consider making investments in such new types of mortgage-related securities. - GNMA Certificates. Certificates of Government National Mortgage Association ("GNMA") are mortgage-backed securities of GNMA that evidence an undivided interest in a pool or pools of mortgages ("GNMA Certificates"). The GNMA Certificates that the Fund may purchase are of the "modified pass-through" type, which entitle the holder to receive timely payment of all interest and principal payments due on the mortgage pool, net of fees paid to the "issuer" and GNMA, regardless of whether the mortgagor actually makes the payments when due. The National Housing Act authorizes GNMA to guarantee the timely payment of principal and interest on securities backed by a pool of mortgages insured by the Federal Housing Administration ("FHA") or guaranteed by the Veterans Administration ("VA"). The GNMA guarantee is backed by the full faith and credit of the U.S. Government. GNMA is also empowered to borrow without limitation from the U.S. Treasury if necessary to make any payments required under its guarantee. The average life of a GNMA Certificate is likely to be substantially shorter than the original maturity of the mortgages underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal investment long before the maturity of the mortgages in the pool. Foreclosures impose no risk to principal investment because of the GNMA guarantee, except to the extent that the Fund has purchased the certificates at a premium in the secondary market. - FNMA Securities. The Federal National Mortgage Association ("FNMA") was established to create a secondary market in mortgages insured by the FHA. FNMA issues guaranteed mortgage pass-through certificates ("FNMA Certificates"). FNMA Certificates resemble GNMA Certificates in that each FNMA Certificate represents a pro rata share of all interest and principal payments made and owed on the underlying pool. FNMA guarantees timely payment of interest and principal on FNMA Certificates. The FNMA guarantee is not backed by the full faith and credit of the U.S. Government. - FHLMC Securities. The Federal Home Loan Mortgage Corporation ("FHLMC") was created to promote development of a nationwide secondary market for conventional residential mortgages. FHLMC issues two types of mortgage pass-through certificates ("FHLMC Certificates"): mortgage participation certificates ("PCs") and guaranteed mortgage certificates ("GMCs"). PCs resemble GNMA Certificates in that each PC represents a pro rata share of all interest and principal payments made and owed on the underlying pool. FHLMC guarantees timely monthly payment of interest on PCs and the ultimate payment of principal. The FHLMC guarantee is not backed by the full faith and credit of the U.S. Government. GMCs also represent a pro rata interest in a pool of mortgages. However, these instruments pay interest semi-annually and return principal once a year in guaranteed minimum payments. The expected average life of these securities is approximately ten years. The FHLMC guarantee is not backed by the full faith and credit of the U.S. Government. - Collateralized Mortgage-Backed Obligations ("CMOs"). CMOs are fully-collateralized bonds that are the general obligations of the issuer thereof, either the U.S. Government, a U.S. government instrumentality, or a private issuer, which may be a domestic or foreign corporation. Such bonds generally are secured by an assignment to a trustee (under the indenture pursuant to which the bonds are issued) of collateral consisting of a pool of mortgages. Payments with respect to the underlying mortgages generally are made to the trustee under the indenture. Payments of principal and interest on the underlying mortgages are not passed through to the holders of the CMOs as such (i.e., the character of payments of principal and interest is not passed through, and therefore payments to holders of CMOs attributable to interest paid and principal repaid on the underlying mortgages do not necessarily constitute income and return of capital, respectively, to such holders), but such payments are dedicated to payment of interest on and repayment of principal of the CMOs. CMOs often are issued in two or more classes with different characteristics such as varying maturities and stated rates of interest. Because interest and principal payments on the underlying mortgages are not passed through to holders of CMOs, CMOs of varying maturities may be secured by the same pool of mortgages, the payments on which are used to pay interest on each class and to retire successive maturities in sequence. Unlike other mortgage-backed securities (discussed above), CMOs are designed to be retired as the underlying mortgages are repaid. In the event of prepayment on such mortgages, the class of CMO first to mature generally will be paid down. Therefore, although in most cases the issuer of CMOs will not supply additional collateral in the event of such prepayment, there will be sufficient collateral to secure CMOs that remain outstanding. - Asset-Backed Securities. The value of an asset-backed security is affected by changes in the market's perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans, or the financial institution providing any credit enhancement, and is also affected if any credit enhancement has been exhausted. The risks of investing in asset-backed securities are ultimately dependent upon payment of consumer loans by the individual borrowers. As a purchaser of an asset-backed security, the Fund would generally have no recourse to the entity that originated the loans in the event of default by a borrower. The underlying loans are subject to prepayments, which shorten the weighted average life of asset-backed securities and may lower their return, in the same manner as described above for the prepayments of a pool of mortgage loans underlying mortgage- backed securities. Other Investment Techniques And Strategies -- Hedging with Options and Futures Contracts. The Fund may employ one or more types of Hedging Instruments for the purposes described in the Prospectus. When hedging to attempt to protect against declines in the market value of the Fund's portfolio, to permit the Fund to retain unrealized gains in the value of portfolio securities which have appreciated, or to facilitate selling securities for investment reasons, the Fund may: (i) sell Futures, (ii) purchase puts on such Futures or securities, or (iii) write calls on securities held by it or on Futures. When hedging to attempt to protect against the possibility that portfolio securities are not fully included in a rise in value of the debt securities market, the Fund may: (i) purchase Futures, or (ii) purchase calls on such Futures or on securities. Covered calls and puts may also be written on debt securities to attempt to increase the Fund's income. When hedging to protect against declines in the dollar value of a foreign currency-denominated security, the Fund may: (a) purchase puts on that foreign currency and on foreign currency Futures, (b) write calls on that currency or on such Futures, or (c) enter into Forward Contracts at a lower rate than the spot ("cash") rate. The Fund's strategy of hedging with Futures and options on Futures will be incidental to the Fund's activities in the underlying cash market. Additional Information about the Hedging Instruments the Fund may use is provided below. At present, the Fund does not intend to enter into Futures, Forward Contracts and options on Futures if, after any such purchase, the sum of margin deposits on Futures and premiums paid on Futures options exceeds 5% of the value of the Fund's total assets. In the future, the Fund may employ Hedging Instruments and strategies that are not presently contemplated but which may be developed, to the extent such investment methods are consistent with the Fund's investment objective, legally permissible and adequately disclosed. - Writing Call Options. The Fund may write (i.e. sell) call options ("calls") on debt securities that are traded on U.S. and foreign securities exchanges and over-the-counter markets, to enhance income through the receipt of premiums from expired calls and any net profits from closing purchase transactions. After any such sale up to 50% of the Fund's total assets may be subject to calls. All such calls written by the Fund must be "covered" while the call is outstanding (i.e. the Fund must own the securities subject to the call or other securities acceptable for applicable escrow requirements). Calls on Futures (discussed below) must be covered by deliverable securities or by liquid assets segregated to satisfy the Futures contract. When the Fund writes a call on a security it receives a premium and agrees to sell the callable investment to a purchaser of a corresponding call on the same security during the call period (usually not more than 9 months) at a fixed exercise price (which may differ from the market price of the underlying security), regardless of market price changes during the call period. The Fund has retained the risk of loss should the price of the underlying security decline during the call period, which may be offset to some extent by the premium. To terminate its obligation on a call it has written, the Fund may purchase a corresponding call in a "closing purchase transaction." A profit or loss will be realized, depending upon whether the net of the amount of the option transaction costs and the premium received on the call written was more or less than the price of the call subsequently purchased. A profit may also be realized if the call lapses unexercised, because the Fund retains the underlying investment and the premium received. Any such profits are considered short-term capital gains for Federal income tax purposes, and when distributed by the Fund are taxable as ordinary income. If the Fund could not effect a closing purchase transaction due to lack of a market, it would have to hold the callable investments until the call lapsed or was exercised. The Fund may also write calls on Futures without owning a futures contract or a deliverable bond, provided that at the time the call is written, the Fund covers the call by segregating in escrow an equivalent dollar amount of liquid assets. The Fund will segregate additional liquid assets if the value of the escrowed assets drops below 100% of the current value of the Future. In no circumstances would an exercise notice require the Fund to deliver a futures contract; it would simply put the Fund in a short futures position, which is permitted by the Fund's hedging policies. - Writing Put Options. The Fund may write put options on debt securities or Futures but only if such puts are covered by segregated liquid assets. The Fund will not write puts if, as a result, more than 50% of the Fund's net assets would be required to be segregated to cover such put obligations. In writing puts, there is the risk that the Fund may be required to buy the underlying security at a disadvantageous price. A put option on securities gives the purchaser the right to sell, and the writer the obligation to buy, the underlying investment at the exercise price during the option period. Writing a put covered by segregated liquid assets equal to the exercise price of the put has the same economic effect to the Fund as writing a covered call. The premium the Fund receives from writing a put option represents a profit, as long as the price of the underlying investment remains above the exercise price. However, the Fund has also assumed the obligation during the option period to buy the underlying investment from the buyer of the put at the exercise price, even though the value of the investment may fall below the exercise price. If the put lapses unexercised, the Fund (as the writer of the put) realizes a gain in the amount of the premium. If the put is exercised, the Fund must fulfill its obligation to purchase the underlying investment at the exercise price, which will usually exceed the market value of the investment at that time. In that case, the Fund may incur a loss, equal to the sum of the current market value of the underlying investment and the premium received minus the sum of the exercise price and any transaction costs incurred. When writing put options on securities, to secure its obligation to pay for the underlying security, the Fund will deposit in escrow liquid assets with a value equal to or greater than the exercise price of the put option. The Fund therefore forgoes the opportunity of investing the segregated assets or writing calls against those assets. As long as the obligation of the Fund as the put writer continues, it may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring the Fund to take delivery of the underlying security against payment of the exercise price. The Fund has no control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the termination of its obligation as the writer of the put. This obligation terminates upon expiration of the put, or such earlier time at which the Fund effects a closing purchase transaction by purchasing a put of the same series as that previously sold. Once the Fund has been assigned an exercise notice, it is thereafter not allowed to effect a closing purchase transaction. The Fund may effect a closing purchase transaction to realize a profit on an outstanding put option it has written or to prevent an underlying security from being put. Furthermore, effecting such a closing purchase transaction will permit the Fund to write another put option to the extent that the exercise price thereof is secured by the deposited assets, or to utilize the proceeds from the sale of such assets for other investments by the Fund. The Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from writing the option. As above for writing covered calls, any and all such profits described herein from writing puts are considered short-term gains for Federal tax purposes, and when distributed by the Fund, are taxable as ordinary income. The Trustees have adopted a non-fundamental policy that the Fund may only purchase call options and put options with a value of up to 5% of its net assets. - Purchasing Puts and Calls. The Fund may purchase calls in order to protect against the possibility that the Fund's portfolio will not fully participate in an anticipated rise in value of the long-term debt securities market. When the Fund purchases a call, it pays a premium (other than in a closing purchase transaction) and, except as to calls on bond indices, has the right to buy the underlying investment from a seller of a corresponding call on the same investment during the call period at a fixed exercise price. In purchasing a call, the Fund benefits only if the call is sold at a profit or if, during the call period, the market price of the underlying investment is above the sum of the call price, transaction costs, and the premium paid, and the call is exercised. If the call is not exercised or sold (whether or not at a profit), it will become worthless at its expiration date and the Fund will lose its premium payment and the right to purchase the underlying investment. When the Fund purchases a put, it pays a premium and has the right to sell the underlying investment to a seller of a corresponding put on the same investment during the put period at a fixed exercise price. Buying a put on an investment the Fund owns (a "protective put") enables the Fund to attempt to protect itself during the put period against a decline in the value of the underlying investment below the exercise price by selling the underlying investment at the exercise price to a seller of a corresponding put. If the market price of the underlying investment is equal to or above the exercise price and as a result the put is not exercised or resold, the put will become worthless at its expiration and the Fund will lose the premium payment and the right to sell the underlying investment. However, the put may be sold prior to expiration (whether or not at a profit). Purchasing either a put on Interest Rate Futures or on debt securities it does not own permits the Fund either to resell the put or to buy the underlying investment and sell it at the exercise price. The resale price of the put will vary inversely with the price of the underlying investment. If the market price of the underlying investment is above the exercise price, and as a result the put is not exercised, the put will become worthless on the expiration date. In the event of a decline in price of the underlying investment, the Fund could exercise or sell the put at a profit to attempt to offset some or all of its loss on its portfolio securities. When the Fund purchases a put on an Interest rate Future or debt security not held by it, the put protects the Fund to the extent that the prices of the underlying Future or debt securities move in a similar pattern of the debt securities in the Fund's portfolio. The Fund's option activities may affect its portfolio turnover rate and brokerage commissions. The exercise of calls written by the Fund may cause the Fund to sell related portfolio securities, thus increasing its turnover rate. The exercise by the Fund of puts on securities will cause the sale of underlying investments, increasing portfolio turnover. Although the decision whether to exercise a put it holds is within the Fund's control, holding a put might cause the Fund to sell the related investments for reasons that would not exist in the absence of the put. The Fund will pay a brokerage commission each time it buys or sells a call, put or an underlying investment in connection with the exercise of a put or call. Those commissions may be higher than the commissions for direct purchases or sales of the underlying investments. Premiums paid for options are small in relation to the market value of the underlying investments and, consequently, put and call options offer large amounts of leverage. The leverage offered by trading in options could result in the Fund's net asset value being more sensitive to changes in the value of the underlying investments. - Options on Foreign Currencies. The Fund intends to write and purchase calls on foreign currencies. The Fund may purchase and write puts and calls on foreign currencies that are traded on a securities or commodities exchange or quoted by major recognized dealers in such options, for the purpose of protecting against declines in the dollar value of foreign securities and against increases in the dollar cost of foreign securities to be acquired. If a rise is anticipated in the dollar value of a foreign currency in which securities to be acquired are denominated, the increased cost of such securities may be partially offset by purchasing calls or writing puts on that foreign currency. If a decline in the dollar value of a foreign currency is anticipated, the decline in value of portfolio securities denominated in that currency may be partially offset by writing calls or purchasing puts on that foreign currency. However, in the event of currency rate fluctuations adverse to the Fund's position, it would lose the premium it paid and transactions costs. A call written on a foreign currency by the Fund is covered if the Fund owns the underlying foreign currency covered by the call or has an absolute and immediate right to acquire that foreign currency without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other foreign currency held in its portfolio. A call may be written by the Fund on a foreign currency to provide a hedge against a decline due to an expected adverse change in the exchange rate in the U.S. dollar value of a security which the Fund owns or has the right to acquire and which is denominated in the currency underlying the option. This is a cross-hedging strategy. In such circumstances, the Fund collateralizes the option by maintaining in a segregated account with the Fund's custodian, cash or U.S. Government Securities in an amount not less than the value of the underlying foreign currency in U.S. dollars marked-to- market daily. - Futures. The Fund may buy and sell Futures. No price is paid or received upon the purchase or sale of an Interest Rate Future or a foreign currency exchange contract ("Forward Contract"), discussed below. An Interest Rate Future obligates the seller to deliver and the purchaser to take a specific type of debt security at a specific future date for a fixed price. That obligation may be satisfied by actual delivery of the debt security or by entering into an offsetting contract. A securities index assigns relative values to the securities included in that index and is used as a basis for trading long-term Financial Futures contracts. Financial Futures reflect the price movements of securities included in the index. They differ from Interest Rate Futures in that settlement is made in cash rather than by delivery of the underlying investment. Upon entering into a Futures transaction, the Fund will be required to deposit an initial margin payment in cash or U.S. Treasury bills with the futures commission merchant (the "futures broker"). The initial margin will be deposited with the Fund's Custodian in an account registered in the futures broker's name; however the futures broker can gain access to that account only under specified conditions. As the Future is marked to market to reflect changes in its market value, subsequent margin payments, called variation margin, will be made to or by the futures broker on a daily basis. At any time prior to the expiration of the Future, if the Fund elects to close out its position by taking an opposite position, a final determination of variation margin is made, additional cash is required to be paid by or released to the Fund, and any loss or gain is realized for tax purposes. Although Interest Rate Futures by their terms call for settlement by delivery or acquisition of debt securities, in most cases the obligation is fulfilled by entering into an offsetting position. All futures transactions are effected through a clearinghouse associated with the exchange on which the contracts are traded. - Forward Contracts. The Fund may enter into foreign currency exchange contracts ("Forward Contracts"), which obligate the seller to deliver and the purchaser to take a specific amount of foreign currency at a specific future date for a fixed price. A Forward Contract involves bilateral obligations of one party to purchase, and another party to sell, a specific currency at a future date (which may be any fixed number of days from the date of the contract agreed upon by the parties), at a price set at the time the contract is entered into. These contracts are traded in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. The Fund may enter into a Forward Contract in order to "lock in" the U.S. dollar price of a security denominated in a foreign currency which it has purchased or sold but which has not yet settled, or to protect against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and a foreign currency. There is a risk that use of Forward Contracts may reduce the gain that would otherwise result from a change in the relationship between the U.S. dollar and a foreign currency. Forward contracts include standardized foreign currency futures contracts which are traded on exchanges and are subject to procedures and regulations applicable to other Futures. The Fund may also enter into a forward contract to sell a foreign currency denominated in a currency other than that in which the underlying security is denominated. This is done in the expectation that there is a greater correlation between the foreign currency of the forward contract and the foreign currency of the underlying investment than between the U.S. dollar and the foreign currency of the underlying investment. This technique is referred to as "cross hedging." The success of cross hedging is dependent on many factors, including the ability of the Manager to correctly identify and monitor the correlation between foreign currencies and the U.S. dollar. To the extent that the correlation is not identical, the Fund may experience losses or gains on both the underlying security and the cross currency hedge. The Fund may use Forward Contracts to protect against uncertainty in the level of future exchange rates. The use of Forward Contracts does not eliminate fluctuations in the prices of the underlying securities the Fund owns or intends to acquire, but it does fix a rate of exchange in advance. In addition, although Forward Contracts limit the risk of loss due to a decline in the value of the hedged currencies, at the same time they limit any potential gain that might result should the value of the currencies increase. There is no limitation as to the percentage of the Fund's assets that may be committed to foreign currency exchange contracts. The Fund does not enter into such forward contracts or maintain a net exposure in such contracts to the extent that the Fund would be obligated to deliver an amount of foreign currency in excess of the value of the Fund's assets denominated in that currency, or enter into a "cross hedge," unless it is denominated in a currency or currencies that the Manager believes will have price movements that tend to correlate closely with the currency in which the investment being hedged is denominated. See "Tax Aspects of Covered Calls and Hedging Instruments" below for a discussion of the tax treatment of foreign currency exchange contracts. The Fund may enter into Forward Contracts with respect to specific transactions. For example, when the Fund enters into a contract for the purchase or sale of a security denominated in a foreign currency, or when the Fund anticipates receipt of dividend payments in a foreign currency, the Fund may desire to "lock-in" the U.S. dollar price of the security or the U.S. dollar equivalent of such payment by entering into a Forward Contract, for a fixed amount of U.S. dollars per unit of foreign currency, for the purchase or sale of the amount of foreign currency involved in the underlying transaction ("transaction hedge"). The Fund will thereby be able to protect itself against a possible loss resulting from an adverse change in the relationship between the currency exchange rates during the period between the date on which the security is purchased or sold, or on which the payment is declared, and the date on which such payments are made or received. The Fund may also use Forward Contracts to lock in the U.S. dollar value of portfolio positions ("position hedge"). In a position hedge, for example, when the Fund believes that foreign currency may suffer a substantial decline against the U.S. dollar, it may enter into a forward sale contract to sell an amount of that foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency, or when the Fund believes that the U.S. dollar may suffer a substantial decline against a foreign currency, it may enter into a forward purchase contract to buy that foreign currency for a fixed dollar amount. In this situation the Fund may, in the alternative, enter into a forward contract to sell a different foreign currency for a fixed U.S. dollar amount where the Fund believes that the U.S. dollar value of the currency to be sold pursuant to the forward contract will fall whenever there is a decline in the U.S. dollar value of the currency in which portfolio securities of the Fund are denominated ("cross hedge"). The Fund's Custodian will place cash or U.S. Government securities or other liquid high-quality debt securities in a separate account of the Fund with the Custodian having a value equal to the aggregate amount of the Fund's commitments under forward contracts entered into with respect to position hedges and cross hedges. If the value of the securities placed in the separate account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the Fund's obligations with respect to such contracts. As an alternative to maintaining all or part of the separate account, the Fund may purchase a call option permitting the Fund to purchase the amount of foreign currency being hedged by a forward sale contract at a price no higher than the forward contract price, or the Fund may purchase a put option permitting the Fund to sell the amount of foreign currency subject to a forward purchase contract at a price as high or higher than the forward contract price. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not entered into such contracts. The precise matching of the Forward Contract amounts and the value of the securities involved will not generally be possible because the future value of such securities in foreign currencies will change as a consequence of market movements in the value of these securities between the date the Forward Contract is entered into and the date it is sold. Accordingly, it may be necessary for the Fund to purchase additional foreign currency on the spot (i.e., cash) market (and bear the expense of such purchase), if the market value of the security is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market some of the foreign currency received upon the sale of the portfolio security if its market value exceeds the amount of foreign currency the Fund is obligated to deliver. The projection of short-term currency market movements is extremely difficult, and the successful execution of a short- term hedging strategy is highly uncertain. Forward Contracts involve the risk that anticipated currency movements will not be accurately predicted, causing the Fund to sustain losses on these contracts and transactions costs. At or before the maturity of a Forward Contract requiring the Fund to sell a currency, the Fund may either sell a portfolio security and use the sale proceeds to make delivery of the currency or retain the security and offset its contractual obligation to deliver the currency by purchasing a second contract pursuant to which the Fund will obtain, on the same maturity date, the same amount of the currency that it is obligated to deliver. Similarly, the Fund may close out a Forward Contract requiring it to purchase a specified currency by entering into a second contract entitling it to sell the same amount of the same currency on the maturity date of the first contract. The Fund would realize a gain or loss as a result of entering into such an offsetting Forward Contract under either circumstance to the extent the exchange rate or rates between the currencies involved moved between the execution dates of the first contract and offsetting contract. The cost to the Fund of engaging in Forward Contracts varies with factors such as the currencies involved, the length of the contract period and the market conditions then prevailing. Because Forward Contracts are usually entered into on a principal basis, no fees or commissions are involved. Because such contracts are not traded on an exchange, the Fund must evaluate the credit and performance risk of each particular counterparty under a Forward Contract. Although the Fund values its assets daily in terms of U.S. dollars, it does not intend to convert its holdings of foreign currencies into U.S. dollars on a daily basis. The Fund may convert foreign currency from time to time, and investors should be aware of the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do seek to realize a profit based on the difference between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. - Interest Rate Swap Transactions. Swap agreements entail both interest rate risk and credit risk. There is a risk that, based on movements of interest rates in the future, the payments made by the Fund under a swap agreement will have been greater than those received by it. Credit risk arises from the possibility that the counterparty will default. If the counterparty to an interest rate swap defaults, the Fund's loss will consist of the net amount of contractual interest payments that the Fund has not yet received. The Manager will monitor the creditworthiness of counterparties to the Fund's interest rate swap transactions on an ongoing basis. The Fund will enter into swap transactions with appropriate counterparties pursuant to master netting agreements. A master netting agreement provides that all swaps done between the Fund and that counterparty under that master agreement shall be regarded as parts of an integral agreement. If on any date amounts are payable in the same currency in respect of one or more swap transactions, the net amount payable on that date in that currency shall be paid. In addition, the master netting agreement may provide that if one party defaults generally or on one swap, the counterparty may terminate the swaps with that party. Under such agreements, if there is a default resulting in a loss to one party, the measure of that party's damages is calculated by reference to the average cost of a replacement swap with respect to each swap (i.e., the mark-to-market value at the time of the termination of each swap). The gains and losses on all swaps are then netted, and the result is the counterparty's gain or loss on termination. The termination of all swaps and the netting of gains and losses on termination is generally referred to as "aggregation". - Additional Information About Hedging Instruments and Their Use. The Fund's Custodian, or a securities depository acting for the Custodian, will act as the Fund's escrow agent, through the facilities of the Options Clearing Corporation ("OCC"), as to the investments on which the Fund has written options traded on exchanges or as to other acceptable escrow securities, so that no margin will be required for such transactions. OCC will release the securities on the expiration of the option or upon the Fund's entering into a closing transaction. An option position may be closed out only on a market which provides secondary trading for options of the same series, and there is no assurance that a liquid secondary market will exist for any particular option. The Fund's option activities may affect its turnover rate and brokerage commissions. The exercise by the Fund of puts on securities will cause the sale of related investments, increasing portfolio turnover. Although such exercise is within the Fund's control, holding a put might cause the Fund to sell the related investments for reasons which would not exist in the absence of the put. The Fund will pay a brokerage commission each time it buys a put or call, sells a call, or buys or sells an underlying investment in connection with the exercise of a put or call. Such commissions may be higher than those which would apply to direct purchases or sales of such underlying investments. Premiums paid for options are small in relation to the market value of the related investments, and consequently, put and call options offer large amounts of leverage. The leverage offered by trading in options could result in the Fund's net asset value being more sensitive to changes in the value of the underlying investments. When the Fund writes an over-the-counter ("OTC") option, it will enter into an arrangement with a primary U.S. Government securities dealer, which would establish a formula price at which the Fund would have the absolute right to repurchase that OTC option. That formula price would generally be based on a multiple of the premium received for the option, plus the amount by which the option is exercisable below the market price of the underlying security (that is, the extent to which the option is "in-the-money"). When the Fund writes an OTC option, it will treat as illiquid (for purposes of the limit on its assets that may be invested in illiquid securities, stated in the Prospectus) the mark-to- market value of any OTC option held by it. The Securities and Exchange Commission ("SEC") is evaluating whether OTC options should be considered liquid securities, and the procedure described above could be affected by the outcome of that evaluation. - Regulatory Aspects of Hedging Instruments. The Fund is required to operate within certain guidelines and restrictions with respect to its use of Futures and options on Futures established by the Commodity Futures Trading Commission ("CFTC"). In particular the Fund is exempted from registration with the CFTC as a "commodity pool operator" if the Fund complies with the requirements of Rule 4.5 adopted by the CFTC. The Rule does not limit the percentage of the Fund's assets that may be used for Futures margin and related options premiums for a bona fide hedging position. However, under the Rule the Fund must limit its aggregate initial futures margin and related option premiums to no more than 5% of the Fund's net assets for hedging strategies that are not considered bona fide hedging strategies under the Rule. Transactions in options by the Fund are subject to limitations established by each of the exchanges governing the maximum number of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options were written or purchased on the same or different exchanges or are held in one or more accounts or through one or more exchanges or brokers. Thus, the number of options which the Fund may write or hold may be affected by options written or held by other entities, including other investment companies having the same or an affiliated investment adviser. Position limits also apply to Futures. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other sanctions. Due to requirements under the Investment Company Act, when the Fund purchases a Future, the Fund will maintain, in a segregated account or accounts with its custodian bank, cash or readily-marketable, short-term (maturing in one year or less) debt instruments in an amount equal to the market value of the securities underlying such Future, less the margin deposit applicable to it. - Tax Aspects of Covered Calls and Hedging Instruments. The Fund intends to qualify as a "regulated investment company" under the Internal Revenue Code (although it reserves the right not to qualify). That qualification enables the Fund to "pass through" its income and realized capital gains to shareholders without having to pay tax on them. This avoids a "double tax" on that income and capital gains, since shareholders normally will be taxed on the dividends and capital gains they receive from the Fund (unless the Fund's shares are held in a retirement account or the shareholder is otherwise exempt from tax). One of the tests for the Fund's qualification as a regulated investment company is that less than 30% of its gross income must be derived from gains realized on the sale of securities held for less than three months. To comply with this 30% cap, the Fund will limit the extent to which it engages in the following activities, but will not be precluded from them: (i) selling investments, including Bond Index Futures, held for less than three months, whether or not they were purchased on the exercise of a call held by the Fund; (ii) purchasing options which expire in less than three months; (iii) effecting closing transactions with respect to calls or puts written or purchased less than three months previously; (iv) exercising puts or calls held by the Fund for less than three months; or (v) writing calls on investments held less than three months. Certain foreign currency exchange contracts ("Forward Contracts") in which the Fund may invest are treated as "section 1256 contracts." Gains or losses relating to section 1256 contracts generally are characterized under the Internal Revenue Code as 60% long-term and 40% short-term capital gains or losses. However, foreign currency gains or losses arising from certain section 1256 contracts (including Forward Contracts) generally are treated as ordinary income or loss. In addition, section 1256 contracts held by the Fund at the end of each taxable year are "marked-to market" with the result that unrealized gains or losses are treated as though they were realized. These contracts also may be marked- to-market for purposes of the excise tax applicable to investment company distributions and for other purposes under rules prescribed pursuant to the Internal Revenue Code. An election can be made by the Fund to exempt these transactions from this mark-to-market treatment. Certain Forward Contracts entered into by the Fund may result in "straddles" for Federal income tax purposes. The straddle rules may affect the character of gains (or losses) realized by the Fund on straddle positions. Generally, a loss sustained on the disposition of a position making up a straddle is allowed only to the extent such loss exceeds any unrecognized gain in the offsetting positions making up the straddle. Disallowed loss is generally allowed at the point where there is no unrecognized gain in the offsetting positions making up the straddle, or the offsetting position is disposed of. Under the Internal Revenue Code, gains or losses attributable to fluctuations in exchange rates that occur between the time the Fund accrues interest or other receivables or accrues expenses or other liabilities denominated in a foreign currency and the time the Fund actually collects such receivables or pays such liabilities generally are treated as ordinary income or ordinary loss. Similarly, on disposition of debt securities denominated in a foreign currency and on disposition of foreign currency forward contracts, gains or losses attributable to fluctuations in the value of a foreign currency between the date of acquisition of the security or contract and the date of disposition also are treated as ordinary gain or loss. Currency gains and losses are offset against market gains and losses before determining a net "Section 988" gain or loss under the Internal Revenue Code, which may increase or decrease the amount of the Fund's investment company income available for distribution to its shareholders. - Possible Risk Factors in Hedging. In addition to the risks with respect to options discussed in the Prospectus and above, there is a risk when hedging by selling Futures to attempt to protect against decline in value of the Fund's portfolio securities (due to an increase in interest rates) that the prices of such Futures will correlate imperfectly with the behavior of the cash (i.e., market value) prices of the Fund's securities. The ordinary spreads between prices in the cash and futures markets are subject to distortions due to differences in the natures of those markets. First, all participants in the futures markets are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit requirements, investors may close out futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures markets depend on participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures markets could be reduced, thus producing distortion. Third, from the point of view of speculators, the deposit requirements in the futures markets are less onerous than margin requirements in the securities markets. Therefore, increased participation by speculators in the futures markets may cause temporary price distortions. -- Repurchase Agreements. In a repurchase transaction, the Fund acquires a security from, and simultaneously resells it to, an approved vendor (a U.S. commercial bank, the U.S. branch of a foreign bank or a broker-dealer which has been designated a primary dealer in government securities, which must meet the credit requirements set by the Trust's Board of Trustees from time to time), 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. The majority of these transactions run from day to day, and delivery pursuant to resale typically will occur within one to five days of the purchase. Repurchase agreements are considered "loans" under the Investment Company Act, collateralized by the underlying security. The Fund's repurchase agreements require that at all times while the repurchase agreement is in effect, the collateral's value must equal or exceed the repurchase price to fully collateralize the repayment obligation. Additionally, the Manager will impose creditworthiness requirements to confirm that the vendor is financially sound and will continuously monitor the collateral's value. -- Illiquid and Restricted Securities. To enable the Fund to sell restricted securities not registered under the Securities Act of 1933, the Fund may have to cause those securities to be registered. The expenses of registration of restricted securities may be negotiated by the Fund with the issuer at the time such securities are purchased by the Fund, if such registration is required before such securities may be sold publicly. When registration must be arranged because the Fund wishes to sell the security, a considerable period may elapse between the time the decision is made to sell the securities and the time the Fund would be permitted to sell them. The Fund would bear the risks of any downward price fluctuation during that period. The Fund may also acquire, through private placements, securities having contractual restrictions on their resale, which might limit the Fund's ability to dispose of such securities and might lower the amount realizable upon the sale of such securities. The Fund has percentage limitations that apply to purchases of restricted securities, as stated in the Prospectus. Those percentage restrictions do not limit purchases of restricted securities that are eligible for sale to qualified institutional purchasers pursuant to Rule 144A under the Securities Act of 1933, provided that those securities have been determined to be liquid by the Board of Trustees of the Fund or by the Manager under Board-approved guidelines. Those guidelines take into account the trading activity for such securities and the availability of reliable pricing information, among other factors. If there is a lack of trading interest in a particular Rule 144A security, the Fund's holding of that security may be deemed to be illiquid. -- Loans of Portfolio Securities. The Fund may lend its portfolio securities subject to the restrictions stated in the Prospectus. Under applicable regulatory requirements (which are subject to change), the loan collateral on each business day must at least equal the value of the loaned securities and must consist of cash, bank letters of credit or securities of the U.S. Government (or its agencies or instrumentalities). To be acceptable as collateral, letters of credit must obligate a bank to pay amounts demanded by the Fund if the demand meets the terms of the letter. Such terms and the issuing bank must be satisfactory to the Fund. When it lends securities, the Fund receives amounts equal to the dividends or interest on loaned securities and also receives one or more of (a) negotiated loan fees, (b) interest on securities used as collateral, and (c) interest on short-term debt securities purchased with such loan collateral. Either type of interest may be shared with the borrower. The Fund may also pay reasonable finder's, custodian and administrative fees. In connection with securities lending, the Fund might experience risks of delay in receiving additional collateral, or risks of delay in recovery of securities, or loss of rights in the collateral should the borrower fail financially. The terms of the Fund's loans must meet applicable tests under the Internal Revenue Code and must permit the Fund to reacquire loaned securities on five days' notice or in time to vote on any important matter. -- When-Issued and Delayed Delivery Transactions. The Fund may purchase securities on a "when-issued" basis, and may purchase or sell such securities on a "delayed delivery" basis. Although the Fund will enter into such transactions for the purpose of acquiring securities for its portfolio or for delivery pursuant to options contracts it has entered into, the Fund may dispose of a commitment prior to settlement. "When- issued" or "delayed delivery" refers to securities whose terms and indenture are available and for which a market exists, but which are not available for immediate delivery. When such transactions are negotiated, the price (which is generally expressed in yield terms) is fixed at the time the commitment is made, but delivery and payment for the securities take place at a later date. The Fund does not intend to make such purchases for speculative purposes. The commitment to purchase a security for which payment will be made on a future date may be deemed a separate security and involve a risk of loss if the value of the security declines prior to the settlement date. During the period between commitment by the Fund and settlement (generally within two months but not to exceed 120 days), no payment is made for the securities purchased by the purchaser, and no interest accrues to the purchaser from the transaction. Such securities are subject to market fluctuation; the value at delivery may be less than the purchase price. The Fund will maintain a segregated account with its Custodian, consisting of cash, U.S. Government securities or other high grade debt obligations at least equal to the value of purchase commitments until payment is made. The Fund will engage in when-issued transactions in order to secure what is considered to be an advantageous price and yield at the time of entering into the obligation. When the Fund engages in when-issued or delayed delivery transactions, it relies on the buyer or seller, as the case may be, to consummate the transaction. Failure of the buyer or seller to do so may result in the Fund losing the opportunity to obtain a price and yield considered to be advantageous. At the time the Fund makes a commitment to purchase or sell a security on a when-issued or forward commitment basis, it records the transaction and reflects the value of the security purchased, or if a sale, the proceeds to be received, in determining its net asset value. If the Fund chooses to (i) dispose of the right to acquire a when-issued security prior to its acquisition or (ii) dispose of its right to deliver or receive against a forward commitment, it may incur a gain or loss. To the extent the Fund engages in when-issued and delayed delivery transactions, it will do so for the purpose of acquiring or selling securities consistent with its investment objective and policies and not for the purposes of investment leverage. The Fund enters into such transactions only with the intention of actually receiving or delivering the securities, although (as noted above), when-issued securities and forward commitments may be sold prior to settlement date. In addition, changes in interest rates before settlement in a direction other than that expected by the Manager will affect the value of such securities and may cause a loss to the Fund. When-issued transactions and forward commitments allow the Fund a technique to use against anticipated changes in interest rates and prices. For instance, in periods of rising interest rates and falling prices, the Fund might sell securities in its portfolio on a forward commitment basis to attempt to limit its exposure to anticipated falling prices. In periods of falling interest rates and rising prices, the Fund might sell portfolio securities and purchase the same or similar securities on a when-issued or forward commitment basis, thereby obtaining the benefit of currently higher cash yields. Other Investment Restrictions The Fund's most significant investment restrictions are set forth in the Prospectus. There are additional investment restrictions that the Fund must follow that are also fundamental policies. Fundamental policies and the Fund's investment objective, cannot be changed without the vote of a "majority" of the Fund's outstanding voting securities. Under the Investment Company Act, such a "majority" vote is defined as the vote of the holders of the lesser of (i) 67% or more of the shares present or represented by proxy at a shareholder meeting, if the holders of more than 50% of the outstanding shares are present, or (ii) more than 50% of the outstanding shares. Under these additional restrictions, the Trust may not, on behalf of the Fund: (1) act as an underwriter, except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed an underwriter under applicable laws; (2) invest in oil, gas or other mineral leases, rights, royalty contracts or exploration or development programs, real estate or real estate mortgage loans (this restriction does not prevent the Fund from purchasing securities secured or issued by companies investing or dealing in real estate and by companies that are not principally engaged in the business of buying and selling such leases, rights, contracts or programs); (3) make loans other than by investing in obligations in which the Fund may invest consistent with its investment objective and policies and other than repurchase agreements and loans of portfolio securities; (4) pledge, mortgage or hypothecate its assets, except that, to secure permitted borrowings, it may pledge securities having a market value at the time of the pledge not exceeding 15% of the cost of the Fund's total assets and except in connection with permitted transactions in options, futures contracts and options on futures contracts, and except for reverse repurchase agreements and securities lending; (5) purchase or retain securities of any issuer if, to the knowledge of the Trust, more than 5% of such issuer's securities are beneficially owned by officers and trustees of the Trust or officers and directors of Massachusetts Mutual Life Insurance Company ("MassMutual") who individually beneficially own more than 1/2 of 1% of the securities of such issuer; and (6) make loans to an officer, trustee or employee of the Trust or to any officer, director or employee of MassMutual, or to MassMutual. In addition to the investment restrictions described above and those contained in the Prospectus, the Trustees of the Trust have voluntarily adopted certain policies and restrictions which are observed in the conduct of the affairs of the Fund. These represent intentions of the Trustees based upon current circumstances. They differ from fundamental investment policies in that the following additional investment restrictions may be changed or amended by action of the Trustees without requiring prior notice to or approval of shareholders. In accordance with such nonfundamental policies and guidelines, the Fund may not: (1) invest for the purpose of exercising control over, or management of, any company; (2) purchase any security of a company which (including any predecessor, controlling person, general partner and guarantor) has a record of less than three years of continuous operations or relevant business experience , if such purchase would cause more than 5% of the current value of the Fund's assets to be invested in such companies; and (3) invest in securities of other investment companies, except by purchase in the open market where no commission or profit to a sponsor or dealer results from such purchase other than the customary broker's commission, except when such purchase is part of a plan of merger, consolidation, reorganization or acquisition. For purposes of the Fund's policy not to concentrate investments as described in the investment restrictions in the Prospectus, the Fund has adopted the industry classifications set forth in Appendix B to this Statement of Additional Information. This policy is not a fundamental policy. How the Fund is Managed Organization and History. The Fund is one of two series of Oppenheimer Integrity Funds (the "Trust"). This Statement of Additional Information may be used with the Fund's Prospectus only to offer shares of the Fund. The Trust was established in 1982 as MassMutual Liquid Assets Trust and changed its name to MassMutual Integrity Funds on April 15, 1988. The Fund was reorganized from a closed-end investment company known as MassMutual Income Investors, Inc. into a series of the Trust on April 15, 1988. On March 29, 1991, the Trust changed its name from MassMutual Integrity Funds to Oppenheimer Integrity Funds and the Fund changed its name from MassMutual Investment Grade Bond Fund to Oppenheimer Investment Grade Bond Fund. Shares of the Fund represent an interest in the Fund proportionately equal to the interest of each other share of the same class and entitle the holder to one vote per share (and a fractional vote for a fractional share) on matters submitted to their vote at shareholders' meetings. Shareholders of the Fund and of the Trust's other series vote together in the aggregate on certain matters at shareholders' meetings, such as the election of Trustees and ratification of appointment of auditors for the Trust. Shareholders of a particular series or class vote separately on proposals which affect that series or class, and shareholders of a series or class which is not affected by that matter are not entitled to vote on the proposal. For example, only shareholders of a series, such as the Fund, vote exclusively on any material amendment to the investment advisory agreement with respect to the series. Only shareholders of a class of a series vote on certain amendments to the Distribution and/or Service Plans if the amendments affect that class. The Trustees are authorized to create new series and classes of series. The Trustees may reclassify unissued shares of the Trust or its series or classes into additional series or classes of shares. The Trustees may also divide or combine the shares of a class into a greater or lesser number of shares without thereby changing the proportionate beneficial interest of a shareholder in the Fund. Shares do not have cumulative voting rights or preemptive or subscription rights. Shares may be voted in person or by proxy. As a Massachusetts business trust, the Trust is not required to hold, and does not plan to hold, regular annual meetings of shareholders. The Trust will hold meetings when required to do so by the Investment Company Act or other applicable law, or when a shareholder meeting is called by the Trustees or upon proper request of the shareholders. Shareholders have the right, upon the declaration in writing or vote of two-thirds of the outstanding shares of the Trust, 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 at least 10% of its outstanding shares. In addition, if the Trustees receive a request from at least 10 shareholders (who have been shareholders for at least six months) holding shares of the Trust valued at $25,000 or more or holding at least 1% of the Trust's outstanding shares, whichever is less, stating that they wish to communicate with other shareholders to request a meeting to remove a Trustee, the Trustees will then either make the Trust's shareholder list available to the applicants or mail their communication to all other shareholders at the applicant's expense, or the Trustees may take such other action as set forth under Section 16(c) of the Investment Company Act. The Trust's Declaration of Trust contains an express disclaimer of shareholder or Trustee liability for the Trust's obligations, and provides for indemnification and reimbursement of expenses out of its property for any shareholder held personally liable for its obligations. The Declaration of Trust also provides that the Fund shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Fund and satisfy any judgment thereon. Thus, while Massachusetts law permits a shareholder of a business trust (such as the Trust) to be held personally liable as a "partner" under certain circumstances, the risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to the relatively remote circumstances in which the Fund would be unable to meet its obligations described above. Any person doing business with the Trust, and any shareholder of the Trust, agrees under the Trust's Declaration of Trust to look solely to the assets of the Trust for satisfaction of any claim or demand which may arise out of any dealings with the Trust, and the Trustees shall have no personal liability to any such person, to the extent permitted by law. Trustees And Officers of the Fund. The Trust's Trustees and officers and their principal occupations and business affiliations during the past five years are listed below. Each Trustee is also a trustee, director or managing general partner of Oppenheimer Total Return Fund, Inc., Oppenheimer Equity Income Fund, Oppenheimer High Yield Fund, Oppenheimer International Bond Fund, Oppenheimer Cash Reserves, Oppenheimer Tax-Exempt Fund, Oppenheimer Limited-Term Government Fund, The New York Tax-Exempt Income Fund, Inc., Oppenheimer Champion High Yield Fund, Oppenheimer Main Street Funds, Inc., Oppenheimer Strategic Funds Trust, Oppenheimer Strategic Income & Growth Fund, Oppenheimer Strategic Investment Grade Bond Fund, Oppenheimer Strategic Short-Term Income Fund, Oppenheimer Variable Account Funds, Daily Cash Accumulation Fund, Inc., Centennial America Fund, L.P., Centennial Money Market Trust, Centennial Government Trust, Centennial New York Tax Exempt Trust, Centennial Tax Exempt Trust and Centennial California Tax Exempt Trust, (collectively, the "Denver- based OppenheimerFunds"). Mr. Fossel is President and Mr. Swain is Chairman of each of the Denver-based OppenheimerFunds. As of July 10, 1995, the Trustees and officers of the Fund as a group owned of record or beneficially less than 1% of each class of the Fund's outstanding shares, and less than 1% of the outstanding shares of the Fund. The foregoing does not include shares held of record by an employee benefit plan for employees of the Manager (for which one of the officers, Mr. Donohue, is a trustee) other than the shares beneficially owned under that plan by the officers of the Fund listed below. Robert G. Avis, Trustee*; Age: 63 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: 80 197 Desert Lakes Drive, Palm Springs, California 92264 Management Consultant. Charles Conrad, Jr., Trustee; Age: 64 19411 Merion Circle, Huntington Beach, California 92648 Vice President of McDonnell Douglas Space Systems, Co.; formerly associated with the National Aeronautics and Space Administration. Jon S. Fossel, President and Trustee*; Age: 53 Two World Trade Center, New York, New York 10048-0203 Chairman, Chief Executive Officer and a director of the Manager; President and a director of Oppenheimer Acquisition Corp. ("OAC"), the Manager's parent holding company; President and a director of HarbourView Asset Management Corporation ("HarbourView"), a subsidiary of the Manager; a director of Shareholder Services, Inc. ("SSI") and Shareholder Financial Services, Inc. ("SFSI"), transfer agent subsidiaries of the Manager; formerly President of the Manager. Raymond J. Kalinowski, Trustee; Age: 65 44 Portland Drive, St. Louis, Missouri 63131 Director of Wave Technologies International, Inc.: formerly Vice Chairman and a director of A.G. Edwards, Inc., parent holding company of A.G. Edwards & Sons, Inc. (a broker-dealer), of which he was a Senior Vice President. C. Howard Kast, Trustee; Age: 73 2552 East Alameda, Denver, Colorado 80209 Formerly the Managing Partner of Deloitte, Haskins & Sells (an accounting firm). Robert M. Kirchner, Trustee; Age: 73 7500 E. Arapahoe Road, Englewood, Colorado 80112 President of The Kirchner Company (management consultants). Ned M. Steel, Trustee; Age: 79 3416 South Race Street, Englewood, Colorado 80110 Chartered Property and Casualty Underwriter; director of Visiting Nurse Corporation of Colorado; formerly Senior Vice President and a director of Van Gilder Insurance Corp. (insurance brokers). James C. Swain, Chairman and Trustee*; Age: 61 3410 South Galena Street, Denver, Colorado 80231 Vice Chairman of the Manager; President and director of Centennial Asset Management Corporation, an investment adviser subsidiary of the Manager ("Centennial"); formerly Chairman of the Board of SSI. Andrew J. Donohue, Vice President; Age: 44 Two World Trade Center, New York, New York 10048-0203 Executive Vice President and General Counsel of the Manager and Oppenheimer Funds Distributor, Inc. (the "Distributor"); an officer of other OppenheimerFunds; formerly Senior Vice President and Associate General Counsel of the Manager and the Distributor; formerly a Partner in, Kraft & McManimon (a law firm) prior to which he was an officer of First Investors Corporation (a broker-dealer) and First Investors Management Company, Inc. (broker-dealer and investment adviser); and a director and an officer of First Investors Family of Funds and First Investors Life Insurance Company. George C. Bowen, Vice President, Secretary and Treasurer; Age: 58 3410 South Galena Street Denver, Colorado 80231 Senior Vice President and Treasurer of the Manager; Vice President and Treasurer of the Distributor and HarbourView; Senior Vice President, Treasurer, Assistant Secretary and a director of Centennial; Vice President, Treasurer and Secretary of SSI and SFSI; an officer of other OppenheimerFunds; formerly Senior Vice President/Comptroller and Secretary of OAMC. David P. Negri, Vice President and Portfolio Manager; Age: 40 Two World Trade Center, New York, New York 10048-0203 Vice President of the Manager; an officer of other OppenheimerFunds. David Rosenberg, Vice President and Portfolio Manager; Age 36 Two World Trade Center, New York, New York 10048-0203 Vice President of the Manager; an officer of other OppenheimerFunds; formerly an officer and portfolio manager for Delaware Investment Advisors and for one of its mutual funds. Robert G. Zack, Assistant Secretary; Age: 46 Two World Trade Center, New York, New York 10048-0203 Senior Vice President and Associate General Counsel of the Manager, Assistant Secretary of SSI and SFSI; an officer of other OppenheimerFunds. Robert J. Bishop, Assistant Treasurer; Age: 36 3410 South Galena Street, Denver, Colorado 80231 Assistant Vice President of the Manager/Mutual Fund Accounting; an officer of other OppenheimerFunds; formerly a Fund Controller of the Manager, prior to which he was an Accountant for Yale & Seffinger, P.C., an accounting firm, and previously an Accountant and Commissions Supervisor for Stuart James Company Inc., a broker-dealer. Scott Farrar, Assistant Treasurer; Age: 29 3410 South Galena Street, Denver, Colorado 80231 Assistant Vice President of the Manager/Mutual Fund Accounting; an officer of other OppenheimerFunds; previously a Fund Controller for the Manager, prior to which he was an International Mutual Fund Supervisor for Brown Brothers Harriman & Co., a bank, and previously a Senior Fund Accountant for State Street Bank & Trust Company. [FN] - ------------- *A Trustee who is an "interested person" of the Fund as defined in the Investment Company Act. -- Remuneration of Trustees. The officers of the Fund are affiliated with the Manager. They and the Trustees of the Fund who are affiliated with the Manager (Messrs. Fossel and Swain, who are both officers and Trustees) receive no salary or fee from the Fund. The Trustees of the Fund (excluding Messrs. Fossel and Swain) received the total amounts shown below from the Fund, during its fiscal year ended December 31, 1994, and from all of the Denver-based OppenheimerFunds (including the Fund) listed in the first paragraph of this section, for services in the positions shown:
Total Compensation Aggregate From All Compensation Denver-based Name and Position from Fund OppenheimerFunds1 Robert G. Avis $600.00 $53,000.00 Trustee William A. Baker $829.00 $73,257.01 Audit and Review Committee Chairman and Trustee Charles Conrad, Jr. $774.00 $68,293.67 Audit and Review Committee Member and Trustee C. Howard Kast $600.00 $53,000.00 Trustee Raymond J. Kalinowski $600.00 $53,000.00 Trustee Robert M. Kirchner $774.00 $68,293.67 Audit and Review Committee Member and Trustee Ned M. Steel $600.00 $53,000.00 Trustee _____________ 1For the 1994 calendar year.
-- Major Shareholders. As of July 10, 1995, the only entity that owned of record or was known by the Fund to own beneficially 5% or more of any class of the Fund's outstanding shares was MML Reinsurance (Bermuda) Ltd., c/o Investment Services 1295 State Street, Springfield, MA 01111-0001, which owned 789,794.139 Class A shares (approximately 7.20% of the Fund's Class A shares and 6.76% of the Fund's outstanding shares), and which represented less than 5% of the outstanding shares of the Trust, and Smith Barney, Inc., 388 Greenwich Street, New York, NY 10013, which owned 102,753.693 Class B shares (approximately 14.47%) of the Fund's Class B shares, and which represented less than 5% of the outstanding shares of the Fund and of the Trust. The Manager and Its Affiliates. The Manager is wholly-owned by Oppenheimer Acquisition Corp. ("OAC"), a holding company controlled by Massachusetts Mutual Life Insurance Company ("MassMutual"). OAC is also owned in part by certain of the Manager's directors and officers, some of whom also serve as officers of the Trust, and two of whom (Mr. Jon S. Fossel and Mr. James C. Swain) serve as Trustees of the Trust. The Manager, and the Fund have a Code of Ethics. It is designed to detect and prevent improper personal trading by certain employees, including portfolio managers, that would compete with or take advantage of the Fund's portfolio transactions. Compliance with the Code of Ethics is carefully monitored and strictly enforced. -- The Investment Advisory Agreement. Under the investment advisory agreement dated July 10, 1995 between the Trust on behalf of the Fund and the Manager, the Fund pays a management fee to the Manager at the annual rate of: .75% of the first $200 million of average annual net assets; .72% of the next $200 million; .69% of the next $200 million; .66% of the next $200 million; .60% of the next $200 million; and .50% of average annual net assets in excess of $1 billion. Under the prior investment advisory agreement between the Trust on behalf of the Fund and the Manager, the Fund paid a management fee to the Manager at the annual rate of: .50% of the first $100 million of average annual net assets; .45% of the next $200 million; .40% of the next $200 million; and .35% of average annual net assets in excess of $500 million. The investment advisory agreement, dated July 10, 1995, between the Trust on behalf of the Fund and the Manager requires the Manager, at its expense, to provide the Fund with adequate office space, facilities and equipment, and to provide and supervise the activities of all administrative and clerical personnel required to provide effective corporate administration for the Fund, including the compilation and maintenance of records with respect to its operations, the preparation and filing of specified reports, and composition of proxy materials and registration statements for continuous public sale of shares of the Fund. Expenses not expressly assumed by the Manager under the advisory agreement or by the Distributor under the General Distributors Agreement are paid by the Fund. The advisory agreement lists examples of expenses paid by the Fund, the major categories of which relate to interest, taxes, brokerage commissions, fees to certain Trustees, legal and audit expenses, custodian and transfer agent expenses, share issuance costs, certain printing and registration costs and non-recurring expenses, including litigation costs. The advisory agreement provides that in the absence of willful misfeasance, bad faith or gross negligence in the performance of its duties or reckless disregard for its obligations and duties under the advisory agreement, the Manager is not liable for any loss resulting from a good faith error or omission on its part with respect to any of its duties thereunder. The advisory agreement permits the Manager to act as investment adviser for any other person, firm or corporation and to use the name "Oppenheimer" in connection with other investment companies for which it may act as investment adviser or general distributor. If the Manager shall no longer act as investment adviser to the Fund, the right of the Fund to use the name "Oppenheimer" as part of its name may be withdrawn. The advisory agreement is subject to annual approval by the Board of Trustees, who may terminate the advisory agreement on sixty days' notice approved by a majority of the Trustees. The advisory agreement contains no expense limitation. However, independently of the advisory agreement, the Manager has undertaken that the total expenses of the Fund in any fiscal year (including the management fee, but excluding taxes, interest, brokerage fees, distribution plan payments, and extraordinary expenses, such as litigation costs) shall not exceed (and the Manager undertakes to reduce the Fund's management fee in the amount by which such expenses shall exceed) the most stringent applicable state "blue sky" expense limitation requirement for qualification of sale of the Fund's shares. At present, that limitation is imposed by California and limits expenses (with specified exclusions) to 2.5% of the first $30 million of the Fund's average annual net assets, 2.0% of the next $70 million of average net assets and 1.5% of average net assets in excess of $100 million. The Manager reserves the right to change or eliminate this expense limitation at any time. The payment of the management fee at the end of any month will be reduced so that at no time will there be any accrued but unpaid liability under the above expense limitation. Prior to July 10, 1995, MassMutual served as investment sub-adviser (the "Sub-Adviser") to the Fund pursuant to a sub-advisory agreement between the Manager and MassMutual dated March 28, 1991. Under the sub- advisory agreement, MassMutual was responsible for managing the Fund's portfolio of securities and making investment decisions with respect to the Fund's investments, subject to the Fund's investment objective, policies and restrictions. The Sub-Adviser's fee was paid by the Manager. The sub-advisory agreement was subject to the same renewal, termination and standard of care provisions as the investment advisory agreement. On July 10, 1995, the Fund's shareholders approved a new investment advisory agreement with the Manager, at the fee rate set forth in the Prospectus, under which the Manager performs the investment decision-making functions previously performed by the Sub-Adviser. The sub-advisory agreement terminated effective July 10, 1995. For the fiscal years ended December 31, 1992, 1993 and 1994, the advisory fees paid to the Manager were $491,642, $555,430 and $522,205, respectively, of which $342,743, $380,790 and $362,287, respectively, was paid by the Manager to the Sub-Adviser. -- The Distributor. Under the General Distributor's Agreement between the Trust and the Distributor, the Distributor acts as the Fund's principal underwriter in the continuous public offering of the Fund's Class A, Class B and Class C shares, but is not obligated to sell a specific number of shares. Expenses normally attributable to sales (other than those paid under the Class A, Class B and Class C Distribution and Service Plans), including advertising and the cost of printing and mailing prospectuses (other than those furnished to existing shareholders), are borne by the Distributor. During the Fund's fiscal years ended December 31, 1992, 1993 and 1994, the aggregate amount of sales charges on sales of the Fund's Class A shares was $337,554, $269,639 and $143,088, respectively, of which the Distributor and on an affiliate, MassMutual Investor Services, Inc. ("MMLISI") retained in the aggregate $213,717, $163,271 and $67,090 in those respective years. For the fiscal year ended December 31, 1994, the Distributor advanced $91,551 to broker-dealers on the sales of the Funds' Class B shares, $8,449 of which went to MMLISI. In addition, the Distributor collected $8,916 from contingent deferred sales charges assessed on Class B shares. Class C shares were not publicly offered prior to July 10, 1995. - -- The Transfer Agent. Oppenheimer Shareholder Services, an operating division of the Manager which is the Fund's transfer agent, is responsible for maintaining the Fund's shareholder registry and shareholder accounting records, and for shareholder servicing and administrative functions. Brokerage Policies Of The Fund Brokerage Provisions of the Investment Advisory Agreements. One of the duties of the Manager under the advisory agreement is to arrange the portfolio transactions of the Fund. In doing so, the Manager is authorized by the advisory agreement to employ broker-dealers ("brokers"), including "affiliated" brokers, as that term is defined in the Investment Company Act, as may, in its best judgment based on all relevant factors, implement the policy of the Fund to obtain, at reasonable expense, the "best execution" (prompt and reliable execution at the most favorable price obtainable) of such transactions. The Manager need not seek competitive commission bidding or base its selection on "posted" rates, but is expected to be aware of the current rates of eligible brokers and to minimize the commissions paid to the extent consistent with the provisions of the advisory agreement and the interests and policies of the Fund as established by the Trust's Board of Trustees. Purchases of securities from underwriters include a commission or concession paid by the issuer to the underwriter, and purchases from dealers include a spread between the bid and asked price. Under the advisory agreement, the Manager is authorized to select brokers which provide brokerage and/or research services for the Fund and/or the other accounts over which it or its affiliates have investment discretion. The commissions paid to such brokers may be higher than another qualified broker would have charged, if a good faith determination is made by the Manager that the commission is fair and reasonable in relation to the services provided. Most purchases made by the Fund are principal transactions at net prices, and the Fund incurs little or no brokerage costs. During the fiscal year ended December 31, 1992, 1993 and 1994, no brokerage commissions were paid by the Fund. Description of Brokerage Practices Followed by the Manager. Subject to the provisions of the advisory agreement and the procedures and rules described above, allocations of brokerage are generally made by the Manager's portfolio traders upon recommendations from the Manager's portfolio managers. In certain instances portfolio managers may directly place trades and allocate brokerage, also subject to the provisions of the advisory agreement and the procedures and rules described above. In either case, brokerage is allocated under the supervision of the Manager's executive officers. Transactions in securities other than those for which an exchange is the primary market are generally done with principals or market makers. Brokerage commissions are paid primarily for effecting transactions in listed securities or for certain fixed-income agency trades in the secondary market, and are otherwise paid only if it appears likely that a better price or execution can be obtained. When the Fund engages in an option transaction, ordinarily the same broker will be used for the purchase or sale of the option and any transaction in the securities to which the option relates. When possible, concurrent orders to purchase or sell the same security by more than one of the accounts managed by the Manager or its affiliates are combined. The transactions effected pursuant to such combined orders are averaged as to price and allocated in accordance with the purchase or sale orders actually placed for each account. Most purchases of money market instruments and debt obligations are principal transactions at net prices. Instead of using a broker for those transactions, the Fund normally deals directly with the selling or purchasing principal or market maker unless it determines that a better price or execution can be obtained by using a broker. Purchases of these securities from underwriters include a commission or concession paid by the issuer to the underwriter. Most purchases from dealers include a spread between the bid and asked prices. The Fund seeks to obtain prompt execution of these orders at the most favorable net price. The research services provided by a particular broker may be useful only to one or more of the advisory accounts of the Manager and its affiliates, and investment research received for the commissions of those other accounts may be useful both to the Fund and one or more of such other accounts. Such research, which may be supplied by a third party at the instance of a broker, includes information and analyses on particular companies and industries as well as market or economic trends and portfolio strategy, receipt of market quotations for portfolio evaluations, information systems, computer hardware and similar products and services. If a research service also assists the Manager in a non- research capacity (such as bookkeeping or other administrative functions), then only the percentage or component that provides assistance to the Manager in the investment decision-making process may be paid in commission dollars. The Board of Trustees has permitted the Manager to use concessions on fixed-price offerings to obtain research, in the same manner as is permitted for agency transactions. The Board has also permitted the Manager to use stated commissions on secondary fixed-income agency trades to obtain research where the broker has represented to Manager that (i) the trade is not from or for the broker's own inventory, (ii) the trade was executed by the broker on an agency basis at the stated commission, and (iii) the trade is not a riskless principal transaction. The research services provided by brokers broadens the scope and supplement the research activities of the Manager, by making available additional views for consideration and comparisons, and by enabling the Manager to obtain market information for the valuation of securities held in the Fund's portfolio or being considered for purchase. The Board of Trustees, including the "independent" Trustees of the Fund (those Trustees of the Fund who are not "interested persons" as defined in the Investment Company Act, and who have no direct or indirect financial interest in the operation of the advisory agreement or the Distribution Plans described below) annually reviews information furnished by the Manager as to the commissions paid to brokers furnishing such services so that the Board may ascertain whether the amount of such commissions was reasonably related to the value or benefit of such services. Performance of the Fund Yield and Total Return Information. As described in the Prospectus, from time to time the "standardized yield," "dividend yield," "average annual total return", "total return," "cumulative total return," "total return at net asset value" and "cumulative total return at net asset value" of an investment in a class of shares of the Fund may be advertised. An explanation of how yields and total returns are calculated for each class and the components of those calculations is set forth below. The Fund's advertisement of its performance data must, under applicable rules of the Securities and Exchange Commission, include the average annual total returns for each class of shares of the Fund for the 1, 5 and 10-year periods (or the life of the class, if less) ending as of the most recently ended calendar quarter prior to the publication of the advertisement. This enables an investor to compare the Fund's performance to the performance of other funds for the same periods. However, a number of factors should be considered before using such information as a basis for comparison with other investments. An investment in the Fund is not insured; its returns and share prices are not guaranteed and normally will fluctuate on a daily basis. When redeemed, an investor's shares may be worth more or less than their original cost. Returns for any given past period are not a prediction or representation by the Fund of future returns on its shares. The returns of Class A, Class B and Class C shares of the Fund are affected by portfolio quality, the type of investments the Fund holds and its operating expenses allocated to a particular class. -- Standardized Yields. - Yield. The Fund's "yield" (referred to as "standardized yield") for a given 30-day period for a class of shares is calculated using the following formula set forth in rules adopted by the Securities and Exchange Commission that apply to all funds (other than money market funds) that quote yields: (a-b) 6 Standardized Yield = 2 ((--- + 1) - 1) ( cd) The symbols above represent the following factors: a = dividends and interest earned during the 30-day period. b = expenses accrued for the period (net of any expense reimbursements). c = the average daily number of shares of that class outstanding during the 30-day period that were entitled to receive dividends. d = the maximum offering price per share of that class on the last day of the period, adjusted for undistributed net investment income. The standardized yield of a class of shares for a 30-day period may differ from its yield for any other period. The SEC formula assumes that the standardized yield for a 30-day period occurs at a constant rate for a six-month period and is annualized at the end of the six-month period. This standardized yield is not based on actual distributions paid by the Fund to shareholders in the 30-day period, but is a hypothetical yield based upon the net investment income from the Fund's portfolio investments calculated for that period. The standardized yield may differ from the "dividend yield" of that class, described below. Additionally, because each class of shares is subject to different expenses, it is likely that the standardized yields of the Fund's classes of shares will differ. For the 30-day period ended December 31, 1994, the standardized yields for the Fund's Class A and Class B shares were 6.76% and 6.34%, respectively. Class C shares were not publicly offered prior to July 11, 1995. -- Dividend Yield and Distribution Return. From time to time the Fund may quote a "dividend yield" or a "distribution return" for each class. Dividend yield is based on the dividends paid on shares of a class from net investment income during a stated period. Distribution return includes dividends derived from net investment income and from realized capital gains declared during a stated period. Under those calculations, the dividends and/or distributions for that class declared during a stated period of one year or less (for example, 30 days) are added together, and the sum is divided by the maximum offering price per share of that class) on the last day of the period. When the result is annualized for a period of less than one year, the "dividend yield" is calculated as follows: Dividend Yield of the Class = Dividends of the Class ----------------------------------------------------- Max. Offering Price of the Class (last day of period) divided by Number of days (accrual period) x 365 The maximum offering price for Class A shares includes the maximum front-end sales charge. For Class B and Class C shares, the maximum offering price is the net asset value per share, without considering the effect of contingent deferred sales charges. From time to time similar yield or distribution return calculations may also be made using the Class A net asset value (instead of its respective maximum offering price) at the end of the period. The dividend yields on Class A shares for distribution made on December 30, 1994 covering the 31-day period ended December 31, 1994, were 10.85% and 11.40% when calculated at maximum offering price and at net asset value, respectively. The dividend yield on Class B shares for the 30-day period ended December 31, 1994, was 10.63% when calculated at net asset value. That distribution included amounts distributed by the Fund for both Class A and Class B shares to avoid paying excise tax on undistributed income at year-end as described in "Dividends, Capital Gains, and Taxes," below. Therefore, these dividend yields are significantly higher than the divided yields for prior months. -- Total Return Information. - Average Annual Total Returns. The "average annual total return" of each class is an average annual compounded rate of return for each year in a specified number of years. It is the rate of return based on the change in value of a hypothetical initial investment of $1,000 ("P" in the formula below) held for a number of years ("n") to achieve an Ending Redeemable Value ("ERV") of that investment, according to the following formula: 1/n (ERV) (---) -1 = Average Annual Total Return ( P ) - Cumulative Total Returns. The cumulative "total return" calculation measures the change in value of a hypothetical investment of $1,000 over an entire period of years. Its calculation uses some of the same factors as average annual total return, but it does not average the rate of return on an annual basis. Cumulative total return is determined as follows: ERV - P ------- = Total Return P In calculating total returns for Class A shares, the current maximum sales charge of 4.75% (as a percentage of the offering price) is deducted from the initial investment ("P") (unless the return is shown at net asset value, as described below). For Class B shares, the payment of the applicable contingent deferred sales charge (of 5.0% for the first year, 4.0% for the second year, 3.0% for the third and fourth years, 2.0% for the fifth year, 1.0% in the sixth year and none thereafter), is applied, as described in the Prospectus. For Class C shares, the payment of the 1% contingent deferred sales charge for shares redeemed within 12 months of purchase is applied, as described in the Prospectus. Total returns also assume that all dividends and capital gains distributions during the period are reinvested to buy additional shares at net asset value per share, and that the investment is redeemed at the end of the period. The "average annual total returns" on an investment in Class A shares for the one year period ended December 31, 1994 and for the period from April 15, 1988 (the date the Fund became an open-end Fund) to December 31, 1994, were -8.43% and 6.79%, respectively. The cumulative "total return" on Class A shares for the latter period was 55.38%. For the fiscal period from May 1, 1993 (inception of the class), through December 31, 1994, the average annual total return and the cumulative total return on an investment in Class B shares of the Fund were -2.67% and -4.41%, respectively. Class C shares were and publicly offered prior to July 11, 1995. -- Total Returns at Net Asset Value. From time to time the Fund may also quote an "average annual total return at net asset value" or a cumulative "total return at net asset value" for Class A, Class B and 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 sales charges) and takes into consideration the reinvestment of dividends and capital gains distributions. The cumulative total returns at net asset value on the Fund's Class A shares for the fiscal year ended December 31, 1993, and for the period from April 15, 1988 to December 31, 1994 were -3.87 and 63.13%, respectively. The cumulative total return at net asset value on the Fund's Class B shares for the fiscal year-ended December 31, 1994 and for the period from May 1, 1993 through December 31, 1994 well -4.53% and -0.80%, respectively. Total return information may be useful to investors in reviewing the performance of the Fund's Class A, Class B and Class C shares. However, when comparing total return of an investment in Class A, Class B or Class C shares of the Fund, a number of factors should be considered before using such information as a basis for comparison with other investments. Other Performance Comparisons. From time to time the Fund may publish the ranking of its Class A, Class B or Class C shares by Lipper Analytical Services, Inc. ("Lipper"), a widely-recognized independent mutual fund monitoring service. Lipper monitors the performance of regulated investment companies, including the Fund, and ranks their performance for various periods based on categories relating to investment objectives. For periods ending December 31, 1994, the performance of the Fund's classes has been ranked against (i) all other funds, excluding money market funds, and (ii) all other general bond funds. The Lipper performance rankings are based on total return that includes the reinvestment of capital gains distributions and income dividends but does not take sales charges or taxes into consideration. For periods ending December 31, 1994 the Fund's performance may also be compared to the performance of the Lipper General Bond Fund Index, which is a net asset value weighted index of general bond funds compiled by Lipper. It is calculated with adjustments for income dividends and capital gains distributions as of the ex-dividend date. From time to time, the Fund may include in its advertisements and sales literature performance information about the Fund cited in other newspapers and periodicals, such as The New York Times, which may include performance quotations from other sources, including Lipper. From time to time the Fund may publish the ranking of the performance of its Class A, Class B or Class C shares by Morningstar, Inc., an independent mutual fund monitoring service that ranks mutual funds, including the Fund, monthly, in broad investment categories (equity, taxable bond, municipal bond and hybrid), based on risk-adjusted investment return. Investment return measures a fund's or Class's three, five and ten-year average annual total returns (when available). Risk and return are combined to produce star rankings reflecting performance relative to the average fund in a fund's category. Five stars is the "highest" ranking (top 10%), four stars is "above average" (next 22.5%), three stars is "average" (next 35%), two stars is "below average" (next 22.5%) and one star is "lowest" (bottom 10%). The current ranking is a weighted average of the 3, 5 and 10 year rankings (if available). Morningstar ranks the Class A, Class B and Class C shares of the Fund in relation to other taxable bond funds. Rankings are subject to change. The total return on an investment in the Fund's Class A, Class B or Class C shares may be compared with the performance for the same period of one or more of the following indices: the Consumer Price Index, the Salomon Brothers World Government Bond Fund Index, the Salomon Brothers High Grade Corporate Bond Index, the Lehman Brothers Government/Corporate Bond Index, the Lehman Brothers Aggregate Bond Index, and the J.P. Morgan Government Bond Index. The Consumer Price Index is generally considered to be a measure of inflation. The Salomon Brothers World Government Bond Index generally represents the performance of government debt securities of various markets throughout the world, including the United States. The Salomon Brothers High Grade Corporate Bond Index generally represents the performance of high grade long-term corporate bonds, and the Lehman Brothers Government/Corporate Bond Index generally represents the performance of intermediate and long-term government and investment grade corporate debt securities. The Lehman Brothers Aggregate Bond Index generally represents the performance of the general fixed-rate investment grade debt market. The J.P. Morgan Government Bond Index generally represents the performance of government bonds issued by various countries including the United States. Each index includes a factor for the reinvestment of interest but does not reflect expenses or taxes. Investors may also wish to compare the Fund's Class A, Class B or Class C shares return to the returns on fixed income investments available from banks and thrift institutions, such as certificates of deposit, ordinary interest-paying checking and savings accounts, and other forms of fixed or variable time deposits, and various other instruments such as Treasury bills. However, the Fund's returns and share price are not guaranteed by the FDIC or any other agency and will fluctuate daily, while bank depository obligations may be insured by the FDIC and may provide fixed rates of return, and Treasury bills are guaranteed as to principal and interest by the U.S. government. From time to time, the Fund's Manager may publish rankings or ratings of the Manager (or Transfer Agent) or the investor services provided by them to shareholders of the OppenheimerFunds, other than performance rankings of the OppenheimerFunds themselves. Those ratings or rankings of shareholder/investor services by third parties may compare the OppenheimerFunds' services to those of other mutual fund families selected by the rating or ranking services and may be based upon the opinions of the rating or ranking service itself, based on its research or judgment, or based upon surveys of investors, brokers, shareholders or others. Distribution and Service Plans The Fund has adopted a Service Plan for Class A shares, and Distribution and Service Plans for Class B and Class C shares under Rule 12b-1 of the Investment Company Act, pursuant to which the Fund will make payments to the Distributor quarterly in connection with the distribution and/or servicing of the shares of that class, as described in the Prospectus. Each Plan has been approved by a vote of (i) the Board of Trustees of the Fund, including a majority of the Independent Trustees, cast in person at a meeting called for the purpose of voting on that Plan, and (ii) the holders of a "majority" (as defined in the Investment Company Act) of the shares of each class. (For the Distribution and Service Plan for the Class B shares, that vote was cast by the Manager as the sole initial holder of Class C shares of the Fund). In addition, under the Plans, the Manager and the Distributor, in their sole discretion, from time to time may use their own resources (which, in the case of the Manager, may include profits from the advisory fee it receives from the Fund) to make payments to brokers, dealers or other financial institutions (each is referred to as a "Recipient" under the Plans) for distribution and administrative services they perform. The Distributor and the Manager may, in their sole discretion, increase or decrease the amount of payments they make from their own resources to Recipients. Unless terminated as described below, each Plan continues in effect from year to year but only as long as its continuance is specifically approved at least annually by the Fund's Board of Trustees and its Independent Trustees by a vote cast in person at a meeting called for the purpose of voting on such continuance. Either Plan may be terminated at any time by the vote of a majority of the Independent Trustees or by the vote of the holders of a "majority" (as defined in the Investment Company Act) of the outstanding shares of that class. Neither Plan may be amended to increase materially the amount of payments to be made unless such amendment is approved by shareholders of the class affected by the amendment. In addition, because Class B shares of the Fund automatically convert into Class A shares after six years, the Fund is required by an exemptive order issued by the Securities and Exchange Commission to obtain the approval of Class B as well as Class A shareholders for a proposed amendment to the Class A Plan that would materially increase the amount to be paid by Class A shareholders under the Class A Plan. Such approval must be by a "majority" of the Class A and Class B shares (as defined in the Investment Company Act), voting separately by class. All material amendments must be approved by the Independent Trustees. While the Plans are in effect, the Treasurer of the Trust shall provide separate written reports to the Trust's Board of Trustees at least quarterly stating generally the amounts of all payments made pursuant to each Plan and the purpose for which each payment was made. Those reports, including the allocations on which they are based, will be subject to the review and approval of the Independent Trustees in the exercise of their fiduciary duty. Each Plan further provides that while it is in effect, the selection and nomination of those Trustees of the Trust who are not "interested persons" of the Trust is committed to the discretion of the Independent Trustees. This does not prevent the involvement of others in such selection and nomination if the final decision on selection or nomination is approved by a majority of the Independent Trustees. Under the Plans, no payment will be made to any Recipient in any quarter if the aggregate net asset value of all Fund shares held by the Recipient for itself and its customers did not exceed a minimum amount, if any, that may be determined from time to time by a majority of the Fund's Independent Trustees. Initially, the Board of Trustees has set the fees at the maximum rate and set no minimum amount. For the fiscal year ended December 31, 1994, payments under the Class A Plan totaled $247,136, all of which was paid by the Distributor to Recipients, including $154,100 paid to MMLISI. Any unreimbursed expenses incurred by the Distributor with respect to Class A shares for any fiscal year may not be recovered in subsequent fiscal years. Payments received by the Distributor under the Plan for Class A shares will not be used to pay any interest expense, carrying charges, or other financial costs, or allocation of overhead by the Distributor. The Class B and Class C Plans allows the service fee payments to be paid by the Distributor to Recipients in advance for the first year Class B and Class C shares are outstanding, and thereafter on a quarterly basis, as described in the Prospectus. The services rendered by Recipients in connection with personal services and the maintenance of Class B shareholder accounts may include but shall not be limited to, the following: answering routine inquiries from the Recipient's customers concerning the Fund, assisting in the establishment and maintenance of accounts or sub-accounts in the Fund and processing share redemption transactions, making the Fund's investment plans and dividend payment options available, and providing such other information and services in connection with the rendering of personal services and/or the maintenance of accounts, as the Distributor or the Fund may reasonably request. The advance payment is based on the net asset value of the Class B and Class C shares sold. An exchange of shares does not entitle the Recipient to an advance service fee payment. In the event Class B or Class C shares are redeemed during the first year that the shares are outstanding, the Recipient will be obligated to repay a pro rata portion of the advance payment for those shares to the Distributor. Service fee payments made under the Class B Plan during the fiscal year ended December 31, 1994 totalled $26,383, all of which was paid by the Distributor to Recipients, including MMLISI. Although the Class B and Class C Plans permit the Distributor to retain both the asset-based sales charge and the service fee on Class B shares, or to pay Recipients the service fee on a quarterly basis without payment in advance, the Distributor intends to pay the service fee to Recipients in the manner described above. A minimum holding period may be established from time to time under the Class B or Class C Plan by the Board. Initially, the Board has set no minimum holding period. All payments under the Class B and Class C Plans are subject to the limitations imposed by the Rules of Fair Practice of the National Association of Securities Dealers, Inc. on payments of asset-based sales charges and service fees. The Distributor anticipates that it will take a number of years for it to recoup (from the Fund's payments to the Distributor under the Class B Plan and recoveries of the contingent deferred sales charge collected on redeemed Class B shares) the Class B sales commissions paid to authorized brokers or dealers. Asset-based sales charge payments are designed to permit an investor to purchase shares of the Fund without paying a front-end sales load and at the same time permit the Distributor to compensate Recipients in connection with the sale of Class B and Class C shares of the Fund. The Distributor retains the asset-based sales charge on Class B shares. As to Class C shares, the Distributor retains the asset-based sales charge during the first year shares are outstanding, and pays the asset-based sales charge as an ongoing commission to the dealer on Class C shares outstanding for a year or more. Under the Class B and Class C Plans, the asset-based sales charge is paid to compensate the Distributor for its services, described below, to the Fund. Under the Class B and Class C Plans, the distribution assistance and administrative support services rendered by the Distributor in connection with the distribution of Class B and Class C shares may include: (i) paying service fees and sales commissions to any broker, dealer, bank or other person or entity that sells and services the Fund's Class B or Class C shares, (ii) paying compensation to and expenses of personnel of the Distributor who support distribution of Class B or Class C shares by Recipients, (iii) obtaining financing or providing such financing from its own resources, or from an affiliate, for interest and other borrowing costs of the Distributor's unreimbursed expenses incurred in rendering distribution assistance for Class B or Class C shares, and (iv) paying certain other distribution expenses. Other distribution assistance rendered by the Distributor and Recipients under the Class B and Class C Plans may include, but shall not be limited to, the following: distributing sales literature and prospectuses other than those furnished to current Class B or Class C shareholders, and providing such other information and services in connection with the distribution of Class B or Class C shares as the Distributor or the Fund may reasonably request. The Class B and Class C Plans further provide that such other distribution assistance may include distribution assistance and administrative support services rendered in connection with Class B or Class C shares acquired (i) by purchase, (ii) in exchange for shares of another investment company for which the Distributor serves as distributor or sub-distributor, or (iii) pursuant to a plan of reorganization to which the Fund is a party. About Your Account How To Buy Shares Alternative Sales Arrangements - Class A, Class B and Class C Shares. The availability of three classes of shares permits an investor to choose the method of purchasing shares that is more beneficial to the investor depending on the amount of the purchase, the length of time the investor expects to hold shares and other relevant circumstances. Investors should understand that the purpose and function of the deferred sales charge and asset-based sales charge with respect to Class B and Class C shares are the same as those of the initial sales charge with respect to Class A shares. Any salesperson or other person entitled to receive compensation for selling Fund shares may receive different compensation with respect to one class of shares than the other. The Distributor normally will not accept (i) any order for $500,000 or more of Class B shares or (ii) any order for $1 million or more of Class C shares, on behalf of a single investor (not including dealer "street name" or omnibus accounts) because generally it will be more advantageous for that investor to purchase Class A shares of the Fund instead. The three classes of shares each represent an interest in the same portfolio investments of the Fund. However, each class has different shareholder privileges and features. The net income attributable to Class B and Class C shares and the dividends payable on Class B and Class C shares will be reduced by incremental expenses borne solely by that class, including the asset-based sales charge to which Class B and Class C shares are subject. The conversion of Class B shares to Class A shares after six years is subject to the continuing availability of a private letter ruling from the Internal Revenue Service, or an opinion of counsel or tax adviser, to the effect that the conversion of Class B shares does not constitute a taxable event for the holder under Federal income tax law. If such a revenue ruling or opinion is no longer available, the automatic conversion feature may be suspended, in which event no further conversions of Class B shares would occur while such suspension remained in effect. Although Class B shares could then be exchanged for Class A shares on the basis of relative net asset value of the two classes, without the imposition of a sales charge or fee, such exchange could constitute a taxable event for the holder, and absent such exchange, Class B shares might continue to be subject to the asset-based sales charge for longer than six years. The methodology for calculating the net asset value, dividends and distributions of the Fund's Class A, Class B and Class C shares recognizes two types of expenses. General expenses that do not pertain specifically to any class are allocated pro rata to the shares of each class, based on the percentage of the net assets of such class to the Fund's total assets, and then equally to each outstanding share within a given class. Such general expenses include (i) management fees, (ii) legal, bookkeeping and audit fees, (iii) printing and mailing costs of shareholder reports, Prospectuses, Statements of Additional Information and other materials for current shareholders, (iv) fees to unaffiliated Trustees, (v) custodian expenses, (vi) share issuance costs, (vii) organization and start-up costs, (viii) interest, taxes and brokerage commissions, and (ix) non- recurring expenses, such as litigation costs. Other expenses that are directly attributable to a class are allocated equally to each outstanding share within that class. Such expenses include (i) Distribution and Service Plan fees, (ii) incremental transfer and shareholder servicing agent fees and expenses, (iii) registration fees and (iv) shareholder meeting expenses, to the extent that such expenses pertain to a specific class rather than to the Fund as a whole. Determination of Net Asset Value Per Share. The net asset values per share of Class A and Class B and Class C 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, by dividing 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 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, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. It may also close on other days. Trading in debt securities and foreign securities at times when the New York Stock Exchange is closed, including weekends and holidays, or after the close of the Exchange on a regular business day. The Fund may invest a substantial portion of its assets in foreign securities primarily listed on foreign exchanges or in foreign over-the-counter markets that may trade on Saturdays or customary U.S. business holidays on which the Exchange is closed. Because the Fund's net asset value will not be calculated on those days, the Fund's net asset value per share may be significantly affected on such days when shareholders may not purchase or redeem shares. The Fund's Board of Trustees has established procedures for the valuation of the Fund's securities, generally as follows: (i) equity securities traded on a U.S. securities exchange or on NASDAQ for which last sale information is regularly reported are valued at the last reported sale price on their primary exchange or NASDAQ that day (or, in the absence of sales that day, at values based on the last sales prices of the preceding trading day, or closing bid and asked prices); (ii) securities actively traded on a foreign securities exchange are valued at the last sales price available to the pricing service approved by the Fund's Board of Trustees or to the Manager as reported by the principal exchange on which the security is traded; (iii) unlisted foreign securities or listed foreign securities not actively traded are valued at the last sale price, or at the mean between "bid" and "asked" prices determined by a pricing service approved by the Board of Trustees or by the Manager; (iv) long-term debt securities having a remaining maturity in excess of 60 days are valued at the mean between the "bid" and "asked" prices determined by a portfolio pricing service approved by the Fund's Board of Trustees or obtained from active market makers in the security on the basis of reasonable inquiry; (v) debt instruments having a maturity of more than one year when issued, and non-money market type instruments having a maturity of one year or less when issued, which have a remaining maturity of 60 days or less 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 from active market makers in the security on the basis of reasonable inquiry; (vi) money market-type debt securities having a maturity of less than one year when issued that having a remaining maturity of 60 days or less are valued at cost, adjusted for amortization of premiums and accretion of discounts; and (vii) securities (including restricted securities) not having readily-available market quotations are valued at fair value under the Board's procedures. Trading in securities on European and Asian exchanges and over-the- counter markets is normally completed before the close of The New York Stock Exchange. Events affecting the values of foreign securities traded in foreign markets that occur between the time their prices are determined and the close of the Exchange will not be reflected in the Fund's calculation of net asset value unless the Board of Trustees or the Manager, under procedures established by the Board of Trustees, determines that the particular event would materially affect the Fund's net asset value, in which case an adjustment would be made, if necessary. Foreign securities priced in a foreign currency as well as foreign currency have their value converted to U.S. dollars at the closing price in the London foreign exchange market as provided by a reliable bank, dealer or pricing service. In the case of U.S. Government Securities, mortgage-backed securities, foreign government securities and corporate bonds, when last sale information is not generally available, such pricing procedures may include "matrix" comparisons to the prices for comparable instruments on the basis of quality, yield, maturity, and other special factors involved. The Trust's Board of Trustees has authorized the Manager to employ a pricing service to price U.S. Government Securities, mortgage-backed securities, foreign government securities and corporate bonds. The Trustees will monitor the accuracy of such pricing services by comparing prices used for portfolio evaluation to actual sales prices of selected securities. Puts, calls and Futures held by the Fund are valued at the last sales price on the principal exchange on which they are traded, or on NASDAQ as applicable, as determined by a pricing service approved by the Board of Trustees or by the Manager, or, if there are no sales that day, in accordance with (i), above. Forward currency contracts are valued at the closing price in the London foreign exchange market as provided by a reliable bank, dealer or pricing service. When the Fund writes an option, an amount equal to the premium received by the Fund is included in the Fund's Statement of Assets and Liabilities as an asset, and an equivalent deferred credit is included in the liability section. The deferred credit is adjusted ("marked-to-market") to reflect the current market value of the option. In determining the Fund's gain on investments, if a call written by the Fund is exercised, the proceeds are increased by the premium received. If a call or put written by the Fund expires, the Fund has a gain in the amount of the premium; if the Fund enters into a closing purchase transaction, it will have a gain or loss depending on whether the premium was more or less than the cost of the closing transaction. If the Fund exercises a put it holds, the amount the Fund receives on its sale of the underlying investment is reduced by the amount of premium paid by the Fund. AccountLink. When shares are purchased through AccountLink, each purchase must be at least $25.00. Shares will be purchased on the regular business day the Distributor is instructed to initiate the Automated Clearing House transfer to buy shares. Dividends will begin to accrue on shares purchased by the proceeds of ACH transfers on the business day the Fund receives Federal Funds for the purchase through the ACH system before the close of The New York Stock Exchange. The Exchange normally closes at 4:00 P.M., but may close earlier on certain days. If Federal Funds are received on a business day after the close of the Exchange, the shares will be purchased and dividends will begin to accrue on the next regular business day. The proceeds of ACH transfers are normally received by the Fund 3 days after the transfers are initiated. The Distributor and the Fund are not responsible for any delays in purchasing shares resulting from delays in ACH transmissions. Reduced Sales Charges. As discussed in the Prospectus, a reduced sales charge rate may be obtained for Class A shares under Right of Accumulation and Letters of Intent because of the economies of sales efforts and expenses realized by the Distributor, dealers and brokers making such sales. No sales charge is imposed in certain circumstances described in the Prospectus because the Distributor or dealer or broker incurs little or no selling expenses. The term "immediate family" refers to one's spouse, children, grandchildren, grandparents, parents, parents-in-law, sons- and daughters-in-law, siblings, a sibling's spouse and a spouse's siblings. -- The OppenheimerFunds. The OppenheimerFunds are those mutual funds for which the Distributor acts as the distributor or the sub-distributor and include the following: Oppenheimer Tax-Free Bond Fund Oppenheimer New York Tax-Exempt Fund Oppenheimer California Tax-Exempt Fund Oppenheimer Intermediate Tax-Exempt Bond Fund Oppenheimer Insured Tax-Exempt Bond Fund Oppenheimer Main Street California Tax-Exempt Fund Oppenheimer Florida Tax-Exempt Fund Oppenheimer Pennsylvania Tax-Exempt Fund Oppenheimer New Jersey Tax-Exempt Fund Oppenheimer Fund Oppenheimer Discovery Fund Oppenheimer Target Fund Oppenheimer Growth Fund Oppenheimer Equity Income Fund Oppenheimer Value Stock Fund Oppenheimer Asset Allocation Fund Oppenheimer Total Return Fund, Inc. Oppenheimer Main Street Income & Growth Fund Oppenheimer High Yield Fund Oppenheimer Champion High Yield Fund Oppenheimer Bond Fund Oppenheimer U.S. Government Trust Oppenheimer Limited-Term Government Fund Oppenheimer Mortgage Income Fund Oppenheimer Global Fund Oppenheimer Global Emerging Growth Fund Oppenheimer Global Growth & Income Fund Oppenheimer Gold & Special Minerals Fund Oppenheimer Strategic Income Fund Oppenheimer Strategic Investment Grade Bond Fund Oppenheimer Strategic Short-Term Income Fund Oppenheimer Strategic Income & Growth Fund Oppenheimer Strategic Diversified Income Fund Oppenheimer International Bond Fund the following "Money Market Funds": Oppenheimer Money Market Fund, Inc. Oppenheimer Cash Reserves Centennial Money Market Trust Centennial Tax Exempt Trust Centennial Government Trust Centennial New York Tax Exempt Trust Centennial California Tax Exempt Trust Centennial America Fund, L.P. Daily Cash Accumulation Fund, Inc. There is an initial sales charge on the purchase of Class A shares of each of the OppenheimerFunds except Money Market Funds (under certain circumstances described herein, redemption proceeds of Money Market Fund shares may be subject to a contingent deferred sales charge). -- Letters of Intent. A Letter of Intent ("Letter") is the investor's statement of intention to purchase Class A and Class B shares (or shares of either Class) of the Fund (and other eligible OppenheimerFunds) during the 13-month period from the investor's first purchase pursuant to the Letter (the "Letter of Intent period"), which may, at the investor's request, include purchases made up to 90 days prior to the date of the Letter. The Letter states the investor's intention to make the aggregate amount of purchases (excluding any purchases made by reinvestment of dividends or distributions or purchases made at net asset value without sales charge), which together with the investor's holdings of such funds (calculated at their respective public offering prices calculated on the date of the Letter) will equal or exceed the amount specified in the Letter. This enables the investor to count the shares to be purchased under the Letter of Intent to obtain the reduced sales charge rate (as set forth in the Prospectus) that applies under the Right of Accumulation to current purchases of Class A shares. Each purchase of Class A shares under the Letter will be made at the public offering price (including the sales charge) that applies to a single lump-sum purchase of shares in the amount intended to be purchased under the Letter. In submitting a Letter, the investor makes no commitment to purchase shares, but if the investor's purchases of shares within the Letter of Intent period, when added to the value (at offering price) of the investor's holdings of shares on the last day of that period, do not equal or exceed the intended purchase amount, the investor agrees to pay the additional amount of sales charge applicable to such purchases, as set forth in "Terms of Escrow," below (as those terms may be amended from time to time). The investor agrees that shares equal in value to 5% of the intended purchase amount will be held in escrow by the Transfer Agent subject to the Terms of Escrow. Also, the investor agrees to be bound by the terms of the Prospectus, this Statement of Additional Information and the Application used for such Letter of Intent, and if such terms are amended, as they may be from time to time by the Fund, that those amendments will apply automatically to existing Letters of Intent. If the total eligible purchases made during the Letter of Intent period do not equal or exceed the intended purchase amount, the commissions previously paid to the dealer of record for the account and the amount of sales charge retained by the Distributor will be adjusted to the rates applicable to actual purchases. If total eligible purchases during the Letter of Intent period exceed the intended purchase amount and exceed the amount needed to qualify for the next sales charge rate reduction set forth in the applicable prospectus, the sales charges paid will be adjusted to the lower rate, but only if and when the dealer returns to the Distributor the excess of the amount of commissions allowed or paid to the dealer over the amount of commissions that apply to the actual amount of purchases. The excess commissions returned to the Distributor will be used to purchase additional shares for the investor's account at the net asset value per share in effect on the date of such purchase, promptly after the Distributor's receipt thereof. In determining the total amount of purchases made under a Letter, shares redeemed by the investor prior to the termination of the Letter of Intent period will be deducted. It is the responsibility of the dealer of record and/or the investor to advise the Distributor about the Letter in placing any purchase orders for the investor during the Letter of Intent period. All of such purchases must be made through the Distributor. - Terms of Escrow that Apply to Letters of Intent. 1. Out of the initial purchase (or subsequent purchases if necessary) made pursuant to a Letter, shares of the Fund equal in value to 5% of the intended purchase amount be held in escrow by the Transfer Agent. For example, if the intended purchase amount specified under the Letter is $50,000, the escrow shall be shares valued in the amount of $2,500 (computed at the public offering price adjusted for a $50,000 purchase). Any dividends and capital gains distributions on the escrowed shares will be credited to the investor's account. 2. If the intended purchase amount specified under the Letter is completed within the thirteen-month Letter of Intent period, the escrowed shares will be promptly released to the investor. 3. If, at the end of the thirteen-month Letter of Intent period the total purchases pursuant to the Letter are less than the intended purchase amount specified in the Letter, the investor must remit to the Distributor an amount equal to the difference between the dollar amount of sales charges actually paid and the amount of sales charges which would have been paid if the total amount purchased had been made at a single time. Such sales charge adjustment will apply to any shares redeemed prior to the completion of the Letter. If such difference in sales charges is not paid within twenty days after a request from the Distributor or the dealer, the Distributor will, within sixty days of the expiration of the Letter, redeem the number of escrowed shares necessary to realize such difference in sales charges. Full and fractional shares remaining after such redemption will be released from escrow. If a request is received to redeem escrowed shares prior to the payment of such additional sales charge, the sales charge will be withheld from the redemption proceeds. 4. By signing the Letter, the investor irrevocably constitutes and appoints the Transfer Agent as attorney-in-fact to surrender for redemption any or all escrowed shares. 5. The shares eligible for purchase under the Letter (or the holding of which may be counted toward completion of a Letter) include Class A shares sold with a front-end sales charge or subject to a Class A contingent deferred sales charge, Class B shares, and Class A or B shares acquired in exchange for either (a) Class A shares of one of the other OppenheimerFunds that were acquired subject to a Class A initial or contingent sales charge or (b) Class B shares of one of the other OppenheimerFunds. 6. Shares held in escrow hereunder will automatically be exchanged for shares of another fund to which an exchange is requested, as described in the section of the Prospectus entitled "How to Exchange Shares," and the escrow will be transferred to that other fund. Asset Builder Plans. To establish an Asset Builder Plan from a bank account, a check (minimum $25) for the initial purchase must accompany the application. Shares purchased by Asset Builder Plan payments from bank accounts are subject to the redemption restrictions for recent purchases described in "How To Sell Shares," in the Prospectus. Asset Builder Plans also enable shareholders of Oppenheimer Cash Reserves to use those accounts for monthly automatic purchases of shares of up to four other OppenheimerFunds. There is a front-end sales charge on the purchase of certain OppenheimerFunds or a contingent deferred sales charge may apply to shares purchased by Asset Builder payments. An application should be obtained from the Distributor, completed and returned, and a prospectus of the selected fund(s) should be obtained from the Distributor or your financial advisor before initiating Asset Builder payments. The amount of the Asset Builder investment may be changed or the automatic investments may be terminated at any time by writing to the Transfer Agent. A reasonable period (approximately 15 days) is required after the Transfer Agent's receipt of such instructions to implement them. The Fund reserves the right to amend, suspend, or discontinue offering such plans at any time without prior notice. Cancellation of Purchase Orders. Cancellation of purchase orders for the Fund's shares (for example, when a purchase check is returned to the Fund unpaid) causes a loss to be incurred when the net asset value of the Fund's shares on the cancellation date is less than on the purchase date. That loss is equal to the amount of the decline in the net asset value per share multiplied by the number of shares in the purchase order. The investor is responsible for that loss. If the investor fails to compensate the Fund for the loss, the Distributor will do so. The Fund may reimburse the Distributor for that amount by redeeming shares from any account registered in that investor's name, or the Fund or the Distributor may seek other redress. Checkwriting. When a check is presented to the Bank for clearance, the Bank will ask the Fund to redeem a sufficient number of full and fractional shares in the shareholder's account to cover the amount of the check. This enables the shareholder to continue receiving dividends on those shares until the check is presented to the Fund. Checks may not be presented for payment at the offices of the Bank or the Fund's Custodian. This limitation does not affect the use of checks for the payment of bills or to obtain cash at other banks. The Fund reserves the right to amend, suspend or discontinue offering checkwriting privileges at any time without prior notice. How to Sell Shares Information on how to sell shares of the Fund is stated in the Prospectus. The information below supplements the terms and conditions for redemptions set forth in the Prospectus. -- 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 Trust may determine that it would be detrimental to the best interests of the remaining shareholders of the Fund to make payment of a redemption order wholly or partly in cash. In that case, the Fund may pay the redemption proceeds in whole or in part by a distribution "in kind" of securities from the portfolio of the Fund, in lieu of cash, in conformity with applicable rules of the Securities and Exchange Commission. The Fund has elected to be governed by Rule 18f-1 under the Investment Company Act, pursuant to which the Fund is obligated to redeem shares solely in cash up to the lesser of $250,000 or 1% of the net assets of the Fund during any 90-day period for any one shareholder. If shares are redeemed in kind, the redeeming shareholder might incur brokerage or other costs in selling the securities for cash. The method of valuing securities used to make redemptions in kind will be the same as the method the Fund uses to value its portfolio securities described above under "Determination of Net Asset Value Per Share" and that valuation will be made as of the time the redemption price is determined. -- Involuntary Redemptions. The Trust'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 $1,000 or such lesser amount as the Board may fix. The Board of Trustees will not cause the involuntary redemption of shares in an account if the aggregate net asset value of the shares has fallen below the stated minimum solely as a result of market fluctuations. Should the Board elect to exercise this right, it may also fix, in accordance with the Investment Company Act, the requirements for any notice to be given to the shareholders in question (not less than 30 days), or the Board may set requirements for granting permission to the shareholder to increase the investment, and set other terms and conditions so that the shares would not be involuntarily redeemed. Reinvestment Privilege. Within six months of a redemption, a shareholder may reinvest all or part of the redemption proceeds of Class A shares or of Class B shares of the Fund that you purchased by reinvesting dividends or distributions or on which you paid a contingent deferred sales charge when you redeemed them. The reinvestment may be made without sales charge only in Class A shares of the Fund or any of the other OppenheimerFunds into which shares of the Fund are exchangeable as described below, at the net asset value next computed after the Transfer Agent receives the reinvestment order. The shareholder must ask the Distributor for such privilege at the time of reinvestment. This privilege is not available for Class C shares. Any capital gain that was realized when the shares were redeemed is taxable, and reinvestment will not alter any capital gains tax payable on that gain. If there has been a capital loss on the redemption, some or all of the loss may not be tax deductible, depending on the timing and amount of the reinvestment. Under the Internal Revenue Code, if the redemption proceeds of Fund shares on which a sales charge was paid are reinvested in shares of the Fund or another of the OppenheimerFunds within 90 days of payment of the sales charge, the shareholder's basis in the shares of the Fund that were redeemed may not include the amount of the sales charge paid. That would reduce the loss or increase the gain recognized from the redemption. However, in that case the sales charge would be added to the basis of the shares acquired by the reinvestment of the redemption proceeds. The Fund may amend, suspend or cease offering this reinvestment privilege at any time as to shares redeemed after the date of such amendment, suspension or cessation. Transfers of Shares. Shares are not subject to the payment of a contingent deferred sales charge of either class at the time of transfer to the name of another person or entity (whether the transfer occurs by absolute assignment, gift or bequest, not involving, directly or indirectly, a public sale). The transferred shares will remain subject to the contingent deferred sales charge, calculated as if the transferee shareholder had acquired the transferred shares in the same manner and at the same time as the transferring shareholder. If less than all shares held in an account are transferred, and some but not all shares in the account would be subject to a contingent deferred sales charge if redeemed at the time of transfer, the priorities described in the Prospectus under "How to Buy Shares" for the imposition of the Class B 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, or pension or profit-sharing plans should be addressed to "Trustee, OppenheimerFunds Retirement Plans," c/o the Transfer Agent at its address listed in "How to Sell Shares" in the Prospectus or on the back cover of this Statement of Additional Information. The request must: (i) state the reason for the distribution; (ii) state the owner's awareness of tax penalties if the distribution is premature; and (iii) conform to the requirements of the plan and the Fund's other redemption requirements. Participants (other than self-employed persons) in OppenheimerFunds-sponsored pension or profit-sharing plans may not directly request redemptions or exchanges of their accounts. The employer or plan administrator must sign the request. Distributions from pension and profit sharing plans are subject to special requirements under the Internal Revenue Code and certain documents (available from the Transfer Agent) must be completed before the distribution may be made. Distributions from retirement plans are subject to withholding requirements under the Internal Revenue Code, and IRS Form W-4P (available from the Transfer Agent) must be submitted to the Transfer Agent with the distribution request, or the distribution may be delayed. Unless the shareholder has provided the Transfer Agent with a certified tax identification number, the Internal Revenue Code requires that tax be withheld from any distribution even if the shareholder elects not to have tax withheld. The Fund, the Manager, the Distributor, the Trustee and the Transfer Agent assume no responsibility to determine whether a distribution satisfies the conditions of applicable tax laws and will not be responsible for any tax penalties assessed in connection with a distribution. Special Arrangements for Repurchase of Shares from Dealers and Brokers. The Distributor is the Fund's agent to repurchase its shares from authorized dealers or brokers. The repurchase price per share will be the net asset value next computed after the Distributor receives the order placed by the dealer or broker, except that if the Distributor receives a repurchase order from a dealer or broker after the close of The New York Stock Exchange on a regular business day, it will be processed at that day's net asset value if the order was received by the dealer or broker from its customers prior to the time the Exchange closes (normally, that is 4:00 P.M., but may be earlier on some days) and the order was transmitted to and received by the Distributor prior to its close of business that day (normally 5:00 P.M.). Payment ordinarily will be made within seven days after the Distributor's receipt of the required redemption documents, with signature(s) guaranteed as described in the Prospectus. Automatic Withdrawal and Exchange Plans. Investors owning shares of the Fund valued at $5,000 or more can authorize the Transfer Agent to redeem shares (minimum $50) automatically on a monthly, quarterly, semi-annual or annual basis under an Automatic Withdrawal Plan. Shares will be redeemed three business days prior to the date requested by the shareholder for receipt of the payment. Automatic withdrawals of up to $1,500 per month may be requested by telephone if payments are to be made by check payable to all shareholders of record and sent to the address of record for the account (and if the address has not been changed within the prior 30 days). Required minimum distributions from OppenheimerFunds- sponsored retirement plans may not be arranged on this basis. Payments are normally made by check, but shareholders having AccountLink privileges (see "How To Buy Shares") may arrange to have Automatic Withdrawal Plan payments transferred to the bank account designated on the OppenheimerFunds New Account Application or signature-guaranteed instructions. The Fund cannot guarantee receipt of a payment on the date requested and reserves the right to amend, suspend or discontinue offering such plans at any time without prior notice. Because of the sales charge assessed on Class A share purchases, shareholders should not make regular additional Class A share purchases while participating in an Automatic Withdrawal Plan. Class B and Class C shareholders should not establish withdrawal plans that would require the redemption of shares purchased subject to a contingent deferred sales charge and held less than 6 years or 12 months, respectively, because of the imposition of the Class B or Class C contingent deferred sales charge on such withdrawals (except where the Class B or Class C contingent deferred sales charge is waived as described in the Prospectus under "Waivers of Class B Sales Charges" and "Waivers of Class C Sales Charges"). By requesting an Automatic Withdrawal or Exchange Plan, the shareholder agrees to the terms and conditions applicable to such plans, as stated below and in the provisions of the OppenheimerFunds Application relating to such Plans, as well as the Prospectus. These provisions may be amended from time to time by the Fund and/or the Distributor. When adopted, such amendments will automatically apply to existing Plans. -- Automatic Exchange Plans. Shareholders can authorize the Transfer Agent (on the OppenheimerFunds Application or signature-guaranteed instructions) to exchange a pre-determined amount of shares of the Fund for shares (of the same class) of other OppenheimerFunds automatically on a monthly, quarterly, semi-annual or annual basis under an Automatic Exchange Plan. The minimum amount that may be exchanged to each other fund account is $25. Exchanges made under these plans are subject to the restrictions that apply to exchanges as set forth in "How to Exchange Shares" in the Prospectus and below in this Statement of Additional Information. -- Automatic Withdrawal Plans. Fund shares will be redeemed as necessary to meet withdrawal payments. Shares acquired without a sales charge will be redeemed first and thereafter shares acquired with reinvested dividends and capital gains distributions will be redeemed next, followed by shares acquired with a sales charge, to the extent necessary to make withdrawal payments. Depending upon the amount withdrawn, the investor's principal may be depleted. Payments made under withdrawal plans should not be considered as a yield or income on your investment. The Transfer Agent will administer the investor's Automatic Withdrawal Plan (the "Plan") as agent for the investor (the "Planholder") who executed the Plan authorization and application submitted to the Transfer Agent. The Transfer Agent and the Fund shall incur no liability to the Planholder for any action taken or omitted by the Transfer Agent in good faith to administer the Plan. Certificates will not be issued for shares of the Fund purchased for and held under the Plan, but the Transfer Agent will credit all such shares to the account of the Planholder on the records of the Fund. Any share certificates held by a Planholder may be surrendered unendorsed to the Transfer Agent with the Plan application so that the shares represented by the certificate may be held under the Plan. For accounts subject to Automatic Withdrawal Plans, distributions of capital gains must be reinvested in shares of the Fund, which will be done at net asset value without a sales charge. Dividends on shares held in the account may be paid in cash or reinvested. Redemptions of shares needed to make withdrawal payments will be made at the net asset value per share determined on the redemption date. Checks or AccountLink payments of the proceeds of Plan withdrawals will normally be transmitted three business days prior to the date selected for receipt of the payment (the receipt of payment on the date selected cannot be guaranteed), according to the choice specified in writing by the Planholder. The amount and the interval of disbursement payments and the address to which checks are to be mailed or AccountLink payments are to be sent may be changed at any time by the Planholder by writing to the Transfer Agent. The Planholder should allow at least two weeks' time in mailing such notification for the requested change to be put in effect. The Planholder may, at any time, instruct the Transfer Agent by written notice (in proper form in accordance with the requirements of the then-current Prospectus of the Fund) to redeem all, or any part of, the shares held under the Plan. In that case, the Transfer Agent will redeem the number of shares requested at the net asset value per share in effect in accordance with the Fund's usual redemption procedures and will mail a check for the proceeds to the Planholder. The Plan may be terminated at any time by the Planholder by writing to the Transfer Agent. A Plan may also be terminated at any time by the Transfer Agent upon receiving directions to that effect from the Fund. The Transfer Agent will also terminate a Plan upon receipt of evidence satisfactory to it of the death or legal incapacity of the Planholder. Upon termination of a Plan by the Transfer Agent or the Fund, shares that have not been redeemed from the account will be held in uncertificated form in the name of the Planholder, and the account will continue as a dividend-reinvestment, uncertificated account unless and until proper instructions are received from the Planholder or his or her executor or guardian, or other authorized person. To use 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 because of exhaustion of uncertificated shares needed to continue payments. However, should such uncertificated shares become exhausted, Plan withdrawals will terminate. If the Transfer Agent ceases to act as transfer agent for the Fund, the Planholder will be deemed to have appointed any successor transfer agent to act as agent in administering the Plan. How to Exchange Shares As stated in the Prospectus, shares of a particular class of OppenheimerFunds having more than one class of shares may be exchanged only for shares of the same class of other OppenheimerFunds. Shares of the OppenheimerFunds that have a single class without a class designation are deemed "Class A" shares for this purpose. All OppenheimerFunds offer Class A shares (except for Oppenheimer Strategic Diversified Income Fund, which offers only Class C shares), but only the following other OppenheimerFunds currently offer Class B shares: Oppenheimer Strategic Income Fund Oppenheimer Strategic Income & Growth Fund Oppenheimer Strategic Investment Grade Bond Fund Oppenheimer Strategic Short-Term Income Fund Oppenheimer New York Tax-Exempt Fund Oppenheimer Tax-Free Bond Fund Oppenheimer California Tax-Exempt Fund Oppenheimer Pennsylvania Tax-Exempt Fund Oppenheimer Florida Tax-Exempt Fund Oppenheimer New Jersey Tax-Exempt Fund Oppenheimer Insured Tax-Exempt Bond Fund Oppenheimer Main Street California Tax-Exempt Fund Oppenheimer Main Street Income & Growth Fund Oppenheimer Total Return Fund, Inc. Oppenheimer Value Stock Fund Oppenheimer Limited-Term Government Fund Oppenheimer High Yield Fund Oppenheimer Mortgage Income Fund Oppenheimer Cash Reserves (Class B shares are available only by exchange or by direct purchase by participants in the OppenheimerFunds proprietary 401(k) plan) Oppenheimer Growth Fund Oppenheimer Equity Income Fund Oppenheimer Global Fund Oppenheimer Discovery Fund Oppenheimer International Bond Fund The following Oppenheimer Funds offer Class C shares: Oppenheimer Fund Oppenheimer Global Growth & Income Fund Oppenheimer Asset Allocation Fund Oppenheimer Champion High Yield Fund Oppenheimer U.S. Government Trust Oppenheimer Intermediate Tax-Exempt Bond Fund Oppenheimer Main Street Income & Growth Fund Oppenheimer Cash Reserves (Class C shares are available only by exchange or by direct purchase by participants in the OppenheimerFunds proprietary 401(k) plan) Oppenheimer Strategic Diversified Income Fund Oppenheimer Limited-Term Government Fund Oppenheimer International Bond Fund Class A shares of OppenheimerFunds may be exchanged at net asset value for shares of any Money Market Fund. Shares of any Money Market Fund purchased without a sales charge may be exchanged for shares of OppenheimerFunds offered with a sales charge upon payment of the sales charge (or, if applicable, may be used to purchase shares of OppenheimerFunds subject to a contingent deferred sales charge). Effective on or about August 1, 1995, if the Distributor receives, at the time of purchase, notice that shares of Oppenheimer Money Market Fund, Inc. are being purchased with the redemption proceeds of shares of other mutual funds (other than other money market funds) that are not part of the OppenheimerFunds family, those shares of Oppenheimer Money Market Fund may be exchanged for shares of other OppenheimerFunds at net asset value without paying a sales charge. Shares of this Fund acquired by reinvestment of dividends or distributions from any other of the OppenheimerFunds or from any unit investment trust for which reinvestment arrangements have been made with the Distributor may be exchanged at net asset value for shares of any of the OppenheimerFunds. No contingent deferred sales charge is imposed on exchanges of shares of either class purchased subject to a contingent deferred sales charge. However, when Class A shares acquired by exchange of Class A shares of other OppenheimerFunds purchased subject to a Class A contingent deferred sales charge are redeemed within 18 months of the end of the calendar month of the initial purchase of the exchanged Class A shares, the Class A contingent deferred sales charge is imposed on the redeemed shares (see "Class A Contingent Deferred Sales Charge" in the Prospectus). The Class B contingent deferred sales charge is imposed on Class B shares acquired by exchange if they are redeemed within 6 years of the initial purchase of the exchanged Class B shares. 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 Class C contingent deferred sales charge will be followed in determining the order in which the shares are exchanged. Shareholders should take into account the effect of any exchange on the applicability and rate of any contingent deferred sales charge that might be imposed in the subsequent redemption of remaining shares. Shareholders owning shares of more than one class must specify whether they intend to exchange Class A, Class B or Class C shares. The Fund reserves the right to reject telephone or written exchange requests submitted in bulk by anyone on behalf of 10 or more accounts. The Fund may accept requests for exchanges of up to 50 accounts per day from representatives of authorized dealers that qualify for this privilege. In connection with any exchange request, the number of shares exchanged may be less than the number requested if the exchange or the number requested would include shares subject to a restriction cited in the Prospectus or this Statement of Additional Information or would include shares covered by a share certificate that is not tendered with the request. In those cases, only the shares available for exchange without restriction will be exchanged. When exchanging shares by telephone, a shareholder must either have an existing account in, or obtain, open an account in, and acknowledge receipt of a prospectus for, the fund to which the exchange is to be made. For full or partial exchanges of an account made by telephone, any special account features such as Asset Builder Plans, Automatic Withdrawal Plans and retirement plan contributions will be switched to the new account unless the Transfer Agent is instructed otherwise. If all telephone lines are busy (which might occur, for example, during periods of substantial market fluctuations), shareholders might not be able to request exchanges by telephone and would have to submit written exchange requests. Shares to be exchanged are redeemed on the regular business day the Transfer Agent receives an exchange request in proper form (the "Redemption Date"). Normally, shares of the fund to be acquired are purchased on the Redemption Date, but such purchases may be delayed by either fund up to five business days if it determines that it would be disadvantaged by an immediate transfer of the redemption proceeds. The Fund reserves the right, in its discretion, to refuse any exchange request that may disadvantage it (for example, if the receipt of multiple exchange request from a dealer might require the disposition of portfolio securities at a time or at a price that might be disadvantageous to the Fund). The different OppenheimerFunds available for exchange have different investment objectives, policies and risks, and a shareholder should assure that the Fund selected is appropriate for his or her investment and should be aware of the tax consequences of an exchange. For federal tax purposes, an exchange transaction is treated as a redemption of shares of one fund and a purchase of shares of another. "Reinvestment Privilege," above, discusses some of the tax consequences of reinvestment of redemption proceeds in such cases. The Fund, the Distributor, and the Transfer Agent are unable to provide investment, tax or legal advice to a shareholder in connection with an exchange request or any other investment transaction. Dividends, Capital Gains and Taxes Dividends and Distributions. Dividends will be payable on shares held of record at the time of the previous determination of net asset value, or as otherwise described in "How to Buy Shares." Daily dividends on newly purchased shares will not be declared or paid until such time as Federal Funds (funds credited to a member bank's account at the Federal Reserve Bank) are available from the purchase payment for such shares. Normally, purchase checks received from investors are converted to Federal Funds on the next business day. Dividends will be declared on shares repurchased by a dealer or broker for four business days following the trade date (i.e., to and including the day prior to settlement of the repurchase). If all shares in an account are redeemed, all dividends accrued on shares of the same class in the account will be paid together with the redemption proceeds. Dividends, distributions and the proceeds of the redemption of Fund shares represented by checks returned to the Transfer Agent by the Postal Service as undeliverable will be invested in shares of Oppenheimer Money Market Fund, Inc., as promptly as possible after the return of such checks to the Transfer Agent, in order to enable the investor to earn a return on otherwise idle funds. Tax Status of the Fund's Dividends and Distributions. The Federal tax treatment of the Fund's dividends and capital gains distributions is explained in the Prospectus under the caption "Dividends, Capital Gains and Taxes." Special provisions of the Internal Revenue Code govern the eligibility of the Fund's dividends for the dividends-received deduction for corporate shareholders. Long-term capital gains distributions are not eligible for the deduction. In addition, the amount of dividends paid by the Fund which may qualify for the deduction is limited to the aggregate amount of qualifying dividends which the Fund derives from its portfolio investments that the Fund has held for a minimum period, usually 46 days. A corporate shareholder will not be eligible for the deduction on dividends paid on shares held for 45 days or less. To the extent the Fund's dividends are derived from its gross income from option premiums, interest income or short-term gains from the sale of securities, or dividends from foreign corporations, its dividends will not qualify for the deduction. It is expected that for the most part the Fund's dividends will not qualify, because of the nature of the investments held by the Fund in its portfolio. The amount of a class's distributions may vary from time to time depending on market conditions, the composition of the Fund's portfolio, and expenses borne by the Fund or borne separately by a class, as described in "Alternative Sales Arrangements -- Class A, Class B and Class C," above. Dividends are calculated in the same manner, at the same time and on the same day for shares of each class. However, dividends on Class B and Class C shares are expected to be lower as a result of the asset- based sales charge on Class B and Class C shares, and Class B and Class C dividends will also differ in amount as a consequence of any difference in net asset value between Class A, Class B and Class C shares. Under the Internal Revenue Code, by December 31 each year the Fund must distribute 98% of its taxable investment income earned from January 1 through December 31 of that year and 98% of its capital gains realized in the period from November 1 of the prior year through October 31 of the current year, or else the Fund must pay an excise tax on the amounts not distributed. While it is presently anticipated that the Fund will meet those requirements, the Fund's Board and the Manager might determine in a particular year that it would be in the best interest of shareholders for the Fund not to make such distributions at the required levels and to pay the excise tax on the undistributed amounts. That would reduce the amount of income or capital gains available for distribution to shareholders. Dividend Reinvestment in Another Fund. Shareholders of the Fund may elect to reinvest all dividends and/or capital gains distributions in shares of the same class of any of the other OppenheimerFunds listed in "Reduced Sales Charges" above at net asset value without sales charge. As of the date of this Statement of Additional Information, not all of the OppenheimerFunds offer Class B or Class C shares. To elect this option, a shareholder must notify the Transfer Agent in writing and either have an existing account in the fund selected for reinvestment or must obtain a prospectus for that fund and an application from the Distributor to establish an account. The investment will be made at the net asset value per share in effect at the close of business on the payable date of the dividend or distribution. Dividends and/or distributions from shares of other OppenheimerFunds may be invested in shares of this Fund on the same basis. Additional Information About The Fund The Custodian. The Bank of New York is the Custodian of the Fund's assets. The Custodian's responsibilities include safeguarding and controlling the Fund's portfolio securities and handling the delivery of such securities to and from the Fund. The Manager has represented to the Fund that the banking relationships between the Manager and the Custodian have been and will continue to be unrelated to and unaffected by the relationship between the Fund and the Custodian. It will be the practice of the Fund to deal with the Custodian in a manner uninfluenced by any banking relationship the Custodian may have with the Manager and its affiliates. The Fund's cash balances with the Custodian in excess of $100,000 are not protected by Federal deposit insurance. Those uninsured balances at times may be substantial. Independent Auditors. The independent auditors of the Fund audit the Fund's financial statements and perform other related audit services. They also act as auditors for the Manager and certain other funds advised by the Manager and its affiliates. Independent Auditors' Report The Board of Trustees and Shareholders of Oppenheimer Investment Grade Bond Fund: We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Oppenheimer Investment Grade Bond Fund as of December 31, 1994, the related statement of operations for the year then ended, the statements of changes in net assets for the years ended December 31, 1994 and 1993 and the financial highlights for the period January 1, 1991 to December 31, 1994. 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. The financial highlights (except for total return) for the period February 1, 1984 to December 31, 1990 were audited by other auditors whose report dated February 4, 1991, expressed an unqualified opinion on those financial highlights. 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures includedconfirmation of securities owned at December 31, 1994 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 Investment Grade Bond Fund at December 31, 1994, 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. January 23, 1995
Face Market Value - ------------------------------------------------------------------------------------------------------ Statement of Investments December 31, 1994 - --------------------------------------------------------------------------------------------------- Amount See Note 1 Short-Term Notes--14.9% - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Non-Cyclicals--2.4% - ----------------------------------------------------------------------------------------------------------------------------------- Food Wholesalers--2.4% Tyson Foods, Inc., 6.10%, 1/4/95 $2,410,000 $ 2,408,775 - ----------------------------------------------------------------------------------------------------------------------------------- Energy--2.5% - ----------------------------------------------------------------------------------------------------------------------------------- Oil: Integrated Domestic--2.5% Burlington Resources, Inc., 6.30%, 1/17/95 2,500,000 2,493,000 - ----------------------------------------------------------------------------------------------------------------------------------- Financial--3.2% - ----------------------------------------------------------------------------------------------------------------------------------- Diversified Finance--0.7% Ford Motor Credit Co., 5.80%, 1/9/95 555,000 555,000 ------------------------------------------------------------------------------------------------------ General Motors Acceptance Corp., 6.05%, 1/9/95 120,000 119,839 ------------ 674,839 - ----------------------------------------------------------------------------------------------------------------------------------- Financial Services: Miscellaneous--2.5% Countrywide Funding Corp., 6.30%, 1/6/95 2,500,000 2,497,812 - ----------------------------------------------------------------------------------------------------------------------------------- Utilities--6.8% - ----------------------------------------------------------------------------------------------------------------------------------- Electric Companies--4.5% Indiana & Michigan Power Co., 6.05%, 1/3/95 2,040,000 2,039,314 Texas Electric Services Co., 6.20%, 1/5/95 2,500,000 2,498,278 4,537,592 - ----------------------------------------------------------------------------------------------------------------------------------- Telephone--2.3% GTE Norwest, Inc., 5.88%, 1/13/95 2,340,000 2,335,414 ------------ Total Short-Term Notes (Cost $14,947,432) 14,947,432 ========================================================== Asset-Backed Securities--7.1% - ----------------------------------------------------------------------------------------------------------------------------------- Auto Loan--7.1% Daimler-Benz Vehicle Trust, Series 1994-A, Cl. A, 5.95%, 12/15/00 827,697 814,537 ------------------------------------------------------------------------------------------------------ Ford Credit Grantor Trust, Series 1994-B, Cl. A, 7.30%, 10/15/99 1,458,742 1,447,933 ------------------------------------------------------------------------------------------------------ General Motors Acceptance Corp., Grantor Trust, Series 1992-E, Cl. A, 4.75%, 8/15/97 454,750 445,615 ------------------------------------------------------------------------------------------------------ Nissan Auto Receivables Grantor Trust, Series 1994-A, Cl. A, 6.45%, 9/15/99 2,241,045 2,202,567 ------------------------------------------------------------------------------------------------------ Select Auto Receivable Trust, Series 1991-2 Asset-Backed Certificates, Cl. A, 7.65%, 7/15/96 194,180 193,881 ------------------------------------------------------------------------------------------------------ World Omni Automobile Lease Securitization Trust, Series 1994-A, Cl. A, 6.45%, 9/25/00 2,000,000 1,967,360 ------------ Total Asset-Backed Securities (Cost $7,163,638) 7,071,893 ========================================================== ========================================================== =============== Mortgage-Backed Obligations--13.3% - ----------------------------------------------------------------------------------------------------------------------------------- Government Agency--11.3% - ----------------------------------------------------------------------------------------------------------------------------------- FHLMC/FNMA/Sponsored--7.1% Federal Home Loan Mortgage Corp., Certificates of Participation, 9%, 3/1/17 770,177 772,234 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Certificates of Participation, Series 17-039, 13.50%, 11/1/10 91,657 101,813 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Certificates of Participation, Series 17-094, 12.50%, 4/1/14 50,645 55,629 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Collateralized Mortgage Obligation Gtd. Multiclass Certificates of Participation, 7.50%, 2/15/07 2,000,000 1,898,120 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Multiclass Mortgage Participation Certificates, Series 1460, Cl. 1460-H, 7%, 5/15/07 1,500,000 1,374,090 ------------------------------------------------------------------------------------------------------ Federal National Mortgage Assn., Gtd. Mtg. Pass-Through Certificates, 8%, 8/1/17 1,116,105 1,097,712 ------------------------------------------------------------------------------------------------------ Federal National Mortgage Assn., Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Series 1993-191, Cl. PD, 5.40%, 4/25/04 1,500,000 1,365,300
5 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Investments (Continued) ------------------------------------------------------------------------------------------------------ Face Market Value Amount See Note 1 - ----------------------------------------------------------------------------------------------------------------------------------- FHLMC/FNMA/Sponsored (continued) Federal National Mortgage Assn., Interest-Only Collateralized Mortgage Obligation Gtd. Real Estate Mortgage Investment Conduit Pass-Through Certificates, Trust 1992 G-57, Cl. SA, 44.60%, 10/25/22(1) $ 568,843 $ 443,698 ------------ 7,108,596 - ----------------------------------------------------------------------------------------------------------------------------------- GNMA/Guaranteed:--4.2% Government National Mortgage Assn.: 10%, 11/15/09 595,139 622,481 12%, 1/15/99 24,402 25,944 12%, 1/15/99 66,980 71,210 12%, 5/15/14 2,184 2,423 12.75%, 6/15/15 44,137 49,704 15%, 2/15/12 26,167 30,505 8%, 10/15/05 243,215 239,689 8%, 10/15/06 377,529 371,447 8%, 6/15/05 125,505 123,686 8%, 6/15/05 97,196 95,787 8%, 6/15/05 132,000 130,087 8%, 7/15/05 222,830 219,600 8%, 7/15/05 326,463 321,730 8%, 7/15/05 109,149 107,567 8%, 7/15/06 167,313 164,618 8%, 7/15/06 216,029 212,549 8%, 8/15/05 135,305 133,344 8%, 8/15/05 146,311 144,190 8%, 9/15/05 309,653 305,163 8%, 9/15/05 158,612 156,312 9%, 2/15/09 22,973 23,335 9%, 2/15/09 234,544 238,238 9%, 3/15/09 167,088 169,720 9%, 3/15/09 25,494 25,896 9%, 5/15/09 28,368 28,815 9%, 6/15/09 159,386 161,897 ------------ 4,175,937 - ----------------------------------------------------------------------------------------------------------------------------------- Other--2.0% JHM Acceptance Corp., 8.96% Collateralized Mortgage Obligation Bonds, Series E, Cl. E-6, 4/1/19 2,000,000 2,008,900 ------------ Total Mortgage-Backed Obligations (Cost $14,177,957) 13,293,433 ========================================================== ========================================================== =============== U.S. Government Obligations--43.8% - ----------------------------------------------------------------------------------------------------------------------------------- Agency--3.8% - ----------------------------------------------------------------------------------------------------------------------------------- Government Agency/ Full Faith--3.8% Allentown, Pennsylvania, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 65,000 66,092 ------------------------------------------------------------------------------------------------------ Babylon, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 115,000 104,767 ------------------------------------------------------------------------------------------------------ Bakersfield, California, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 255,000 232,311 ------------------------------------------------------------------------------------------------------ Boston, Massachusetts, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 795,000 724,262 ------------------------------------------------------------------------------------------------------ Buena Vista Township, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 270,000 245,976
6 Oppenheimer Investment Grade Bond Fund
Face Market Value Amount See Note 1 - ----------------------------------------------------------------------------------------------------------------------------------- Government Agency/ Full Faith (continued) Buffalo, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 $ 400,000 $ 364,409 ------------------------------------------------------------------------------------------------------ Detroit, Michigan, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 405,000 368,964 ------------------------------------------------------------------------------------------------------ Fajardo, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 300,000 305,042 ------------------------------------------------------------------------------------------------------ New Haven, Connecticut, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 400,000 406,722 ------------------------------------------------------------------------------------------------------ Roanoke, Virginia, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 220,000 200,425 ------------------------------------------------------------------------------------------------------ Sacramento County, California Redevelopment Agency U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 240,000 218,390 ------------------------------------------------------------------------------------------------------ Tacoma, Washington, U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 165,000 150,319 ------------------------------------------------------------------------------------------------------ Trenton, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 135,000 122,988 ------------------------------------------------------------------------------------------------------ Tujillo Alto, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 235,000 238,949 ------------ 3,749,616 - ----------------------------------------------------------------------------------------------------------------------------------- Treasury--40.0% U.S. Treasury Bonds: 7.125%, 2/15/23 4,000,000 3,638,748 7.25%, 8/15/22 4,900,000 4,521,778 7.875%, 2/15/21 900,000 888,188 8%, 11/15/21 2,000,000 2,006,874 ------------------------------------------------------------------------------------------------------ U.S. Treasury Notes: 6.375%, 8/15/02 2,750,000 2,519,687 7%, 4/15/99 10,700,000 10,372,312 7.25%, 8/15/04 10,000,000 9,600,000 8.50%, 7/15/97 6,400,000 6,504,000 ------------ 40,051,587 ------------ Total U.S. Government Obligations (Cost $47,152,705) 43,801,203 ========================================================== ========================================================== =============== Foreign Government Obligations--0.9% Iceland (Republic of) Nts., 6.125%, 2/1/04 (Cost $989,168) 1,000,000 857,030 ========================================================== ========================================================== =============== Corporate Bonds and Notes--29.0% - ----------------------------------------------------------------------------------------------------------------------------------- Basic Materials--5.5% - ----------------------------------------------------------------------------------------------------------------------------------- Chemicals--0.4% Imcera Group, Inc., 6% Nts., 10/15/03 500,000 424,747 - ----------------------------------------------------------------------------------------------------------------------------------- Metals--3.5% AMAX, Inc., 9.875% Nts., 6/13/01 1,000,000 1,041,957 ------------------------------------------------------------------------------------------------------ Newmont Mining Corp., 8.625% Nts., 4/1/02 1,000,000 985,022 ------------------------------------------------------------------------------------------------------ Teck Corp., 8.70% Debs., 5/1/02 1,500,000 1,479,052 ------------ 3,506,031 - ----------------------------------------------------------------------------------------------------------------------------------- Paper and Forest Products--1.6% Georgia-Pacific Corp., 9.95% Debs., 6/15/02 1,500,000 1,600,647 - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Cyclicals--3.0% - ----------------------------------------------------------------------------------------------------------------------------------- Automotive--1.1% Chrysler Corp., 10.40% Nts., 8/1/99 1,000,000 1,048,078 - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Goods and Services--1.0% Toro Co. (The), 11% Debs., 8/1/17 1,000,000 1,041,250 - ----------------------------------------------------------------------------------------------------------------------------------- Media--0.9% News America Holdings, Inc., 7.50% Gtd. Sr. Nts., 3/1/00 1,000,000 945,495 - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Non-Cyclicals--2.0% - ----------------------------------------------------------------------------------------------------------------------------------- Food--1.0% Wendy's International, Inc., 12.125% Debs., 4/1/95 1,000,000 1,010,211 - ----------------------------------------------------------------------------------------------------------------------------------- Healthcare--1.0% Baxter International, Inc., 9.25% Nts., 9/15/96 1,000,000 1,018,178
7 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Investments (Continued) ------------------------------------------------------------------------------------------------------ Face Market Value Amount See Note 1 - ----------------------------------------------------------------------------------------------------------------------------------- Energy--4.5% Enron Corp., 8.10% Nts., 12/15/96 $1,500,000 $ 1,499,236 ------------------------------------------------------------------------------------------------------ Union Oil Co. of California, 8.75% Nts., 8/15/01 1,500,000 1,517,873 ------------------------------------------------------------------------------------------------------ Union Oil Co. of California, 9.625% Gtd. Debs., 5/15/95 1,500,000 1,513,434 ------------ 4,530,543 - ----------------------------------------------------------------------------------------------------------------------------------- Financial--5.9% Ford Motor Credit Co., 9.90% Med.-Term Nts., 11/6/97 2,000,000 2,057,252 ------------------------------------------------------------------------------------------------------ Goldman Sachs Group, LP, 6.20% Nts., 2/15/01 1,500,000 1,312,969 ------------------------------------------------------------------------------------------------------ Leucadia National Corp., 7.75% Sr. Nts., 8/15/13 2,000,000 1,757,329 ------------------------------------------------------------------------------------------------------ PaineWebber Group, Inc., 6.50% Nts., 11/1/05 1,000,000 794,856 ------------ 5,922,406 - ----------------------------------------------------------------------------------------------------------------------------------- Industrial--3.8% - ----------------------------------------------------------------------------------------------------------------------------------- General Industrial--1.0% Thomas & Betts Corp., 8.25% Sr. Nts., 1/15/04 1,000,000 976,858 - ----------------------------------------------------------------------------------------------------------------------------------- Transportation--2.8% AMR Corp., 9% Debs., 8/1/12 1,500,000 1,353,010 ------------------------------------------------------------------------------------------------------ United Air Lines, Inc., 10.11% Equipment Trust Certificates, Series 91B, 2/19/06 1,449,687 1,409,815 ------------ 2,762,825 - ----------------------------------------------------------------------------------------------------------------------------------- Technology--3.3% - ----------------------------------------------------------------------------------------------------------------------------------- Aerospace/Defense--3.3% McDonnell Douglas Corp., 9.25% Nts., 4/1/02 2,750,000 2,812,540 ------------------------------------------------------------------------------------------------------ Textron, Inc., 9.55% Med.-Term Nts., 3/19/01 500,000 525,255 ------------ 3,337,795 - ----------------------------------------------------------------------------------------------------------------------------------- Utilities--1.0% Tenaga Nasional Berhad, 7.875% Nts., 6/15/04(2) 1,000,000 951,846 ------------ Total Corporate Bonds and Notes (Cost $30,473,758) 29,076,910 Shares ========================================================== ========================================================== =============== Common Stocks--0.0% - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Non-Cyclicals--0.0% - ----------------------------------------------------------------------------------------------------------------------------------- Food Processing--0.0% Doskocil Cos., Inc. (Cost $0) 1,761 13,208 - ----------------------------------------------------------------------------------------------------------------------------------- Total Investments, at Value (Cost $114,904,658) 109.0% 109,061,109 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities in Excess of Other Assets (9.0) (8,970,361) ---------- ------------ Net Assets 100.0% $100,090,748 ========== ============ 1. Interest rate resets monthly, inversely related to LIBOR. Interest-Only Strips represent the right to receive the monthly interest payments on an underlying pool of mortgage loans. These securities are subject to the risk of accelerated principal paydowns as interest rates decline. The principal amount represents the notional amount on which current interest is calculated. 2. Restricted security--See Note 6 of Notes to Financial Statements. See accompanying Notes to Financial Statements.
8 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Assets and Liabilities December 31, 1994 ------------------------------------------------------------------------------------------------------ ========================================================== ========================================================== =============== Assets Investments, at value (cost $114,904,658)--see accompanying statement $109,061,109 ------------------------------------------------------------------------------------------------------ Receivables: Interest and principal paydowns 1,694,107 Shares of beneficial interest sold 202,489 ------------------------------------------------------------------------------------------------------ Other 55,797 ------------ Total assets 111,013,502 ========================================================== ========================================================== =============== Liabilities Bank overdraft 57,356 ------------------------------------------------------------------------------------------------------ Payables and other liabilities: Investments purchased 9,823,047 Dividends 646,989 Shares of beneficial interest redeemed 258,588 Distribution and service plan fees--Note 4 65,541 Deferred trustee fees--Note 5 18,086 Other 53,147 ------------ Total liabilities 10,922,754 ========================================================== ========================================================== =============== Net Assets $100,090,748 ============ ========================================================== ========================================================== =============== Composition of Net Assets Paid-in capital $110,009,506 ------------------------------------------------------------------------------------------------------ Undistributed (overdistributed) net investment income (204,894) ------------------------------------------------------------------------------------------------------ Accumulated net realized gain (loss) from investment transactions (3,870,315 ------------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) on investments--Note 3 (5,843,549) ------------- Net assets $100,090,748 ============= ========================================================== ========================================================== =============== Net Asset Value Per Share Class A Shares: Net asset value and redemption price per share (based on net assets of $96,639,607 and 9,653,273 shares of beneficial interest outstanding) $10.01 Maximum offering price per share (net asset value plus sales charge of 4.75% of offering price) $10.51 ------------------------------------------------------------------------------------------------------ Class B Shares: Net asset value, redemption price and offering price per share (based on net assets of $3,451,141 and 344,660 shares of beneficial interest outstanding) $10.01
See accompanying Notes to Financial Statements. 9 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Operations For the Year Ended December 31, 1994 ------------------------------------------------------------------------------------------------------ ========================================================== ========================================================== =============== Investment Income Interest $ 7,667,379 ========================================================== ========================================================== =============== Expenses Management fees--Note 4 522,205 ------------------------------------------------------------------------------------------------------ Distribution and service plan fees: Class A--Note 4 247,136 Class B--Note 4 26,383 ------------------------------------------------------------------------------------------------------ Transfer and shareholder servicing agent fees--Note 4 184,806 ------------------------------------------------------------------------------------------------------ Shareholder reports 80,889 ------------------------------------------------------------------------------------------------------ Legal and auditing fees 13,761 ------------------------------------------------------------------------------------------------------ Trustees' fees and expenses 12,864 ------------------------------------------------------------------------------------------------------ Custodian fees and expenses 12,743 ------------------------------------------------------------------------------------------------------ Registration and filing fees: Class A 162 Class B 603 ------------------------------------------------------------------------------------------------------ Other 28,219 ----------- Total expenses 1,129,771 ========================================================== ========================================================== =============== Net Investment Income (Loss) 6,537,608 ========================================================== ========================================================== =============== Realized and Unrealized Gain (Loss) on Investments Net realized gain (loss) on investments (2,274,518) ------------------------------------------------------------------------------------------------------ Net change in unrealized appreciation or depreciation on investments (8,559,673) ----------- Net realized and unrealized gain (loss) on investments (10,834,191) ========================================================== ========================================================== =============== Net Increase (Decrease) in Net Assets Resulting From Operations $(4,296,583) ===========
See accompanying Notes to Financial Statements. 10 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statements of Changes in Net Assets ------------------------------------------------------------------------------------------------------ Year Ended December 31, 1994 1993 ========================================================== ========================================================== =============== Operations Net investment income (loss) $6,537,608 $ 6,955,080 ------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments (2,274,518) 3,772,429 ------------------------------------------------------------------------------------------------------ Net change in unrealized appreciation or depreciation on investments (8,559,673) 22,233 ------------ ------------ Net increase (decrease) in net assets resulting from operations (4,296,583) 10,749,742 ========================================================== ========================================================== =============== Dividends and Distributions To Shareholders Dividends from net investment income: Class A ($.6539 and $.707 per share, respectively) (6,381,575) (7,067,709) Class B ($.5754 and $.42 per share, respectively) (156,032) (33,652) ------------------------------------------------------------------------------------------------------ Dividends in excess of net investment income: Class A ($.0306 per share) (298,880) -- Class B ($.027 per share) (7,308) -- ========================================================== ========================================================== =============== Beneficial Interest Transactions Net increase (decrease) in net assets resulting from Class A beneficial interest transactions--Note 2 (3,255,547) 802,199 ------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from Class B beneficial interest transactions--Note 2 1,918,288 1,828,205 ========================================================== ========================================================== =============== Net Assets Total increase (decrease) (12,477,637) 6,278,785 ------------------------------------------------------------------------------------------------------ Beginning of period 112,568,385 106,289,600 ------------ ------------ End of period (including overdistributed net investment income of $204,894 and $56,074, respectively) $100,090,748 $112,568,385 ============ ============
See accompanying Notes to Financial Statements. 11 Oppenheimer Investment Grade Bond Fund
----------------------------------------------------------------------------------- Financial Highlights ----------------------------------------------------------------------------------- Class A ----------------------------------------------------------------------------------- Eleven Months Ended Year Ended December 31, Dec. 31, 1994 1993 1992 1991(3) 1990 1989 1988(2) ========================================================== ========================================================== Per Share Operating Data: Net asset value, beginning of period $11.12 $10.74 $10.80 $ 9.86 $10.29 $10.12 $10.55 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .65 .69 .75 .82 .88(4) .92 .93 Net realized and unrealized gain (loss) on investments (1.08) .40 (.05) .90 (.43) .19 (.36) ------- ------- ------- ------- ------ ------- ------- Total income (loss) from investment operations (.43) 1.09 .70 1.72 .45 1.11 .57 - ------------------------------------------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (.65) (.71) (.76) (.78) (.88) (.94) (1.00) Dividends in excess of net investment income (.03) -- -- -- -- -- -- ------- ------- ------- ------- ------ ------- ------- Total dividends to shareholders (.68) (.71) (.76) (.78) (.88) (.94) (1.00) - ------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.01 $ 11.12 $ 10.74 $ 10.80 $ 9.86 $ 10.29 $ 10.12 ======= ======= ======= ======= ====== ======= ======= ========================================================== ========================================================== Total Return, at Net Asset Value(5) (3.87)% 10.30% 6.77% 18.28% 4.74% 11.31% 4.48% ========================================================== ========================================================== Ratios/Supplemental Data: Net assets, end of period (in thousands) $96,640 $110,759 $106,290 $90,623 $87,021 $96,380 $102,293 - ------------------------------------------------------------------------------------------------------------------- Average net assets (in thousands) $102,168 $111,702 $ 98,672 $86,471 $ 90,065 $100,891 $111,264 - ------------------------------------------------------------------------------------------------------------------- Number of shares outstanding at end of period (in thousands) 9,653 9,963 9,899 8,390 8,829 9,369 10,108 - ------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 6.25% 6.20% 7.00% 8.02% 8.85% 8.85% 8.75% Expenses 1.06% 1.06% 1.10% 1.23% 1.24%(4) 1.14% 1.05% - ------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(7) 70.3% 110.1% 116.4% 97.1% 80.4% 41.3% 45.0%
------------------------------------------------------------------------ Financial Highlights (continued) ------------------------------------------------------------------------ Class A (continued) Class B -------------------------------------------------------------- -------- Year Period Ended Ended Year Ended January 31, Dec. 31, Dec. 31, 1988(2) 1987(2) 1986(2) 1985(2) 1994 1993(1) ========================================================== ============================================= Per Share Operating Data: Net asset value, beginning of period $ 11.30 $ 11.16 $ 10.91 $ 11.00 $ 11.11 $ 11.10 - ------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income 1.09 1.16 1.22 1.27 .58 .40 Net realized and unrealized gain (loss) on investments (.55) .22 .35 (.04) (1.08) .03 ------- ------- ------- ------- ------- ------- Total income (loss) from investment operations .54 1.38 1.57 1.23 (.50) .43 - ------------------------------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (1.29) (1.24) (1.32) (1.32) (.57) (.42) Dividends in excess of net investment income -- -- -- -- (.03) -- ------- ------- ------- ------- ------- ------- Total dividends to shareholders (1.29) (1.24) (1.32) (1.32) (.60) (.42) - ------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.55 $ 11.30 $ 11.16 $ 10.91 $ 10.01 $ 11.11 ======= ======= ======= ======= ======= ======= ========================================================== ============================================= Total Return, at Net Asset Value(5) N/A N/A N/A N/A (4.53)% 3.91% ========================================================== ============================================= Ratios/Supplemental Data: Net assets, end of period (in thousands) $118,568 $125,513 $121,979 $117,293 $3,451 $1,809 - ------------------------------------------------------------------------------------------------------- Average net assets (in thousands) $118,724 $123,045 $118,253 $111,235 $2,747 $ 922 - ------------------------------------------------------------------------------------------------------- Number of shares outstanding at end of period (in thousands) 11,234 11,103 10,930 10,751 345 163 - ------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 10.28% 10.45% 11.26% 12.21% 5.53% 4.80%(6) Expenses .98% .93% .97% 1.01% 1.78% 1.90%(6) - ------------------------------------------------------------------------------------------------------- Portfolio turnover rate(7) 19.5% 59.8% 36.5% 76.7% 70.3% 110.1% 1. For the period from May 1, 1993 (inception of offering) to December 31, 1993. 2. Operating results prior to April 15, 1988 were achieved by the Fund's predecessor corporation as a closed-end fund under different investment objectives and policies. Such results are thus not necessarily representative of operating results the Fund may achieve under its current investment objectives and policies. 3. On March 28, 1991, Oppenheimer Management Corporation became the investment advisor to the Fund. 4. Net investment income would have been $.87 absent the voluntary expense limitation, resulting in an expense ratio of 1.26%. 5. Assumes a hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Sales charges are not reflected in the total returns. 6. Annualized. 7. The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation. Purchases and sales of investment securities (excluding short-term securities) for the year ended December 31, 1994 were $67,852,873 and $67,362,839, respectively. See accompanying Notes to Financial Statements.
12 Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- Notes to Financial Statements ----------------------------------------------------------------------------------------------------- ========================================================== ========================================================== =============== 1. Significant Accounting Policies Oppenheimer Investment Grade Bond Fund (the Fund) is a separate fund of Oppenheimer Integrity Funds, a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended. The Fund's investment advisor is Oppenheimer Management Corporation (the Manager). The Fund offers both Class A and Class B shares. Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent deferred sales charge. Both classes of shares have identical rights to earnings, assets and voting privileges, except that each class has its own distribution and/or service plan, expenses directly attributable to a particular class and exclusive voting rights with respect to matters affecting a single class. Class B shares will automatically convert to Class A shares six years after the date of purchase. The following is a summary of significant accounting policies consistently followed by the Fund. ----------------------------------------------------------------------------------------------------- Investment Valuation. Portfolio securities are valued at 4:00 p.m. (New York time) on each trading day. Long-term debt securities are valued by a portfolio pricing service approved by the Board of Trustees. Long-term debt securities which cannot be valued by the approved portfolio pricing service are valued 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 under consistently applied procedures established by the Board of Trustees to determine fair value in good faith. Short-term debt securities having a remaining maturity of 60 days or less are valued at cost (or last determined market value) adjusted for amortization to maturity of any premium or discount. Forward foreign currency contracts are valued at the closing price on the London foreign exchange market on a daily basis. 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 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 or asked price closest to the last reported sale price is used. ----------------------------------------------------------------------------------------------------- Allocation of Income, Expenses and Gains and Losses. Income, expenses (other than those attributable to a specific class) and gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class. ----------------------------------------------------------------------------------------------------- Federal Income Taxes. The Fund intends to continue to comply with provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income, including any net realized gain on investments not offset by loss carryovers, to shareholders. Therefore, no federal income tax provision is required. At December 31, 1994, the Fund had available for federal income tax purposes an unused capital loss carryover of approximately $3,738,000, $442,000 of which will expire in 1997, $958,000 in 1998 and $2,338,000 in 2002. ----------------------------------------------------------------------------------------------------- Distributions to Shareholders. The Fund intends to declare dividends separately for Class A and Class B shares from net investment income each day the New York Stock Exchange is open for business and pay such dividends monthly. Distributions from net realized gains on investments, if any, will be declared at least once each year. ----------------------------------------------------------------------------------------------------- Change in Accounting for Distributions to Shareholders. Net investment income (loss) and net realized gain (loss) may differ for financial statement and tax purposes primarily because of paydown gains and losses. The character of the distributions made during the year from net investment income or net realized gains may differ from their 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 year that the income or realized gain (loss) was recorded by the Fund. Effective January 1, 1994, the Fund adopted Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. As a result, the Fund changed the classification of distributions to shareholders to better disclose the differences between financial statement amounts and distributions determined in accordance with income tax regulations. Accordingly, subsequent to December 31, 1993, amounts have been reclassified to reflect a decrease in paid-in capital of $29,803, an increase in undistributed net investment income of $42,134, and an increase in undistributed capital loss on investments of $12,331. During the year ended December 31, 1994, in accordance with Statement of Position 93-2, undistributed net investment income was increased by $115,233 and undistributed capital loss on investments was increased by the same amount.
13 Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- Notes to Financial Statements (Continued) ----------------------------------------------------------------------------------------------------- ========================================================== ========================================================== =============== 1. Significant Accounting Policies (continued) Other. Investment transactions are accounted for on the date the investments are purchased or sold (trade date). Discount on securities purchased is amortized over the life of the respective securities, in accordance with federal income tax requirements. Realized gains and losses on investments and unrealized appreciation and depreciation are determined on an identified cost basis, which is the same basis used for federal income tax purposes. ========================================================== ========================================================== =============== 2. Shares of 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:
Year Ended December 31, 1994 Year Ended December 31, 1993(1) ---------------------------- --------------------------------- Shares Amount Shares Amount ----------------------------------------------------------------------------------------------------- Class A: Sold 1,071,379 $ 11,256,317 2,953,788 $ 33,325,053 Dividends reinvested 323,100 3,353,309 259,953 2,897,712 Redeemed (1,704,508) (17,865,173) (3,149,098) (35,420,566) --------- ------------ --------- ------------ Net increase (decrease) (310,029) $ (3,255,547) 64,643 $ 802,199 ========= ============ ========= ============ ----------------------------------------------------------------------------------------------------- Class B: Sold 293,817 $ 3,089,618 195,606 $ 2,198,191 Dividends reinvested 11,974 123,504 2,293 25,726 Redeemed (123,969) (1,294,834) (35,061) (395,712) --------- ------------ --------- ------------ Net increase 181,822 $ 1,918,288 162,838 $ 1,828,205 ========= ============ ========= ============ 1. For the year ended December 31, 1993 for Class A shares and for the period from May 1, 1993 (inception of offering) to December 31, 1993 for Class B shares. ========================================================== ========================================================== =============== 3. Unrealized Gains and Losses on Investments At December 31, 1994, net unrealized depreciation on investments of $5,843,549 was composed of gross appreciation of $404,576, and gross depreciation of $6,248,125. ========================================================== ========================================================== =============== 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 .50% on the first $100 million of net assets with a reduction of .05% on each $200 million thereafter, to .35% on net assets in excess of $500 million. The Manager has agreed to reimburse the Fund if aggregate expenses (with specified exceptions) exceed the most stringent applicable regulatory limit on Fund expenses. For the year ended December 31, 1994, commissions (sales charges paid by investors) on sales of Class A shares totaled $143,088, of which $67,090 was retained by Oppenheimer Funds Distributor, Inc. (OFDI), a subsidiary of the Manager, as general distributor, and by an affiliated broker/dealer. During the year ended December 31, 1994, OFDI received contingent deferred sales charges of $8,916 upon redemption of Class B shares, as reimbursement for sales commissions advanced by OFDI at the time of sale of such shares. Oppenheimer Shareholder Services (OSS), a division of the Manager, is the transfer and shareholder servicing agent for the Fund, and for other registered investment companies. OSS's total costs of providing such services are allocated ratably to these companies. Under separate approved plans, each class may expend up to .25% of its net assets annually to reimburse OFDI for costs incurred in connection with the personal service and maintenance of accounts that hold shares of the Fund, including amounts paid to brokers, dealers, banks and other institutions. In addition, Class B shares are subject to an asset-based sales charge of .75% of net assets annually, to reimburse OFDI for sales commissions paid from its own resources at the time of sale and associated financing costs. In the event of termination or discontinuance of the Class B plan, the Board of Trustees may allow the Fund to continue payment of the asset-based sales charge to OFDI for distribution expenses incurred on Class B shares sold prior to termination or discontinuance of the plan. During the year ended December 31, 1994, OFDI paid $154,100 to an affiliated broker/dealer as reimbursement for Class A personal service and maintenance expenses and retained $27,341 as reimbursement for Class B sales commissions and service fee advances, as well as financing costs.
14 Oppenheimer Investment Grade Bond Fund ========================================================== ========================================================== =============== 5. Deferred Trustee Compensation A former trustee elected to defer receipt of fees earned. These deferred fees earn interest at a rate determined by the current Board of Trustees at the beginning of each calendar year, compounded each quarter-end. As of December 31, 1994, the Fund was incurring interest at a rate of 5.22% per annum. Deferred fees are payable in annual installments, with accrued interest, each April 1 through 1995. ========================================================== ========================================================== =============== 6. Restricted Securities The Fund owns securities purchased in private placement transactions, without registration under the Securities Act of 1933 (the Act). The securities are valued under methods approved by the Board of Trustees as reflecting fair value. The Fund intends to invest no more than 10% of its net assets (determined at the time of purchase) in restricted and illiquid securities, excluding securities eligible for resale pursuant to rule 144A of the Act that are determined to be liquid by the Board of Trustees or by the Manager under Board-approved guidelines. Valuation Per Unit Security Acquisition Date Cost Per Unit of December 31, 1994 ----------------------------------------------------------------------------------------------------- Tenaga Nasional Berhad 7.875% Nts., 6/15/04(1) 9/27/94 $96.79 $95.18 1. Transferable under Rule 144A of the Act.
15 Oppenheimer Investment Grade Bond Fund Appendix A: Description of Securities Ratings Description of Standard & Poor's Corporation ("Standard & Poor's") and Moody's Investors Service, Inc. ("Moody's") commercial paper, note and bond ratings: Commercial Paper Ratings Standard & Poor's commercial paper ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. The "A-l" and "A-2" categories are described as follows: "A" - Issues assigned this highest rating are regarded as having the greatest capacity for timely payment. Issues in this category are further refined with the designations 1, 2, and 3 to indicate the relative degree of safety. "A-l" - This designation indicates that the degree of safety regarding timely payment is either overwhelming or very strong. Those issues determined to possess overwhelming safety characteristics will be noted with a plus (+) sign designation. "A-2" - Capacity for timely payment on issues with this designation is strong. However, the relative degree of safety is not as high as for issues designated "A-l." Moody's employs three designations, all judged to be investment grade, to indicate the relative repayment ability of rated issuers. The two highest designations are as follows: Issuers (or supporting institutions) rated Prime-1 (or P-1) have a superior ability for repayment of senior short-term debt obligations. Prime-1 repayment ability will normally be evidenced by many of the following characteristics: - Leading market positions in well-established industries. - High rates of return on funds employed. - Conservative capitalization structure with moderate reliance on debt and ample asset protection. - Broad margins in earnings coverage of fixed financial charges and high internal cash generation. - Well-established access to a range of financial markets and assured sources of alternate liquidity. Issuers (or supporting institutions) rated Prime-2 (or P-2) have a strong ability for repayment of senior short-term debt obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, may be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Standard & Poor's ratings for Municipal Notes due in three years or less are: SP-1: Very strong or strong capacity to pay principal and interest. Those issues determined to possess overwhelming safety characteristics will be given a plus (+) designation. SP-2: Satisfactory capacity to pay principal and interest. Bond Ratings Standard & Poor's describes its ratings for corporate bonds as follows: AAA: Debt rated "AAA" has the highest rating assigned by Standard & Poor's. Capacity to pay interest and repay principal is extremely strong. AA: Debt rated "AA" has a very strong capacity to pay interest and repay principal and differ from the higher rated issues only in a small degree. A: Debt rated "A" has a strong capacity to pay interest and repay principal although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB: Debt rated "BBB" is regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than for bonds rated "A." BB, B, CCC, CC: Bonds rated "BB," "B," "CCC" and "CC" are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "CC" the highest degree. While such bonds will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions. C, D: Bonds on which no interest is being paid are rated "C." Bonds rated "D" are in default and payment of interest and/or repayment of principal is in arrears. 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. Moody's describes its corporate bond ratings as follows: Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edge." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which make the long term risks appear somewhat larger than in Aaa securities. A: Bonds which are rated A possess many favorable investment attributes and may 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 which are rated Baa are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba: Bonds 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" 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 B in its corporate bond rating system. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid- range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category. Appendix B: Industry Classifications Aerospace/Defense Air Transportation Auto Parts Distribution Automotive Bank Holding Companies Banks Beverages Broadcasting Broker-Dealers Building Materials Cable Television Chemicals Commercial Finance Computer Hardware Computer Software Conglomerates Consumer Finance Containers Convenience Stores Department Stores Diversified Financial Diversified Media Drug Stores Drug Wholesalers Durable Household Goods Education Electric Utilities Electrical Equipment Electronics Energy Services & Producers Entertainment/Film Environmental Food Gas Transmission Gas Utilities Gold Health Care/Drugs Health Care/Supplies & Services Homebuilders/Real Estate Hotel/Gaming Industrial Services Insurance Leasing & Factoring Leisure Manufacturing Metals/Mining Nondurable Household Goods Oil - Integrated Paper Publishing/Printing Railroads Restaurants Savings & Loans Shipping Special Purpose Financial Specialty Retailing Steel Supermarkets Telecommunications - Technology Telephone - Utility Textile/Apparel Tobacco Toys Trucking Investment Adviser Oppenheimer Management Corporation Two World Trade Center New York, New York 10048-0203 Distributor Oppenheimer Funds Distributor, Inc. Two World Trade Center New York, New York 10048-0203 Transfer and Shareholder Servicing Agent Oppenheimer Shareholder Services P.O. Box 5270 Denver, Colorado 80217 1-800-525-7048 Custodian of Portfolio Securities The Bank of New York One Wall Street New York, New York 10015 Independent Auditors Deloitte & Touche LLP 1560 Broadway Denver, Colorado 80202 Legal Counsel Myer, Swanson, Adams & Wolf, P.C. 1600 Broadway Denver, Colorado 80202-4918 paula put in annuals from Quest Oppenheimer Investment Grade Bond Fund Annual Report December 31, 1994 [photo depicting woman and girl shopping] "To help pay for extras, I count on the money I get from my investments." [logo] OppenheimerFunds This Fund is for people who want solid income and feel most comfortable getting it from quality investments. How Your Fund Is Managed Oppenheimer Investment Grade Bond Fund's portfolio is made up of investment grade corporate bonds, U.S. government securities, and high-quality money market instruments. Of these three types of investments, corporate bonds often offer the highest yields, but can come in all different levels of quality. That's why your Fund allocates assets to investment grade corporate bonds only--so it can seek high yields with less risk. And investing in U.S. government securities and high-quality money market instruments helps to further provide income with relative stability. Yield Standardized Yield For the 30 Days Ended 12/31/94:(1) Class A 6.76% Class B 6.34% Performance Total return at net asset value for the 12 months ended 12/31/94 was -3.87% for Class A shares and -4.53% for Class B shares.(2) The financial markets had a difficult year and, like many mutual funds, your Fund felt the effects. While difficult years are hard to accept, they're an inevitable part of investing. That's why keeping a long-term perspective is crucial to getting the most from your investment and helping you through short-term market fluctuations. Your Fund's average annual total returns at maximum offering price for Class A shares for the 1- and 5-year periods ended 12/31/94 and since inception of the Class on 4/15/88 were -8.43%, 5.97% and 6.79%, respectively. For Class B shares, average annual total returns for the 1-year period ended 12/31/94 and since inception of the Class on 5/1/93 were -9.03% and -2.67%, respectively.(3) Outlook "The past year was a challenging one for the bond market, but our outlook as we enter 1995 is very constructive. The Federal Reserve's efforts to fend off inflation, while temporarily disconcerting, have had their desired effect. Inflation remains under control, and with our ability to invest across the investment-grade spectrum--in corporate, asset-backed, mortgage-backed and U.S. government bonds--the Fund is positioned to deliver attractive real, inflation-adjusted returns." Mary Wilson, Portfolio Manager Massachusetts Mutual Life Insurance Co., The Fund's Sub-Advisor December 31, 1994 1. Standardized yield is net investment income calculated on a yield-to-maturity basis for the 30-day period ended 12/31/94, divided by the maximum offering price at the end of the period, compounded semi-annually and then annualized. Falling net asset values will tend to artificially raise yields. 2. Based on the change in net asset value per share from 12/31/93 to 12/31/94, without deducting any sales charges. Such performance would have been lower if sales charges were taken into account. 3. Average annual total returns are based on a hypothetical investment held until 12/31/94, after deducting the current maximum initial sales charge of 4.75% for Class A shares and the contingent deferred sales charge of 5% (1 year) and 4% (since inception) for Class B shares. The Fund's maximum sales charge rate for Class A shares was lower during a portion of some of the periods shown, and actual investment results will be different as a result of the change. Class A and Class B shares were first publicly offered on 4/15/88 and 5/1/93, respectively. All figures assume reinvestment of dividends and capital gains distributions. Past performance is not indicative of future results. Investment and principal value on an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. 2 Oppenheimer Investment Grade Bond Fund Dear OppenheimerFunds Shareholder, The past year was marked by one of the greatest tests the bond markets faced in more than six decades. As the U.S. Federal Reserve undertook one of the most aggressive series of moves to raise interest rates in its history, bond prices declined across the board, leaving many investors to wonder what the future holds for interest rates and the fixed income markets. Changing interest rates and fluctuating bond prices are facts of life affecting all bond markets, and it's a bond market basic principle that when interest rates rise, bond prices generally decline. That is why we believe the best measure for any fixed income investment is its performance over the long term. And we believe the long-term outlook for the bond markets is excellent. We expect the Fed's attempt to preempt possible inflation, while temporarily disconcerting, to have its desired effect in 1995. The economy should start to slow, and although short-term rates may move up modestly from their present levels, long-term interest rates should stabilize in their current range. Long-term rates may even begin to decline as overblown concerns about inflation abate. Those concerns are, in fact, already fading. While the prices of some commodities have risen over the past year and U.S. manufacturing capacity utilization and employment rose to their highest levels in years, in today's globally competitive environment, price increases are difficult to pass on to either consumers or businesses. The inflation rate--as measured by the Consumer Price Index--continues to run at less than 3% a year, and there's nothing on the horizon to suggest to us that it will increase substantially anytime soon. As a result, bonds today offer some of the highest real, inflation-adjusted returns we have seen in years. At the same time, the changing political landscape reflected in results of the mid-term election bode well for the bond market over time. In addition to limiting the expectation that Congress will pass potentially inflationary government spending proposals, the realignment in Washington has raised the possibility of tax relief in the form of an expanded deduction for individual retirement savings or possibly a reduction in the capital gains tax rate. What specific action, if any, Congress will take on these proposals remains to be seen. But any action to reduce the federal deficit, cut spending, and reduce taxes should be good news for the investment markets overall. Together, these factors suggest to us that 1995 will be a rewarding time for bond market investors. We expect that as short-term rates rise and inflation holds at its current level, short-term investments should provide more attractive real, inflation-adjusted yields. Longer-term bonds in all sectors--corporate, municipal, and U.S. government--may also provide very attractive total return opportunities. Along with strong yields, longer-term bonds offer the prospect of modest price appreciation during 1995 as well. Your portfolio manager discusses your Fund's outlook on the following pages. We appreciate your confidence in OppenheimerFunds and we look forward to helping you continue to reach your investment goals. James C. Swain Chairman Oppenheimer Investment Grade Bond Fund Jon S. Fossel President Oppenheimer Investment Grade Bond Fund James C. Swain Jon S. Fossel January 23, 1995 3 Oppenheimer Investment Grade Bond Fund Q + A An interview with the Fund's managers. The Fund delivered an attractive yield over the last 12 months, but its performance was off for the year on a total return basis. What factors affected the Fund's results? One factor stands out: the Federal Reserve's aggressive moves to raise short-term interest rates to control inflation. Rising interest rates took a toll on all bonds and bond funds, and the bonds on which this Fund concentrated--those in the intermediate-maturity sector--were particularly affected. How did you respond to rising interest rates? We made a number of adjustments. As the corporate yield advantage over Treasury securities narrowed during the year, we reduced our corporate holdings somewhat, selling bonds that had performed well, including Marriott and Comdisco, and reinvesting the proceeds in asset-backed issues from issuers like Ford and Daimler-Benz. These issues, which are secured by short-term and medium-term receivables, combine very attractive yields with high credit quality. We also modestly increased our holdings of mortgage-backed bonds.(1) What made mortgage-backed securities so attractive in the past six months? As interest rates rose, the major risk in the mortgage market--that of pre-payments and refinancing by mortgage- holders--was reduced significantly. With interest rates at their current levels, the mortgage-backed market is much more stable and predictable than it was a year ago, while offering attractive yields. Of course, to keep potential price fluctuations to a minimum, we continue to invest in well-seasoned, well-structured mortgage-backed securities. How about Treasuries? Have you made any adjustments to that portion of the portfolio in the past six months? We have. Given the outlook for rising interest rates, we reduced the Fund's relative exposure to Treasuries, which tend to lag investment-grade corporate bonds in the mid-to-late stages of economic expansion. We also modestly reduced our Treasury durations--a technical measure of a bond portfolio's sensitivity to interest rate changes. At year end, our portfolio's duration was about half a year shorter than that of the Lehman Brothers Corporate/Government Bond Index. All in all, it sounds like you've positioned the portfolio somewhat conservatively. That's true. In addition to the adjustments we've made in our bond holdings, we've also increased our position in short-term money market securities somewhat, in an effort to "keep our powder dry" until the bond market stabilizes. What's your outlook for the Fund? Do you expect the markets to stabilize any time soon? We do; in fact, we're seeing signs of it today. Investors are beginning to recognize that there are no signs of runaway inflation or double-digit interest rates on the horizon. They're also recognizing that bonds offer some of the most attractive real, inflation-adjusted returns available in years. As a result, money is beginning to come back to the bond market, providing solid sup-port for bond prices. Mary Wilson Portfolio Manager 1. The Fund's portfolio is subject to change. 4 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Investments December 31, 1994 ------------------------------------------------------------------------------------------------------ Face Market Value Amount See Note 1 =============== Short-Term Notes--14.9% - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Non-Cyclicals--2.4% - ----------------------------------------------------------------------------------------------------------------------------------- Food Wholesalers--2.4% Tyson Foods, Inc., 6.10%, 1/4/95 $2,410,000 $ 2,408,775 - ----------------------------------------------------------------------------------------------------------------------------------- Energy--2.5% - ----------------------------------------------------------------------------------------------------------------------------------- Oil: Integrated Domestic--2.5% Burlington Resources, Inc., 6.30%, 1/17/95 2,500,000 2,493,000 - ----------------------------------------------------------------------------------------------------------------------------------- Financial--3.2% - ----------------------------------------------------------------------------------------------------------------------------------- Diversified Finance--0.7% Ford Motor Credit Co., 5.80%, 1/9/95 555,000 555,000 ------------------------------------------------------------------------------------------------------ General Motors Acceptance Corp., 6.05%, 1/9/95 120,000 119,839 ------------ 674,839 - ----------------------------------------------------------------------------------------------------------------------------------- Financial Services: Miscellaneous--2.5% Countrywide Funding Corp., 6.30%, 1/6/95 2,500,000 2,497,812 - ----------------------------------------------------------------------------------------------------------------------------------- Utilities--6.8% - ----------------------------------------------------------------------------------------------------------------------------------- Electric Companies--4.5% Indiana & Michigan Power Co., 6.05%, 1/3/95 2,040,000 2,039,314 ------------------------------------------------------------------------------------------------------ Texas Electric Services Co., 6.20%, 1/5/95 2,500,000 2,498,278 ------------ 4,537,592 - ----------------------------------------------------------------------------------------------------------------------------------- Telephone--2.3% GTE Norwest, Inc., 5.88%, 1/13/95 2,340,000 2,335,414 ------------ Total Short-Term Notes (Cost $14,947,432) 14,947,432 ========================================================== Asset-Backed Securities--7.1% - ----------------------------------------------------------------------------------------------------------------------------------- Auto Loan--7.1% Daimler-Benz Vehicle Trust, Series 1994-A, Cl. A, 5.95%, 12/15/00 827,697 814,537 ------------------------------------------------------------------------------------------------------ Ford Credit Grantor Trust, Series 1994-B, Cl. A, 7.30%, 10/15/99 1,458,742 1,447,933 ------------------------------------------------------------------------------------------------------ General Motors Acceptance Corp., Grantor Trust, Series 1992-E, Cl. A, 4.75%, 8/15/97 454,750 445,615 ------------------------------------------------------------------------------------------------------ Nissan Auto Receivables Grantor Trust, Series 1994-A, Cl. A, 6.45%, 9/15/99 2,241,045 2,202,567 ------------------------------------------------------------------------------------------------------ Select Auto Receivable Trust, Series 1991-2 Asset-Backed Certificates, Cl. A, 7.65%, 7/15/96 194,180 193,881 ------------------------------------------------------------------------------------------------------ World Omni Automobile Lease Securitization Trust, Series 1994-A, Cl. A, 6.45%, 9/25/00 2,000,000 1,967,360 ------------ Total Asset-Backed Securities (Cost $7,163,638) 7,071,893 ========================================================== Mortgage-Backed Obligations--13.3% - ----------------------------------------------------------------------------------------------------------------------------------- Government Agency--11.3% - ----------------------------------------------------------------------------------------------------------------------------------- FHLMC/FNMA/Sponsored--7.1% Federal Home Loan Mortgage Corp., Certificates of Participation, 9%, 3/1/17 770,177 772,234 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Certificates of Participation, Series 17-039, 13.50%, 11/1/10 91,657 101,813 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Certificates of Participation, Series 17-094, 12.50%, 4/1/14 50,645 55,629 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Collateralized Mortgage Obligation Gtd. Multiclass Certificates of Participation, 7.50%, 2/15/07 2,000,000 1,898,120 ------------------------------------------------------------------------------------------------------ Federal Home Loan Mortgage Corp., Multiclass Mortgage Participation Certificates, Series 1460, Cl. 1460-H, 7%, 5/15/07 1,500,000 1,374,090 ------------------------------------------------------------------------------------------------------ Federal National Mortgage Assn., Gtd. Mtg. Pass-Through Certificates, 8%, 8/1/17 1,116,105 1,097,712 ------------------------------------------------------------------------------------------------------ Federal National Mortgage Assn., Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Series 1993-191, Cl. PD, 5.40%, 4/25/04 1,500,000 1,365,300
5 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Investments (Continued) ------------------------------------------------------------------------------------------------------ Face Market Value Amount See Note 1 - ----------------------------------------------------------------------------------------------------------------------------------- FHLMC/FNMA/Sponsored (continued) Federal National Mortgage Assn., Interest-Only Collateralized Mortgage Obligation Gtd. Real Estate Mortgage Investment Conduit Pass-Through Certificates, Trust 1992 G-57, Cl. SA, 44.60%, 10/25/22(1) $ 568,843 $ 443,698 ------------ 7,108,596 - ----------------------------------------------------------------------------------------------------------------------------------- GNMA/Guaranteed:--4.2% Government National Mortgage Assn.: 10%, 11/15/09 595,139 622,481 12%, 1/15/99 24,402 25,944 12%, 1/15/99 66,980 71,210 12%, 5/15/14 2,184 2,423 12.75%, 6/15/15 44,137 49,704 15%, 2/15/12 26,167 30,505 8%, 10/15/05 243,215 239,689 8%, 10/15/06 377,529 371,447 8%, 6/15/05 125,505 123,686 8%, 6/15/05 97,196 95,787 8%, 6/15/05 132,000 130,087 8%, 7/15/05 222,830 219,600 8%, 7/15/05 326,463 321,730 8%, 7/15/05 109,149 107,567 8%, 7/15/06 167,313 164,618 8%, 7/15/06 216,029 212,549 8%, 8/15/05 135,305 133,344 8%, 8/15/05 146,311 144,190 8%, 9/15/05 309,653 305,163 8%, 9/15/05 158,612 156,312 9%, 2/15/09 22,973 23,335 9%, 2/15/09 234,544 238,238 9%, 3/15/09 167,088 169,720 9%, 3/15/09 25,494 25,896 9%, 5/15/09 28,368 28,815 9%, 6/15/09 159,386 161,897 ------------ 4,175,937 - ----------------------------------------------------------------------------------------------------------------------------------- Other--2.0% JHM Acceptance Corp., 8.96% Collateralized Mortgage Obligation Bonds, Series E, Cl. E-6, 4/1/19 2,000,000 2,008,900 ------------ Total Mortgage-Backed Obligations (Cost $14,177,957) 13,293,433 ========================================================== U.S. Government Obligations--43.8% - ----------------------------------------------------------------------------------------------------------------------------------- Agency--3.8% - ----------------------------------------------------------------------------------------------------------------------------------- Government Agency/ Full Faith--3.8% Allentown, Pennsylvania, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 65,000 66,092 ------------------------------------------------------------------------------------------------------ Babylon, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 115,000 104,767 ------------------------------------------------------------------------------------------------------ Bakersfield, California, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 255,000 232,311 ------------------------------------------------------------------------------------------------------ Boston, Massachusetts, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 795,000 724,262 ------------------------------------------------------------------------------------------------------ Buena Vista Township, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 270,000 245,976
6 Oppenheimer Investment Grade Bond Fund
Face Market Value Amount See Note 1 - ----------------------------------------------------------------------------------------------------------------------------------- Government Agency/ Full Faith (continued) Buffalo, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 $ 400,000 $ 364,409 ------------------------------------------------------------------------------------------------------ Detroit, Michigan, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 405,000 368,964 ------------------------------------------------------------------------------------------------------ Fajardo, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 300,000 305,042 ------------------------------------------------------------------------------------------------------ New Haven, Connecticut, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 400,000 406,722 ------------------------------------------------------------------------------------------------------ Roanoke, Virginia, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 220,000 200,425 ------------------------------------------------------------------------------------------------------ Sacramento County, California Redevelopment Agency U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 240,000 218,390 ------------------------------------------------------------------------------------------------------ Tacoma, Washington, U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 165,000 150,319 ------------------------------------------------------------------------------------------------------ Trenton, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 135,000 122,988 ------------------------------------------------------------------------------------------------------ Tujillo Alto, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 235,000 238,949 ------------ 3,749,616 - ----------------------------------------------------------------------------------------------------------------------------------- Treasury--40.0% U.S. Treasury Bonds: 7.125%, 2/15/23 4,000,000 3,638,748 7.25%, 8/15/22 4,900,000 4,521,778 7.875%, 2/15/21 900,000 888,188 8%, 11/15/21 2,000,000 2,006,874 ------------------------------------------------------------------------------------------------------ U.S. Treasury Notes: 6.375%, 8/15/02 2,750,000 2,519,687 7%, 4/15/99 10,700,000 10,372,312 7.25%, 8/15/04 10,000,000 9,600,000 8.50%, 7/15/97 6,400,000 6,504,000 ------------ 40,051,587 ------------ Total U.S. Government Obligations (Cost $47,152,705) 43,801,203 ========================================================== Foreign Government Obligations--0.9% Iceland (Republic of) Nts., 6.125%, 2/1/04 (Cost $989,168) 1,000,000 857,030 Corporate Bonds and Notes--29.0% - ----------------------------------------------------------------------------------------------------------------------------------- Basic Materials--5.5% - ----------------------------------------------------------------------------------------------------------------------------------- Chemicals--0.4% Imcera Group, Inc., 6% Nts., 10/15/03 500,000 424,747 - ----------------------------------------------------------------------------------------------------------------------------------- Metals--3.5% AMAX, Inc., 9.875% Nts., 6/13/01 1,000,000 1,041,957 ------------------------------------------------------------------------------------------------------ Newmont Mining Corp., 8.625% Nts., 4/1/02 1,000,000 985,022 ------------------------------------------------------------------------------------------------------ Teck Corp., 8.70% Debs., 5/1/02 1,500,000 1,479,052 ------------ 3,506,031 - ----------------------------------------------------------------------------------------------------------------------------------- Paper and Forest Products--1.6% Georgia-Pacific Corp., 9.95% Debs., 6/15/02 1,500,000 1,600,647 - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Cyclicals--3.0% - ----------------------------------------------------------------------------------------------------------------------------------- Automotive--1.1% Chrysler Corp., 10.40% Nts., 8/1/99 1,000,000 1,048,078 - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Goods and Services--1.0% Toro Co. (The), 11% Debs., 8/1/17 1,000,000 1,041,250 - ----------------------------------------------------------------------------------------------------------------------------------- Media--0.9% News America Holdings, Inc., 7.50% Gtd. Sr. Nts., 3/1/00 1,000,000 945,495 - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Non-Cyclicals--2.0% - ----------------------------------------------------------------------------------------------------------------------------------- Food--1.0% Wendy's International, Inc., 12.125% Debs., 4/1/95 1,000,000 1,010,211 - ----------------------------------------------------------------------------------------------------------------------------------- Healthcare--1.0% Baxter International, Inc., 9.25% Nts., 9/15/96 1,000,000 1,018,178
7 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Investments (Continued) ------------------------------------------------------------------------------------------------------ Face Market Value Amount See Note 1 - ----------------------------------------------------------------------------------------------------------------------------------- Energy--4.5% Enron Corp., 8.10% Nts., 12/15/96 $1,500,000 $ 1,499,236 ------------------------------------------------------------------------------------------------------ Union Oil Co. of California, 8.75% Nts., 8/15/01 1,500,000 1,517,873 ------------------------------------------------------------------------------------------------------ Union Oil Co. of California, 9.625% Gtd. Debs., 5/15/95 1,500,000 1,513,434 ------------ 4,530,543 - ----------------------------------------------------------------------------------------------------------------------------------- Financial--5.9% Ford Motor Credit Co., 9.90% Med.-Term Nts., 11/6/97 2,000,000 2,057,252 ------------------------------------------------------------------------------------------------------ Goldman Sachs Group, LP, 6.20% Nts., 2/15/01 1,500,000 1,312,969 ------------------------------------------------------------------------------------------------------ Leucadia National Corp., 7.75% Sr. Nts., 8/15/13 2,000,000 1,757,329 ------------------------------------------------------------------------------------------------------ PaineWebber Group, Inc., 6.50% Nts., 11/1/05 1,000,000 794,856 ------------ 5,922,406 - ----------------------------------------------------------------------------------------------------------------------------------- Industrial--3.8% - ----------------------------------------------------------------------------------------------------------------------------------- General Industrial--1.0% Thomas & Betts Corp., 8.25% Sr. Nts., 1/15/04 1,000,000 976,858 - ----------------------------------------------------------------------------------------------------------------------------------- Transportation--2.8% AMR Corp., 9% Debs., 8/1/12 1,500,000 1,353,010 ------------------------------------------------------------------------------------------------------ United Air Lines, Inc., 10.11% Equipment Trust Certificates, Series 91B, 2/19/06 1,449,687 1,409,815 ------------ 2,762,825 - ----------------------------------------------------------------------------------------------------------------------------------- Technology--3.3% - ----------------------------------------------------------------------------------------------------------------------------------- Aerospace/Defense--3.3% McDonnell Douglas Corp., 9.25% Nts., 4/1/02 2,750,000 2,812,540 ------------------------------------------------------------------------------------------------------ Textron, Inc., 9.55% Med.-Term Nts., 3/19/01 500,000 525,255 ------------ 3,337,795 - ----------------------------------------------------------------------------------------------------------------------------------- Utilities--1.0% Tenaga Nasional Berhad, 7.875% Nts., 6/15/04(2) 1,000,000 951,846 ------------ Total Corporate Bonds and Notes (Cost $30,473,758) 29,076,910 Shares Common Stocks--0.0% - ----------------------------------------------------------------------------------------------------------------------------------- Consumer Non-Cyclicals--0.0% - ----------------------------------------------------------------------------------------------------------------------------------- Food Processing--0.0% Doskocil Cos., Inc. (Cost $0) 1,761 13,208 - ----------------------------------------------------------------------------------------------------------------------------------- Total Investments, at Value (Cost $114,904,658) 109.0% 109,061,109 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities in Excess of Other Assets (9.0) (8,970,361) ---------- ------------ Net Assets 100.0% $100,090,748 ========== ============ 1. Interest rate resets monthly, inversely related to LIBOR. Interest-Only Strips represent the right to receive the monthly interest payments on an underlying pool of mortgage loans. These securities are subject to the risk of accelerated principal paydowns as interest rates decline. The principal amount represents the notional amount on which current interest is calculated. 2. Restricted security--See Note 6 of Notes to Financial Statements. See accompanying Notes to Financial Statements.
8 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Assets and Liabilities December 31, 1994 ------------------------------------------------------------------------------------------------------ Assets Investments, at value (cost $114,904,658)--see accompanying statement $109,061,109 ------------------------------------------------------------------------------------------------------ Receivables: Interest and principal paydowns 1,694,107 Shares of beneficial interest sold 202,489 ------------------------------------------------------------------------------------------------------ Other 55,797 ------------ Total assets 111,013,502 =============== Liabilities Bank overdraft 57,356 ------------------------------------------------------------------------------------------------------ Payables and other liabilities: Investments purchased 9,823,047 Dividends 646,989 Shares of beneficial interest redeemed 258,588 Distribution and service plan fees--Note 4 65,541 Deferred trustee fees--Note 5 18,086 Other 53,147 ------------ Total liabilities 10,922,754 ========================================================== Net Assets $100,090,748 ============ ========================================================== Composition of Net Assets Paid-in capital $110,009,506 ------------------------------------------------------------------------------------------------------ Undistributed (overdistributed) net investment income (204,894) ------------------------------------------------------------------------------------------------------ Accumulated net realized gain (loss) from investment transactions (3,870,315 ------------------------------------------------------------------------------------------------------ Net unrealized appreciation (depreciation) on investments--Note 3 (5,843,549) ------------- Net assets $100,090,748 ============= ========================================================== Net Asset Value Per Share Class A Shares: Net asset value and redemption price per share (based on net assets of $96,639,607 and 9,653,273 shares of beneficial interest outstanding) $10.01 Maximum offering price per share (net asset value plus sales charge of 4.75% of offering price) $10.51 ------------------------------------------------------------------------------------------------------ Class B Shares: Net asset value, redemption price and offering price per share (based on net assets of $3,451,141 and 344,660 shares of beneficial interest outstanding) $10.01
See accompanying Notes to Financial Statements. 9 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statement of Operations For the Year Ended December 31, 1994 ------------------------------------------------------------------------------------------------------ =============== Investment Income Interest $ 7,667,379 ========================================================== Expenses Management fees--Note 4 522,205 ------------------------------------------------------------------------------------------------------ Distribution and service plan fees: Class A--Note 4 247,136 Class B--Note 4 26,383 ------------------------------------------------------------------------------------------------------ Transfer and shareholder servicing agent fees--Note 4 184,806 ------------------------------------------------------------------------------------------------------ Shareholder reports 80,889 ------------------------------------------------------------------------------------------------------ Legal and auditing fees 13,761 ------------------------------------------------------------------------------------------------------ Trustees' fees and expenses 12,864 ------------------------------------------------------------------------------------------------------ Custodian fees and expenses 12,743 ------------------------------------------------------------------------------------------------------ Registration and filing fees: Class A 162 Class B 603 ------------------------------------------------------------------------------------------------------ Other 28,219 ----------- Total expenses 1,129,771 ========================================================== Net Investment Income (Loss) 6,537,608 Realized and Unrealized Gain (Loss) on Investments Net realized gain (loss) on investments (2,274,518) ------------------------------------------------------------------------------------------------------ Net change in unrealized appreciation or depreciation on investments (8,559,673) ----------- Net realized and unrealized gain (loss) on investments (10,834,191) ========================================================== ========================================================== =============== Net Increase (Decrease) in Net Assets Resulting From Operations $(4,296,583) ===========
See accompanying Notes to Financial Statements. 10 Oppenheimer Investment Grade Bond Fund
------------------------------------------------------------------------------------------------------ Statements of Changes in Net Assets ------------------------------------------------------------------------------------------------------ Year Ended December 31, 1994 1993 Operations Net investment income (loss) $6,537,608 $ 6,955,080 ------------------------------------------------------------------------------------------------------ Net realized gain (loss) on investments (2,274,518) 3,772,429 ------------------------------------------------------------------------------------------------------ Net change in unrealized appreciation or depreciation on investments (8,559,673) 22,233 ------------ ------------ Net increase (decrease) in net assets resulting from operations (4,296,583) 10,749,742 ========================================================== Dividends and Distributions To Shareholders Dividends from net investment income: Class A ($.6539 and $.707 per share, respectively) (6,381,575) (7,067,709) Class B ($.5754 and $.42 per share, respectively) (156,032) (33,652) ------------------------------------------------------------------------------------------------------ Dividends in excess of net investment income: Class A ($.0306 per share) (298,880) -- Class B ($.027 per share) (7,308) -- ========================================================== Beneficial Interest Transactions Net increase (decrease) in net assets resulting from Class A beneficial interest transactions--Note 2 (3,255,547) 802,199 ------------------------------------------------------------------------------------------------------ Net increase (decrease) in net assets resulting from Class B beneficial interest transactions--Note 2 1,918,288 1,828,205 ========================================================== Net Assets Total increase (decrease) (12,477,637) 6,278,785 ------------------------------------------------------------------------------------------------------ Beginning of period 112,568,385 106,289,600 ------------ ------------ End of period (including overdistributed net investment income of $204,894 and $56,074, respectively) $100,090,748 $112,568,385 ============ ============
See accompanying Notes to Financial Statements. 11 Oppenheimer Investment Grade Bond Fund
-------------------------- Financial Highlights ----------------------------------------------------------------------------------- Class A ----------------------------------------------------------------------------------- Eleven Months Ended Year Ended December 31, Dec. 31, 1994 1993 1992 1991(3) 1990 1989 1988(2) ========================================================== Per Share Operating Data: Net asset value, beginning of period $11.12 $10.74 $10.80 $ 9.86 $10.29 $10.12 $10.55 - ------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .65 .69 .75 .82 .88(4) .92 .93 Net realized and unrealized gain (loss) on investments (1.08) .40 (.05) .90 (.43) .19 (.36) ------- ------- ------- ------- ------ ------- ------- Total income (loss) from investment operations (.43) 1.09 .70 1.72 .45 1.11 .57 - ------------------------------------------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (.65) (.71) (.76) (.78) (.88) (.94) (1.00) Dividends in excess of net investment income (.03) -- -- -- -- -- -- ------- ------- ------- ------- ------ ------- ------- Total dividends to shareholders (.68) (.71) (.76) (.78) (.88) (.94) (1.00) - ------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.01 $ 11.12 $ 10.74 $ 10.80 $ 9.86 $ 10.29 $ 10.12 ======= ======= ======= ======= ====== ======= ======= Total Return, at Net Asset Value(5) (3.87)% 10.30% 6.77% 18.28% 4.74% 11.31% 4.48% ========================================================== Ratios/Supplemental Data: Net assets, end of period (in thousands) $96,640 $110,759 $106,290 $90,623 $87,021 $96,380 $102,293 - ------------------------------------------------------------------------------------------------------------------- Average net assets (in thousands) $102,168 $111,702 $ 98,672 $86,471 $ 90,065 $100,891 $111,264 Number of shares outstanding at end of period (in thousands) 9,653 9,963 9,899 8,390 8,829 9,369 10,108 - ------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 6.25% 6.20% 7.00% 8.02% 8.85% 8.85% 8.75% Expenses 1.06% 1.06% 1.10% 1.23% 1.24%(4) 1.14% 1.05% - ------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(7) 70.3% 110.1% 116.4% 97.1% 80.4% 41.3% 45.0%
------------------------------------------------------------------------ Financial Highlights (continued) ------------------------------------------------------------------------ Class A (continued) Class B -------------------------------------------------------------- -------- Year Period Ended Ended Year Ended January 31, Dec. 31, Dec. 31, 1988(2) 1987(2) 1986(2) 1985(2) 1994 1993(1) ========================================================== Per Share Operating Data: Net asset value, beginning of period $ 11.30 $ 11.16 $ 10.91 $ 11.00 $ 11.11 $ 11.10 - ------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income 1.09 1.16 1.22 1.27 .58 .40 Net realized and unrealized gain (loss) on investments (.55) .22 .35 (.04) (1.08) .03 ------- ------- ------- ------- ------- ------- Total income (loss) from investment operations .54 1.38 1.57 1.23 (.50) .43 - ------------------------------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (1.29) (1.24) (1.32) (1.32) (.57) (.42) Dividends in excess of net investment income -- -- -- -- (.03) -- ------- ------- ------- ------- ------- ------- Total dividends to shareholders (1.29) (1.24) (1.32) (1.32) (.60) (.42) - ------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.55 $ 11.30 $ 11.16 $ 10.91 $ 10.01 $ 11.11 ======= ======= ======= ======= ======= ======= ============================================= Total Return, at Net Asset Value(5) N/A N/A N/A N/A (4.53)% 3.91% ============================================= Ratios/Supplemental Data: Net assets, end of period (in thousands) $118,568 $125,513 $121,979 $117,293 $3,451 $1,809 - ------------------------------------------------------------------------------------------------------- Average net assets (in thousands) $118,724 $123,045 $118,253 $111,235 $2,747 $ 922 - ------------------------------------------------------------------------------------------------------- Number of shares outstanding at end of period (in thousands) 11,234 11,103 10,930 10,751 345 163 - ------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 10.28% 10.45% 11.26% 12.21% 5.53% 4.80%(6) Expenses .98% .93% .97% 1.01% 1.78% 1.90%(6) - ------------------------------------------------------------------------------------------------------- Portfolio turnover rate(7) 19.5% 59.8% 36.5% 76.7% 70.3% 110.1% 1. For the period from May 1, 1993 (inception of offering) to December 31, 1993. 2. Operating results prior to April 15, 1988 were achieved by the Fund's predecessor corporation as a closed-end fund under different investment objectives and policies. Such results are thus not necessarily representative of operating results the Fund may achieve under its current investment objectives and policies. 3. On March 28, 1991, Oppenheimer Management Corporation became the investment advisor to the Fund. 4. Net investment income would have been $.87 absent the voluntary expense limitation, resulting in an expense ratio of 1.26%. 5. Assumes a hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Sales charges are not reflected in the total returns. 6. Annualized. 7. The lesser of purchases or sales of portfolio securities for a period, divided by the monthly average of the market value of portfolio securities owned during the period. Securities with a maturity or expiration date at the time of acquisition of one year or less are excluded from the calculation. Purchases and sales of investment securities (excluding short-term securities) for the year ended December 31, 1994 were $67,852,873 and $67,362,839, respectively. See accompanying Notes to Financial Statements.
12 Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- Notes to Financial Statements ----------------------------------------------------------------------------------------------------- ==== 1. Significant Accounting Policies Oppenheimer Investment Grade Bond Fund (the Fund) is a separate fund of Oppenheimer Integrity Funds, a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended. The Fund's investment advisor is Oppenheimer Management Corporation (the Manager). The Fund offers both Class A and Class B shares. Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent deferred sales charge. Both classes of shares have identical rights to earnings, assets and voting privileges, except that each class has its own distribution and/or service plan, expenses directly attributable to a particular class and exclusive voting rights with respect to matters affecting a single class. Class B shares will automatically convert to Class A shares six years after the date of purchase. The following is a summary of significant accounting policies consistently followed by the Fund. ----------------------------------------------------------------------------------------------------- Investment Valuation. Portfolio securities are valued at 4:00 p.m. (New York time) on each trading day. Long-term debt securities are valued by a portfolio pricing service approved by the Board of Trustees. Long-term debt securities which cannot be valued by the approved portfolio pricing service are valued 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 under consistently applied procedures established by the Board of Trustees to determine fair value in good faith. Short-term debt securities having a remaining maturity of 60 days or less are valued at cost (or last determined market value) adjusted for amortization to maturity of any premium or discount. Forward foreign currency contracts are valued at the closing price on the London foreign exchange market on a daily basis. 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 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 or asked price closest to the last reported sale price is used. ----------------------------------------------------------------------------------------------------- Allocation of Income, Expenses and Gains and Losses. Income, expenses (other than those attributable to a specific class) and gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class. ----------------------------------------------------------------------------------------------------- Federal Income Taxes. The Fund intends to continue to comply with provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income, including any net realized gain on investments not offset by loss carryovers, to shareholders. Therefore, no federal income tax provision is required. At December 31, 1994, the Fund had available for federal income tax purposes an unused capital loss carryover of approximately $3,738,000, $442,000 of which will expire in 1997, $958,000 in 1998 and $2,338,000 in 2002. ----------------------------------------------------------------------------------------------------- Distributions to Shareholders. The Fund intends to declare dividends separately for Class A and Class B shares from net investment income each day the New York Stock Exchange is open for business and pay such dividends monthly. Distributions from net realized gains on investments, if any, will be declared at least once each year. ----------------------------------------------------------------------------------------------------- Change in Accounting for Distributions to Shareholders. Net investment income (loss) and net realized gain (loss) may differ for financial statement and tax purposes primarily because of paydown gains and losses. The character of the distributions made during the year from net investment income or net realized gains may differ from their 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 year that the income or realized gain (loss) was recorded by the Fund. Effective January 1, 1994, the Fund adopted Statement of Position 93-2: Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. As a result, the Fund changed the classification of distributions to shareholders to better disclose the differences between financial statement amounts and distributions determined in accordance with income tax regulations. Accordingly, subsequent to December 31, 1993, amounts have been reclassified to reflect a decrease in paid-in capital of $29,803, an increase in undistributed net investment income of $42,134, and an increase in undistributed capital loss on investments of $12,331. During the year ended December 31, 1994, in accordance with Statement of Position 93-2, undistributed net investment income was increased by $115,233 and undistributed capital loss on investments was increased by the same amount.
13 Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- Notes to Financial Statements (Continued) ----------------------------------------------------------------------------------------------------- ========================================================== 1. Significant Accounting Policies (continued) Other. Investment transactions are accounted for on the date the investments are purchased or sold (trade date). Discount on securities purchased is amortized over the life of the respective securities, in accordance with federal income tax requirements. Realized gains and losses on investments and unrealized appreciation and depreciation are determined on an identified cost basis, which is the same basis used for federal income tax purposes. ========================================================== 2. Shares of 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:
Year Ended December 31, 1994 Year Ended December 31, 1993(1) ---------------------------- --------------------------------- Shares Amount Shares Amount ----------------------------------------------------------------------------------------------------- Class A: Sold 1,071,379 $ 11,256,317 2,953,788 $ 33,325,053 Dividends reinvested 323,100 3,353,309 259,953 2,897,712 Redeemed (1,704,508) (17,865,173) (3,149,098) (35,420,566) --------- ------------ --------- ------------ Net increase (decrease) (310,029) $ (3,255,547) 64,643 $ 802,199 ========= ============ ========= ============ ----------------------------------------------------------------------------------------------------- Class B: Sold 293,817 $ 3,089,618 195,606 $ 2,198,191 Dividends reinvested 11,974 123,504 2,293 25,726 Redeemed (123,969) (1,294,834) (35,061) (395,712) --------- ------------ --------- ------------ Net increase 181,822 $ 1,918,288 162,838 $ 1,828,205 ========= ============ ========= ============ 1. For the year ended December 31, 1993 for Class A shares and for the period from May 1, 1993 (inception of offering) to December 31, 1993 for Class B shares.
3. Unrealized Gains and Losses on Investments At December 31, 1994, net unrealized depreciation on investments of $5,843,549 was composed of gross appreciation of $404,576, and gross depreciation of $6,248,125. ========================================================== ========================================================== =============== 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 .50% on the first $100 million of net assets with a reduction of .05% on each $200 million thereafter, to .35% on net assets in excess of $500 million. The Manager has agreed to reimburse the Fund if aggregate expenses (with specified exceptions) exceed the most stringent applicable regulatory limit on Fund expenses. For the year ended December 31, 1994, commissions (sales charges paid by investors) on sales of Class A shares totaled $143,088, of which $67,090 was retained by Oppenheimer Funds Distributor, Inc. (OFDI), a subsidiary of the Manager, as general distributor, and by an affiliated broker/dealer. During the year ended December 31, 1994, OFDI received contingent deferred sales charges of $8,916 upon redemption of Class B shares, as reimbursement for sales commissions advanced by OFDI at the time of sale of such shares. Oppenheimer Shareholder Services (OSS), a division of the Manager, is the transfer and shareholder servicing agent for the Fund, and for other registered investment companies. OSS's total costs of providing such services are allocated ratably to these companies. Under separate approved plans, each class may expend up to .25% of its net assets annually to reimburse OFDI for costs incurred in connection with the personal service and maintenance of accounts that hold shares of the Fund, including amounts paid to brokers, dealers, banks and other institutions. In addition, Class B shares are subject to an asset-based sales charge of .75% of net assets annually, to reimburse OFDI for sales commissions paid from its own resources at the time of sale and associated financing costs. In the event of termination or discontinuance of the Class B plan, the Board of Trustees may allow the Fund to continue payment of the asset-based sales charge to OFDI for distribution expenses incurred on Class B shares sold prior to termination or discontinuance of the plan. During the year ended December 31, 1994, OFDI paid $154,100 to an affiliated broker/dealer as reimbursement for Class A personal service and maintenance expenses and retained $27,341 as reimbursement for Class B sales commissions and service fee advances, as well as financing costs.
14 Oppenheimer Investment Grade Bond Fund ========================================================== =============== 5. Deferred Trustee Compensation A former trustee elected to defer receipt of fees earned. These deferred fees earn interest at a rate determined by the current Board of Trustees at the beginning of each calendar year, compounded each quarter-end. As of December 31, 1994, the Fund was incurring interest at a rate of 5.22% per annum. Deferred fees are payable in annual installments, with accrued interest, each April 1 through 1995. ========================================================== =============== 6. Restricted Securities The Fund owns securities purchased in private placement transactions, without registration under the Securities Act of 1933 (the Act). The securities are valued under methods approved by the Board of Trustees as reflecting fair value. The Fund intends to invest no more than 10% of its net assets (determined at the time of purchase) in restricted and illiquid securities, excluding securities eligible for resale pursuant to rule 144A of the Act that are determined to be liquid by the Board of Trustees or by the Manager under Board-approved guidelines. Valuation Per Unit Security Acquisition Date Cost Per Unit of December 31, 1994 ----------------------------------------------------------------------------------------------------- Tenaga Nasional Berhad 7.875% Nts., 6/15/04(1) 9/27/94 $96.79 $95.18 1. Transferable under Rule 144A of the Act.
15 Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- Independent Auditors' Report ----------------------------------------------------------------------------------------------------- ========================================================== =============== The Board of Trustees and Shareholders of Oppenheimer Investment Grade Bond Fund: We have audited the accompanying statement of assets and liabilities, including the statement of investments, of Oppenheimer Investment Grade Bond Fund as of December 31, 1994, the related statement of operations for the year then ended, the statements of changes in net assets for the years ended December 31, 1994 and 1993 and the financial highlights for the period January 1, 1991 to December 31, 1994. 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. The financial highlights (except for total return) for the period February 1, 1984 to December 31, 1990 were audited by other auditors whose report dated February 4, 1991, expressed an unqualified opinion on those financial highlights. 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned at December 31, 1994 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 Investment Grade Bond Fund at December 31, 1994, 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 January 23, 1995
16 Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- Federal Income Tax Information (Unaudited) ----------------------------------------------------------------------------------------------------- ========================================================== =============== In early 1995, shareholders will receive information regarding all dividends and distributions paid to them by the Fund during calendar year 1994. Regulations of the U.S. Treasury Department require the Fund to report this information to the Internal Revenue Service. None of the dividends paid by the Fund during the fiscal year ended December 31, 1994 are eligible for the corporate dividend-received deduction. The foregoing information is presented to assist shareholders in reporting distributions received from the Fund to the Internal Revenue Service. Because of the complexity of the federal regulations which may affect your individual tax return and the many variations in state and local tax regulations, we recommend that you consult your tax advisor for specific guidance.
17 Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- Oppenheimer Investment Grade Bond Fund ----------------------------------------------------------------------------------------------------- A Series of Oppenheimer Integrity Funds ========================================================== ========================================================== =============== Officers and Trustees James C. Swain, Chairman and Chief Executive Officer Robert G. Avis, Trustee William A. Baker, Trustee Charles Conrad, Jr., Trustee Jon S. Fossel, Trustee and President Raymond J. Kalinowski, Trustee C. Howard Kast, Trustee Robert M. Kirchner, Trustee Ned M. Steel, Trustee Andrew J. Donohue, Vice President Mary E. Wilson, Vice President George C. Bowen, Vice President, Secretary and Treasurer Robert J. Bishop, Assistant Treasurer Scott Farrar, Assistant Treasurer Robert G. Zack, Assistant Secretary ========================================================== ========================================================== =============== Investment Advisor Oppenheimer Management Corporation ========================================================== ========================================================== =============== Sub-Advisor Massachusetts Mutual Life Insurance Company ========================================================== ========================================================== =============== Distributor Oppenheimer Funds Distributor, Inc. ========================================================== ========================================================== =============== Transfer and Shareholder Servicing Agent Oppenheimer Shareholder Services ========================================================== ========================================================== =============== Custodian of Portfolio Securities The Bank of New York ========================================================== ========================================================== =============== Independent Auditors Deloitte & Touche LLP ========================================================== ========================================================== =============== Legal Counsel Myer, Swanson, Adams & Wolf, P.C. This is a copy of a report to shareholders of Oppenheimer Investment Grade Bond Fund. This report must be preceded by a Prospectus of Oppenheimer Investment Grade Bond Fund. For material information concerning the Fund, see the Prospectus.
18 Oppenheimer Investment Grade Bond Fund OppenheimerFunds Family OppenheimerFunds offers over 35 funds designed to fit virtually every investment goal. Whether you're investing for retirement, your children's education or tax-free income, we have the funds to help you seek your objective. When you invest with OppenheimerFunds, you can feel comfortable knowing that you are investing with a respected financial institution with over 30 years of experience in helping people just like you reach their financial goals. And you're investing with a leader in global, growth stock and flexible fixed income investments--with over 1.8 million shareholder accounts and more than $29 billion under Oppenheimer's management and that of our affiliates. As an OppenheimerFunds shareholder, you can easily exchange shares of eligible funds of the same class by mail or by telephone for a small administrative fee.1 For more information on OppenheimerFunds, please contact your financial advisor or call us at 1-800-525-7048 for a prospectus. You may also write us at the address shown on the back cover. As always, please read the prospectus carefully before you invest. Stock Funds Discovery Fund Global Fund Global Emerging Growth Fund(2) Oppenheimer Fund Time Fund Value Stock Fund Target Fund Gold & Special Minerals Fund Growth Fund(3) Stock & Bond Funds Main Street Income & Growth Fund Equity Income Fund Total Return Fund Asset Allocation Fund Global Growth & Income Fund Bond Funds High Yield Fund Strategic Short-Term Income Fund Champion High Yield Fund Investment Grade Bond Fund Strategic Income & Growth Fund Mortgage Income Fund Strategic Income Fund U.S. Government Trust Strategic Diversified Income Fund Limited-Term Government Fund Strategic Investment Grade Bond Fund Tax-Exempt Funds New York Tax-Exempt Fund(4) New Jersey Tax-Exempt Fund(4) California Tax-Exempt Fund(4) Tax-Free Bond Fund Pennsylvania Tax-Exempt Fund(4) Insured Tax-Exempt Bond Fund Florida Tax-Exempt Fund(4) Intermediate Tax-Exempt Bond Fund Money Market Funds Money Market Fund Cash Reserves 1. The fee is waived for PhoneLink exchanges between existing accounts. Exchange privileges are subject to change or termination. 2. Formerly Oppenheimer Global Bio-Tech Fund and Oppenheimer Global Environment Fund. 3. Formerly Special Fund. 4. Available only to residents of those states. OppenheimerFunds are distributed by Oppenheimer Funds Distributor, Inc., Two World Trade Center, New York, NY10048-0203. (C)Copyright 1995 Oppenheimer Management Corporation. All rights reserved.
19 Oppenheimer Investment Grade Bond Fund "How may I help you?" As an OppenheimerFunds shareholder, some special privileges are available to you. Whether it's automatic investment plans, informative newsletters and hotlines, or ready account access, you can benefit from services designed to make investing simple. And when you need help, our Customer Service Representatives are only a toll-free phone call away. They can provide information about your account and handle administrative requests. You can reach them at our General Information number. When you want to make a transaction, you can do it easily by calling our toll-free Telephone Transactions number. And, by enrolling in AccountLink, a convenient service that "links" your OppenheimerFunds accounts and your bank checking or savings account, you can use the Telephone Transactions number to make investments. For added convenience, you can get automated information with OppenheimerFunds PhoneLink service, available 24 hours a day, 7 days a week. PhoneLink gives you access to a variety of fund, account, and market information. It also gives you the ability to make transactions using your touch-tone phone. Of course, you can always speak with a Customer Service Representative during business hours. You can count on us whenever you need assistance. That's why the International Customer Service Association, an independent, non-profit organization made up of over 3,200 customer service management professionals from around the country, honored the OppenheimerFunds' transfer agent, Oppenheimer Shareholder Services, with their Award of Excellence in 1993. So call us today--we're here to help. Information General Information Monday-Friday 8:30 a.m.-8 p.m. ET Saturday 10 a.m.-2 p.m. ET 1-800-525-7048 Telephone Transactions Monday-Friday 8:30 a.m.-8 p.m. ET 1-800-852-8457 Jennifer Leonard, Customer Service Representative Oppenheimer Shareholder Services PhoneLink 24 hours a day, automated information and transactions 1-800-533-3310 Telecommunications Device for the Deaf (TDD) Monday-Friday 8:30 a.m.-8 p.m. ET 1-800-843-4461 OppenheimerFunds Information Hotline 24 hours a day, timely and insightful messages on the economy and issues that affect your investments 1-800-835-3104 RA0285.001.0295 [logo] OppenheimerFunds(R) Oppenheimer Funds Distributor, Inc. P.O. Box 5270 Denver, CO 80217-5270 Bulk Rate U.S. Postage PAID Permit No. 377 Hackensack, NJ OPPENHEIMER BOND FUND Semiannual Report June 30, 1995 [PHOTO] "To help pay for extras, I COUNT on the money I get from my investments." [LOGO] OPPENHEIMERFUNDS This Fund is for people who want solid INCOME. NEWS STANDARDIZED YIELD For the 30 Days Ended 6/30/95:(3) Class A - ------------------------------ 5.25% - ------------------------------ Class B - ------------------------------ 4.71% - ------------------------------ AS OF JULY 11, 1995, YOUR FUND'S NAME CHANGED FROM OPPENHEIMER INVESTMENT GRADE BOND FUND TO OPPENHEIMER BOND FUND, AND OPPENHEIMER MANAGEMENT CORPORATION ASSUMED RESPONSIBILITY FOR THE DAY-TO-DAY MANAGEMENT OF THE FUND'S PORTFOLIO. - ------------------------------------------------------------------------------- HOW YOUR FUND IS MANAGED - ------------------------------------------------------------------------------- Oppenheimer Bond Fund's portfolio is made up primarily of corporate bonds and government securities. Of these investments, corporate bonds often offer the highest yields, but can come in all different levels of quality and risk. That's why your Fund's manager is careful to allocate assets to seek high yields with less risk, thereby offering the potential for high current income. - ------------------------------------------------------------------------------- PERFORMANCE Total return at net asset value for the 6 months ended 6/30/95 was 11.51% for Class A shares and 11.09% for Class B shares.(1) Your Fund's average annual total returns at maximum offering price for Class A shares for the 1- and 5-year periods ended 6/30/95 and since inception of the Class on 4/15/88 were 6.94%, 7.95% and 7.92%, respectively. For Class B shares, average annual total returns for the 1-year period ended 6/30/95 and since inception of the Class on 5/1/93 were 6.43% and 3.30%, respectively.(2) - ------------------------------------------------------------------------------- OUTLOOK - ------------------------------------------------------------------------------- "We don't expect dramatic changes in the bond market, but we will keep the portfolio in a somewhat defensive position, working to hold on to the advantages we've gained from what has so far been an excellent market." Mary Wilson, Portfolio Manager Massachusetts Mutual Life Insurance Co., The Fund's Former Sub-Advisor June 30, 1995 All figures assume reinvestment of dividends and capital gains distributions. Past performance is not indicative of future results. Investment and principal value on an investment in the Fund will fluctuate so that an investor's shares, when redeemed, may be worth more or less than the original cost. 1. Based on the change in net asset value per share for the period shown, without deducting any sales charges. Such performance would have been lower if sales charges were taken into account. 2. Class A returns show results of hypothetical investments on 6/30/94, 6/30/90 and 4/15/88 (since inception), after deducting the current maximum initial sales charge of 4.75%. The Fund's maximum sales charge rate for Class A shares was lower during a portion of some of the periods shown, and actual investment results will be different as a result of the change. Class B returns show results of hypothetical investments on 6/30/94 and 5/1/93 (inception of class), and the deduction of the applicable contingent deferred sales charge of 5% (1-year) and 3% (since inception). An explanation of the different performance calculations is in the Fund's prospectus. 3. Standardized yield is net investment income calculated on a yield-to-maturity basis for the 30-day period ended 6/30/95, divided by the maximum offering price at the end of the period, compounded semiannually and then annualized. Falling net asset values will tend to artificially raise yields. 2 Oppenheimer Bond Fund [PHOTO] James C. Swain Chairman Oppenheimer Bond Fund [PHOTO] Jon S. Fossel President Oppenheimer Bond Fund DEAR OPPENHEIMERFUNDS SHAREHOLDER, In contrast to last year, the first half of 1995 has been exceptionally good for the bond market. Almost all types of bonds have participated in the upswing and, in many cases, have more than made up for last year's declines in the first half alone--rewarding investors who were patient through the market's short-term difficulties. The strength of the current market adds to evidence showing, once again, that profitable investing calls for a long-term perspective. The single most important factor behind the bond rally was a change in the Federal Reserve's monetary policy. Between February 1994 and February 1995, the Fed raised rates aggressively to preempt possible rising inflation by slowing the economy to a more moderate growth rate--thus prolonging the current cycle of economic growth. As evidence began to mount that indicated the economy was indeed slowing, the Fed stopped raising rates. Indications now are that the desired slowdown, or "soft-landing" you may have read about, has been achieved. This has allowed rates to decline considerably, which in turn pushed bond prices up dramatically. While a near perfect landing is unlikely, our expectation going forward is that with the current fundamentals in place, we will continue to experience moderate, sustainable growth with relatively low inflation. We believe the Fed will not feel pressure to tighten monetary policy in the near term. Still, until the full extent of the economic slowdown is known, some questions remain. Signs of economic pickup later this year could motivate the Fed to raise rates again to combat potential inflation. The more likely scenario, however, is that the Fed might actually lower rates during the second half if the economy slows too much. In light of the uncertainties in the market, your Fund's managers remain cautious with an eye toward opportunity, so we're positioning investments somewhat defensively at this time. The bond markets have performed very well and we don't want to give back the gains the Fund has made. Thus, your Fund's managers continue to focus on the income potential of bonds, because this area has contributed most significantly and predictably to performance over time. Oppenheimer Management's fixed income investment team will continue to monitor the economy and market conditions going forward to keep ahead of significant events. We believe a conservative stance and an income orientation in addition to this year's strong capital appreciation justify a positive outlook for fixed income investments across the board. And finally, as mentioned in a recent mailing to you, your Fund's name changed to Oppenheimer Bond Fund on July 11, 1995, to more accurately reflect the Fund's greater investment flexibility. As of that date, Oppenheimer Management Corporation assumed responsibility for the day-to-day management of the Fund's portfolio. Thank you for your confidence in OppenheimerFunds, and we look forward to helping you continue to reach your investment goals in the future. /s/ James C. Swain /s/ Jon S. Fossel James C. Swain Jon S. Fossel July 24, 1995 3 Oppenheimer Bond Fund Q + A AN INTERVIEW WITH THE FUND'S MANAGERS. MARY WILSON Portfolio Manager A LOW-INFLATIONARY OUTLOOK FOR THE ECONOMY AND LOWER INTEREST RATES SPARKED A RALLY IN THE BOND MARKET OVER THE PAST SEVERAL MONTHS. WHAT EFFECT HAS THIS HAD ON THE FUND? The rally has been quite substantial, with interest rates falling dramatically since the first of the year. Intermediate-maturity bonds, where our holdings are presently concentrated, benefited from the rally in price, because interest rates on these bonds have come down more than they have in longer bonds. So, the effect of the rally for us from a total return perspective--or the combination of income and appreciation--has been very positive. The Fund is up almost 12% for the six months ended June 30, 1995. WHAT SHIFTS HAVE YOU MADE IN THE PORTFOLIO IN RESPONSE TO THE CHANGING MARKET? We haven't made many changes this year, because we'd already set ourselves up to take advantage of a bond market rally in 1995. Our weighting in Treasuries--one of the best performing sectors so far this year--is at about 28% of the portfolio. Our corporate bond position has been relatively stable at around 28%. Differences in income between corporate bonds of varying credit ratings are generally small right now, but where they have increased, we're engaging in very thorough hands-on credit analysis. Credit research, which was important in 1994, has become even more so in this environment.(1) HAVE LOWER INTEREST RATES REIGNITED PREPAYMENT RISK IN MORTGAGES? IF SO, WHAT IS YOUR STRATEGY FOR LIMITING IT? We've increased our holdings in mortgage-backed securities slightly. As usual, we're buying very well-seasoned paper--for example, mortgages that have lasted through several refinancing waves--so that we're not exposed to a great deal of prepayment risk. If rates continue to come down, however, we will expect to see some prepayments, even within our holdings of mortgage-backed bonds. One small strategic shift we've made in this arena is a move into the adjustable rate mortgage (ARM) market. We're buying primarily GNMA ARMs at this time, believing that they are an attractively priced sector of the mortgage market for nimble investors at this time. WHAT IS YOUR OUTLOOK FOR INTEREST RATES GOING FORWARD? We've had a substantial market rally, so much so that it's somewhat hard to imagine the rally will continue at this pace. At this time, we're looking for rates to stay near their current levels. However, there are two possibilities that could alter this view. If inflation should begin to show signs of increasing, the Fed might be tempted to raise rates again. IN LIGHT OF THESE POINTS, WHAT IS YOUR OUTLOOK FOR THE FUND? We're very pleased that the Fund has done so well for the period, both in terms of capturing the appreciation in the market and paying competitive income. We don't expect dramatic changes in the bond market, but we will keep the portfolio in a somewhat defensive position, working to hold on to the advantages we've gained from what has so far been an excellent market. / / 1. The Fund's portfolio is subject to change. 4 Oppenheimer Bond Fund FINANCIALS - ------------------------------------------------------------------------------- CONTENTS - ------------------------------------------------------------------------------- STATEMENT OF INVESTMENTS 6 STATEMENT OF ASSETS & LIABILITIES 10 STATEMENT OF OPERATIONS 11 STATEMENTS OF CHANGES IN NET ASSETS 12 FINANCIAL HIGHLIGHTS 13 NOTES TO FINANCIAL STATEMENTS 14 5 Oppenheimer Bond Fund --------------------------------------------------- Statement of Investments June 30, 1995 (Unaudited) ---------------------------------------------------
FACE MARKET VALUE AMOUNT SEE NOTE 1 - ------------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM NOTES--24.6% - ------------------------------------------------------------------------------------------------------------------------------------ Baxter International, Inc., 6.05%, 7/7/95 $2,260,000 $2,257,721 -------------------------------------------------------------------------------------------------------- Boston Edison Co., 6.07%, 7/6/95 2,500,000 2,497,892 -------------------------------------------------------------------------------------------------------- Burlington Northern Railroad Co., 6.10%, 7/27/95 2,500,000 2,488,986 -------------------------------------------------------------------------------------------------------- ConAgra, Inc., 6.05%, 7/5/95 2,175,000 2,173,538 -------------------------------------------------------------------------------------------------------- Eastman Chemical Co., 6.10%, 7/20/95 2,400,000 2,392,273 -------------------------------------------------------------------------------------------------------- GTE Corp., 6.03%, 7/12/95 1,070,000 1,068,029 -------------------------------------------------------------------------------------------------------- Illinois Power Co., 6.07%, 7/18/95 1,590,000 1,585,442 -------------------------------------------------------------------------------------------------------- Indiana & Michigan Power Co., 6.05%--6.22%, 7/11/95 760,000 758,723 -------------------------------------------------------------------------------------------------------- Orix Credit Alliance, Inc., 6.11%, 7/14/95 2,500,000 2,494,484 -------------------------------------------------------------------------------------------------------- Pacific Telecom, Inc., 6.125%--6.15%, 7/31/95 1,345,000 1,338,135 -------------------------------------------------------------------------------------------------------- Rite Aid Corp., 6.05%, 7/19/95 1,730,000 1,724,767 -------------------------------------------------------------------------------------------------------- Ryder System, Inc., 6.15%, 7/28/95 2,500,000 2,488,469 -------------------------------------------------------------------------------------------------------- Sonat, Inc., 6.08%, 7/13/95 1,960,000 1,956,028 -------------------------------------------------------------------------------------------------------- SuperValu Stores, Inc., 6.10%, 8/1/95 1,985,000 1,974,573 -------------------------------------------------------------------------------------------------------- Textron Financial Corp., 6.07%, 7/10/95 2,500,000 2,496,206 -------------------------------------------------------------------------------------------------------- Tyson Foods, Inc., 6.05%, 7/21/95 1,490,000 1,484,992 ---------- Total Short-Term Notes (Cost $31,180,258) 31,180,258 - ------------------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES--4.7% - ------------------------------------------------------------------------------------------------------------------------------------ AUTO LOAN--4.7% Daimler-Benz Vehicle Trust, Series 1994-A, Cl. A, 5.95%, 12/15/00 614,013 613,934 -------------------------------------------------------------------------------------------------------- Ford Credit Grantor Trust, Series 1994-B, Cl. A, 7.30%, 10/15/99 1,209,370 1,230,027 -------------------------------------------------------------------------------------------------------- General Motors Acceptance Corp., Grantor Trust, Series 1992-E, Cl. A, 4.75%, 8/15/97 311,342 309,704 -------------------------------------------------------------------------------------------------------- Nissan Auto Receivables Grantor Trust, Series 1994-A, Cl. A, 6.45%, 9/15/99 1,742,150 1,752,551 -------------------------------------------------------------------------------------------------------- World Omni Automobile Lease Securitization Trust, Series 1994-A, Cl. A, 6.45%, 9/25/00 2,000,000 2,011,600 --------- Total Asset-Backed Securities (Cost $5,867,852) 5,917,816 - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED OBLIGATIONS--13.7% - ------------------------------------------------------------------------------------------------------------------------------------ GOVERNMENT AGENCY--12.1% - ------------------------------------------------------------------------------------------------------------------------------------ FHLMC/FNMA/SPONSORED--7.4% Federal Home Loan Mortgage Corp.: Certificates of Participation, 9%, 3/1/17 734,171 766,178 Certificates of Participation, Series 17-039, 13.50%, 11/1/10 89,109 102,045 Certificates of Participation, Series 17-094, 12.50%, 4/1/14 48,706 55,287 Collateralized Mtg. Obligation Gtd. Multiclass Certificates of Participation, Series 1322, Cl. G, 7.50%, 2/15/07 2,000,000 2,074,660 Multiclass Gtd. Mtg. Participation Certificates, Series 1460, Cl. H, 7%, 5/15/07 1,500,000 1,521,300 -------------------------------------------------------------------------------------------------------- Federal National Mortgage Assn.: Gtd. Mtg. Pass-Through Certificates, 8%, 8/1/17 993,349 1,019,639 Collateralized Mtg. Obligation Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Series 1993-175, Cl. PL, 5%, 10/25/02 2,000,000 1,958,640 Collateralized Mtg. Obligation Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Series 1993-191, Cl. PD, 5.40%, 3/25/04 1,500,000 1,459,950 Interest-Only Collateralized Mtg. Obligations, Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Trust 1992 G-57, Cl. SA, 35.85%, 10/25/22(1) 529,602 397,202 --------- 9,354,901
6 Oppenheimer Bond Fund
FACE MARKET VALUE AMOUNT SEE NOTE 1 - ------------------------------------------------------------------------------------------------------------------------------------ GNMA/GUARANTEED--4.7% Government National Mortgage Assn.: 10%, 11/15/09 $ 467,695 $ 507,265 12%, 1/15/99-5/15/14 76,028 81,435 12.75%, 6/15/15 43,874 50,737 6%, 10/20/24(2) 2,000,000 2,005,625 8%, 6/15/05-10/15/06 2,547,389 2,631,481 9%, 2/15/09-6/15/09 606,003 638,044 ---------- 5,914,587 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER--1.6% JHM Mtg. Acceptance Corp., 8.96% Collateralized Mtg. Obligation Bonds, Series E, Cl. 5, 4/1/19 1,928,395 2,044,292 ---------- Total Mortgage-Backed Obligations (Cost $17,391,169) 17,313,780 - ------------------------------------------------------------------------------------------------------------------------------------ U.S. GOVERNMENT OBLIGATIONS--32.8% - ------------------------------------------------------------------------------------------------------------------------------------ AGENCY--3.2% - ------------------------------------------------------------------------------------------------------------------------------------ GOVERNMENT AGENCY/ Allentown, Pennsylvania, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 65,000 71,876 -------------------------------------------------------------------------------------------------------- FULL FAITH--3.2% Babylon, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 115,000 112,592 -------------------------------------------------------------------------------------------------------- Bakersfield, California, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 255,000 249,661 -------------------------------------------------------------------------------------------------------- Boston, Massachusetts, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 795,000 778,355 -------------------------------------------------------------------------------------------------------- Buena Vista Township, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 270,000 264,347 -------------------------------------------------------------------------------------------------------- Buffalo, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 400,000 391,625 -------------------------------------------------------------------------------------------------------- Detroit, Michigan, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 405,000 396,521 -------------------------------------------------------------------------------------------------------- Fajardo, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 300,000 331,735 -------------------------------------------------------------------------------------------------------- New Haven, Connecticut, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 400,000 442,299 -------------------------------------------------------------------------------------------------------- Roanoke, Virginia, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 220,000 215,394 -------------------------------------------------------------------------------------------------------- Sacramento County, California Redevelopment Agency, U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 240,000 234,975 -------------------------------------------------------------------------------------------------------- Tacoma, Washington, U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 165,000 161,545 -------------------------------------------------------------------------------------------------------- Trenton, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 135,000 132,174 -------------------------------------------------------------------------------------------------------- Tujillo Alto, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 235,000 259,851 ---------- 4,042,950 - ------------------------------------------------------------------------------------------------------------------------------------ TREASURY--29.6% - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury Bonds: 11.125%, 8/15/03 1,000,000 1,309,062 7.125%, 2/15/23 3,600,000 3,801,373 7.25%, 8/15/22 3,650,000 3,899,795 7.875%, 2/15/21 900,000 1,025,156 8%, 11/15/21 2,000,000 2,311,874 8.875%, 8/15/17 4,500,000 5,622,188 STRIPS, Zero Coupon, 2/15/15 13,500,000 3,526,994 -------------------------------------------------------------------------------------------------------- U.S. Treasury Nts.: 5.75%, 8/15/03 1,150,000 1,116,219 6.375%, 8/15/02 750,000 758,438 7.25%, 8/15/04 1,000,000 1,068,125 7.50%, 11/15/01 5,500,000 5,902,188 7.50%, 2/15/05 6,500,000 7,082,965 ---------- 37,424,377 ---------- Total U.S. Government Obligations (Cost $40,475,081) 41,467,327 ----------
7 Oppenheimer Bond Fund ---------------------------------------------------
--------------------------------------------------- STATEMENT OF INVESTMENTS (Unaudited) (Continued) CORPORATE BONDS AND NOTES--30.1% - ----------------------------------------------------------------------------------------------------------------------------------- BASIC INDUSTRY--4.4% - ----------------------------------------------------------------------------------------------------------------------------------- METALS/MINING--3.0% AMAX, Inc., 9.875% Nts., 6/13/01 $1,000,000 $1,126,492 ------------------------------------------------------------------------------------------------------- Newmont Mining Corp., 8.625% Nts., 4/1/02 1,000,000 1,077,506 ------------------------------------------------------------------------------------------------------- Teck Corp., 8.70% Debs., 5/1/02 1,500,000 1,617,678 --------- 3,821,676 - ----------------------------------------------------------------------------------------------------------------------------------- PAPER--1.4% Georgia-Pacific Corp., 9.95% Debs., 6/15/02 1,500,000 1,744,662 - ----------------------------------------------------------------------------------------------------------------------------------- CONSUMER RELATED--3.6% - ----------------------------------------------------------------------------------------------------------------------------------- CONSUMER PRODUCTS--0.8% Toro Co. (The), 11% Debs., 8/1/17 1,000,000 1,074,560 - ----------------------------------------------------------------------------------------------------------------------------------- HEALTHCARE--2.8% Grace (W.R.) & Co., 7.25% Medium-Term Nts., 7/15/97 2,000,000 2,024,448 ------------------------------------------------------------------------------------------------------- Imcera Group, Inc., 6% Nts., 10/15/03 500,000 474,124 ------------------------------------------------------------------------------------------------------- Service Corp. International, 7% Sr. Nts., 6/1/15 1,000,000 1,019,000 ---------- 3,517,572 - ----------------------------------------------------------------------------------------------------------------------------------- ENERGY--1.2% Enron Corp., 8.10% Nts., 12/15/96 1,500,000 1,538,329 - ----------------------------------------------------------------------------------------------------------------------------------- FINANCIAL SERVICES--8.0% - ----------------------------------------------------------------------------------------------------------------------------------- DIVERSIFIED FINANCIAL--6.8% Enterprise Rent-A-Car USA Finance Co., 7.875% Nts., 3/15/98(3) 1,500,000 1,538,292 ------------------------------------------------------------------------------------------------------- Ford Motor Credit Co., 9.90% Medium-Term Nts., 11/6/97 2,000,000 2,098,914 ------------------------------------------------------------------------------------------------------- Goldman Sachs Group LP, 6.20% Nts., 2/15/01 1,500,000 1,432,031 ------------------------------------------------------------------------------------------------------- Leucadia National Corp., 7.75% Sr. Nts., 8/15/13 2,000,000 1,949,960 ------------------------------------------------------------------------------------------------------- Penske Truck Leasing Co. LP, 7.75% Sr. Nts., 5/15/99 1,500,000 1,555,368 --------- 8,574,565 - ----------------------------------------------------------------------------------------------------------------------------------- INSURANCE--1.2% Comdisco, Inc., 6.50% Nts., 6/15/00 1,500,000 1,486,972 - ----------------------------------------------------------------------------------------------------------------------------------- MANUFACTURING--5.8% - ----------------------------------------------------------------------------------------------------------------------------------- AEROSPACE/ELECTRONICS/ McDonnell Douglas Corp., 9.25% Nts., 4/1/02 1,500,000 1,690,873 ------------------------------------------------------------------------------------------------------- COMPUTERS--3.3% Rolls-Royce Capital, Inc., 7.125% Gtd. Unsec. Unsub. Nts., 7/29/03 2,500,000 2,510,938 --------- 4,201,811 - ----------------------------------------------------------------------------------------------------------------------------------- AUTOMOTIVE--0.8% Chrysler Corp., 10.40% Nts., 8/1/99 1,000,000 1,062,621 - ----------------------------------------------------------------------------------------------------------------------------------- CAPITAL GOODS--1.7% Thomas & Betts Corp., 8.25% Sr. Nts., 1/15/04 1,000,000 1,079,045 ------------------------------------------------------------------------------------------------------- Westinghouse Electric Corp., 8.375% Nts., 6/15/02 1,000,000 1,054,497 --------- 2,133,542 - ----------------------------------------------------------------------------------------------------------------------------------- MEDIA--3.3% - ----------------------------------------------------------------------------------------------------------------------------------- CABLE TELEVISION--2.0% Tele-Communications, Inc., 5.28% Medium-Term Nts., 8/20/96 1,000,000 985,566 - ----------------------------------------------------------------------------------------------------------------------------------- Tele-Communications, Inc., 8.25% Sr. Nts., 1/15/03 1,500,000 1,546,320 --------- 2,531,886
8 Oppenheimer Bond Fund
--------------------------------------------------- STATEMENT OF INVESTMENTS (Unaudited) (Continued) --------------------------------------------------- FACE MARKET VALUE AMOUNT SEE NOTE 1 - ----------------------------------------------------------------------------------------------------------------------------------- PUBLISHING/PRINTING--1.3% Valassis Communications, Inc., 9.55% Sr. Nts., 12/1/03 $1,500,000 $1,684,645 - ----------------------------------------------------------------------------------------------------------------------------------- OTHER--0.5% - ----------------------------------------------------------------------------------------------------------------------------------- CONGLOMERATES--0.5% Textron, Inc., 9.55% Medium-Term Nts., 3/19/01 500,000 567,789 - ----------------------------------------------------------------------------------------------------------------------------------- TRANSPORTATION--2.5% - ----------------------------------------------------------------------------------------------------------------------------------- AIR TRANSPORTATION--2.5% AMR Corp., 9% Debs., 8/1/12 1,500,000 1,617,442 ------------------------------------------------------------------------------------------------------- United Air Lines, Inc., 10.11% Equipment Trust Certificates, Series 91B, 2/19/06 1,430,581 1,550,909 --------- 3,168,351 - ----------------------------------------------------------------------------------------------------------------------------------- UTILITIES--0.8% - ----------------------------------------------------------------------------------------------------------------------------------- ELECTRIC UTILITIES--0.8% Tenaga Nasional Berhad, 7.875% Nts., 6/15/04(3) 1,000,000 1,058,726 --------- Total Corporate Bonds and Notes (Cost $36,708,104) 38,167,707 SHARES - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS--0.0% - ----------------------------------------------------------------------------------------------------------------------------------- Foodbrands America, Inc. (Cost $0) 2,113 27,996 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS, AT VALUE (COST $131,622,464) 105.9% 134,074,884 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES IN EXCESS OF OTHER ASSETS (5.9) (7,509,860) ---------- ---------- NET ASSETS 100.0% $126,565,024 ---------- ---------- ---------- ---------- 1. Interest rate resets monthly, inversely related to LIBOR. Interest-Only Strips represent the right to receive the monthly interest payments on an underlying pool of mortgage loans. These securities are subject to the risk of accelerated principal paydowns as interest rates decline. The principal amount represents the notional amount on which current interest is calculated. 2. When-issued security to be delivered and settled after June 30, 1995. 3. Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Board of Trustees. These securities amount to $2,597,018 or 2.05% of the Fund's net assets, at June 30, 1995. See accompanying Notes to Financial Statements.
9 Oppenheimer Bond Fund ------------------------------------------------------------- STATEMENT OF ASSETS AND LIABILITIES June 30, 1995 (Unaudited) -------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments, at value (cost $131,622,464)--see accompanying statement $134,074,884 ------------------------------------------------------------------------------------------------------- Receivables: Investments sold 10,861,821 Interest and principal paydowns 1,593,375 Shares of beneficial interest sold 251,712 ------------------------------------------------------------------------------------------------------- Other 26,066 ---------- Total assets 146,807,858 - ----------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Bank overdraft 75,439 ------------------------------------------------------------------------------------------------------- Payables and other liabilities: Investments purchased 19,267,031 Dividends 499,146 Shares of beneficial interest redeemed 294,005 Distribution and service plan fees--Note 4 72,871 Transfer and shareholder servicing agent fees 9,378 Other 24,964 --------- Total liabilities 20,242,834 - ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSETS $126,565,024 ------------ ------------ - ------------------------------------------------------------------------------------------------------------------------------------ COMPOSITION OF Paid-in capital $127,974,410 NET ASSETS ------------------------------------------------------------------------------------------------------- Overdistributed net investment income (204,540) ------------------------------------------------------------------------------------------------------- Accumulated net realized loss from investment transactions (3,657,266) ------------------------------------------------------------------------------------------------------- Net unrealized appreciation on investments--Note 3 2,452,420 ------------ Net assets $126,565,024 ------------ ------------ - ----------------------------------------------------------------------------------------------------------------------------------- NET ASSET VALUE Class A Shares: PER SHARE Net asset value and redemption price per share (based on net assets of $118,864,206 and 10,995,949 shares of beneficial interest outstanding) $10.81 Maximum offering price per share (net asset value plus sales charge of 4.75% of offering price) $11.35 ------------------------------------------------------------------------------------------------------- Class B Shares: Net asset value, redemption price and offering price per share (based on net assets of $7,700,818 and 712,334 shares of beneficial interest outstanding) $10.81 See accompanying Notes to Financial Statements.
10 Oppenheimer Bond Fund - -------------------------------------------------------------------------- STATEMENT OF OPERATIONS For the Six Months Ended June 30, 1995 (Unaudited) - --------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- INVESTMENT INCOME Interest $ 4,185,138 EXPENSES Management fees--Note 4 276,022 ---------------------------------------------------------------------- Distribution and service plan fees: Class A--Note 4 131,136 Class B--Note 4 27,526 ---------------------------------------------------------------------- Transfer and shareholder servicing agent fees--Note 4 106,447 ---------------------------------------------------------------------- Shareholder reports 40,946 ---------------------------------------------------------------------- Custodian fees and expenses 12,853 ---------------------------------------------------------------------- Legal and auditing fees 10,458 ---------------------------------------------------------------------- Registration and filing fees: Class A 559 Class B 810 ---------------------------------------------------------------------- Other 8,053 ------------ Total expenses 614,810 - ------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME 3,570,328 - ------------------------------------------------------------------------------------------------------------- REALIZED AND UNREALIZED Net realized gain on investments 213,049 GAIN ON INVESTMENTS ---------------------------------------------------------------------- Net change in unrealized appreciation or depreciation on investments 8,295,969 ----------- Net realized and unrealized gain on investments 8,509,018 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $12,079,346 ----------- -----------
See accompanying Notes to Financial Statements. 11 Oppenheimer Bond Fund --------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS ---------------------------------------------------
SIX MONTHS ENDED YEAR ENDED JUNE 30, 1995 DECEMBER 31, (UNAUDITED) 1994 - -------------------------------------------------------------------------------------------------------------------------------- OPERATIONS Net investment income $ 3,570,328 $ 6,537,608 ----------------------------------------------------------------------------------------- Net realized gain (loss) on investments 213,049 (2,274,518) ----------------------------------------------------------------------------------------- Net change in unrealized appreciation or depreciation on investments 8,295,969 (8,559,673) ------------ ------------ Net increase (decrease) in net assets resulting from operations 12,079,346 (4,296,583) - -------------------------------------------------------------------------------------------------------------------------------- DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income: TO SHAREHOLDERS Class A ($.3324 and $.6539 per share, respectively) (3,416,487) (6,381,575) Class B ($.2934 and $.5754 per share, respectively) (153,487) (156,032) ----------------------------------------------------------------------------------------- Dividends in excess of net investment income: Class A ($.0306 per share) -- (298,880) Class B ($.027 per share) -- (7,308) - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- BENEFICIAL INTEREST Net increase (decrease) in net assets resulting from TRANSACTIONS Class A beneficial interest transactions--Note 2 14,123,914 (3,255,547) ----------------------------------------------------------------------------------------- Net increase in net assets resulting from Class B beneficial interest transactions--Note 2 3,840,990 1,918,288 - -------------------------------------------------------------------------------------------------------------------------------- NET ASSETS Total increase (decrease) 26,474,276 (12,477,637) ----------------------------------------------------------------------------------------- Beginning of period 100,090,748 112,568,385 ------------ ------------ End of period (including overdistributed net investment income of $204,540 and $204,894, respectively) $126,565,024 $100,090,748 ------------ ------------ ------------ ------------
See accompanying Notes to Financial Statements. 12 Oppenheimer Bond Fund -------------------- FINANCIAL HIGHLIGHTS --------------------
CLASS A ----------------------------------------------------------------------------------------- SIX MONTHS ENDED JUNE 30, 1995 YEAR ENDED DECEMBER 31, (UNAUDITED) 1994 1993 1992 1991(2) 1990 ----------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------- PER SHARE OPERATING DATA: Net asset value, beginning of period $10.01 $11.12 $10.74 $10.80 $9.86 $10.29 - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .33 .65 .69 .75 .82 .88(3) Net realized and unrealized gain (loss) on investments .80 (1.08) .40 (.05) .90 (.43) -------- -------- -------- -------- -------- -------- Total income (loss) from investment operations 1.13 (.43) 1.09 .70 1.72 .45 - -------------------------------------------------------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (.33) (.65) (.71) (.76) (.78) (.88) Dividends in excess of net investment income -- (.03) -- -- -- -- -------- -------- -------- -------- -------- -------- Total dividends to shareholders (.33) (.68) (.71) (.76) (.78) (.88) - -------------------------------------------------------------------------------------------------------------------------------- Net asset value, end of period $ 10.81 $ 10.01 $ 11.12 $ 10.74 $ 10.80 $ 9.86 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL RETURN, AT NET ASSET VALUE(4) 11.51% (3.87)% 10.30% 6.77% 18.28% 4.74% - -------------------------------------------------------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $118,864 $ 96,640 $110,759 $106,290 $ 90,623 $ 87,021 - -------------------------------------------------------------------------------------------------------------------------------- Average net assets (in thousands) $107,151 $102,168 $111,702 $ 98,672 $ 86,471 $ 90,065 - -------------------------------------------------------------------------------------------------------------------------------- Number of shares outstanding at end of period (in thousands) 10,996 9,653 9,963 9,899 8,390 8,829 - -------------------------------------------------------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 6.43%(5) 6.25% 6.20% 7.00% 8.02% 8.85% Expenses 1.06%(5) 1.06% 1.06% 1.10% 1.23% 1.24%(3) - -------------------------------------------------------------------------------------------------------------------------------- - -------------------------------------------------------------------------------------------------------------------------------- Portfolio turnover rate(6) 86.9% 70.3% 110.1% 116.4% 97.1% 80.4%
CLASS B ---------------------------------------- SIX MONTHS ENDED JUNE 30, 1995 YEAR ENDED DEC. 31, (UNAUDITED) 1994 1993(1) ---------------------------------------- PER SHARE OPERATING DATA: Net asset value, beginning of period $10.01 $11.11 $11.10 - ------------------------------------------------------------------------------- Income (loss) from investment operations: Net investment income .31 .58 .40 Net realized and unrealized gain (loss) on investments .78 (1.08) .03 -------- -------- -------- Total income (loss) from investment operations .09 (.50) .43 - ------------------------------------------------------------------------------- Dividends to shareholders: Dividends from net investment income (.29) (.57) (.42) Dividends in excess of net investment income -- (.03) -- -------- -------- -------- Total dividends to shareholders (.29) (.60) (.42) - ------------------------------------------------------------------------------- Net asset value, end of period $ 10.81 $ 10.01 $ 11.11 -------- -------- -------- -------- -------- -------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- TOTAL RETURN, AT NET ASSET VALUE(4) 11.09% (4.53)% 3.91% - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- RATIOS/SUPPLEMENTAL DATA: Net assets, end of period (in thousands) $ 7,701 $ 3,451 $ 1,809 - ------------------------------------------------------------------------------- Average net assets (in thousands) $ 5,571 $ 2,747 $ 922 - ------------------------------------------------------------------------------- Number of shares outstanding at end of period (in thousands) 712 345 163 - ------------------------------------------------------------------------------- Ratios to average net assets: Net investment income 5.54%(5) 5.53% 4.80%(5) Expenses 1.85%(5) 1.78% 1.90%(5) - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Portfolio turnover rate(6) 86.9% 70.3% 110.1% 1. For the period from May 1, 1993 (inception of offering) to December 31, 1993. 2. On March 28, 1991, Oppenheimer Management Corporation became the investment advisor to the Fund. 3. Net investment income would have been $.87 per share absent the voluntary expense limitation, resulting in an expense ratio of 1.26%. 4. Assumes a hypothetical initial investment on the business day before the first day of the fiscal period, with all dividends and distributions reinvested in additional shares on the reinvestment date, and redemption at the net asset value calculated on the last business day of the fiscal period. Sales charges are not reflected in the total returns. Total returns are not annualized for periods of less than one full year. 5. Annualized. 6. 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 June 30, 1995 were $89,966,334 and $89,236,960, respectively.
See accompanying Notes to Financial Statements. 13 Oppenheimer Bond Fund --------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (Unaudited) ---------------------------------------------------
- ----------------------------------------------------------------------------- 1. SIGNIFICANT Oppenheimer Bond Fund (the Fund), operating under the ACCOUNTING POLICIES name Oppenheimer Investment Grade Bond Fund, through July 10, 1995, is a separate fund of Oppenheimer Integrity Funds, a diversified, open-end management investment company registered under the Investment Company Act of 1940, as amended. The Fund's investment advisor is Oppenheimer Management Corporation (the Manager). The Fund offers both Class A and Class B shares. Class A shares are sold with a front-end sales charge. Class B shares may be subject to a contingent deferred sales charge. Both classes of shares have identical rights to earnings, assets and voting privileges, except that each class has its own distribution and/or service plan, expenses directly attributable to a particular class and exclusive voting rights with respect to matters affecting a single class. Class B shares will automatically convert to Class A shares six years after the date of purchase. The following is a summary of significant accounting policies consistently followed by the Fund. ------------------------------------------------------ INVESTMENT VALUATION. Portfolio securities are valued at 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 asked price or the last sale price on the prior trading day. Long-term and short-term "non-money market" debt securities are valued by a portfolio pricing service approved by the Board of Trustees. Such securities which cannot be valued by the approved portfolio pricing service are valued using dealer-supplied valuations provided the Manager is satisfied that the firm rendering the quotes is reliable and that the quotes reflect current market value, or 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. ------------------------------------------------------ ALLOCATION OF INCOME, EXPENSES AND GAINS AND LOSSES. Income, expenses (other than those attributable to a specific class) and gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets represented by such class. Operating expenses directly attributable to a specific class are charged against the operations of that class. ------------------------------------------------------ FEDERAL TAXES. The Fund intends to continue to comply with provisions of the Internal Revenue Code applicable to regulated investment companies and to distribute all of its taxable income, including any net realized gain on investments not offset by loss carryovers, to shareholders. Therefore, no federal income or excise tax provision is required. ------------------------------------------------------ DISTRIBUTIONS TO SHAREHOLDERS. The Fund intends to declare dividends separately for Class A and Class B shares from net investment income each day the New York Stock Exchange is open for business and pay such dividends monthly. Distributions from net realized gains on investments, if any, will be declared at least once each year. ------------------------------------------------------ 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 paydown gains and losses. The character of the distributions made during the year from net investment income or net realized gains may differ from their 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 year that the income or realized gain (loss) was recorded by the Fund.
14 Oppenheimer Bond Fund
- ------------------------------------------------------------------------------ 1. SIGNIFICANT OTHER. Investment transactions are accounted for on ACCOUNTING POLICIES the date the investments are purchased or sold (CONTINUED) (trade date). Discount on securities purchased is amortized over the life of the respective securities, in accordance with federal income tax requirements. Realized gains and losses on investments and unrealized appreciation and depreciation are determined on an identified cost basis, which is the same basis used for federal income tax purposes. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 2. SHARES OF The Fund has authorized an unlimited number of no BENEFICIAL INTEREST par value shares of beneficial interest of each class. Transactions in shares of beneficial interest were as follows:
Six Months Ended June 30, 1995 Year Ended December 31, 1994 ------------------------------- ---------------------------- Shares Amount Shares Amount ---------------------------------------------------------------------------------------- Class A: Sold 2,460,939 $25,703,467 1,071,379 $11,256,317 Dividends reinvested 181,231 1,895,693 323,100 3,353,309 Redeemed (1,299,494) (13,475,246) (1,704,508) (17,865,173) ---------- ----------- ---------- ----------- Net increase (decrease) 1,342,676 $14,123,914 (310,029) $(3,255,547) ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- --------------------------------------------------------------------------------------- Class B: Sold 519,473 $ 5,406,619 293,817 $ 3,089,618 Dividends reinvested 9,622 100,824 11,974 123,504 Redeemed (161,421) (1,666,453) (123,969) (1,294,834) ---------- ----------- ---------- ----------- Net increase 367,674 $ 3,840,990 181,822 $ 1,918,288 ---------- ----------- ---------- ----------- ---------- ----------- ---------- -----------
- ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 3. UNREALIZED GAINS AND At June 30, 1995, net unrealized appreciation on LOSSES ON INVESTMENTS investments of $2,452,420 was composed of gross appreciation of $3,509,324, and gross depreciation of $1,056,904. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 4. MANAGEMENT FEES Management fees paid to the Manager were AND OTHER in accordance with the investment advisory TRANSACTIONS WITH agreement with the Fund which provides for a fee of AFFILIATES .50% on the first $100 million of average annual net assets with a reduction of .05% on each $200 million thereafter, to .35% on net assets in excess of $500 million. The Manager has agreed to reimburse the Fund if aggregate expenses (with specified exceptions) exceed the most stringent state regulatory limit on Fund expenses. At a meeting held on July 10, 1995, shareholders of Oppenheimer Bond Fund approved a new investment advisory agreement. Subsequent to July 10, management fees are as follows: .75% of the first $200 million of the Fund's average annual net assets, .72% of the next $200 million, .69% of the next $200 million, .66% of the next $200 million, .60% of the next $200 million, and .50% of aggregate net assets over $1 billion. For the six months ended June 30, 1995, commissions (sales charges paid by investors) on sales of Class A shares totaled $76,610, of which $25,631 was retained by Oppenheimer Funds 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 shares totaled $80,287, of which $5,165 was paid to an affiliated broker/dealer. During the six months ended June 30, 1995, OFDI received contingent deferred sales charges of $4,962 upon redemption of Class B shares, as reimbursement for sales commissions advanced by OFDI at the time of sale of such shares. Oppenheimer Shareholder Services (OSS), a division of the Manager, is the transfer and shareholder servicing agent for the Fund, and for other registered investment companies. OSS's total costs of providing such services are allocated ratably to these companies. 15 Oppenheimer Bond Fund NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 4. MANAGEMENT FEES Under separate approved plans, each class may AND OTHER expend up to .25% of its net assets annually to TRANSACTIONS WITH reimburse OFDI for costs incurred in connection AFFILIATES with the personal service and maintenance of (CONTINUED) accounts that hold shares of the Fund, including amounts paid to brokers, dealers, banks and other institutions. In addition, Class B shares are subject to an asset-based sales charge of .75% of net assets annually, to reimburse OFDI for sales commissions paid from its own resources at the time of sale and associated financing costs. In the event of termination or discontinuance of the Class B plan, the Board of Trustees may allow the Fund to continue payment of the asset-based sales charge to OFDI for distribution expenses incurred on Class B shares sold prior to termination or discontinuance of the plan. During the six months ended June 30, 1995, OFDI paid $70,318 to an affiliated broker/dealer as reimbursement for Class A personal service and maintenance expenses, and retained $24,009 as reimbursement for Class B sales commissions and service fee advances, as well as financing costs. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ 5. DEFERRED TRUSTEE A former trustee elected to defer receipt of fees COMPENSATION earned. These deferred fees earn interest at a rate determined by the current Board of Trustees at the beginning of each calendar year, compounded each quarter-end. From January 1, 1995 through May 10, 1995, the Fund was incurring interest at a rate of 7.89% per annum. The final payment was made on May 10, 1995. 16 Oppenheimer Bond Fund OPPENHEIMER BOND FUND A Series of Oppenheimer Integrity Funds - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ OFFICERS AND TRUSTEES James C. Swain, Chairman and Chief Executive Officer Robert G. Avis, Trustee William A. Baker, Trustee Charles Conrad, Jr., Trustee Jon S. Fossel, Trustee and President Raymond J. Kalinowski, Trustee C. Howard Kast, Trustee Robert M. Kirchner, Trustee Ned M. Steel, Trustee Andrew J. Donohue, Vice President David P. Negri, Vice President David Rosenberg, Vice President George C. Bowen, Vice President, Secretary and Treasurer Robert J. Bishop, Assistant Treasurer Scott Farrar, Assistant Treasurer Robert G. Zack, Assistant Secretary - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ INVESTMENT ADVISOR Oppenheimer Management Corporation - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ DISTRIBUTOR Oppenheimer Funds Distributor, Inc. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ TRANSFER AND SHAREHOLDER Oppenheimer Shareholder Services SERVICING AGENT - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ CUSTODIAN OF The Bank of New York PORTFOLIO SECURITIES - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ INDEPENDENT AUDITORS Deloitte & Touche LLP - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ LEGAL COUNSEL Myer, Swanson, Adams & Wolf, P.C. The financial statements included herein have been taken from the records of the Fund without examination by the independent auditors. This is a copy of a report to shareholders of Oppenheimer Bond Fund. This report must be preceded by a Prospectus of Oppenheimer Bond Fund. For material information concerning the Fund, see the Prospectus. Shares of Oppenheimer funds are not deposits or obligations of any bank, are not guaranteed by any bank, and are not insured by the FDIC or any other agency, and involve investment risks, including possible loss of the principal amount invested. 17 Oppenheimer Bond Fund OPPENHEIMERFUNDS FAMILY - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ OppenheimerFunds offers over 30 funds designed to fit virtually every investment goal. Whether you're investing for retirement, your children's education or tax-free income, we have the funds to help you seek your objective. When you invest with OppenheimerFunds, you can feel comfortable knowing that you are investing with a respected financial institution with over 30 years of experience in helping people just like you reach their financial goals. And you're investing with a leader in global, growth stock and flexible fixed income investments--with over 2.6 million shareholder accounts and more than $35 billion under Oppenheimer's management and that of our affiliates. At OppenheimerFunds, we don't charge a fee to exchange shares of eligible funds of the same class. And you can exchange shares easily by mail or by telephone(1). For more information on OppenheimerFunds, please contact your financial advisor or call us at 1-800-525-7048 for a prospectus. You may also write us at the address shown on the back cover. As always, please read the prospectus carefully before you invest. - ----------------------------------------------------------------------------- - -----------------------------------------------------------------------------
STOCK FUNDS Discovery Fund Global Fund Global Emerging Growth Fund(2) Oppenheimer Fund Target Fund Value Stock Fund Growth Fund(3) Gold & Special Minerals Fund - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- STOCK & BOND FUNDS Main Street Income & Growth Fund Equity Income Fund Total Return Fund Asset Allocation Fund Global Growth & Income Fund - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- BOND FUNDS High Yield Fund Strategic Short-Term Income Fund Champion High Yield Fund International Bond Fund Strategic Income & Growth Fund Bond Fund(4) Strategic Income Fund U.S. Government Trust Strategic Investment Grade Bond Fund Limited-Term Government Fund - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- TAX-EXEMPT FUNDS New York Tax-Exempt Fund(5) New Jersey Tax-Exempt Fund(5) California Tax-Exempt Fund(5) Tax-Free Bond Fund Pennsylvania Tax-Exempt Fund(5) Insured Tax-Exempt Bond Fund Florida Tax-Exempt Fund(5) Intermediate Tax-Exempt Bond Fund - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- MONEY MARKET FUNDS Money Market Fund Cash Reserves
1. Exchange privileges are subject to change or termination. 2. Formerly Global Bio-Tech Fund. 3. Formerly Special Fund. 4. Formerly Investment Grade Bond Fund. 5. Available only to residents of certain states. OppenheimerFunds are distributed by Oppenheimer Funds Distributor, Inc., Two World Trade Center, New York, NY 10048-0203. -C- Copyright 1995 Oppenheimer Management Corporation. All rights reserved. INFORMATION GENERAL INFORMATION Monday-Friday 8:30 a.m.-8 p.m. ET Saturday 10 a.m.-2 p.m. ET - -------------- 1-800-525-7048 - -------------- TELEPHONE TRANSACTIONS Monday-Friday 8:30 a.m.-8 p.m. ET - -------------- 1-800-852-8457 - -------------- PHONELINK 24 hours a day, automated information and transactions - -------------- 1-800-533-3310 - -------------- TELECOMMUNICATIONS DEVICE FOR THE DEAF (TDD) Monday-Friday 8:30 a.m.-8 p.m. ET - -------------- 1-800-843-4461 - -------------- OPPENHEIMERFUNDS INFORMATION HOTLINE 24 hours a day, timely and insightful messages on the economy and issues that affect your investments. - -------------- 1-800-835-3104 - -------------- RSO285.001.0695 August 31, 1995 - ------------------------------------------------------------------------------ "HOW MAY I HELP YOU?" [PHOTO] Jennifer Leonard, Customer Service Representative Oppenheimer Shareholder Services As an OppenheimerFunds shareholder, you have some special privileges. Whether it's automatic investment plans, informative newsletters and hotlines, or ready account access, you can benefit from services designed to make investing simple. And when you need help, our Customer Service Representatives are only a toll-tree phone call away. They can provide information about your account and handle administrative requests. You can reach them at our General Information number. When you want to make a transaction, you can do it easily by calling our toll-free Telephone Transactions number. And, by enrolling in AccountLink, a convenient service that "links" your OppenheimerFunds accounts and your bank checking or savings account, you can use the Telephone Transactions number to make investments. For added convenience, you can get automated information with OppenheimerFunds PhoneLink service, available 24 hours a day, 7 days a week. PhoneLink gives you access to a variety of fund, account, and market information. Of course, you can always speak with a Customer Service Representative during the General Information hours shown at the left. You can count on us whenever you need assistance. That's why the International Customer Service Association, an independent, nonprofit organization, made up of over 3,200 customer service management professionals from around the country, honored the OppenheimerFunds' transfer agent, Oppenheimer Shareholder Services, with their Award of Excellence in 1993. So call us today--we're here to help. - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ [LOGO] Oppenheimer Funds-C- Oppenheimer Funds Distributor, Inc. P.O. Box 5270 Denver, CO 80217-5270 - ------------------ Bulk Rate U.S. Postage PAID Permit No. 469 Denver, CO - ------------------ QUEST FOR VALUE-SM- FUNDS Quest for Value Funds is a family of mutual funds (the "Funds") managed by Quest for Value Advisors ("Quest Advisors"). The Global Income Fund is a non-diversified fund. The other Funds covered by this Prospectus are diversified funds. Total assets under the management of Quest Advisors and its parent, Oppenheimer Capital, amounted to approximately $33 billion on May 31, 1995. The Funds covered by this prospectus are: Equity: QUEST FOR VALUE FUND, INC. SMALL CAPITALIZATION FUND GROWTH AND INCOME FUND Fixed Income: U.S. GOVERNMENT INCOME FUND INVESTMENT QUALITY INCOME FUND Flexible: OPPORTUNITY FUND Global: Equity: QUEST FOR VALUE GLOBAL EQUITY FUND, INC. Income: GLOBAL INCOME FUND This Prospectus sets forth basic information about the Funds, including applicable sales and distribution fees, that you should understand before investing. You should read it carefully and retain it for future reference. Statements of Additional Information dated March 1, 1995 for each of the Quest for Value Global Equity Fund, Inc., Global Income Fund, Quest for Value Family of Funds, and Quest for Value Fund, Inc. (the "SAIs"), have been filed with the Securities and Exchange Commission and are incorporated by reference in this Prospectus. You can obtain a copy of the SAIs without charge by contacting Quest for Value Distributors, at the address or telephone number listed on the back cover. SHARES IN THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY ANY BANK AND THE SHARES OF THE FUNDS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY AND ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL INVESTED. The Funds offer three separate classes of shares: Class A, B and C shares. Shares of each Class represent an identical interest in the investment portfolio of a Fund, and generally have the same rights, but are offered under different sales charge and distribution fee arrangements. The offering of Class A, B and C shares presents the investor with the opportunity to choose the sales charge and distribution fee arrangement which is most beneficial, depending on the amount of purchase, the length of time the investor expects to hold the shares, and other circumstances. Shares of each Class are offered at the net asset value next determined after receipt of your purchase order plus an initial ("front-end") sales charge for purchases of Class A shares, or a deferred sales charge for purchases of Class B or Class C shares. (See "How to Buy Shares," p. 17) Class B and C shares bear a higher ongoing distribution fee than Class A shares, and investors should understand that over time the accumulated distribution charges on Class B and C shares may exceed the amount of the initial sales charge and ongoing distribution fee on Class A shares. (See "Distribution Plan," p. 35) MARCH 1, 1995, AS REVISED JUNE 30, 1995 - -------------------------------------------------------------------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- QUEST FOR VALUE is a registered service mark of Oppenheimer Capital - -------------------------------------------------------------------------------- SUMMARY OF FUND EXPENSES
QUEST FOR VALUE SMALL CAPITALIZATION U.S. GOVERNMENT INCOME FUND CLASS OF SHARES: A B C A B C A B C - ----------------------------------- -------- -------- -------- -------- -------- -------- -------- -------- -------- SHAREHOLDER TRANSACTION EXPENSES Maximum Initial Sales Load Imposed on Purchase (as a % of offering price)............................ 5.50% none none 5.50% none none 4.75% none none Maximum Deferred Sales Load(1)..... none 5.00% 1.00% none 5.00% 1.00% none 5.00% 1.00% Maximum Sales Load Imposed On Reinvested Dividends.............. none none none none none none none none none Redemption Fee..................... none none none none none none none none none Exchange Fee....................... $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00 ANNUAL FUND OPERATING EXPENSES (AS % OF AVERAGE NET ASSETS) Management Fee (2)................. 1.00% 1.00% 1.00% 1.00% 1.00% 1.00% .60% .60% .60% 12b-1 Fee (including service fees of .25%) (4)...................... .50% 1.00% 1.00% .50% 1.00% 1.00% .30% 1.00% 1.00% Other Expenses..................... .21% .24% .28% .38% .48% .59% .33% .33% .35% -------- -------- -------- -------- -------- -------- -------- -------- -------- TOTAL FUND OPERATING EXPENSES AFTER WAIVER AND/OR EXPENSE ASSUMPTIONS(3).................... 1.71% 2.24% 2.28% 1.88% 2.48% 2.59% 1.23% 1.93% 1.95% -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- EXAMPLE 1: You would pay the following expense over the indicated periods in each of the Funds on a $1,000 investment assuming (a) payment of the maximum sales charge, (b) a 5% annual return, and (c) retention of shares at the end of the time period. 10-year figures for Class B shares assume conversion to Class A shares after eight years. 1 Year............................. 71.43 22.71 23.11 73.04 25.11 26.21 59.44 19.60 19.80 3 Years............................ 105.92 70.03 71.23 110.84 77.25 80.54 84.68 60.62 61.22 5 Years............................ 142.72 119.99 122.01 151.03 132.05 137.52 111.86 104.20 105.21 10 Years........................... 245.84 244.16 261.54 263.00 266.87 292.45 189.29 207.22 227.48 EXAMPLE 2: You would pay the following expenses over the indicated periods in each of the Funds on a $1,000 investment assuming (a) payment of the maximum sales charge, (b) a 5% annual return, and (c) redemption at the end of the time period. 10-year figures for Class B shares assume conversion to Class A shares after eight years. 1 Year............................. 71.43 72.71 33.11 73.04 75.11 36.21 59.44 69.60 29.80 3 Years............................ 105.92 100.03 71.23 110.84 107.25 80.54 84.68 90.62 61.22 5 Years............................ 142.72 129.99 122.01 151.03 142.05 137.52 111.86 114.20 105.21 10 Years........................... 245.84 244.16 261.54 263.00 266.87 292.45 189.29 207.22 227.48
THE EXAMPLES SHOULD NOT BE CONSIDERED INDICATIONS OF PAST OR FUTURE EXPENSES OR PERFORMANCE, AND ACTUAL EXPENSES OR PERFORMANCE MAY VARY FROM THOSE SHOWN. The purpose of the table is to assist you in understanding the various costs and expenses that you would bear, whether directly or indirectly. For more complete descriptions of the various costs and expenses, see "How to Buy Shares," "Investment Management Agreement" and "Distribution Plan". Investors should be aware that over time, Class B and C shareholders may pay more than the equivalent of the maximum front-end sales charges permitted by the National Association of Securities Dealers Rules of Fair Practice. (1) Certain purchases of Class A shares of $1 million or more are not subject to front-end sales charges, but a contingent deferred sales charge ("CDSC") is imposed on the proceeds of such shares equal to 1% if the shares are redeemed within the first 12 months after the end of the calendar month of their purchase, and .5 of 1% if redeemed within the next 12 months. Purchases made on or after July 1, 1994 of the Quest for Value Fund, Inc., the Small Capitalization Fund, the Growth and Income Fund, the Opportunity Fund and the Global Equity Fund are subject to a CDSC of 1% if the shares are redeemed within the first 12 months after the end of the calendar month of their purchase. See "How to Buy Shares." (2) Includes an administration fee of .25% of average net assets.
INVESTMENT QUALITY INCOME OPPORTUNITY GLOBAL EQUITY A B C A B C A B C ------- ------- ------- ------- ------- ------- ---------- ---------- ---------- 4.75% none none 5.50% none none 5.50% none none none 5.00% 1.00% none 5.00% 1.00% none 5.00% 1.00% none none none none none none none none none none none none none none none none none none $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 .60% .60% .60% 1.00% 1.00% 1.00% .75% .75% .75% .40% 1.00% 1.00% .50% 1.00% 1.00% .50% 1.00% 1.00% .59% .63% .61% .28% .34% .35% .68%(2) .66%(2) .66%(2) ------- ------- ------- ------- ------- ------- ---------- ---------- ---------- 1.59% 2.23% 2.21% 1.78% 2.34% 2.35% 1.93% 2.41% 2.41% ------- ------- ------- ------- ------- ------- ---------- ---------- ---------- ------- ------- ------- ------- ------- ------- ---------- ---------- ---------- 62.90 22.61 22.41 72.09 23.71 23.81 73.52 24.41 24.41 95.30 69.73 69.12 107.94 73.04 73.34 112.28 75.14 75.14 129.94 119.49 118.48 146.14 125.03 125.53 153.46 128.54 128.54 227.44 240.35 254.43 252.93 253.66 268.61 267.98 262.76 274.62 62.90 72.61 32.41 72.09 73.71 33.81 73.52 74.41 34.41 95.30 99.73 69.12 107.94 103.04 73.34 112.28 105.14 75.14 129.94 129.49 118.48 146.14 135.03 125.53 153.46 138.54 128.54 227.44 240.35 254.43 252.93 253.66 268.61 267.98 262.76 274.62 GROWTH AND INCOME GLOBAL INCOME A B C A B C ------- ------- ------- ---------- ---------- ---------- 4.75% none none 3.00% none none none 5.00% 1.00% none 5.00% 1.00% none none none none none none none none none none none none $5.00 $5.00 $5.00 $5.00 $5.00 $5.00 .57% .57% .57% .11% .11% .11% .40% 1.00% 1.00% .25%(4) 1.00% 1.00% .93% .93% .93% 1.34%(2) 1.34%(2) 1.34%(2) ------- ------- ------- ---------- ---------- ---------- 1.90% 2.50% 2.50% 1.70% 2.45% 2.45% ------- ------- ------- ---------- ---------- ---------- ------- ------- ------- ---------- ---------- ---------- 65.88 25.31 25.31 46.76 24.81 24.81 104.37 77.85 77.85 81.97 76.35 76.35 145.28 133.05 133.05 119.54 130.55 130.55 259.17 268.89 283.59 224.85 260.12 278.62 65.88 75.31 35.31 46.76 74.81 34.81 104.37 107.85 77.85 81.97 106.35 76.35 145.28 143.05 133.05 119.54 140.55 130.55 259.17 268.89 283.59 224.85 260.12 278.62
(3) The expenses for certain funds have been restated to reflect voluntary expense limitations currently in effect. Currently, expenses of the Growth and Income and Global Income Funds are voluntarily limited by Quest Advisors so that annualized operating Fund Expenses (as defined on p. 33) exclusive of Class Expenses (as defined on p. 33) do not exceed 1.50% and 1.45%, respectively. These Fund Expense limitations may be discontinued at any time. Without such limitations, annual operating expenses as a percentage of average daily net assets would have been as follows: Growth and Income Fund: Class A: 2.32%, Class B: 2.93% and Class C: 3.10%; and Global Income Fund: Class A: 2.09%, Class B: 2.88% and Class C: 2.84%. Certain expenses of the Growth and Income Fund were waived in order to comply with a state's expense limitations. The expenses stated for the U.S. Government Income, Investment Quality Income and Global Equity Funds reflect what the expenses of those Funds would have been for their respective fiscal years if Quest Advisors had not waived a portion of its fee. (4) See "Distribution Plan." Although the Global Income Fund's Distribution Plan and Agreement ("Plan") for Class A shares authorizes the Fund to pay a maximum service fee of .25% of average daily net assets and a distribution fee of .05% of average daily net assets, the Board of Directors of the Fund has set a maximum .25% service fee under the Plan. 3 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS The financial information given for the Small Capitalization, U.S. Government Income, Investment Quality Income, Opportunity, Growth and Income, Global Equity and Global Income Funds has been audited by Price Waterhouse LLP, independent accountants, whose unqualified reports thereon appear in the Statements of Additional Information ("SAI(s)"). The financial information given for Quest for Value Fund has been audited by KPMG Peat Marwick LLP, independent auditors, whose unqualified report thereon appears in the SAI. All the following information should be read in conjunction with the financial statements and related notes thereto appearing in the SAIs. Further information regarding the performance of each Fund is available in each Fund's Annual Report. Annual Reports may be obtained without charge by calling the Fund at (800) 232-FUND.
NET REALIZED DISTRIBUTION NET AND DIVIDENDS FROM INVEST- UNREALIZED TOTAL FROM NET TOTAL NAV: MENT GAIN FROM NET REALIZED TAX DIVIDENDS START OF INCOME (LOSS) ON INVESTMENT INVESTMENT GAIN ON RETURN OF AND PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME INVESTMENTS CAPITAL DISTRIBUTIONS --------- ------- ---------- ------- ------- ------- ---------- ---------- QUEST FOR VALUE - CLASS A Year ended 10/31/94............. $12.51 $ .09 $ .50 $ .59 $ (.04) $ (.47) -- $ (.51) ...10/31/93..................... 11.71 .05 1.34 1.39 (.05) (.54) -- (.59) ...10/31/92..................... 10.61 .04 1.77 1.81 (.07) (.64) -- (.71) ...10/31/91..................... 7.84 .09 2.84 2.93 (.16) -- -- (.16) ...10/31/90 (9)................. 9.85 .18 (1.38) (1.20) (.26) (.55) -- (.81) ...10/31/89 (9)................. 8.99 .24 1.09 1.33 (.10) (.37) -- (.47) ...10/31/88 (9)................. 7.94 .09 1.38 1.47 (.05) (.37) -- (.42) 5/1/87-10/31/87 (9,10).......... 9.44 .03 (1.14) (1.11) (.09) (.30) -- (.39) Year ended 4/30/87 (9).......... 9.47 .09 .81 .90 (.07) (.86) -- (.93) ...4/30/86 (9).................. 7.40 .06 2.33 2.39 (.09) (.23) -- (.32) ...4/30/85 (9).................. 7.69 .10 .99 1.09 (.11) (1.27) -- (1.38) ...4/30/84 (9).................. 8.90 .10 .48 .58 (.17) (1.62) -- (1.79) QUEST FOR VALUE - CLASS B Year ended 10/31/94............. 12.51 .02 .50 .52 (.03) (.47) -- (.50) 9/2/93(4) - 10/31/93............ 12.66(3) (.01) (.14) (.15) -- -- -- -- QUEST FOR VALUE - CLASS C Year ended 10/31/94............. 12.50 .01 .51 .52 (.03) (.47) -- (.50) 9/2/93(4) - 10/31/93............ 12.66(3) (.01) (.15) (.16) -- -- -- -- SMALL CAPITALIZATION - CLASS A Year ended 10/31/94............. $17.68 $ (.03) $ .01 $ (.02) -- $(1.33) -- $(1.33) ...10/31/93..................... 14.60 (.04) 4.26 4.22 -- (1.14) -- (1.14) ...10/31/92..................... 13.52 .00 1.50 1.50 -- (.42) -- (.42) ...10/31/91..................... 8.80 (.05) 4.85 4.80 (.08) -- -- (.08) ...10/31/90..................... 10.91 .07 (2.04) (1.97) (.08) (.06) -- (.14) ...1/1/89(7)-10/31/89........... 10.00(3) .08 .83 .91 -- -- -- -- SMALL CAPITALIZATION - CLASS B Year ended 10/31/94............. 17.66 (.11) .02 (.09) -- (1.33) -- (1.33) 9/2/93(4)-10/31/93.............. 17.19(3) (.02) .49 .47 -- -- -- -- SMALL CAPITALIZATION - CLASS C Year ended 10/31/94............. 17.67 (.13) .02 (.11) -- (1.33) -- (1.33) ...9/2/93(4) - 10/31/93......... 17.19(3) (.02) .50 .48 -- -- -- -- OPPORTUNITY - CLASS A Year ended 10/31/94............. $18.71 $ .18 $ 1.35 $ 1.53 $ (.33) $ (.22) -- $ (.55) ...10/31/93..................... 16.73 .35 2.02 2.37 (.07) (.32) -- (.39) ...10/31/92..................... 14.29 .09 2.93 3.02 (.03) (.55) -- (.58) ...10/31/91..................... 9.74 .03 4.78 4.81 (.23) (.03) -- (.26) ...10/31/90..................... 11.59 .25 (1.64) (1.39) (.22) (.24) -- (.46) 1/1/89(7)-10/31/89.............. 10.00(3) .17 1.42 1.59 -- -- -- -- OPPORTUNITY - CLASS B Year ended 10/31/94............. 18.70 .08 1.34 1.42 (.31) (.22) -- (.53) ...9/2/93(4)-10/31/93........... 18.73(3) .02 (.05) (.03) -- -- -- -- OPPORTUNITY - CLASS C Year ended 10/31/94............. 18.70 .08 1.33 1.41 (.31) (.22) -- (.53) ...9/2/93(4)-10/31/93........... 18.73(3) .02 (.05) (.03) -- -- -- -- U.S. GOVERNMENT INCOME - CLASS A Year ended 10/31/94............. $12.08 $ .59 $(1.08) $ (.49) $ (.59) $ (.21) -- $ (.80) ...10/31/93..................... 11.92 .65 .35 1.00 (.68) (.16) -- (.84) ...10/31/92..................... 11.80 .74 .18 .92 (.74) (.06) -- (.80) ...10/31/91..................... 11.35 .85 .61 1.46 (.86) (.15) -- (1.01) ...10/31/90..................... 11.50 .93 (.06) .87 (.93) (.09) -- (1.02) ...10/31/89..................... 11.50 .94 .08 1.02 (.93) (.09) -- (1.02) ...5/6/88(7)-10/31/88........... 11.46(3) .44 .10 .54 (.44) (.06) -- (.50) U.S. GOVERNMENT INCOME - CLASS B Year ended 10/31/94............. 12.08 .51 (1.08) (.57) (.51) (.21) -- (.72) 9/2/93(4)-10/31/93.............. 12.13(3) .08 (.04) .04 (.08) (.01) -- (.09) U.S. GOVERNMENT INCOME - CLASS C Year ended 10/31/94............. 12.08 .51 (1.08) (.57) (.51) (.21) -- (.72) ...9/2/93(4)-10/31/93........... 12.13(3) .08 (.04) .04 (.08) (.01) -- (.09)
NET ASSETS RATIO OF NET RATIO OF NET NAV: TOTAL AT END OPERATING INVESTMENT PORT- END RETURN OF EXPENSES TO INCOME (LOSS) FOLIO OF FOR PERIOD AVERAGE NET TO AVERAGE TURN- PERIOD PERIOD(1)* (000) ASSETS NET ASSETS OVER ------- -------- ------- ------------ ------------- ------- QUEST FOR VALUE - CLASS A Year ended 10/31/94............. $ 12.59 5.01% $238,085 1.71%(2) .72% 49% ...10/31/93..................... 12.51 12.27% 245,320 1.75% .40% 27% ...10/31/92..................... 11.71 18.45% 142,939 1.75% .53% 41% ...10/31/91..................... 10.61 37.94% 79,914 1.83% 1.06% 48% ...10/31/90 (9)................. 7.84 (13.43%) 49,740 1.82% 1.71% 51% ...10/31/89 (9)................. 9.85 15.68% 77,205 1.81% 2.31% 30% ...10/31/88 (9)................. 8.99 19.54% 83,228 2.21% .94% 15% 5/1/87-10/31/87 (9,10).......... 7.94 (12.19%) 91,255 2.24%(2) .76%(2) 21% Year ended 4/30/87 (9).......... 9.44 10.25% 104,538 2.17% 1.23% 34% ...4/30/86 (9).................. 9.47 33.66% 64,331 2.18% 1.18% 68% ...4/30/85 (9).................. 7.40 17.86% 28,055 2.34% 1.90% 42% ...4/30/84 (9).................. 7.69 7.45% 13,388 2.29% 1.68% 74% QUEST FOR VALUE - CLASS B Year ended 10/31/94............. 12.53 4.43% 14,373 2.24% .14% 49% 9/2/93(4) - 10/31/93............ 12.51 (1.19%) 2,015 2.27%(1) (1.19%)(1) 27% QUEST FOR VALUE - CLASS C Year ended 10/31/94............. 12.52 4.45% 3,581 2.28% .09% 49% 9/2/93(4) - 10/31/93............ 12.50 (1.26%) 221 2.27%(1) (.90%)(1) 27% SMALL CAPITALIZATION - CLASS A Year ended 10/31/94............. $ 16.33 .04% $120,102 1.88% (.14%) 67% ...10/31/93..................... 17.68 30.21% 104,898 1.89% (.36%) 74% ...10/31/92..................... 14.60 11.60% 39,693 2.11% (.04%) 95% ...10/31/91..................... 13.52 55.01% 20,686 2.25%(5) (.41%)(5) 103% ...10/31/90..................... 8.80 (18.33%) 1,880 2.00%(5) .71%(5) 18% ...1/1/89(7)-10/31/89........... 10.91 9.10% 2,085 1.74%(1,5) 1.34%(1,5) 32% SMALL CAPITALIZATION - CLASS B Year ended 10/31/94............. 16.24 (.39%) 16,144 2.48% (.70%) 67% 9/2/93(4)-10/31/93.............. 17.66 2.73% 1,754 2.57%(1) (1.15%)(1) 74% SMALL CAPITALIZATION - CLASS C Year ended 10/31/94............. 16.23 (.51%) 3,344 2.59% (.81%) 67% ...9/2/93(4) - 10/31/93......... 17.67 2.79% 235 2.57%(1) (1.20%)(1) 74% OPPORTUNITY - CLASS A Year ended 10/31/94............. $ 19.69 8.41% $163,340 1.78% .96% 42% ...10/31/93..................... 18.71 14.34% 127,225 1.83% 2.69% 24% ...10/31/92..................... 16.73 21.93% 40,563 2.27% .72% 32% ...10/31/91..................... 14.29 50.44% 8,446 2.35%(5) .30%(5) 88% ...10/31/90..................... 9.74 (12.62%) 4,570 2.00%(5) 2.30%(5) 206% 1/1/89(7)-10/31/89.............. 11.59 15.90% 3,868 1.84%(1,5) 3.75%(5) 103% OPPORTUNITY - CLASS B Year ended 10/31/94............. 19.59 7.84% 43,317 2.34% .43% 42% ...9/2/93(4)-10/31/93........... 18.70 (.16%) 2,115 2.52%(1) 1.32%(1) 24% OPPORTUNITY - CLASS C Year ended 10/31/94............. 19.58 7.78% 7,289 2.35% .43% 42% ...9/2/93(4)-10/31/93........... 18.70 (.16%) 313 2.52%(1) 1.13%(1) 24% U.S. GOVERNMENT INCOME - CLASS A Year ended 10/31/94............. $ 10.79 (4.15%) $123,257 1.20% 5.19%(6) 126% ...10/31/93..................... 12.08 8.55% 189,091 1.15%(6) 5.33%(6) 315% ...10/31/92..................... 11.92 7.98% 151,197 1.15%(6) 6.26%(6) 207% ...10/31/91..................... 11.80 13.40% 82,400 1.15%(6) 7.24%(6) 309% ...10/31/90..................... 11.35 7.98% 52,742 1.15%(6) 8.21%(6) 101% ...10/31/89..................... 11.50 9.42% 71,139 1.15%(6) 8.37%(6) 255% ...5/6/88(7)-10/31/88........... 11.50 4.78% 82,560 1.15%(6) 7.78%(1,6) 207% U.S. GOVERNMENT INCOME - CLASS B Year ended 10/31/94............. 10.79 (4.84%) 6,813 1.92%(6) 4.53%(6) 126% 9/2/93(4)-10/31/93.............. 12.08 .29% 1,286 1.85%(6) 3.07%(1,6) 315% U.S. GOVERNMENT INCOME - CLASS C Year ended 10/31/94............. 10.79 (4.84%) 1,224 1.94%(6) 4.57%(6) 126% ...9/2/93(4)-10/31/93........... 12.08 .34% 141 1.85%(1,6) 3.89%(1,6) 315%
4
NET REALIZED DISTRIBUTION NET AND DIVIDENDS FROM INVEST- UNREALIZED TOTAL FROM NET TOTAL NAV: MENT GAIN FROM NET REALIZED TAX DIVIDENDS START OF INCOME (LOSS) ON INVESTMENT INVESTMENT GAIN ON RETURN OF AND PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME INVESTMENTS CAPITAL DISTRIBUTIONS --------- ------- ---------- ------- ------- ------- ---------- ---------- INVESTMENT QUALITY INCOME - CLASS A Year ended 10/31/94............. $11.49 $ .68 $(1.75) $(1.07) $ (.68) $ (.07) -- $ (.75) ...10/31/93..................... 10.36 .68 1.19 1.87 (.68) (.06) -- (.74) ...10/31/92..................... 10.06 .80 .30 1.10 (.80) -- -- (.80) 12/18/90(7) - 10/31/91.......... 10.00(3) .71 .06 .77 (.71) -- -- (.71) INVESTMENT QUALITY INCOME - CLASS B Year ended 10/31/94............. 11.49 .61 (1.75) (1.14) (.61) (.07) -- (.68) 9/2/93(4)-10/31/93.............. 11.52(3) .08 (.03) .05 (.08) -- -- (.08) INVESTMENT QUALITY INCOME - CLASS C Year ended 10/31/94............. 11.49 .61 (1.75) (1.14) (.61) (.07) -- (.68) 9/2/93(4)-10/31/93.............. 11.52(3) .09 (.03) .06 (.09) -- -- (.09) GLOBAL EQUITY - CLASS A Year ended 11/30/94............. $13.54 $ .01 $ 1.10(8) $ 1.11 -- $ (.49) -- $ (.49) ...11/30/93..................... 12.30 -- 2.26(8) 2.26 (.12) (.90) -- (1.02) ...11/30/92..................... 11.25 .12 .93(8) 1.05 -- -- -- -- ...11/30/91..................... 10.57 (.04) .85(8) .81 (.05) (.08)(8) -- (.13) 7/2/90(7)-11/30/90.............. 12.05(3) .05 (1.53)(8) (1.48) -- -- -- -- GLOBAL EQUITY - CLASS B Year ended 11/30/94............. 13.52 (.06) 1.10(8) 1.04 -- (.49) -- $ (.49) 9/2/93(4)-11/30/93.............. 13.75(3) (.02) (.21)(8) (.23) -- -- -- -- GLOBAL EQUITY - CLASS C Year ended 11/30/94............. 13.52 (.08) 1.11(8) 1.03 -- (.49) -- $ (.49) 9/2/93(4)-11/30/93.............. 13.75(3) (.02) (.21)(8) (.23) -- -- -- -- GLOBAL INCOME - CLASS A Year ended 11/30/94............. $ 9.36 $ 57 $ (.87)(8) $ (.30) $ (.08) -- $ (.49) $ (.57) ...11/30/93..................... 9.14 .63 .27(8) .90 (.17) -- (.51) (.68) ...12/2/91(7) - 11/30/92 10.00(3) .77 (1.00)(8) (.23) (.63) -- -- (.63) GLOBAL INCOME - CLASS B Year ended 11/30/94............. 9.36 .50 (.87)(8) (.37) (.07) -- (.43) (.50) 9/2/92(4) - 11/30/93............ 9.42(3) .12 (.06)(8) .06 (.03) -- (.09) (.12) GLOBAL INCOME - CLASS C Year ended 11/30/94............. 9.36 .48 (.87)(8) (.39) (.07) -- (.41) (.48) 9/2/93(4) - 11/30/93............ 9.42(3) .13 (.06)(8) .07 (.03) -- (.10) (.13) GROWTH AND INCOME - CLASS A Year ended 10/31/94............. $11.24 $ .32 $ .55 $ .87 $ (.32) $(1.70) -- $(2.02) ...10/31/93..................... 10.80 .30 .73 1.03 (.26) (.33) -- (.59) 11/4/91(7) - 10/31/92........... 10.00(3) .28 .80 1.08 (.28) -- -- (.28) GROWTH AND INCOME - CLASS B Year ended 10/31/94............. 11.23 .25 .56 .81 (.27) (1.70) -- (1.97) 9/2/93(4) - 10/31/93............ 11.21(3) .04 .05 .09 (.07) -- -- (.07) GROWTH AND INCOME - CLASS C Year ended 10/31/94............. 11.23 .24 .56 .80 (.26) (1.70) -- (1.96) 9/2/93(4) - 10/31/93............ 11.21(3) .04 .05 .09 (.07) -- -- (.07)
NET ASSETS RATIO OF NET RATIO OF NET NAV: TOTAL AT END OPERATING INVESTMENT PORT- END RETURN OF EXPENSES TO INCOME (LOSS) FOLIO OF FOR PERIOD AVERAGE NET TO AVERAGE TURN- PERIOD PERIOD(1)* (000) ASSETS NET ASSETS OVER ------- -------- ------- ------------ ------------- ------- INVESTMENT QUALITY INCOME - CLASS A Year ended 10/31/94............. $ 9.67 (9.61%) $46,922 1.29%(5) 6.47%(5) 33% ...10/31/93..................... 11.49 18.64% 61,288 1.20%(5) 6.07%(5) 12% ...10/31/92..................... 10.36 11.21% 29,701 .95%(5) 7.62%(5) 18% 12/18/90(7) - 10/31/91.......... 10.06 8.11% 17,235 .82%(1,5) 8.25%(1,5) 19% INVESTMENT QUALITY INCOME - CLASS B Year ended 10/31/94............. 9.67 (10.22%) 6,605 1.92%(5) 5.85%(5) 33% 9/2/93(4)-10/31/93.............. 11.49 .45% 1,468 1.84%(1,5) 3.68%(1,5) 12% INVESTMENT QUALITY INCOME - CLASS C Year ended 10/31/94............. 9.67 (10.23%) 2,583 1.90%(5) 6.01%(5) 33% 9/2/93(4)-10/31/93.............. 11.49 .55% 101 1.84%(1,5) 4.83%(1,5) 12% GLOBAL EQUITY - CLASS A Year ended 11/30/94............. $ 14.16 8.37% $148,044 1.92%(6) .05%(6) 70% ...11/30/93..................... 13.54 19.72% 135,616 1.76%(6) .04%(6) 46% ...11/30/92..................... 12.30 9.33% 111,207 1.76%(6) .72%(6) 62% ...11/30/91..................... 11.25 7.72% 46,937 2.09% (.27%) 41% 7/2/90(7)-11/30/90.............. 10.57 (12.28%) 58,087 2.11% .92% 2% GLOBAL EQUITY - CLASS B Year ended 11/30/94............. 14.07 7.84% 10,268 2.50%(6) (.44%)(6) 70% 9/2/93(4)-11/30/93.............. 13.52 (1.67%) 1,676 2.26%(1,6) (.76%)(1,6) 46% GLOBAL EQUITY - CLASS C Year ended 11/30/94............. 14.06 7.77% 2,415 2.66%(6) (.59%)(6) 70% 9/2/93(4)-11/30/93.............. 13.52 (1.67%) 244 2.26%(1,6) (.69%)(1,6) 46% GLOBAL INCOME - CLASS A Year ended 11/30/94............. $ 8.49 (3.24%) $16,781 1.65% 6.45% 144% ...11/30/93..................... 9.36 10.20% 22,465 1.70%(6) 6.73%(6) 114% ...12/2/91(7) - 11/30/92 9.14 (2.60%) 19,469 1.84%(2,6) 7.93%(1,6) 360% GLOBAL INCOME - CLASS B Year ended 11/30/94............. 8.49 (3.99%) 1,176 2.41% 5.71% 144% 9/2/92(4) - 11/30/93............ 9.36 .65% 699 2.45%(1,6) 4.38%(1,6) 114% GLOBAL INCOME - CLASS C Year ended 11/30/94............. 8.49 (4.20%) 220 2.70% 5.48% 144% 9/2/93(4) - 11/30/93............ 9.36 .71% 151 2.45%(1,6) 5.16%(1,6) 114% GROWTH AND INCOME - CLASS A Year ended 10/31/94............. $ 10.09 8.64% $30,576 1.86%(6) 3.16%(6) 113% ...10/31/93..................... 11.24 9.93% 28,466 1.90%(6) 2.66%(6) 192% 11/4/91(7) - 10/31/92........... 10.80 10.84% 8,057 2.23%(1,6) 2.73%(1,6) 77% GROWTH AND INCOME - CLASS B Year ended 10/31/94............. 10.07 7.96% 2,928 2.47(6) 2.53%(6) 113% 9/2/93(4) - 10/31/93............ 11.23 .81% 319 2.49%(1,6) 1.83%(1,6) 192% GROWTH AND INCOME - CLASS C Year ended 10/31/94............. 10.07 7.91% 455 2.62%(6) 2.39%(6) 113% 9/2/93(4) - 10/31/93............ 11.23 .81% 102 2.49%(1,6) 2.18%(1,6) 192%
- ---------------------------------------- (1)Total return shown assumes reinvestment of all dividends and distributions but does not reflect deductions for sales charges. Aggregate (not annualized) total return is shown for any period shorter than one year. (2)Annualized (3)Offering Price (4)Initial offering of Class B and C shares (5)During the periods the Advisor voluntarily waived all or a portion of its fees and assumed some operating expenses of the Funds. Without such waivers and assumptions, the ratios of net operating expenses to average net assets and the ratios of net investment income to average net assets would have been, respectively: Investment Quality Income Fund: Class A shares - 1.59% and 6.17% for the year ended October 31, 1994, 1.50% and 5.77% for the year ended 10/31/93, 1.72% and 6.85% for the year ended 10/31/92, and 2.11% and 6.96% (annualized) for the period 12/18/90 (commencement of operations) to 10/31/91; Class B shares - 2.23% and 5.54% for the year ended October 31, 1994. 2.07% and 3.45% (annualized) for the period 9/2/93 (initial offering) to October 31, 1993; and Class C shares - 2.21% and 5.70% for the year ended October 31, 1994 and 2.06% and 4.61% (annualized) for the period 9/2/93 (initial offering) to 10/31/93; Small Capitalization Fund: Class A shares - 3.27% and (1.43%) for the year ended 10/31/91, 5.82% and (3.11%) for the year ended 10/31/90, and 6.27% and (3.19%) (annualized) for the period 1/1/89 (commencement of operations) to 10/31/89; Opportunity Fund: Class A shares - 3.33% and (.68%) for the year ended 10/31/91, 3.69% and .61% for the year ended 10/31/90, and 5.32% and .27% (annualized) for the period 1/1/89 (commencement of operations) to 10/31/89. (6)During the periods the Advisor voluntarily waived a portion of its fees. Without such waiver, the ratios of operating expenses to average net assets and the ratios of net investment income to average net assets would have been, respectively: U.S. Government Income Fund: Class A shares - 1.23% and 5.16% for the year ended October 31, 1994, 1.20% and 5.28% for the year ended 10/31/93, 1.17% and 6.24% for the year ended 10/31/92, 1.46% and 6.93% for the year ended 10/31/91, 1.44% and 7.92% for the year ended 10/31/90, 1.37% and 8.15% for the year ended 10/31/89, and 1.42% and 7.51% (annualized) for the period from 5/6/88 (commencement of operations) to 10/31/88; Class B shares - 1.93% and 4.52% for the year ended October 31, 1994 and 1.96% and 2.96% (annualized) for the period September 2, 1993 (initial offering) to October 31, 1993 and Class C shares - 1.95% and 4.56% for the year ended October 31, 1994 and 1.96% and 3.78% (annualized) for the period September 2, 1993 (initial offering) to October 31, 1993 ; Growth and Income Fund: Class A shares - 2.32% and 2.70% for the year ended October 31, 1994, 2.18% and 2.38% for the year ended 10/31/93, and 2.98% and 1.98% (annualized) for the period 11/4/91 (commencement of operations) to 10/31/92, Class B shares - 2.93% and 2.07% for the year ended October 31, 1994 and 2.88% and 1.44% (annualized) for the period September 2, 1993 (initial offering) to October 31, 1993 and Class C shares 3.10% and 1.91% for the year ended October 31, 1994 and 2.87% and 1.80% (annualized) for the period 9/2/93 (initial offering) to 10/31/93; Global Equity Fund: Class A shares - 1.93% and .04% for the year ended 11/30/94, 1.91% and (.11%) for the year ended 11/30/93 and 1.84% and .64% for the year ended 11/30/92, Class B shares - 2.51% and (.45%) for the year ended 11/30/94 and 2.32% and (.82%) (annualized) for the period 9/2/93 (initial offering) to 11/30/93 and Class C shares - 2.66% and (.59%) for the year ended 11/30/94 and 2.35% and (.78%) (annualized) for the period 9/2/93 (initial offering) to 11/30/93; Global Income Fund - Class A shares -2.35% and 5.75% for the year ended 11/30/94, 2.09% and 6.34% for the year ended 11/30/93 and 1.88% and 7.89% (annualized) for the period 12/2/91 (commencement of operations) to 11/30/92, Class B shares - 3.12% and 5.00% for the year ended 11/30/94 and 2.88% and 3.95% (annualized) for the period 9/2/93 (initial offering) to 11/30/93 and Class C shares - 3.39% and 4.79% for the year ended 11/30/94 and 2.84% and 4.77% (annualized) for the period 9/2/93 (initial offering) to 11/30/93. (7)Commencement of Operations (8)Includes net gains (losses) on foreign currency transactions (9)Per share data has been retroactively restated to reflect a 200% stock dividend as of July 1, 1991. (10)Quest for Value Fund, Inc. changed its fiscal year end to October 31 in 1987. 5 - ---------------------------------------------------------------------------- INTRODUCTION The Quest for Value Funds are a family of open-end mutual funds offering many different investment objectives to select from ranging from funds that invest primarily in bonds or other fixed income securities to funds that invest in common stocks of large or small companies. You can select from all of these funds in order to meet your long term investment objectives. This introduction is designed to provide an overview of the funds. More information and greater detail is provided in the remainder of this Prospectus. WHAT ARE THE BENEFITS OF INVESTING IN QUEST FOR VALUE FUNDS? Quest for Value Funds offer the individual investor or qualified retirement plans access to professional money managers that are normally available only to investors with several millions to invest. The Quest for Value Funds are managed by Quest for Value Advisors ("Quest Advisors"), a subsidiary of Oppenheimer Capital, one of the nation's largest institutional money managers, which has been in business since 1968. In addition to professional money management, the Funds offer the benefit of diversification. Your investment is spread over many different securities in many different industries. Diversification is so important in reducing risk that the law requires all qualified retirement plans to diversify their investments. Professional management and diversification offers you the opportunity to improve your returns and reduce the risk that you would incur if you concentrated your investments in just a limited number of securities. WHAT FUNDS CAN I INVEST IN? There are many Quest for Value Funds that you can choose from to meet your investment objectives. We have funds that invest in stocks, bonds or a combination of stocks and bonds, as well as funds that invest in foreign securities. See "Investment Objectives of the Funds," following this Introduction, for a description of the specific investment objectives of each of the Funds: FUNDS INVESTING IN COMMON STOCKS Quest for Value Fund Small Capitalization Fund FUNDS INVESTING IN STOCKS AND BONDS Opportunity Fund Growth and Income Fund FUNDS INVESTING IN BONDS U.S. Government Income Fund Investment Quality Income Fund FUNDS INVESTING IN FOREIGN SECURITIES Global Equity Fund Global Income Fund In addition, Quest for Value manages and distributes money market funds and tax-exempt funds. Ask your broker or dealer for a prospectus. HOW CAN I PURCHASE SHARES? You can purchase shares through your broker or dealer who has a sales agreement with Quest for Value Distributors ("Quest Distributors"). The Funds offer Class A, B and C shares. Class A shares have an initial sales charge that declines for larger orders. Purchases of $1 million or more of Class A shares of the U.S. Government Income Fund and the Investment Quality Income Fund have no initial sales charge but are subject to a contingent deferred sales charge ("CDSC") if held for less than two years. Purchases of $1 million or more of Class A shares of the Quest for Value Fund, Inc., the Small Capitalization Fund, the Growth and Income Fund, the Opportunity Fund and the Global Equity Fund made on or after July 1, 1994 have no initial sales charge but are subject to a CDSC if held for less than one year; if such purchases were made before July 1, 1994 they are subject to a CDSC if held for less than two years. Class A shares are also subject to an ongoing distribution fee pursuant to the 6 Distribution Plan and Agreement for Class A shares ("Plan") at the following annual rates of each Fund's average daily net assets: U.S. Government Income Fund--.05%, Investment Quality Income and Growth and Income Fund--.15%, all other Funds except Global Income Fund--.25%. Each Fund's Class A Shares also pay a service fee at the annual rate of .25% of average daily net assets. Although the Global Income Fund is authorized to pay a distribution fee of .05% and a service fee of .25% under its Plan, the Board of Directors of that Fund has set a maximum fee under the Plan of .25%. Class B shares incur no initial sales charge but are subject to a CDSC that declines over time for shares held less than six years; Class B shares are only available to investors purchasing less than $250,000. Class B shares are also subject to an ongoing distribution fee pursuant to the Distribution Plan and Agreement for Class B shares at the annual rate of .75% of each Fund's average daily net assets and a service fee at the annual rate of .25% of average daily net assets. Class B shares will automatically convert to Class A shares of the same Fund eight years after the end of the calendar month in which the purchase order for such Class B shares was accepted, on the basis of the relative net asset values of the two classes, subject to the terms described under "Conversion of Class B Shares," p. 20. Class C shares incur no initial sales charge but are subject to a CDSC for shares held less than one year. Class C shares of each Fund are subject to an ongoing distribution fee pursuant to the Distribution Plan and Agreement for Class C shares at the annual rate of .75% of each Fund's average daily net assets and a service fee at the annual rate of .25% of average daily net assets. In determining which class of shares to purchase, investors should consider whether during the anticipated life of their investment in a Fund the accumulated distribution fees and deferred sales charges on Class B or C shares would be more or less than the amount of the initial sales charges and distribution fees paid on Class A shares held for the same amount of time. Investors who qualify for significantly reduced sales charges for Class A shares or who expect to hold their investment for an extended period of time might find the initial sales charge alternative preferable. However, because the initial sales charge is deducted at the time of purchase, investors should consider the extent to which any return might otherwise be realized on the additional funds invested under the deferred sales charge alternative and weigh such consideration against the higher per share return of Class A shares afforded by the lower distribution fees of such shares. Other investors might determine it more advantageous to have all their funds invested initially, although they would be subject to higher ongoing distribution fees and, possibly, a CDSC. ARE THERE SPECIAL SALES CHARGES FOR QUALIFIED RETIREMENT PLANS? The Funds offer qualified retirement plans several different ways of buying shares at reduced sales charges. Class A shares offer a special lower sales charge structure based on the number of eligible employees in the plan, and do not have a sales charge for sales over $1,000,000 or for retirement plans covering at least 50 employees. Class B shares currently are not being offered to non-qualified retirement plans and qualified retirement plans under Internal Revenue Code Sections 401(a), 401(k), 403(b) and 457 but are being offered to qualified retirement plans under Internal Revenue Code Section 408(a). The CDSC is waived for certain benefit payments from these plans. See "Exemptions from Class A, B and C CDSC" p. 21. Your broker or dealer can help you establish an IRA, 401(k), 403(b) or pension and profit sharing plan using the Quest for Value Funds. 7 HOW DO I GET MONEY OUT OF A FUND? You can receive periodic income dividends. Some of our Funds distribute income monthly, some quarterly and some for which income is not a primary goal, annually. You can establish a withdrawal plan that will send you a set amount or percentage of your account on a regular basis. You can redeem shares through your broker or dealer or through Quest Distributors directly. Some of the Funds offer the ability to redeem shares by writing a check on the shares in your account. For convenience, you can also redeem shares by telephone. When you redeem shares you will receive the value of the shares that are redeemed (less any applicable CDSC). This value can be more or less than your purchase price depending on the results of the investments that the fund holds. A check will be mailed to you for your redemption (or the proceeds wired to your bank) on the day after a redemption request is received. WHERE CAN I GET INFORMATION ABOUT MY INVESTMENT? The Funds send all shareholders an annual and semi-annual report. The annual report contains information about the Funds' investment management strategies and performance; you can receive a copy of this report from your broker or dealer or from the Fund free of charge. You will receive a confirmation from the Funds' transfer agent, State Street Bank and Trust Company, after every transaction (purchase, redemption, exchange or distribution). The confirmation will show you the number of shares that you own. You can determine the value of your shares by looking up the price in the mutual fund pages of most daily newspapers. You can also get current information from your broker or dealer or by calling the Fund at 800-232-FUND (800-232-3863). WHAT ARE THE RISKS OF INVESTING IN MUTUAL FUNDS? The Funds are not fixed investments and their net asset values will fluctuate because the values of the securities that they own will fluctuate. On redemption the value of your shares may be more or less than your investment. See "Risk Factors." - --------------------------------------------- INVESTMENT OBJECTIVES OF THE FUNDS Quest Advisors manages the Funds in accordance with their investment objectives described below. Quest Advisors' equity investment policy is overseen by George Long, Managing Director and Chief Investment Officer for Oppenheimer Capital, the parent of Quest Advisors. Mr. Long has been with Oppenheimer Capital since 1982. Fixed income investment policy is overseen by Robert J. Bluestone, Managing Director and Director of Fixed Income Management for Oppenheimer Capital. Mr. Bluestone has been with the firm since 1986. QUEST FOR VALUE FUND seeks capital appreciation through investment in securities (primarily equity securities) of companies believed by Quest Advisors to be undervalued in the marketplace in relation to factors such as the companies' assets, earnings, growth potential and cash flows. For the purposes of this Prospectus the term equity securities is defined as common stocks and preferred stocks; bonds, debentures and notes convertible into common stocks; and depository receipts for such securities. Investments of the Quest for Value Fund are managed by Eileen Rominger, Managing Director of Oppenheimer Capital. She has been portfolio manager and Vice President of this Fund since 1989. Ms. Rominger has been an analyst and portfolio manager at Oppenheimer Capital since 1981. SMALL CAPITALIZATION FUND seeks capital appreciation through investments in a diversified portfolio which under normal conditions will have at least 65% of its assets invested in equity securities of companies with market capitalizations under $1 8 billion. The Fund's investment approach will attempt to identify securities of companies whose prices are favorable in relation to their book values and/or sales and securities of companies which have limited operating leverage (relatively stable business with below average sensitivity to changes in the general economy) and/or limited financial leverage (a ratio of debt to assets, or cost of debt service to income, which is meaningfully below those of their competitors). The Small Capitalization Fund is managed by Jenny Beth Jones, Senior Vice President of Oppenheimer Capital, and Louis Goldstein, Vice President of Oppenheimer Capital . Ms. Jones has been portfolio manager and Vice President of this Fund since 1990. Previously Ms. Jones was a portfolio manager and analyst with Mutual of America. Mr. Goldstein has been portfolio manager of the Fund since January 3, 1995. He has been a security analyst with Oppenheimer Capital since 1991. From 1988 to 1991 he was a security analyst with David J. Greene & Co. U.S. GOVERNMENT INCOME FUND seeks to provide shareholders with a high level of current income together with protection of capital by investing exclusively in debt obligations, including mortgage-backed securities, issued or guaranteed by the United States government, its agencies or instrumentalities ("U.S. government securities"), and in related futures, options and repurchase agreements. The Fund will attempt to enhance its income and reduce the impact of changing interest rates on the value of its shares by engaging in options and financial futures transactions. Such transactions will tend to limit opportunities for appreciation during periods of declining interest rates. The average maturity of the Fund's investments will vary based on market conditions. It is estimated that the average dollar weighted maturity of the Fund will be between five and ten years. The U.S. Government Income Fund is managed by Vikki Hanges, Vice President of Oppenheimer Capital. Ms. Hanges has been portfolio manager and Vice President of this Fund since 1993. Ms. Hanges assisted with the management of Quest Cash Reserves, Inc., a money market fund with five portfolios managed by Quest Advisors, from 1987 through 1992. Ms. Hanges has been on the fixed income trading desk at Oppenheimer Capital since 1982. Howard Potter, President and Chief Executive of New Castle Advisers, Inc., advises the Fund on investment strategies for options and financial futures. From 1986-1991 he was a Vice President in the Fixed Income Department at Oppenheimer & Co., Inc. ("Opco") and while Opco acted as subadvisor to this Fund from 1988 to 1991, Mr. Potter was responsible for advising this Fund regarding options and financial futures. INVESTMENT QUALITY INCOME FUND seeks to provide shareholders with as high a level of current income as is consistent with conservation of principal through a portfolio consisting primarily of fixed income obligations. Under normal conditions, at least 80% of the Fund's assets will be invested in corporate bonds, U.S. government securities and/or mortgage backed debt securities rated A or better by Moody's Investor Services Inc. (Moody's) or Standard & Poors Corporation ("S&P"), or, if unrated, considered to be of comparable quality by Quest Advisors. The Fund may invest up to 20% of its assets in the lowest category of investment-grade corporate bonds, those which are rated Baa3 by Moody's or BBB - by S&P or, if unrated, considered to be of comparable quality by Quest Advisors. The term bonds includes debentures but does not include bills, commercial paper or notes. The average maturity of the Fund's investments will vary based on market conditions. It is anticipated, however, that the average dollar weighted maturity of the Fund will be greater than 20 years. The Investment Quality Income Fund is managed by George H. Tilghman, Jr., Vice President of Oppenheimer Capital. Mr. Tilghman has been responsible for the management of this fund's portfolio since its inception. He was named Vice President of the 9 Fund in 1993. He was previously a fixed income portfolio manager in International Investment Management at Brown Brothers Harriman & Co. OPPORTUNITY FUND seeks growth of capital over time through investments in a diversified portfolio of common stocks, bonds and cash equivalents, the proportions of which will vary based upon management's assessment of the relative values of each investment under prevailing market conditions. The Fund's portfolio will normally be invested primarily in common stocks and securities convertible into common stock. During periods when common stocks appear to be overvalued and when value differentials are such that fixed-income obligations appear to present meaningful capital growth opportunities relative to common stocks or pending investment in securities with capital growth opportunities, up to 50% or more of the Fund's assets may be invested in bonds and other fixed-income obligations. This may include cash equivalents which do not generate capital appreciation. The bonds in which the Fund invests will be limited to U.S. government obligations, mortgage-backed securities, investment-grade corporate debt obligations and unrated obligations, including those of foreign issuers, which management believes to be of comparable quality. The investments of the Opportunity Fund are managed by Richard J. Glasebrook II, Managing Director of Oppenheimer Capital. Mr. Glasebrook has been portfolio manager and Vice President of this Fund since 1991. Previously, he was a Partner with Delafield Asset Management where he served as a portfolio manager and analyst. GROWTH AND INCOME FUND seeks to achieve a combination of growth of capital and investment income with growth of capital as the primary objective, by investing in securities that are believed by Quest Advisors to be undervalued in the marketplace and to offer the possibility of increased value. The Fund invests in marketable securities traded on national securities exchanges and in the over-the-counter market. Ordinarily, the Fund invests its assets in common stocks (with emphasis on dividend paying stocks), preferred stocks, securities convertible into common stock, and debt securities. The Fund may invest in lower-quality, high-yielding convertible debt securities and other debt securities and currently intends to limit its investments in these securities to up to 25% of its assets. See "Risk Factors." By focusing its purchases of equity securities on those issued by mature companies which it believes to be under-valued, the Fund seeks to achieve both its objectives of obtaining capital appreciation as well as income from dividends. The Fund's purchases of convertible securities similarly affords it the potential of capital growth through the conversion option and greater investment income prior to conversion. The Fund's purchases of debt securities furthers the objective of investment income and offers potential for capital appreciation in an economic environment of declining interest rates or as a result of improved issuer credit quality. It is anticipated that the Fund, as a result of its investment approach, will be less volatile than the market in general. The Growth and Income Fund is managed by Colin Glinsman, Vice President of Oppenheimer Capital. Mr. Glinsman has been portfolio manager and Vice President of this Fund since 1992. Since 1991, Mr. Glinsman has assisted with the management of the Quest for Value Dual Purpose Fund, Inc., a closed-end mutual fund managed by Quest Advisors, and has been a securities analyst with Oppenheimer Capital since 1989. He was previously an investment banker with Prudential Securities and Morgan Grenfell, and qualified as a certified public accountant while with Coopers & Lybrand. GLOBAL EQUITY FUND seeks long-term capital appreciation through pursuit of a global investment strategy primarily involving equity securities. The Fund may invest anywhere in the world with no requirement that any specific percentage of its assets be committed to any given country. Under 10 normal circumstances, at least 65% of the Fund's total assets will be invested in equity securities in at least three different countries, one of which may be the United States. Opportunities for capital appreciation may also be presented by debt securities. The Fund may invest up to 35% of its total assets in debt obligations with remaining maturities of one year or more of U.S. or foreign corporate, governmental or bank issuers. It is the present intention of the Fund, although not a fundamental policy, not to invest more than 5% of its total assets in debt securities rated below investment-grade. Domestic investments of this Fund are managed by Richard J. Glasebrook II, Managing Director of Oppenheimer Capital. Mr. Glasebrook has been portfolio manager and Vice President and of this Fund since 1991. Effective January 1, 1994, the Fund's investments in foreign securities are managed by Pierre Daviron, President and Chief Investment Officer of Oppenheimer Capital International, a division of Oppenheimer Capital created in 1993. Mr. Daviron was named portfolio manager and Vice President of this Fund in 1993. Previously, he was Chairman and Chief Executive Officer at Indosuez Gartmore Asset Management, a division of Banque Indosuez, Paris, France. Prior thereto he was a Managing Director in Mergers and Acquisitions at J.P. Morgan. GLOBAL INCOME FUND seeks investment income as its primary objective, with capital appreciation as a secondary objective through a non-diversified portfolio. The Fund invests primarily in investment-grade debt securities of foreign and domestic corporations and foreign governments, or their agencies and instrumentalities, and in U.S. government securities. Generally, the debt securities in which the Global Income Fund will invest will be those believed by Quest Advisors to offer potential for capital appreciation in addition to investment income, because of such factors as anticipated changes in the comparative level of interest rates in different countries or anticipated improvements in the issuer's credit rating. Under normal circumstances the Fund will invest at least 65% of its total assets in the securities of issuers located in not less than three different countries, one of which may be the United States. The Fund may also invest in preferred stocks, securities convertible into common stock and short-term money market instruments. Investments in preferred stocks and securities convertible into common stock will be limited to 10% of the total assets of the Fund at the time of purchase. The Fund may invest in lower-quality high-yielding debt securities (also known as "junk bonds") of foreign issuers which may be located in countries with "emerging markets" (as defined under "Emerging Market Countries," below). The Fund's current intention is to limit its investment in these securities to up to 35% of its net assets. See "Risk Factors" and "Investment Restrictions and Techniques." The Fund also may engage in certain transactions in options and futures. See "Risk Factors" and "Investment Restrictions and Techniques." The Fund's limitations respecting options and futures transactions, preferred stock, convertible securities, lower-rated debt secu- rities and foreign currency are non-fundamental policies and can be changed without a vote of shareholders. It is anticipated that the average dollar weighted maturity of the Fund will be between 5 and 10 years. The Global Income Fund is managed by Richard A. Gluck, Vice President of Oppenheimer Capital. Mr. Gluck was named portfolio manager and Vice President of this Fund in 1993. He was previously a global fixed income portfolio manager with Dean Witter InterCapital and Clemente Capital. --------------------- To provide liquidity for the purchase of new instruments and to effect redemptions of shares, the Funds typically invest a part of their assets in various types of U.S. government securities and 11 high quality, short-term debt securities with remaining maturities of one year or less such as government obligations, certificates of deposit, bankers' acceptances, commercial paper, short-term corporate securities and repurchase agreements ("money market instruments"). For temporary defensive purposes, the Funds may invest up to 100% of their assets in such securities and, in the case of the Growth and Income Fund, preferred stock. At any time that a Fund for temporary defensive purposes invests in such securities, to the extent of such investments, it is not pursuing its investment objectives. In the case of the Global Equity Fund and Global Income Fund, such money market instruments may be issued by entities organized in the U.S. or any foreign country, denominated in dollars or in the currency of any foreign country. In the future, each of the Quest for Value, U.S. Government Income, Growth and Income, Global Equity and Global Income Funds may endeavor to achieve its respective investment objective by investing its assets in a no-load diversified open-end management investment company which has the same portfolio manager and substantially the same investment objective as that Fund. This possible investment has been approved by shareholder vote. Shareholders will receive prior notice with respect to the commencement of any such investment. Except as indicated, the investment objectives and policies described above are fundamental and may not be changed without a vote of the shareholders. - --------------------------------------------- RISK FACTORS The value of the Funds' shares will fluctuate and on redemption the value of your shares may be more or less than your investment. There are two types of risk generally associated with owning equity securities: market risk and financial risk. Market risk is the risk associated with the movement of the stock market in general. Financial risk is associated with the financial condition and profitability of the underlying company. Smaller capitalization companies may experience higher growth rates and higher failure rates than do larger capitalization companies. The trading volume of securities of smaller capitalization companies is normally less than that of larger capitalization companies and, therefore, may disproportionately affect their market price, tending to make them rise more in response to buying demand and fall more in response to selling pressure than is the case with larger capitalization companies. There are two types of risk associated with owning debt securities: interest rate risk and credit risk. Interest rate risk relates to fluctuations in market value arising from changes in interest rates. If interest rates rise, the value of debt securities will normally decline and if interest rates fall, the value of debt securities will normally increase. All debt securities, including U.S. government securities, which are generally considered to be the most creditworthy of all debt obligations, are subject to interest rate risk. Securities with longer maturities generally will have a more pronounced reaction to interest rate changes than shorter term securities. Credit risk relates to the ability of the issuer to make periodic interest payments and ultimately repay principal at maturity. Bonds rated Baa3 by Moody's or BBB- by S&P, which the Quest for Value, Small Capitalization, Investment Quality Income, Opportunity, Growth and Income, Global Equity and Global Income Funds may acquire, are described by those rating agencies as having speculative elements. If a debt security is rated below investment grade by one rating agency and as investment grade by a different rating agency, Quest Advisors will make a determination as to the debt security's investment grade quality. It is the present intention of the Quest for Value, Small 12 Capitalization and Global Equity Funds to invest no more than 5% of their respective assets in bonds rated below Baa3 by Moody's or BBB- by S&P (commonly known as "high yield" or "junk bonds"). In the event that any of those Funds intends in the future to invest more than 5% of its assets in such bonds, appropriate disclosures will be made to existing and prospective shareholders. The Growth and Income Fund may invest up to 25% of the value of net assets in convertible debt and other debt securities rated not lower than Caa by Moody's or CCC by S&P, Fitch Investors Service, Inc. ("Fitch") or Duff & Phelps, Inc. ("Duff") or, if unrated, deemed to be of comparable quality by Quest Advisors. The Global Income Fund may invest up to 35% of its net assets in lower-quality high-yielding debt securities of government and corporate issuers including securities of issuers located in emerging market countries. Such securities may be rated Ca or C by Moody's or CI or D by S&P, or if unrated, deemed to be of comparable quality in the opinion of Quest Advisors. As used in this Prospectus, an "emerging market country" is any country considered to be an emerging market country by the World Bank at the time of the Fund's investment. Such securities may be subject to higher risks and greater market fluctuations than are lower-yielding higher-rated securities. Securities rated Ba by Moody's are judged to have speculative elements; their future cannot be considered as well assured and often the protection of interest and principal payments may be very moderate. Securities rated BB by S&P, Fitch or Duff are regarded as having predominantly speculative characteristics and, while such obligations have less near-term vulnerability to default than other speculative grade debt, they face major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payment. Securities rated Caa by Moody's or CCC by S&P, Fitch and Duff are considered to have predominantly speculative characteristics with respect to capacity to pay interest and repay principal and to be of poor standing. Securities rated Ca by Moody's are speculative to a high degree; such issues are often in default or have other marked shortcomings. A security rated C by Moody's has extremely poor prospects of ever attaining any real investment standing. Securities rated CI by S&P are income bonds on which no interest is being paid, and securities rated D by S&P are in payment default. Debt obligations of issuers outside the United States and its territories are rated on substantially the same basis as domestic corporate and municipal issues. The ratings measure the creditworthiness of the issuer but do not take into account potential actions by the government controlling the currency of denomination which might have a negative effect on exchange rates. The Growth and Income and Global Income Funds do not intend to hold such lower-rated securities unless the opportunities for capital appreciation and income, combined, remain attractive. See the Appendix in the SAI for a more complete general description of Moody's, S&P, Fitch and Duff ratings. The ratings of Moody's, S&P, Fitch and Duff represent their opinions as to the quality of the obligations which they undertake to rate. It should be emphasized, however, that ratings are relative and subjective and although ratings may be useful in evaluating the safety of interest and principal payments, they do not evaluate the market risk of these securities. Therefore, although these ratings may be an initial criterion for selection of such investments, Quest Advisors also will evaluate these securities and the ability of the issuers of such securities to pay interest and principal. The Growth and Income and Global Income Funds' ability to achieve their investment objectives may be more dependent on Quest Advisors' credit analysis than might be the case for a fund that invested in higher rated securities. Once the rating of a security has been changed, the Growth and Income and 13 Global Income Funds will consider all circumstances deemed relevant in determining whether to continue to hold the security. The market price and yield of securities rated Ba or lower by Moody's and BB or lower by S&P, Fitch or Duff are more volatile than those of higher rated securities. Factors adversely affecting the market price and yield of these securities will adversely affect the Growth and Income or Global Income Fund's net asset value. In addition, the retail secondary market for these securities may be less liquid than that of higher rated securities; adverse market conditions could make it difficult at times for the Growth and Income and Global Income Funds to sell certain securities. The market values of certain lower rated debt securities tend to reflect individual corporate developments to a greater extent than do higher rated securities, which react primarily to fluctuations in the general level of interest rates, and tend to be more sensitive to economic conditions than higher rated securities. Companies that issue such securities are often highly leveraged and may not have available to them more traditional methods of financing. Consequently, the risk associated with acquiring the securities of such issuers is greater than with higher rated securities. The Funds are not obliged to dispose of securities due to changes by the rating agencies. Although there is no minimum rating for the investments of the Quest for Value, Small Capitalization, Global Equity, or Growth and Income Funds, the Funds do not intend to invest in bonds which are in default. The Global Income Fund may invest in bonds which are in default, which could result in increased costs associated with the sale or recovery of such bonds. To the extent the Funds invest in mortgage-backed securities, they will be subject to prepayment risks. Prepayments of mortgage principal reduce the stream of future payments and generate cash which must be reinvested. Prepayments tend to increase following declines in interest rates, resulting in reinvestment in a lower interest rate environment. The ability of the Investment Quality Income Fund to generate income is limited by its policy to invest at least 80% of its assets in investment-grade securities. The Global Income Fund is non-diversified as that term is defined in the Investment Company Act of 1940 but intends to continue to qualify as a "regulated investment company" for Federal income tax purposes. This means generally that more than 5% of such Fund's total assets may be invested in any one issuer, but only if at the close of each fiscal quarter the aggregate amount of such holdings does not exceed 50% of the value of its total assets and no more than 25% of the value of its total assets is invested in the securities of a single issuer. As a non-diversified investment company, the Global Income Fund may present greater risks than diversified companies because the Fund can invest in a smaller number of issuers. The nature and degree of market and financial risk affecting an investment in each of the Opportunity Fund and Growth and Income Fund will depend on the relative amounts of the Fund's assets committed to equity, longer-term debt or money market securities at any particular time. Higher portfolio turnover can be expected to result in a higher incidence of short-term capital gains upon which taxes will be payable and will also result in correspondingly higher transaction costs. Certain of the Funds may have turnover rates of up to 250%. ADDITIONAL RISKS OF FOREIGN SECURITIES: All Funds (except the U.S. Government Income Fund) may purchase foreign securities that are listed on a domestic or foreign securities exchange, traded in domestic or foreign over-the counter markets or represented by American Depository Receipts. There is no limit to the amount of such foreign securities the Funds may acquire. It will be the general practice of the Global Equity Fund to invest 14 in foreign equity securities and the general practice of the Global Income Fund to invest in foreign debt securities. Certain factors and risks are presented by investment in foreign securities which are in addition to the usual risks inherent in domestic securities. Foreign companies are not necessarily subject to uniform accounting, auditing and financial reporting standards or other regulatory requirements comparable to those applicable to U.S. companies. Thus, there may be less available information concerning non-U.S. issuers of securities held by a Fund than is available concerning U.S. companies. In addition, with respect to some foreign countries, there is the possibility of nationalization, expropriation or confiscatory taxation; income earned in the foreign nation being subject to taxation, including withholding taxes on interest and dividends (see "Tax Status"), or other taxes imposed with respect to investments in the foreign nation; limitations on the removal of securities, property or other assets of a fund; difficulties in pursuing legal remedies and obtaining judgments in foreign courts, or political or social instability or diplomatic developments which could affect U.S. investments in those countries. For a description of the risks of possible losses through holding of securities in foreign custodian banks and depositories, see "Risk Factors and Special Considerations" in the SAI. Securities of many non-U.S. companies may be less liquid and their prices more volatile than securities of comparable U.S. companies. Non-U.S. stock exchanges and brokers are generally subject to less governmental supervision and regulation than in the U.S. and commissions on foreign stock exchanges are generally higher than negotiated commissions on U.S. transactions. In addition, there may in certain instances be delays in the settlement of non-U.S. stock exchange transactions. Certain countries restrict foreign investments in their securities markets. These restrictions may limit or preclude investment in certain countries, industries or market sectors, or may increase the cost of investing in securities of particular companies. Purchasing the shares of investment companies which invest in securities of a given country may be the only or the most efficient way to invest in that country. This may require the payment of a premium above the net asset value of such investment companies and the return will be reduced by the operating expenses of those investment companies. A decline in the value of the U.S. dollar against the value of any particular currency will cause an increase in the U.S. dollar value of a Fund's holdings denominated in such currency. Conversely, a decline in the value of any particular currency against the U.S. dollar will cause a decline in the U.S. dollar value of the Fund's holdings of securities denominated in such currency. Some foreign currency values may be volatile and there is the possibility of governmental controls on currency exchange or governmental intervention in currency markets which could adversely affect a Fund. The Funds do not intend to speculate in foreign currency in connection with the purchase or sale of securities on a foreign securities exchange but may enter into foreign currency contracts to hedge their foreign currency exposure. While those transactions may minimize the impact of currency appreciation and depreciation, the Funds will bear a cost for entering into the transaction and such transactions do not protect against a decline in the security's value relative to other securities denominated in that currency. The Global Equity Fund may invest its assets in American Depository Receipts ("ADRs"), European Depository Receipts ("EDRs") or Global Depository Receipts ("GDRs") which are U.S. dollar-denominated receipts that represent and may be converted into the underlying foreign security. ADRs, GDRs or EDRs are issued by persons other 15 than the underlying issuer, typically a domestic bank or trust company. Issuers of the stock of ADRs, EDRs or GDRs sponsored by banks or trust companies are not obligated to disclose material information in the United States and therefore, there may not be a correlation between such information and the market value of such ADRs, GDRs or EDRs. EMERGING MARKET COUNTRIES: Certain developing countries may have relatively unstable governments, economies based on only a few industries that are dependent upon international trade and reduced secondary market liquidity. Foreign investment in certain emerging market countries is restricted or controlled in varying degrees. In the past, securities in these countries have experienced greater price movement, both positive and negative, than securities of companies located in developed countries. Lower-rated high-yielding emerging market securities may be considered to have speculative elements. SOVEREIGN DEBT OBLIGATIONS: The Global Income Fund and the Global Equity Fund may purchase sovereign debt instruments issued or guaranteed by foreign governments or their agencies, including those located in emerging market countries. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Sovereign debt of emerging market countries may involve a high degree of risk and may be in default or present the risk of default. Certain emerging market countries have historically experienced, and may continue to experience, high inflation and interest rates, large fluctuations in exchange rates, large amounts of external debt, trade difficulties and extreme poverty and unemployment. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and interest when due. In the event of a default, the Funds may have limited legal recourse against the issuer or guarantor. Remedies must in some cases be pursued in the courts of the defaulting party itself and the ability of holders of foreign government debt securities to obtain recourse may depend on the political climate in the relevant country. No assurance can be given that the holders of commercial bank debt will not contest payments to holders of other sovereign debt obligations in the event of a default under their commercial bank loan agreements. EASTERN EUROPE: The Global Equity Fund presently intends not to invest more than 5% of its net assets in companies located in Eastern European countries, but may invest in companies located outside of such countries which conduct business in such countries. OPTIONS AND FUTURES: Different uses of futures and options have different risk and return characteristics. Generally, selling futures contracts, purchasing put options and writing call options are strategies designed to protect against falling security prices and can limit potential gains if prices rise. Purchasing futures contracts, purchasing call options and writing put options are strategies whose returns tend to rise and fall together with securities prices and can cause losses if prices fall. If securities prices remain unchanged over time, option writing strategies tend to be profitable while option buying strategies tend to be unprofitable. The U.S. Government Income Fund will write covered put and call options on U.S. Government securities to generate additional income through the receipt of options premiums. CURRENTLY, EACH OF THE U.S. GOVERNMENT INCOME, INVESTMENT QUALITY INCOME, GLOBAL INCOME, GLOBAL EQUITY, GROWTH AND INCOME, SMALL CAPITALIZATION AND QUEST FOR VALUE FUNDS INTEND TO ENGAGE ONLY IN FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS OR OPTIONS ON STOCK INDEXES FOR BONA FIDE HEDGING OR OTHER NON-SPECULATIVE PURPOSES. The Global Income Fund may also write covered call options and purchase 16 put options. The Small Capitalization Fund may write covered call options on individual securities. The Funds will not enter into any leveraged futures transactions. REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS: All Funds may acquire securities subject to repurchase agreements. The Global Income Fund may enter into reverse repurchase agreements. Repurchase agreements and reverse repurchase agreements involve certain risks. For a further description of options and futures, repurchase agreements and reverse repurchase agreements and other investment techniques used by the Funds, see "Investment Restrictions and Techniques." - --------------------------------------------- HOW TO BUY SHARES The Funds offer Class A, Class B and Class C shares. Class A shares are sold with an initial sales charge that declines for larger orders. Purchases of $1 million or more of Class A shares of the U.S. Government Income Fund and the Investment Quality Income Fund are sold without an initial sales charge but are subject to a CDSC if held less than two years. Purchases of $1 million or more of Class A shares of the Quest for Value Fund, Inc., the Small Capitalization Fund, the Growth and Income Fund, the Opportunity Fund and the Global Equity Fund made on or after July 1, 1994 are sold without an initial sales charge but are subject to CDSC if held less than one year; if such purchases were made prior to July 1, 1994 they are subject to a CDSC if held for less than two years. Class B shares are sold without an initial sales charge but are subject to a CDSC if held for less than six years. Class B shares are available only to investors purchasing less than $250,000 in the aggregate and currently are not being offered to non-qualified deferred compensation plans and qualified retirement plans under Internal Revenue Code Sections 401(a), 401(k), 403(b) and 457 but are being offered to qualified retirement plans under Internal Revenue Code Section 408(a). Class C shares are sold without an initial sales charge but are subject to a CDSC if held less than one year. Each class is described below in greater detail. The different classes provide you with alternative methods of acquiring shares and you should determine which class best meets your individual needs. Dealers may be compensated at different rates for selling Class A, Class B or Class C shares. Your initial purchase of either Class A, B or C shares must be made through a broker or dealer having a sales agreement with Quest Distributors, an affiliate of Quest Advisors. Subsequent purchases of shares may also be made through your broker or dealer by mailing your payment to the Fund's Transfer Agent, State Street Bank and Trust Company ("State Street"), P.O. Box 8505, Boston, MA 02266. Your initial investment must be at least $1,000 and subsequent investments must be at least $250. There are no minimums for shares purchased under an Automatic Investment Plan or under employee benefit plans. Some investors may qualify to purchase Class A shares at net asset value without a sales charge. (See "Reduced Sales Charges--Net Asset Value Purchases," and "Additional Information--Purchases by Former Shareholders of AMA Family of Funds and Unified Funds.") Class B and C shares will not be sold to investors who qualify to purchase Class A shares at net asset value, as described on pages 20 and 38. Sales of all classes of shares will be suspended during any period when the determination of net asset value is suspended, and may be suspended by the Board of a Fund whenever the Board judges it to be in the best interest of the Fund to do so. Quest Distributors, in its sole discretion, may accept or reject any purchase order. 17 BUYING CLASS A SHARES. Purchases of Class A shares will be processed at the net asset value next determined after receipt of your purchase order, plus the applicable front-end sales charge, if any, as set forth in the following tables.
QUEST FOR VALUE, SMALL CAPITALIZATION, OPPORTUNITY AND U.S. GOVERNMENT INCOME, INVESTMENT QUALITY INCOME, AND GLOBAL EQUITY FUNDS GROWTH AND INCOME FUNDS ---------------------------------- ---------------------------------- OFFERING OFFERING % OF NET PRICE SALES CHARGE TABLES* % OF NET PRICE AS A % OF ASSET RE-ALLOWED CLASS A SHARES AS A % OF ASSET RE-ALLOWED OFFERING VALUE PER TO SELLING ----------------------------------- OFFERING VALUE PER TO SELLING PRICE SHARE DEALER AMOUNT OF PURCHASE PRICE SHARE DEALER --------- --------- ---------- ----------------------------------- --------- --------- ---------- 5.50% 5.82% 4.75% Less than $50,000.................. 4.75% 4.99% 4.25% 4.75% 4.99% 4.25% $50,000 - 99,999................... 4.50% 4.71% 4.00% 4.00% 4.17% 3.50% $100,000 - 249,999................. 3.50% 3.63% 3.15% 3.00% 3.09% 2.75% $250,000 - 499,999................. 2.75% 2.85% 2.50% 2.00% 2.04% 1.75% $500,000 - 999,999................. 2.00% 2.04% 1.75% ** ** ** $1 million or more**............... ** ** **
GLOBAL INCOME FUND ---------------------------------- OFFERING % OF NET PRICE AS A % OF ASSET RE-ALLOWED OFFERING VALUE PER TO SELLING AMOUNT OF PURCHASE PRICE SHARE DEALER ----------------------------------- --------- --------- ---------- Less than $100,000................. 3.00% 3.09% 2.50% $100,000 - 249,999................. 2.50% 2.56% 2.15% $250,000 - 499,999................. 2.00% 2.04% 1.75% $500,000 - 999,999................. 1.50% 1.52% 1.25% $1 million or more................. .75% .76% .65%
- ------------- *The entire sales charge may be re-allowed to dealers who achieve certain levels of sales or who have rendered coordinated sales support efforts. Such dealers may be deemed to be "underwriters." **PURCHASES OF CLASS A SHARES OF $1 MILLION OR MORE (all funds except Global Income Fund) On purchases by a single purchaser aggregating $1 million or more, the investor will not pay an initial sales charge, and Quest Distributors will pay authorized dealers an amount equal to .9 of 1% of the first $2 million of such purchases, plus .8 of 1% of the next $1 million, plus .50 of 1% of the next $2 million, plus .35 of 1% on amounts over $6 million. A CDSC will be imposed on the proceeds of the redemption of shares of the U.S. Government Income Fund and the Investment Quality Income Fund purchased in amounts aggregating $1 million or more or of shares of the Quest for Value Fund, Inc., the Small Capitalization Fund, the Growth and Income Fund, the Opportunity Fund and the Global Equity Fund purchased prior to July 1, 1994 in amounts aggregating $1 million or more if they are redeemed within 24 months of the end of the calendar month of their purchase, in an amount equal to 1% if the redemption occurs within the first 12 months and equal to .5 of 1% if the redemption occurs in the next 12 months, of the lesser of (a) the net asset value of the shares at the time of purchase or (b) the net asset value of the shares at the time of redemption. A CDSC will be imposed on the proceeds of the redemption of shares of the Quest for Value Fund, the Small Capitalization Fund, the Growth and Income Fund, the Opportunity Fund and the Global Equity Fund purchased on or after July 1, 1994 in amounts aggregating $1 million or more if they are redeemed within 12 months of the end of the calendar month of their purchase in an amount equal to 1% of the lesser of (a) the net asset value of the shares at the time of purchase or (b) the 18 net asset value of the shares at the time of redemption. The CDSC will be deducted from the redemption proceeds otherwise payable to the shareholder and will be retained by Quest Distributors. For the period of 13 months from the date of the sales of Class A shares of $1 million or more, the distribution fee payable by a Fund to Quest Distributors pursuant to the Fund's Distribution Plan in connection with such shares will be retained by Quest Distributors. REDUCED SALES CHARGES: There are several ways you may qualify for reduced sales charges when buying Class A Shares. You should notify the Transfer Agent or your Dealer if you qualify. COMBINED PURCHASE: Purchases by related accounts may be combined to determine the appropriate sales charge. Related accounts are: all accounts in your name and/or of your spouse or children under 21 years of age, all accounts of a fiduciary purchasing for a single trust, and all accounts for which a single person (e.g., investment advisor, trust department, etc.) exercises investment discretion. Qualified employee benefit trusts of an employer and its consolidated subsidiaries will be considered a single trust. RIGHTS OF ACCUMULATION: In determining the applicable level of sales charge, the value of shares you purchase will be added to the greater of cost or market value of the Class A, B or C shares you hold of any Quest Fund, provided that any such Class A shares were purchased with a sales charge, were acquired by exchange for shares on which a sales charge was paid, or were subject to a CDSC. LETTER OF INTENT: If you intend to purchase shares valued at $50,000 or more during a 13-month period, you may make the purchase under a Letter of Intent so that the initial shares you purchase qualify for the reduced sales charge applicable to the aggregate amount of your projected purchase. Your initial purchase must be at least 5% of the intended purchase. An appropriate number of shares will be held by the Transfer Agent to cover any sales charge due if you purchase less than the indicated amount during the 13-month period. GROUP AND ASSOCIATION PURCHASES AND PURCHASES BY QUALIFIED RETIREMENT PLANS: The following table sets forth the applicable sales charge for purchases of Class A shares made through a single broker or dealer by qualified retirement plans including 401(k), 403(b) plans, SEP/IRA and IRA plans of a single employer, and by members of associations formed for any purpose other than the purchase of securities:
AS A % OF PERCENT OF NUMBER OF AS A % OF NET ASSET OFFERING PRICE ELIGIBLE EMPLOYEES OR OFFERING VALUE PER RE-ALLOWED TO MEMBERS PRICE SHARE SELLING DEALERS - ---------------------- ------------- -------------- ------------------- 9 or less............. 3.00% 3.09% 2.60% Between 10 & 49....... 2.00% 2.04% 1.65% 50 or more............ 0.00% see "Purchases of Class A shares of $1,000,000 or more," p. 18
Purchases made under the Group Purchase provision will qualify for the lower of the sales charge computed according to the table based on the number of eligible employees in a plan or members of an association or the sales charge level under the Rights of Accumulation described above. Purchases by retirement plans covering 50 or more employees or by associations or groups with 50 or more members shall be entitled to the sales charge waiver applicable to purchases of $1 million or more described above. In addition, purchases by 401(k) plans can qualify for this sales charge waiver if, in the opinion of Quest Distributors, the initial purchase plus projected contributions to be invested in the plan for the following 12 months will exceed $1,000,000. Individuals who qualify for reduced sales charges as members of associations, 19 groups or eligible employees in plans as set forth in the above table may also purchase shares for their individual or custodial accounts at the same sales charge level. NET ASSET VALUE PURCHASES: No sales charge will be applied to the following transactions in Class A shares: purchases by persons who for the prior 90 days have been directors, trustees, officers or full-time employees of any of the Funds distributed by Quest Distributors, or of Quest Advisors, Quest Distributors, or of their affiliates, their relatives or any trust, pension, profit sharing or other benefit plan for any of them; purchases by any account advised by Oppenheimer Capital, the parent of Quest Advisors, or by persons who are directors or trustees of such accounts; purchases made with the proceeds of maturing principal of any Quest Unit Investment Laddered Trust Series ("QUILTS"); purchases by an employee of a broker-dealer or bank having a dealer or agency agreement pertaining to Fund shares; purchases by trust companies and bank trust departments for funds over which they exercise exclusive discretionary investment authority and charge an account management fee and which are held in a fiduciary, agency, advisory, custodial or similar capacity; purchases by registered investment advisors for their clients for whom they charge an account management fee; accounts opened for shareholders by dealers where the amounts invested represent the redemption proceeds from investment companies distributed by an entity other than Quest Distributors if such redemption has occurred no more than 60 days prior to the purchase of shares of the Funds and the shareholder paid an initial sales charge or a contingent deferred sales charge on the redeemed account. Shares sold at net asset value will be included in the asset base upon which payments under a Fund's Distribution Plan and Agreement are determined. The CDSC does not apply to purchases of Class A shares at net asset value described herein. BUYING CLASS B SHARES. Purchases of Class B shares will be processed at the net asset value next determined after receipt of your purchase order for less than $250,000. While not subject to a front-end sales charge, Class B shares may be subject to a CDSC upon redemption. Dealers who sell Class B shares are paid a commission by Quest Distributors equal to 4.00% of the purchase price of the shares. CLASS B SHARES CURRENTLY ARE NOT BEING OFFERED TO NON-QUALIFIED DEFERRED COMPENSATION PLANS AND QUALIFIED RETIREMENT PLANS UNDER INTERNAL REVENUE CODE SECTIONS 401(A), 401(K), 403(B) AND 457 BUT ARE BEING OFFERED TO QUALIFIED RETIREMENT PLANS UNDER INTERNAL REVENUE CODE SECTION 408(A). If Class B Shares of any Fund are redeemed within six years after the end of the calendar month in which a purchase order for Class B shares was accepted, a CDSC will be imposed by applying the appropriate percentage indicated below to the lesser of: (1) the net asset value of such shares at the time of purchase or (2) the net asset value of such shares at the time of redemption. The CDSC will be deducted from the redemption proceeds otherwise payable to the shareholder and will be retained by Quest Distributors. The CDSC to be imposed on such share redemptions will be assessed according to the following schedule:
YEARS SINCE PURCHASE APPLICABLE CLASS B ORDER OF LESS THAN CONTINGENT DEFERRED $250,000 WAS ACCEPTED SALES CHARGE - ----------------------------------- ------------------------ Up to one year..................... 5.00% One year or more but less than 2 years............................. 4.00% Two years or more but less than 4 years............................. 3.00% Four years or more but less than 5 years............................. 2.00% Five years or more but less than 6 years............................. 1.00% 6 or more years.................... None
CONVERSION OF CLASS B SHARES. Class B shares will automatically convert to Class A shares of the same Fund eight years after the end of the calendar month in which the purchase order for Class B shares was accepted, on the basis of the relative net asset values of the two classes and subject to the following terms: Class B shares acquired through the reinvestment of dividends and distributions ("reinvested Class B shares") will be converted to Class A shares on a pro-rata basis only when Class B 20 shares not acquired through reinvestment of dividends or distributions ("purchased Class B shares") are converted. The portion of reinvested Class B shares to be converted will be determined by the ratio that the purchased Class B shares eligible for conversion bear to the total amount of purchased Class B shares in the shareholder's account. For the purposes of calculating the holding period, Class B shares will be deemed to have been issued on the sooner of: (a) the date on which the issuance of Class B shares occurred, or (b) for Class B shares obtained by an exchange or series of exchanges, the date on which the issuance of the original Class B shares occurred. This conversion to Class A shares will relieve Class B shares that have been outstanding for at least eight years (a period of time sufficient for Quest Distributors to have been compensated for distribution expenses related to such Class B shares) from the higher ongoing distribution fee paid by Class B shares. Only Class B shares have this conversion feature. Conversion of Class B shares to Class A shares is contingent on the continuing availability of a private letter revenue ruling from the Internal Revenue Service affirming that such conversion does not constitute a taxable event for the shareholder under the Internal Revenue Code. If such revenue ruling or an opinion of counsel is no longer available, conversion of Class B shares to Class A shares would have to be suspended, and Class B shares would continue to be subject to the Class B distribution fee until redeemed. BUYING CLASS C SHARES. Purchases of Class C shares will be processed at the net asset value next determined after receipt of your purchase order. Class C shares are not subject to a front-end sales charge, but may be subject to a CDSC upon redemption. Dealers who sell Class C shares are paid a commission by Quest Distributors equal to .85% of the purchase price of the shares. If Class C shares are redeemed within one year after the end of the calendar month in which a purchase order for Class C shares was accepted, a CDSC of 1.00% would be imposed on the lesser of (1) the net asset value of such shares at the time of purchase or (2) the net asset value of such shares at the time of redemption. The CDSC will be deducted from the redemption proceeds otherwise payable to the shareholder and will be retained by Quest Distributors. EXEMPTIONS FROM CLASS A, B AND C CDSC. No CDSC will be imposed when a shareholder redeems Class A, B or C shares in the following instances: (a) shares or amounts representing increases in the value of an account above the net cost of the investment due to increases in the net asset value per share; (b) shares acquired through reinvestment of income dividends or capital gains distributions; (c) shares acquired by exchange from any Quest Fund, other than a money market fund, where the exchanged shares would not have been subject to a CDSC upon redemption; and (d) Class A shares of the U.S. Government Income Fund or the Investment Quality Income Fund purchased in the amount of $1 million or more held for more than 24 months, Class A shares of the Quest for Value Fund, Inc., the Small Capitalization Fund, the Growth and Income Fund, the Opportunity Fund and Global Equity Fund purchased in the amount of $1 million or more prior to July 1, 1994 held for more than 24 months and Class A shares purchased in the amount of $1 million or more on or after July 1, 1994 if held for more than 12 months, Class B shares held for more than six years or Class C shares held for more than one year from the end of the calendar month in which the purchase order was accepted. PURCHASES PRIOR TO MARCH 6, 1995. The CDSC does not apply to purchases of Class A shares at net asset value described under "Net Asset Value Purchases" above and will be waived in the case of redemptions of Class A, B or C shares purchased prior to March 6, 1995 in connection with (i) distributions to participants or beneficiaries of 21 plans qualified under Section 401(a) of the Internal Revenue Code ("IRC") or from custodial accounts under IRC Section 403(b)(7), individual retirement accounts under IRC Section 408(a), deferred compensation plans under IRC section 457 and other employee benefit plans ("plans"), and returns of excess contributions made to these plans, (ii) withdrawals under an automatic withdrawal plan where the annual withdrawal does not exceed 10% of the opening value of the account (only for Class B and C shares); and (iii) liquidation of a shareholder's account if the aggregate net asset value of shares held in the account is less than the required minimum. PURCHASES ON OR AFTER MARCH 6, 1995. The CDSC will be waived in the case of redemptions of Class A, B or C shares purchased on or after March 6, 1995 in connection with 1) distributions to participants or beneficiaries from individual retirement accounts under Section 408(a) of the IRC, and retirement plans under Section 401(a), 401(k), 403(b) and 457 of the IRC, which distributions are made either (a) to an individual participant as a result of separation from service or (b) following the death or disability (as defined in the IRC) of the participant or beneficiary; 2) returns of excess contributions to such retirement plans; 3) redemptions other than from retirement plans following the death or disability of the shareholder(s) (as evidenced by a determination of total disability by the U.S. Social Security Administration); 4) withdrawals under an automatic withdrawal plan where the annual withdrawals do not exceed 10% of the opening value of the account (only for Class B and C shares); and 5) liquidation of a shareholder's account if the aggregate net asset value of shares held in the account is less than the required minimum. A shareholder will be credited with any CDSC paid in connection with the redemption of any Class A, B or C shares if within 90 days after such redemption, the proceeds are invested in the same Class of shares in the same and/or another Quest Fund. In determining whether the Class A, B or C CDSC is payable, it will be assumed that shares not subject to a CDSC are redeemed first and that other shares are then redeemed in the order purchased. No CDSC will be imposed on exchanges to purchase shares of another Quest Fund although a CDSC will be imposed on shares of the acquired Quest Fund purchased by exchange of shares subject to a CDSC if the acquired shares are then redeemed within 24 months if the exchanged shares were Class A Shares (12 months with respect to Class A shares of the Quest for Value Fund, Inc., the Small Capitalization Fund, the Growth and Income Fund, the Opportunity Fund, or the Global Equity Fund purchased on or after July 1, 1994), six years if the exchanged shares were Class B Shares or one year if the exchanged shares were Class C shares of the end of the calendar month in which the exchanged shares were purchased. SPECIAL FIDUCIARY RELATIONSHIPS. The CDSC will not apply with respect to purchases of Class A shares for which the selling dealer is not permitted to receive a sales load or redemption fee imposed on a shareholder with whom such dealer has a fiduciary relationship in accordance with provisions of the Employee Retirement Income Security Act and regulations thereunder. If such dealer agrees to the reimbursement provision described below, no sales charge will be imposed on sales of $1,000,000 or more and Quest Distributors will pay to the selling dealer a commission described above in "Purchases of Class A Shares of $1 Million or More." For the period of 13 months from the date of the sales referred to in the above paragraph, the distribution fee payable by a Fund to Quest Distributors pursuant to the Fund's Distribution Plan in 22 connection with such shares will be retained by Quest Distributors. In the event of a redemption of any such shares within 24 months of purchase, the selling dealer will reimburse Quest Distributors for the amount of commission paid less the amount of the distribution fee with respect to such shares. PURCHASES BY STRATEGIC ALLIANCES. The CDSC will not apply with respect to purchases of Class A shares by participants in qualified retirement plans that are part of strategic alliances. No sales charge will be imposed on such purchases and Quest Distributors will pay to the selling dealer a commission described above in "Purchases of Class A Shares of $1 Million or More." For the period of 13 months from the date of such sales, the distribution fee payable by a Fund to Quest Distributors pursuant to the Fund's Distribution Plan in connection with such shares will be retained by Quest Distributors. OTHER DEALER COMPENSATION. Quest Distributors will provide additional compensation to dealers in connection with sales of shares of the Funds and other mutual funds distributed by Quest Distributors ("Quest Funds") including promotional gifts (which may include gift certificates, dinners and other items), financial assistance to dealers in connection with conferences, sales or training programs for their employees, seminars for the public and advertising campaigns. In some instances, these incentives may be made available only to dealers whose representatives have sold or are expected to sell significant amounts of shares. If a registered representative of a securities dealer sells more than $500,000 or $1 million (net of redemptions) of any open-end investment company distributed by Quest Distributors and managed by Quest Advisors other than Quest Cash Reserves, Inc. in the 1995 calendar year, the dealer firm is eligible to send the representative and a guest to a sales conference at a luxury resort; individual sales of Class A shares in the amount of $1 million or more that are purchased at net asset value and sales of Class C shares will count as one-half their amount for determining eligibility. - --------------------------------------------- DETERMINING NET ASSET VALUE The value of shares is determined by adding up the value of all security holdings and other assets of the Fund, deducting the value of the liabilities, and dividing the result by the number of shares outstanding. The value of a Fund's portfolio securities and other assets is based on market values determined by procedures established by the Board of the Fund. Securities listed on a national securities exchange or designated as national market system securities are valued at the last sale price or, if there has been no sale that day, at the last bid price. Debt and equity securities actively traded in the over-the-counter market but not designated as national market system securities are valued at the most recent bid price. Valuations may be provided by a pricing service or from independent securities dealers. Short-term investments with remaining maturities of less than 60 days are valued at amortized cost so long as the Board determines in good faith that such method reflects fair value. Other securities are valued by methods that the Board of a Fund believes accurately reflect fair value. The calculation is made at the close of the regular trading session ("Close") of the New York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern Time) each day the NYSE is open. The value that is calculated is known as the net asset value per share, which will fluctuate daily. Although the legal rights of Class A, B and C shares are identical, the different expenses borne by each class may result in differing net asset values and dividends for each Class. Generally, trading in foreign securities is substantially completed each day at various times prior to the Close of the NYSE. The values of such securities 23 used in computing the net asset value of a Fund's shares are determined as of such times. Foreign currency exchange rates are also generally determined prior to the Close of the NYSE. If events materially affecting the value of such securities and exchange rates occur between the time of such determination and/or the Close of the NYSE, then these securities will be valued at their fair value as determined in good faith under procedures established by and under the supervision of the Fund's Board. See "Determination of Net Asset Value" in the SAIs. - --------------------------------------------- HOW TO REDEEM SHARES You may redeem shares on any day the Funds are open for business--normally when the New York Stock Exchange ("NYSE") is open-- using the Procedures described below. See "Determination of Net Asset Value" in the SAI for the days on which the NYSE will be closed. DEALER REDEMPTION: Your redemption requests may be handled by your securities dealer who is responsible for providing the necessary documentation to the Transfer Agent and who may impose a charge for its services. Requests received by your dealer prior to the Close of the NYSE and transmitted to the Transfer Agent by its close of business that day will receive that day's net asset value per share. REGULAR REDEMPTION: You may send a redemption request by mail to the Transfer Agent and will receive the net asset value of the shares being redeemed which is next determined after your request is received in "good form". "Good form" means the request is signed in the name in which the account is registered and the signature is guaranteed by an eligible guarantor. Eligible guarantors include member firms of a national securities exchange, banks, savings associations and credit unions, as defined by the Federal Deposit Insurance Act. Special requirements may exist for corporations, trusts and similar accounts. If you hold stock certificates, you should call the Transfer Agent for instructions on the appropriate redemption procedure. EXPEDITED REDEMPTIONS: You and your account representative will automatically receive the ability to redeem or exchange shares by telephone unless you indicate otherwise on the application. You may also authorize certain other expedited redemption procedures. BY TELEPHONE (minimum $1,000). The proceeds of redemption will either be mailed to you or wired to the account of any bank that is a member of the Federal Reserve wire system. This account must be designated on your application. If you change the bank account, you must let us know in writing with a signature guarantee. BY AUTOMATIC WITHDRAWAL PLAN (minimum $50). If your account has a value of at least $5,000 you may arrange an automatic withdrawal plan so that the amount you specify (minimum $50) will be sent to you on a monthly or quarterly basis. Dividends and distributions on your shares must be reinvested. BY CHECK DRAFT (U.S. Government Income Fund only--$250 minimum). A service fee of $10 is imposed for drafts under $250. Your checks are drafts drawn on State Street. When your draft is presented, State Street as your agent redeems a sufficient number of whole and fractional shares to cover the amount of the draft. You cannot close out your account by check redemption, because your shares continue to earn dividends and fluctuate in value until the draft is presented. Your redemption proceeds, from which any applicable CDSC will have been deducted, will normally be mailed or wired the day after your redemption is processed. Payments for redemption of shares that you purchased by check may be delayed until the 24 check has cleared, which may take up to 15 days. To avoid this collection period, you can wire federal funds to pay for purchases. REINSTATEMENT PRIVILEGE: If you reinvest in a Quest Fund within 60 days of redemption, you will be reinstated as a shareholder with the same privileges regarding the non-payment of sales charges that apply to exchanges. You may exercise this privilege only once each calendar year. The redemption may produce a gain or loss for tax purposes. The Funds may suspend redemption procedures and postpone redemption payments during any period when the NYSE is closed other than for customary weekend or holiday closing or the SEC has determined an emergency exists or has otherwise permitted such suspension or postponement. The Funds reserve the right to redeem your account if its value is less than $500 due to redemptions. Your Fund will give you 30 days' notice to increase your account value to at least $500. Redemption proceeds will be mailed. - --------------------------------------------- EXCHANGING SHARES An exchange represents the sale of shares of one fund and the purchase of shares of another, which may produce a gain or loss for tax purposes. Your exchange will be processed at the net asset value next determined after the Transfer Agent receives your exchange request. A service fee (currently $5) will be charged for administrative services in connection with an exchange. You will receive a prospectus along with your confirmation if you exchange into a Fund not offered in this Prospectus. The exchange feature may be modified or discontinued at any time, upon notice to shareholders in accordance with applicable rules adopted by the Securities and Exchange Commission ("SEC"). Your exchange may be processed only if the shares of the fund to be acquired are eligible for sale in your state and if the amount of your transaction meets the minimum requirements for that fund. The exchange privilege is only available in states in which it may be legally offered. EXCHANGES OF CLASS A SHARES: You may exchange your Class A shares for Class A shares of any mutual fund (except as described below with respect to exchanges from the Global Income Fund) distributed by Quest Distributors ("Quest Fund") and for shares of Quest Cash Reserves, Inc. ("QCR"), a single-class money market fund with five different portfolios. You need not pay any sales charge differential between Quest Funds on the exchange of Class A shares purchased with a front-end sales charge if: 1. You have held the shares being exchanged for at least 31 days; 2. The shares being exchanged were acquired through the reinvestment of dividends or distributions; or 3. The shares being exchanged were themselves the proceeds of an exchange from a fund with the same or higher sales charge. If you exchange Class A shares of the Global Income Fund into another Quest Fund within six months of your purchase of Class A shares of the Global Income Fund, you will have to pay the difference between the sales charge paid on your purchase of Class A shares of the Global Income Fund and the sales charge that would have been charged if you had originally purchased Class A shares of the Fund into which you are exchanging. EXCHANGES OF CLASS B SHARES: Class B shares of all Quest Funds are exchangeable for Class B shares of any other Quest Fund. Class B shares of any Quest Fund cannot be exchanged for Class A or C shares of any Quest Fund. 25 EXCHANGES OF CLASS C SHARES: Class C shares of all Quest Funds are exchangeable for Class C shares of any other Quest Fund. Class C shares of any Quest Fund cannot be exchanged for Class A or B shares of any Quest Fund. Because excessive trading (including short-term "market timing" trading) can hurt a Fund's performance, each Fund may refuse any exchange orders (1) if they appear to be market-timing transactions involving significant portions of a Fund's assets or (2) from any shareholder account if the shareholder or his or her broker-dealer has been advised that previous use of the exchange privilege is considered excessive. Accounts under common ownership or control, including those with the same taxpayer ID number and those administered so as to redeem or purchase shares based upon certain predetermined market indicators, will be considered one account for this purpose. --------------------- Quest Distributors and the Fund's transfer agent will employ reasonable procedures for telephone redemptions and exchanges to confirm that the instructions received from shareholders or their account representatives are genuine, and if they do not, Quest Distributors or the transfer agent may be liable for any losses due to unauthorized or fraudulent instructions. Shareholders will be required to provide their name, address, social security number and other identifying information. Account representatives must identify themselves and their firm and Quest Distributors will confirm that such firm has a valid selling agreement with Quest Distributors and that the representative is authorized to act on behalf of the firm. IF YOU HAVE ANY QUESTIONS ON EXCHANGE OR REDEMPTION PROCEDURES, CALL YOUR DEALER OR OUR TRANSFER AGENT. - --------------------------------------------- INVESTMENT RESTRICTIONS AND TECHNIQUES The Funds are subject to certain investment restrictions which are fundamental policies changeable only by shareholder vote. The restrictions in a, b and c below do not apply to U.S. government securities. The restrictions apply to each Fund unless otherwise noted. A Fund may not (except that in the future the Quest for Value, U.S. Government Income, the Growth and Income, the Global Income and the Global Equity Funds may invest all or part of their respective assets in an open-end management investment company with substantially the same respective investment objective and restrictions): (a) Purchase more than 10% of the voting securities of any one issuer (for Global Equity, Global Income and Growth and Income only with respect to 75% of their respective total assets; except that to comply with a state's securities laws, Global Income has adopted this restriction with respect to 100% of its total assets, although this restriction is not a fundamental policy of the Global Income Fund); (b) Purchase more than 10% of any class of security of any issuer, with all outstanding debt securities and all preferred stock of an issuer each being considered as one class (all Funds except Global Equity, Global Income and Growth and Income); (c) Concentrate its investments in any particular industry, but if deemed appropriate for attaining its investment objective, a Fund may invest up to 25% of its total assets (valued at the time of investment) in any one industry classification used by the Fund for investment purposes (for this purpose, a foreign government is considered an industry). Concentration of investment in securities of one issuer may tend to increase a Fund's financial risk (See "Risk Factors," p. 12);(d) Borrow money in excess of: 10% of the value of the Fund's total assets in the case of the Small Capitalization, U.S. Government Income, Investment Quality Income and Opportunity Funds; 26 33 1/3% of the value of the Fund's total assets in the case of the Quest for Value, Global Equity, Global Income and Growth and Income Funds; each Fund (except for Quest for Value Fund) may borrow only from banks and only as a temporary measure for extraordinary or emergency purposes and will make no additional investments while such borrowings exceed 5% of the total assets; Quest for Value Fund may, but has no present intention to, borrow for leveraging purposes; (e) Invest more than 10% of the Fund's total assets in illiquid securities (15% for Quest for Value Fund, the Growth and Income Fund, the Global Income Fund and the Global Equity Fund), including securities for which there is no readily available market, repurchase agreements which have a maturity of longer than seven days, securities subject to legal or contractual restrictions and certain over-the-counter options (it is the opinion of the Wisconsin Securities Commission that investments in restricted securities in excess of 5% of a Fund's total assets may be considered a speculative activity and therefore involve greater risk and increase the Fund's expenses; to comply with Wisconsin's securities laws, all Funds except Global Income have agreed to limit investments in restricted securities to 5% of their respective total assets, although the restriction is not a fundamental policy of such Funds); and (f) Invest more than 5% (15% for Quest for Value Fund) of the Fund's total assets in securities of issuers having a record, together with predecessors, of less than three years of continuous operation. (This restriction is not a fundamental policy of each of the Global Equity, Global Income or Growth and Income Funds, but was adopted to comply with a state's securities laws). Notwithstanding investment restriction (e) above, the Funds each may purchase securities which are not registered under the Securities Act of 1933 ("1933 Act") but which can be sold to "qualified institutional buyers" in accordance with Rule 144A under the 1933 Act. Any such security will not be considered illiquid so long as it is determined by the Board of Directors or Quest Advisors, acting under guidelines approved and monitored by the Board, which has the ultimate responsibility for any determination regarding liquidity, that an adequate trading market exists for that security. This investment practice could have the effect of increasing the level of illiquidity in each of the Funds during any period that qualified institutional buyers become uninterested in purchasing these restricted securities. The ability to sell to qualified institutional buyers under Rule 144A is a relatively recent development and it is not possible to predict how this market will develop. The Board will carefully monitor any investments by each of the Funds in these securities. Other investment restrictions are described in the SAIs. The investment techniques or instruments described below are used for investment programs of the Funds. REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS: All Funds may acquire securities subject to repurchase agreements. Under a typical repurchase agreement, a Fund acquires a debt security for a relatively short period (usually for one day and very seldom for more than one week) subject to an obligation of the seller to repurchase (and the Fund's obligation to resell) the security at an agreed-upon higher price, thereby establishing a fixed investment return during the holding period. Pending such repurchase, the seller of the instrument maintains securities as collateral equal in market value to the repurchase price. In the event a seller defaulted on its repurchase obligation, a Fund might suffer a loss to the extent that the proceeds from the sale of the collateral were less than the repurchase price. In the event of a seller's bankruptcy, a Fund might be delayed in, or prevented from, selling the collateral for the Fund's benefit. Each Fund's Board of Directors/ Trustees has established procedures, which are 27 periodically reviewed by the Board, pursuant to which Quest Advisors will monitor the creditworthiness of the dealers and banks with which the Funds enter into repurchase agreement transactions. The Global Income Fund may enter into reverse repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed date and price. At the time the Global Income Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high grade securities having a value not less than the repurchase price (including accrued interest). Reverse repurchase agreements involve the risk that the market value of the securities retained in lieu of sale by the Fund may decline more than or appreciate less than the securities the Fund has sold but is obligated to repurchase. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce the Fund's obligation to repurchase the securities and the Fund's use of the proceeds of the reverse repurchase agreements may effectively be restricted pending such decisions. Reverse repurchase agreements create leverage, a speculative factor, and will be considered borrowings for purposes of the Global Income Fund's limitation on borrowing. LOANS OF PORTFOLIO SECURITIES: All Funds may lend portfolio securities if collateral (cash, U.S. Government or agency obligations or letters of credit) securing such loans is maintained daily in an amount at least equal to the market value of the securities loaned and if the Funds do not incur any fees (except transaction fees of the custodian bank) in connection with such loans. A Fund may call the loan at any time on five days' notice and reacquire the loaned securities. The Fund would receive the cash equivalent of the interest or dividends paid by the issuer on the securities loan and would have the right to receive the interest on investment of the cash collateral in short-term debt instruments. A portion of either or both kinds of such interest may be paid to the borrower of such securities. The Fund would continue to retain any voting rights with respect to the securities. The value of the securities loaned, if any, is not expected to exceed 10% of the value of the total assets of Quest for Value, Small Capitalization, Opportunity or Investment Quality Income Funds and 33 1/3% of the value of the total assets of U.S. Government Income, Global Equity, Global Income or Growth and Income Funds. There is a risk that the borrower of the securities may default and the Funds may have difficulty in reacquiring the loaned securities. BRADY BONDS. The Global Income Fund and the Global Equity Fund may purchase Brady Bonds and other sovereign debt of countries that have restructured or are in the process of restructuring their sovereign debt. Brady Bonds are debt securities issued under the Brady Plan, a mechanism whereby debtor nations can restructure their indebtedness by negotiating with lenders and exchanging existing commercial bank debt for Brady Bonds. Brady Bonds may also be issued in respect of new money being advanced by existing lenders in connection with the debt restructuring. The Brady Plan only sets forth general guidelines for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis between debtor nations and their creditors. Brady Bonds have been issued only recently and consequently do not have a long payment history. The principal of certain Brady Bonds has been collateralized by Treasury zero coupon bonds with maturities equal to the final maturity of such Brady Bonds. In addition, the first two or three interest payments on certain Brady Bonds may be collateralized by cash 28 or securities agreed upon by creditors. See "Risk Factors and Special Considerations" in the SAI for a more complete description of Brady Bonds. MORTGAGE-BACKED SECURITIES: The U.S. Government Income, Investment Quality Income, Opportunity, Growth and Income and Global Income Funds may invest in a type of mortgage-backed security known as modified pass-through certificates. Each certificate evidences an interest in a specific pool of mortgages that have been grouped together for sale and provides investors with payments of interest and principal. The issuer of modified pass-through certificates guarantees the payment of the principal and interest whether or not the issuer has collected such amounts on the underlying mortgage. The average life of these securities varies with the maturities of the underlying mortgage instruments (generally up to 30 years) and with the extent of prepayments or the mortgages themselves. Any such prepayments are passed through to the certificate holder, reducing the stream of future payments. Prepayments tend to rise in periods of falling interest rates, decreasing the average life of the certificate and generating cash which must be invested in a lower interest rate environment. This could also limit the appreciation potential of the certificates when compared to similar debt obligations which may not be paid down at will, and could cause losses on certificates purchased at a premium or gains on certificates purchased at a discount. Government National Mortgage Association ("Ginnie Mae") certificates represent pools of mortgages insured by the Federal Housing Administration or the Farmers Home Administration or guaranteed by the Veteran's Administration. The guarantee of payments under these certificates is backed by the full faith and credit of the United States. Federal National Mortgage Association ("Fannie Mae") is a government-sponsored corporation owned entirely by private stockholders. The guarantee of payments under these instruments is that of Fannie Mae only. They are not backed by the full faith and credit of the United States but the U.S. Treasury may extend credit to Fannie Mae through discretionary purchases of its securities. The U.S. Government has no obligation to assume the liabilities of Fannie Mae. Federal Home Loan Mortgage Corp. ("Freddie Mac") is a corporate instrumentality of the United States government whose stock is owned by the Federal Home Loan Banks. Certificates issued by Freddie Mac represent interest in mortgages from its portfolio. Freddie Mac guarantees payments under its certificates but this guarantee is not backed by the full faith and credit of the United States and Freddie Mac does not have authority to borrow from the U.S. Treasury. The coupon rate of these instruments is lower than the interest rate on the underlying mortgages by the amount of fees paid to the issuing agencies, usually approximately 1/2 of 1%. It is not anticipated that the Funds' investments will have any particular maturity. Mortgage-backed securities, due to the scheduled periodic repayment of principal, and the possibility of accelerated repayment of underlying mortgage obligations, fluctuate in value in a different manner than other, non-redeemable debt securities. The U.S. Government Income, Investment Quality Income, Opportunity, Growth and Income and Global Income Funds also may invest in "collateralized mortgage obligations" ("CMO's") which are debt obligations secured by mortgage-backed securities where the investor looks only to the issuer of the security for payment of principal and interest. OPTIONS AND FUTURES: The U.S. Government Income Fund may buy and sell futures contracts and options, write covered put and call options on U.S. government securities to generate additional income, purchase put and call options to close-out or off-set options it has written and to hedge its investments against changes in value or as a temporary substitute for purchases or sales of actual 29 securities. The U.S. Government Income Fund also may purchase put and call options on financial futures and write put and call options on such contracts. The Global Income Fund may write covered call options and the Global Equity and Global Income Funds may purchase and sell financial futures contracts (including bond futures contracts and index futures contracts), foreign currency forward contracts, foreign currency futures contracts, options on futures contracts and options on currencies. In addition, the Global Income Fund is authorized to write covered put options but does not presently intend to do so. The Quest for Value, Small Capitalization and Growth and Income Funds may buy and sell options on stock indexes, futures contracts and options on futures to hedge their investments against changes in value or as a temporary substitute for purchases or sales of actual securities. The Small Capitalization Fund may write covered call options on individual securities. The Investment Quality Income Fund may purchase or sell financial futures contracts and options on such contracts for similar purposes. When each such Fund anticipates a significant market or market sector advance, the purchase of a futures contract affords a hedge against not participating in the advance at a time when the Fund is not fully invested ("anticipatory hedge"). Such a purchase of a futures contract would serve as a temporary substitute for the purchase of individual securities, which may be purchased in an orderly fashion once the market has stabilized. As individual securities are purchased, an equivalent amount of futures contracts could be terminated by offsetting sales. A Fund may sell futures contracts in anticipation of or in a general market or market sector decline or increase in interest rates that may adversely affect the market value of the Fund's securities ("defensive hedge"). To the extent that a Fund's portfolio of securities changes in value in correlation with the underlying security or index, the sale of futures contracts would substantially reduce the risk to the Fund of a market decline and by so doing, provide an alternative to the liquidation of securities positions in the Fund with attendant transaction costs. All options purchased or sold by a Fund will be traded on a U.S. or foreign commodities exchange or will result from separate, privately negotiated transactions with a primary government securities dealer recognized by the Board of Governors of the Federal Reserve System or with other broker-dealers approved by the Fund's Board. Options on securities, futures contracts and options on futures contracts that are traded on foreign exchanges are subject to the risk of governmental action affecting trading in or the prices of foreign currencies or securities. The value of such positions also could be adversely affected by (i) other complex foreign political and economic factors, (ii) lesser availability than in the United States of data on which to make trading decisions (iii) delays in a Fund's ability to act upon economic events occurring in foreign markets during nonbusiness hours in the United States, (iv) the imposition of different exercise and settlement terms and procedures and margin requirements than in the United States, (v) lesser trading volume and (vi) in certain circumstances, currency fluctuations. In addition, the Small Capitalization Fund may write covered call options on individual securities. So long as Commodities Futures Trading Commission rules so require, a Fund will not enter into any financial futures or options contract unless such transactions are for bona-fide hedging purposes or for other purposes only if the aggregate initial margins and premiums required to establish such non-hedging positions would not exceed 5% of the liquidation value of the Fund's total assets. A call option written by a Fund is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or 30 for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash, U.S. Government Securities or other liquid high-grade debt securities in a segregated account with its custodian. A put option written by a Fund is "covered" if the Fund maintains cash, U.S. Government securities or other liquid high-grade debt securities with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. As a result, the Fund forgoes the opportunity of trading the segregated assets or writing calls against those assets. There may not be a complete correlation between the price of options or futures and the market prices of the underlying securities. The Fund may lose the ability to profit from an increase in the market value of the underlying securities or may lose its premium payment. If due to a lack of a market the Fund could not effect a closing purchase transaction with respect to an OTC option, it would have to hold the callable securities until the call lapsed or was exercised. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FIRM COMMITMENTS: All Funds may purchase securities on a "when-issued" or "delayed delivery" basis or may either purchase or sell securities on a "firm commitment basis", whereby the price is fixed at the time of commitment but delivery and payment may be as much as a month or more later. The underlying securities are subject to market fluctuations and no interest accrues prior to delivery of the securities. RIGHTS AND WARRANTS (GLOBAL EQUITY, GLOBAL INCOME AND GROWTH AND INCOME FUNDS): Each of these Funds may invest up to 5% of its total assets in rights or warrants which entitle the holder to buy equity securities at a specific price for a specific period of time. The 5% limitation is not a fundamental policy for the Global Equity and Global Income Funds. - --------------------------------------------- DIVIDENDS AND DISTRIBUTIONS The U.S. Government Income, Investment Quality Income and Global Income Funds declare dividends of their net investment income, consisting of interest earned less estimated expenses, on a daily basis. These dividends are paid monthly. You are entitled to receive the dividend declared on the day after the Transfer Agent receives payment for your shares of these funds. Dividends from net investment income are declared and paid quarterly for the Growth and Income Fund. The Quest for Value, Small Capitalization, Opportunity and Global Equity Funds declare and pay dividends from net investment income on an annual basis following the end of their fiscal years (October 31, except for the Global Equity and Global Income Funds, which is November 30). The Funds may at times make payments from sources other than income or net capital gains. Payments from such sources would, in effect, represent a return of each shareholder's investment. All or a portion of such payments would not be taxable to shareholders. Distributions from net long-term capital gains, if any, for all Funds normally are declared and paid annually, subsequent to the end of their respective 31 fiscal years. Distributions from net short-term capital gains, if any, for the U.S. Government Income Fund will be made quarterly and for all other Funds will be made annually. Short-term capital gains include the gains from the disposition of securities held less than one year, a portion of the premiums from expired put and call options written by a Fund and net gains from closing transactions with respect to such options. If required by tax laws to avoid excise or other taxes, dividends and/or capital gains distributions may be made more frequently. Dividends paid by any Fund with respect to Class A, B and C shares, to the extent any dividends are paid, will be calculated in the same manner at the same time on the same day, with each class bearing its own distribution and other class-related expenses. Accordingly, the higher distribution fees paid by Class B and C shares and the higher resulting expense ratio will cause such shares to be paid lower per share dividends than those paid on Class A shares. However, a Class B or C shareholder will receive more shares at the time of purchase than a Class A shareholder investing the same dollar amount since no sales charge is deducted from the amount invested in Class B or C shares. REINVESTMENT OPTIONS: You can receive your dividends and capital gains distributions either in cash or in additional Fund shares without a sales charge. You will be subject to tax on such distributions. See the SAI for a description of how to change your election. - --------------------------------------------- TAX STATUS The Funds intend to qualify for taxation as regulated investment companies under the provisions of Subchapter M of the Internal Revenue Code. As such, the Funds will not be taxed on their net investment income or net realized capital gains, if any, to the extent they have been distributed to their shareholders. Distributions from the Funds' income and short-term capital gains are taxed as ordinary income while long-term capital gains distributions by the Fund are taxed to you as long-term capital gains, regardless of how long you have held your shares. While tax treatment varies from state to state, some portion of the dividends of the U.S. Government Income Fund should be exempt from income taxes in most states depending, in part, on the percentage of income that is derived from direct U.S. Government obligations. The U.S. Government Income Fund will send you its best information on the tax status of dividends under the laws of each state and will provide information regarding the source (including the percentage of income derived from direct U.S. Government obligations) of all its dividends and distributions. For purposes of Federal income tax, futures contracts and certain options, if any, held by the Funds at the end of their respective fiscal years generally will be treated as having been sold at market value. As a general rule any gain or loss on such contracts will be treated as 60% long-term and 40% short-term. See the SAI for more detail on the tax aspects of Hedging Instruments. Dividends will qualify for the dividends received deduction for corporations only to the extent of a Fund's qualifying dividend income. Since the income received by the U.S. Government Income, Investment Quality Income and Global Income Funds will be derived from interest income rather than dividend income, their dividends normally will not qualify for this deduction. Shortly after the end of each calendar year, the Funds will send you a statement of the amount and nature of net income and capital gains. Dividends, interest and gains on foreign securities may give rise to withholding and other taxes imposed by foreign countries, reducing the amount distributable to you. Tax conventions between certain countries and the United States may reduce or eliminate such taxes. The Global Equity and Global Income Funds may each qualify to make an election 32 to allow you either to claim United States foreign tax credits with respect to such foreign taxes withheld or paid, or to deduct such amounts as an itemized deduction on your tax return. This would increase your taxable income (in addition to income you actually received) by the amount of such taxes and these Funds would not be able to deduct such taxes in computing their taxable income. The above information is a summary of the tax treatment that will be applied to a Fund and its distributions. You should contact your tax adviser, particularly in connection with state and local taxes. - --------------------------------------------- INVESTMENT MANAGEMENT AGREEMENT The day-to-day management of the Funds is the responsibility of Quest Advisors, operating under the supervision of the Board of Directors or Trustees of each Fund. Quest Advisors is a majority-owned subsidiary of Oppenheimer Capital, a registered investment advisor, whose employees perform all investment advisory services provided to the Funds by Quest Advisors. For its services each Fund is authorized to pay Quest Advisors a monthly fee at the following annual rates, based on each Fund's daily net assets: Quest for Value, Small Capitalization and Opportunity--1.00%; Growth and Income--.85%; Global Equity--.75%; U.S. Government Income and Investment Quality Income--.60%; and Global Income-- .50%. The fees paid by the Quest for Value, Small Capitalization, Opportunity and Growth and Income Funds are higher than that paid by most other investment companies. The fee of the Global Equity Fund combined with the administration fee described below, is also higher than that paid by most other investment companies. Each of the Funds except Quest for Value, Global Income and Global Equity also reimburses Quest Advisors on a cost basis for bookkeeping and accounting services performed on behalf of each Fund. The U.S. Government Income Fund, the Small Capitalization Fund, the Opportunity Fund, the Investment Quality Income Fund and the Growth and Income Fund have retained State Street Bank and Trust Company ("State Street"), the custodian of each of the Funds, to calculate the net asset value of each class of the Fund's shares and prepare the Fund's books and records. State Street also performs such services for the Quest for Value Fund, the Global Income Fund and the Global Equity Fund but the fees for such services are paid by Quest Advisors. Pursuant to Administration Agreements with the Global Equity and Global Income Funds, Quest Advisors provides administrative services and manages the business affairs of each Fund. Such services include maintenance of the Fund's books and records, monitoring the activities of entities providing services to the Fund, furnishing office space, facilities, equipment, clerical help and bookkeeping and legal services required in the conduct of the Fund's business, including the preparation of proxy statements and reports filed with federal and state securities commissions (except to the extent that the participation of independent accountants and attorneys is, in the opinion of Quest Advisors, necessary or desirable). Quest Advisors bears the cost of telephone service, heat, light, power and other utilities provided to the Fund. For these services, the Fund pays Quest Advisors a fee at the annual rate of .25% of average daily net assets of the respective Fund. Each Fund is responsible for bearing certain expenses attributable to the Fund but not to a particular class ("Fund Expenses"), including deferred organization expenses; taxes; registration fees; typesetting of prospectuses and financial reports required for distribution to shareholders; brokerage commissions; fees and related expenses of trustees or directors who are not interested persons; legal, accounting and audit expenses; 33 custodian fees; insurance premiums; and trade association dues. Fund Expenses will be allocated based on the total net assets of each class. Each class of shares of each Fund will also be responsible for certain expenses attributable only to that class ("Class Expenses"). These Class Expenses may include distribution and service fees, transfer and shareholder servicing agent fees, professional fees, printing and postage expenses for materials distributed to current shareholders, state registration fees and shareholder meeting expenses. Such items are considered Class Expenses provided such fees and expenses relate solely to such Class. A portion of printing expenses, such as typesetting costs, will be divided equally among the Funds, while other printing expenses, such as the number of copies printed, will be considered Class Expenses. Quest Advisors will assume expenses of each class of the Funds in the event that aggregate ordinary operating expenses incurred in any fiscal year exceed the most restrictive expense limitations imposed upon the Funds in states in which shares are then eligible for sale. Currently the most restrictive expense limitation, which excludes certain distribution fees from operating expenses, is 2 1/2% of the first $30 million of average net assets, 2% of the next $70 million of average net assets and 1 1/2% of the remaining average net assets. Quest Advisors has agreed to limit Fund Expenses (as defined above) of the Growth and Income and Global Income Funds so that annualized operating Fund Expenses, exclusive of Class Expenses (as defined above), do not exceed 1.50% and 1.45%, respectively, of each Fund's average daily net assets; this expense limitations are voluntary and may be discontinued at any time. Quest Advisors may make additional waivers of its management fee and/or assume Fund expenses on a voluntary basis. Quest Advisors has retained New Castle Advisers Inc. ("New Castle") as the Subadvisor for the U.S. Government Income Fund pursuant to an agreement with Quest Advisors whereby New Castle provides advice and assistance in connection with the options and financial futures investments of the U.S. Government Income Fund. New Castle, a registered investment advisor, maintains an office at 1 Barker Avenue, White Plains, New York, and has been in business since 1991. Howard Potter is the President and Chief Executive Officer of New Castle and is the sole stockholder. Prior to establishing New Castle, Mr. Potter was the individual responsible for developing investment strategies for options and financial futures for Oppenheimer & Co., Inc, subadvisor to the U.S. Government Income Fund from April 29, 1988 to November 1, 1991. Quest Advisors will pay New Castle 20% of the advisory fee paid by the U.S. Government Income Fund to the Advisor, subject to certain reimbursements. There is no additional cost to the U.S. Government Income Fund from this agreement. Prior to January 1, 1994, Quest Advisors had retained Clay Finlay Inc. (formerly Globe Finlay Inc.) as the Subadvisor for the Global Equity Fund pursuant to an agreement with Quest Advisors whereby Clay Finlay had the primary responsibility for selecting non-U.S. securities, subject to the overall review of Quest Advisors. This agreement was terminated effective December 31, 1993 and management of the non-U.S. portion of the Fund's portfolio was assumed by Quest Advisors. Oppenheimer Financial Corp., a holding company holds a 33% interest in Oppenheimer Capital, a registered investment advisor, and Oppenheimer Capital, L.P., a Delaware limited partnership whose units are traded on the New York Stock Exchange and of which Oppenheimer Financial Corp. is the sole general partner, owns the remaining 67% interest. Oppenheimer Capital has operated as an investment advisor since 1968. 34 - --------------------------------------------- DISTRIBUTION PLAN Each Class of shares of each Fund has adopted a Distribution Plan and Agreement (the "Plan(s)") pursuant to Rule 12b-1 adopted under the Investment Company Act of 1940. Under the Plans, Class A, B and C shares of each of the Funds are authorized to pay Quest Distributors a distribution fee for expenses incurred in connection with the distribution of shares of the Fund and for shareholder servicing. CLASS A SHARES. Class A shares of each Fund pay Quest Distributors a distribution fee at the following annual rates of each Fund's average daily net assets: U.S. Government Income Fund--.05%, Investment Quality Income and Growth and Income Fund--.15%, all other Funds except Global Income Fund --.25%. Each Fund's Class A Shares also pay a service fee at the annual rate of .25% of average daily net assets. Although the Global Income Fund is authorized under its Plan to pay a distribution fee of .05% and a service fee of .25%, the Board of Directors of the Global Income Fund has set a maximum fee under the Plan of .25%. CLASS B AND C SHARES. Class B and C shares of each Fund pay Quest Distributors a distribution fee at the annual rate of .75% of each Fund's average daily net assets. Class B and C shares of each Fund will also pay a service fee at the annual rate of .25% of each Fund's average daily net assets. The Class B Plans were amended and restated in December 1994, without changing the fees each Fund pays to Quest Distributors under such Plans, to reflect the intention of Quest Distributors to assign its right to payments under the Plans in order to finance Quest Distributors' costs in distributing Plan B Shares. USE OF DISTRIBUTION AND SERVICE FEES. All or a portion of the distribution fees paid by either Class A, B or C shares may be used by Quest Distributors to pay costs of printing reports and prospectuses for potential investors and all or a portion of the distribution and/or service fees may be paid to broker-dealers or others for the provision of personal continuing services to shareholders, including such matters as responding to shareholder inquiries concerning the status of their accounts and assistance in account maintenance matters such as changes in address. Payments under the Plan are not limited to amounts actually paid or expenses actually incurred by Quest Distributors but cannot exceed the maximum rate set by the Plan or by the Board. It is, therefore, possible that Quest Distributors may realize a profit in a particular year as a result of these payments. The Plans have the effect of increasing the Funds' expenses from what they otherwise would be. The Board of each Fund reviews that Fund's distribution payments and may reduce or eliminate the fee at any time without further obligation of the Fund. Investors should understand that the purpose and function of the distribution fee and CDSC applicable to Class B and C shares are the same as the sales charge and distribution fee applicable to Class A shares, i.e., to compensate Quest Distributors for expenses incurred in distributing shares of the Funds. The SAIs contain more information about the Investment Management Agreement and the Plans. - --------------------------------------------- PORTFOLIO TRANSACTIONS AND TURNOVER Quest Advisors may select its affiliate Oppenheimer & Co., Inc. ("Opco"), a registered broker-dealer to execute transactions for the Funds, provided that the commissions, fees or other remuneration received by Opco are reasonable and fair compared to those paid to other brokers in connection with comparable transactions. When selecting broker-dealers other than Opco, 35 Quest Advisors may consider their record of sales of shares of the Funds. (For a further discussion of portfolio trading, see the SAIs, "Investment Objectives, Policies and Restrictions"). Although Quest Advisors cannot accurately predict a Fund's annual turnover rate, it is anticipated that the Small Capitalization, Global Equity and Growth and Income Funds each will have an annual turnover rate (excluding turnover of securities having a maturity of one year or less) of 100% or less and that the U.S. Government Income, Opportunity, Investment Quality Income and Global Income Funds each will have an annual turnover rate of 250% or less. For the year ended October 31, 1994, the annual turnover rate of the Growth and Income Fund was 113%, which was higher than anticipated, as a result of asset allocation shifts made in reaction to interest rate changes and the overall market outlook. To the extent that higher portfolio turnover increases capital gains, more taxes will be payable. See "Tax Status". - --------------------------------------------- ADDITIONAL INFORMATION ORGANIZATION OF THE FUNDS. The Small Capitalization, U.S. Government Income, Investment Quality Income, Opportunity and Growth and Income Funds are portfolios of Quest for Value Family of Funds (the "Trust"), an open-end management investment company organized as a Massachusetts business trust on April 17, 1987. The Trust's other portfolios are National Tax-Exempt, California Tax-Exempt and New York Tax-Exempt Funds and the Officers Fund. The Trust may establish additional portfolios which may have different investment objectives from those stated in this prospectus. Quest for Value Fund, Inc. and Quest for Value Global Equity Fund, Inc. are each open-end diversified management investment companies organized as Maryland corporations. Global Income Fund, an open-end non-diversified management investment company, is a portfolio of Quest for Value Global Funds, Inc., a company organized as a Maryland corporation. None of the Funds is required to hold annual shareholder meetings, although special meetings may be called for a specific Fund or group of Funds as a whole as required by applicable law or as requested in writing by holders of 10% or more of the outstanding shares of the Fund for the purpose of voting upon the question of removal of a director or trustee. Each Fund will assist shareholders in communicating with one another in connection with such a meeting. For matters affecting only one portfolio of Quest for Value Family of Funds or Quest for Value Global Funds, Inc., only the shareholders of that portfolio are entitled to vote. For matters affecting all the portfolios, but affecting them differently, separate votes by portfolio are required. No stock certificates will be issued unless specifically requested in writing. Under Massachusetts law shareholders of the Trust could, in certain circumstances, be held personally liable as partners for obligations of the Trust. The Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust and its portfolios and requires that notice of such disclaimer be given in each instrument entered into or executed by the Trust on behalf of its portfolios. The Declaration of Trust also provides indemnification out of the Trust's property for any shareholder held personally liable for any of the obligations of the Trust. Thus, the risk of loss to a shareholder from being held personally liable for the obligations of the Trust is limited to the unlikely circumstance in which the Trust would be unable to meet its obligations. There is a remote possibility that one Fund might become liable for a misstatement in this Prospectus about another Fund. 36 Each class of shares represents identical interests in the applicable Fund's investment portfolio. As such, they have the same rights, privileges and preferences, except with respect to the: (a) designation of each class, (b) effect of the respective sales charges, if any, for each class, (c) distribution fees borne by each class, (d) expenses allocable exclusively to each class, (e) voting rights on matters exclusively affecting a single class and (f) exchange privilege of each class. PERFORMANCE INFORMATION: From time to time the Funds may advertise yield and total return figures, based on historical earnings. The figures are not intended to indicate future performance. "Yield" is calculated by dividing the net investment income for the stated period (exclusive of gains, if any, from options and financial futures transactions) by the value, at maximum offering price on the last day of the period, of the average number of shares entitled to receive dividends during the period. The yield formula assumes that net investment income is earned at a constant rate and reinvested semi-annually. "Total Return" refers to the average annual compounded rates of return over some representative period that would equate an initial amount invested at the beginning of a stated period to the ending redeemable value of the investment, after giving effect to the reinvestment of all dividends and distributions and deductions of expenses during the period. A Fund also may advertise its total return over different periods of time by means of aggregate, average, year by year or other types of total return figures. In addition, reference in advertisements may be made to ratings and rankings among similar funds by independent evaluators such as Lipper Analytical Services, Inc. or Morningstar and the performance of the Funds may be compared to recognized indices of market performance. Performance data will be computed separately for each Class of shares in accordance with formulas specified by the SEC. POSSIBLE CONFLICTS OF INTEREST BETWEEN CLASSES. The Boards of the Funds have determined that currently no conflict of interest exists between Class A, B and/or C shares of any Fund. On an ongoing basis, the Boards shall monitor the Funds for the existence of any material conflicts between the interests of the classes of outstanding shares. The Boards shall take such action as is reasonably necessary to eliminate any such conflicts that may develop, up to and including establishing a new Fund. CUSTODIAN, TRANSFER AGENT AND SHAREHOLDER SERVICING AGENT. The custodian of the assets, transfer agent and shareholder servicing agent for the Funds is State Street Bank and Trust Company, whose principal business address is P.O. Box 8505, Boston, MA 02266. Cash balances of the Funds with the Custodian in excess of $100,000 are unprotected by Federal deposit insurance. Such uninsured balances may at times be substantial. SHAREHOLDER INQUIRIES. You may telephone 1-800-232-FUND for inquiries concerning the Funds, including purchase and sale of shares of the Funds, as well as inquiries concerning dividends and account statements. If you prefer, you may write to Quest for Value Shareholder Services, P.O. Box 3567, Church Street Station, New York, NY, 10277-1296. Written inquiries concerning management and investment policies of the Funds may be directed to Quest for Value Advisors, One World Financial Center, New York, New York 10281. SHAREHOLDER REPORTS. To reduce expenses, only one copy of financial reports will be mailed to your household, even if you have more than one account in the particular fund. If you wish to receive additional copies of financial reports, please call 1-800-232-FUND. SHAREHOLDER SERVICING AGENT FOR CERTAIN SHAREHOLDERS. Unified Management Corporation (1-800-346-4601) is the shareholder servicing agent 37 for former shareholders of the AMA Family of Funds and clients of AMA Investment Advisers, L.P. who acquire shares of any Quest Fund, and for former shareholders of the Unified Funds and Liquid Green Trusts, accounts which participated or participate in a retirement plan for which Unified Investment Advisers, Inc. or an affiliate acts as custodian or trustee, accounts which have a Money Manager brokerage account, and other accounts for which Unified Management Corporation is the dealer of record. SPECIAL ARRANGEMENTS FOR FORMER SHAREHOLDERS OF AMA FAMILY OF FUNDS AND UNIFIED FUNDS: PURCHASES BY FORMER SHAREHOLDERS OF AMA FAMILY OF FUNDS. All shareholders of the AMA Family of Funds who acquired shares of any Quest Funds pursuant to the combination of a Quest Fund with a portfolio of the AMA Family of Funds who were shareholders of the AMA Family of Funds on February 28, 1991, are able to make future purchases of any of the Funds at net asset value without a sales charge, provided they continuously own shares of a Quest Fund. PURCHASES BY FORMER SHAREHOLDERS OF THE UNIFIED FUNDS. Shareholders who acquired shares of any Quest Fund pursuant to the combination of several Quest Funds (including the Growth and Income and Quest for Value Funds) with portfolios of the Unified Funds are able to make future purchases of any Quest Fund at net asset value without a sales charge, provided that such shareholders continuously own shares of a Quest Fund subsequent to their acquisition of shares of a Quest Fund in the above described transactions. REDEMPTIONS BY FORMER SHAREHOLDERS OF AMA FAMILY OF FUNDS AND UNIFIED FUNDS. While they have no present intention to do so, in the event that Quest Distributors imposes a redemption fee in the future, no redemption fees will be imposed upon redemption of shares of any Quest Fund by former shareholders of the Unified Funds who are entitled to purchase shares of Quest Funds at net asset value (see Purchases by Former Shareholders of the Unified Funds, above). EXCHANGES BY FORMER SHAREHOLDERS OF AMA FAMILY OF FUNDS AND UNIFIED FUNDS. All former shareholders of the AMA Family of Funds who acquired shares of any Quest Fund pursuant to the combination of a Quest Fund with a portfolio of the AMA Family of Funds who were shareholders of the AMA Family of Funds on February 28, 1991 and former shareholders of the Unified Funds who qualify to purchase shares of Quest Funds at net asset value (see Purchases by Former Shareholders of the Unified Funds), will be able to make exchanges into any other Quest Fund without a sales charge provided they continuously own shares of a Quest Fund. They will pay a service fee (currently $5) for administrative services in connection with an exchange into a non-money market fund. 38 APPENDIX The average distribution of investments in bonds by ratings as a percentage of average net assets for the Growth and Income Fund and the Global Income Fund for the fiscal year ended October 31, 1994 and November 30, 1994, respectively, calculated monthly on a dollar-weighted basis was as follows: RATED BONDS
MOODY'S STANDARD & INVESTORS POOR'S SERVICE, INC. CORPORATION PERCENTAGE - --------------- --------------- ------------------------------------- GROWTH AND GLOBAL INCOME FUND INCOME FUND -------------- -------------- Aaa AAA -- 10.2% Aa AA -- 6.5% A A -- -- Baa BBB 6.2% 2.6% Ba BB -- 17.7% B B 6.8% 5.2% Caa CCC 4.4% --
UNRATED BONDS DEEMED COMPARABLE TO THE INDICATED RATING
MOODY'S STANDARD & INVESTORS POOR'S SERVICE, INC. CORPORATION PERCENTAGE - --------------- --------------- ------------------------------------- GROWTH AND GLOBAL INCOME FUND INCOME FUND -------------- -------------- Aaa AAA 0% 15.2% Aa AA 0% 32.2% A A 0% 0% Baa BBB 0% 0% Ba BB 0% 5.6% B B 0% 2.2% Caa CCC 0% 0%
The actual distribution of a Fund's corporate bond investments by rating will vary on any given date. The distribution of a Fund's investments by rating as set forth above should not be considered representative of the future composition of the Fund's portfolio. 41 (This page has been left blank intentionally.) (This page has been left blank intentionally.) QUEST FOR VALUE-SM- FUNDS TWO WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10080 QUEST FOR VALUE-SM- FUNDS TABLE OF CONTENTS Summary of Fund Expenses.................. 2 Financial Highlights...................... 4 Introduction.............................. 6 Investment Objectives of the Funds........ 8 Risk Factors.............................. 12 How to Buy Shares......................... 17 Determining Net Asset Value............... 23 How to Redeem Shares...................... 24 Exchanging Shares......................... 25 Investment Restrictions and Techniques.... 26 Dividends and Distributions............... 31 Tax Status................................ 32 Investment Management Agreement........... 33 Distribution Plan......................... 35 Portfolio Transactions and Turnover....... 35 Additional Information.................... 36 Application Terms and Conditions.......... 39
INVESTMENT ADVISOR: QUEST FOR VALUE ADVISORS ONE WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10281 (800) 232-FUND TRANSFER AGENT: STATE STREET BANK AND TRUST COMPANY BOSTON, MA 02266-8505 GENERAL DISTRIBUTOR: QUEST FOR VALUE DISTRIBUTORS P.O. BOX 3567 CHURCH STREET STATION NEW YORK, NY 10277-1296 (800) 232-FUND QUEST FOR VALUE FUNDS / / GROWTH AND INCOME FUND / / INVESTMENT QUALITY INCOME FUND / / OPPORTUNITY FUND / / SMALL CAPITALIZATION FUND / / U.S. GOVERNMENT INCOME FUND (THE ABOVE FUNDS ARE SERIES OF QUEST FOR VALUE FAMILY OF FUNDS) / / QUEST FOR VALUE FUND, INC. / / QUEST FOR VALUE GLOBAL EQUITY FUND, INC. / / GLOBAL INCOME FUND (A SERIES OF QUEST FOR VALUE GLOBAL FUNDS, INC.) MARCH 1, 1995, AS REVISED JUNE 30, 1995 PROSPECTUS Statement of Additional Information QUEST FOR VALUE GLOBAL EQUITY FUND, INC. QUEST FOR VALUE GLOBAL INCOME FUND (A Series of Quest for Value Global Funds, Inc.) One World Financial Center New York, New York 10281 (800) 232-FUND This Statement of Additional Information (the "Additional Statement") is not a Prospectus. Investors should understand that this Additional Statement should be read in conjunction with the Prospectus dated March 1, 1995 (the "Prospectus") of the Quest for Value Global Equity Fund, Inc. and the Quest for Value Global Income Fund (the "Fund(s)") which may be obtained by written request to State Street Bank and Trust Company ("State Street"), P.O. Box 8505, Boston, MA 02266-8505 or by calling State Street at (800) 232-FUND. The date of this Additional Statement is March 1, 1995. QUEST FOR VALUE is a registered service mark of Oppenheimer Capital TABLE OF CONTENTS Page ---- INVESTMENT OF THE FUNDS' ASSETS. . . . . . . . . . . . . . . . . . . . . . . . 3 OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS. . . . . . . . . . . . . . . . .16 INVESTMENT RESTRICTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . .20 DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 INVESTMENT MANAGEMENT AND OTHER SERVICES . . . . . . . . . . . . . . . . . . .26 DETERMINATION OF NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . .31 PERFORMANCE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . . . . . .32 DISTRIBUTION EXPENSE PLAN. . . . . . . . . . . . . . . . . . . . . . . . . . .36 ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .38 Appendix A -- Ratings. . . . . . . . . . . . . . . . . . . . . . . . . . . . A-1 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1 INVESTMENT OF THE FUNDS' ASSETS The investment objective and policies of the Funds are described in the Prospectus. A further description of the Funds' investments and investment methods appears below. TYPE OF SECURITIES IN WHICH THE FUNDS MAY INVEST. As discussed in the Prospectus, the Funds seek to achieve their investment objectives through investment primarily in equity securities in the case of the Global Equity Fund and investment grade debt securities in the case of the Global Income Fund. In addition to investing directly in equity securities, the Funds may invest in American Depository Receipts ("ADRs") and European Depository Receipts ("EDRs"). Generally, ADRs in registered form are U.S. dollar denominated securities designed for use in the U.S. securities markets, which represent and may be converted into the underlying foreign security. EDRs are typically issued in bearer form and are designed for use in the European securities markets. No more than 5% of the Global Equity Fund's assets will be invested in ADRs or EDRs sponsored by persons other than the underlying issuers. Issuers of the stock of such unsponsored ADRs are not obligated to disclose material information in the United States and, therefore, there may not be a correlation between such information and the market value of such ADRs. Each Fund also may purchase shares of investment companies or trusts which invest principally in securities in which the Fund is authorized to invest. The return on a Fund's investments in investment companies will be reduced by the operating expenses, including investment advisory and administrative fees, of such companies. A Fund's investment in an investment company may require the payment of a premium above the net asset value of the investment company's shares, and the market price of the investment company thereafter may decline without any change in the value of the investment company's assets. Neither Fund, however, will invest in any investment company or trust unless it is believed that the potential benefits of such investment are sufficient to warrant the payment of any such premium. Under the Investment Company Act of 1940, neither Fund may invest more than 10% of its assets in investment companies or more than 5% of its total assets in the securities of any one investment company, nor may it own more than 3% of the outstanding voting securities of any such company. To the extent a Fund invests in securities in bearer form it may be more difficult to recover securities in the event such securities are lost or stolen. If a Fund invests in an entity which is classified as a "passive foreign investment company" ("PFIC") for U.S. tax purposes, the application of certain technical tax provisions applying to such companies could result in the imposition of federal income tax with respect to such investments at the Fund level which could not be eliminated by distributions to shareholders. The U.S. Treasury has issued proposed regulations which establish a mark-to-market regime that allows a regulated investment company ("RIC") to avoid most, if not all, of the difficulties posed by the PFIC rules. In any event, it is not anticipated that any taxes on a Fund with respect to investments in PFIC's would be significant. PRIVATE PLACEMENTS. The Funds may invest in securities which are subject to restriction on resale because they have not been registered under the Securities Act of 1933, or which are otherwise not readily marketable. These securities are generally referred to as private placements or restricted 2 securities. Limitations on the resale of such securities may have an adverse effect on their marketability, and may prevent the Fund from disposing of them promptly at reasonable prices. The Fund may have to bear the expense of registering such securities for resale and risk the substantive delays in effecting such registration. However, as described in the Prospectus, the Funds may avail themselves of recently adopted regulatory changes to the Securities Act of 1933 ("Rule 144A") which permit the Funds to purchase securities which have been privately placed and resell such securities to certain qualified institutional buyers without restriction. Since it is not possible to predict with assurance exactly how this market for restricted securities sold and offered under Rule 144A will develop, the Boards of Directors will carefully monitor the Funds' investments in these securities, focusing on such important factors, among others, as valuation, liquidity and availability of information. This investment practice could have the effect of increasing the level of illiquidity in the Funds to the extent that qualified institutional buyers become, for a time, uninterested in purchasing these restricted securities. Securities of foreign issuers often have not been registered in the U.S. Accordingly, if a Fund wishes to sell unregistered foreign securities in the U.S. it will avail itself of Rule 144A. CONVERTIBLE SECURITIES. The Funds may invest in fixed-income securities which are convertible into common stock. Convertible securities rank senior to common stocks in a corporation's capital structure and, therefore, entail less risk than the corporation's common stock. The value of a convertible security is a function of its "investment value" (its value as if it did not have a conversion privilege), and its "conversion value" (the security's worth if it were to be exchanged for the underlying security, at market value, pursuant to its conversion privilege). To the extent that a convertible security's investment value is greater than its conversion value, its price will be primarily a reflection of such investment value and its price will be likely to increase when interest rates fall and decrease when interest rates rise, as with a fixed-income security (the credit standing of the issuer and other factors may also have an effect on the convertible security's value). If the conversion value exceeds the investment value, the price of the convertible security will rise above its investment value and, in addition, will sell at some premium over its conversion value. (This premium represents the price investors are willing to pay for the privilege of purchasing a fixed-income security with a possibility of capital appreciation due to the conversion privilege.) At such times the price of the convertible security will tend to fluctuate directly with the price of the underlying equity security. Convertible securities may be purchased by the Funds at varying price levels above their investment values and/or their conversion values in keeping with the Funds' objectives. FOREIGN CURRENCY TRANSACTIONS. When a Fund agrees to purchase or sell a security in a foreign market it will generally be obligated to pay or entitled to receive a specified amount of foreign currency and will then generally convert dollars to that currency in the case of a purchase or that currency to dollars in the case of a sale. The Funds will conduct their foreign currency exchange transactions either on a spot basis (i.e., cash) at the spot rate prevailing in the foreign currency exchange market, or through entering into forward foreign currency contracts ("forward contracts") to 3 purchase or sell foreign currencies. A Fund may enter into forward contracts in order to lock in the U.S. dollar amount it must pay or expects to receive for a security it has agreed to buy or sell. A Fund may also enter into forward currency contracts with respect to the Fund's portfolio positions when it believes that a particular currency may change unfavorably compared to the U.S. dollar. A forward contract involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are traded in the interbank market conducted directly between currency traders (usually large, commercial banks) and their customers. A forward contract generally has no deposit requirement, and no commissions are charged at any stage for trades. The Fund's custodian bank will place cash, U.S. Government securities or debt securities in a separate account of the Fund in an amount equal to the value of the Fund's total assets committed to the consummation of any such contract in such account and if the value of the securities placed in the separate account declines, additional cash or securities will be placed in the account on a daily basis so that the value of the account will equal the amount of the Fund's commitments with respect to such forward contracts. If, rather than cash, portfolio securities are used to secure such a forward contract, on the settlement of the forward contract for delivery by the Fund of a foreign currency, the Fund may either sell the portfolio security and make delivery of the foreign currency, or it may retain the security and terminate its contractual obligation to deliver the foreign currency by purchasing an "offsetting" contract obligating it to purchase, on the same settlement date, the same amount of foreign currency. The Funds may effect currency hedging transactions in foreign currency futures contracts, exchange-listed and over-the-counter call and put options on foreign currency futures contracts and on foreign currencies. The use of forward futures or options contracts will not eliminate fluctuations in the underlying prices of the securities which the Funds own or intend to purchase or sell. They simply establish a rate of exchange for a future point in time. Additionally, while these techniques tend to minimize the risk of loss due to a decline in the value of the hedged currency, their use tends to limit any potential gain which might result from the increase in value of such currency. In addition, such transactions involve costs and may result in losses. Although each 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. It will, however, do so from time to time, and investors should be aware of the costs of currency conversion. Although foreign exchange dealers do not charge a fee for conversion, they do realize a profit based on the spread between the prices at which they are buying and selling various currencies. Thus, a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund desire to resell that currency to the dealer. Under Internal Revenue Code Section 988, special rules are provided for certain transactions in a currency other than the taxpayer's functional currency (i.e., unless certain special rules apply, currencies other than the U.S. dollar). In general, foreign currency gains or losses from forward contracts, futures contracts that are not "regulated futures contracts", and from unlisted options will be 4 treated as ordinary income or loss under Code Section 988. Also, certain foreign exchange gains or losses derived with respect to fixed-income securities are also subject to Section 988 treatment. In general, therefore, Code Section 988 gains or losses will increase or decrease the amount of the Fund's investment company taxable income available to be distributed to shareholders as ordinary income, rather than increasing or decreasing the amount of the Fund's net capital gain. Additionally, if Code Section 988 losses exceed other investment company taxable income during a taxable year, the Fund would not be able to make any ordinary income distributions. COLLATERALIZED MORTGAGE OBLIGATIONS. The Global Income Fund may invest in mortgage-backed securities. In addition to securities issued by Ginnie Mae, Fannie Mae and Freddie Mac, another type of mortgage-backed security is the "collateralized mortgage obligation", which is secured by groups of individual mortgages but is similar to a conventional bond where the investor looks only to the issuer for payment of principal and interest. Although the obligations are recourse obligations to the issuer, the issuer typically has no significant assets, other than assets pledged as collateral for the obligations, and the market value of the collateral, which is sensitive to interest rate movements, may affect the market value of the obligations. A public market for a particular collateralized mortgage obligation may or may not develop and thus, there can be no guarantee of liquidity of an investment in such obligations. TIME DEPOSITS AND VARIABLE RATE NOTES. The Global Income Fund may invest in fixed time deposits, whether or not subject to withdrawal penalties; however, investment in such deposits which are subject to withdrawal penalties, other than overnight deposits, are subject to the 15% limit on investments in illiquid securities set forth in the Prospectus. The commercial paper obligations which the Global Income Fund may buy may include variable rate notes. The nature and terms of a variable rate note (i.e., a "Master Note") permit a fund to invest fluctuating amounts at varying rates of interest pursuant to a direct arrangement between a fund as lender, and the issuer, as borrower. It permits daily changes in the amounts borrowed. The fund has the right at any time to increase, up to the full amount stated in the note agreement, or to decrease the amount outstanding under the note. The issuer may prepay at any time and without penalty any part of or the full amount of the note. The note may or may not be backed by one or more bank letters of credit. Because these notes are direct lending arrangements between the fund and the issuer, it is not generally contemplated that they will be traded; moreover, there is currently no secondary market for them. Except as specifically provided in the Prospectus, there is no limitation on the type of issuer from whom these notes will be purchased; however, in connection with such purchase and on an ongoing basis, Quest for Value Advisors ("Quest Advisors") will consider the earning power, cash flow and other liquidity ratios of the issuer, and its ability to pay principal and interest on demand, including in a situation in which all holders of such notes made demand simultaneously. The Global Income Fund will not invest more than 5% of its total assets in variable rate notes. Variable rate notes are subject to the Global Income Fund's investment restriction on illiquid securities unless such notes can be put back to the issuer on demand within seven days. 5 PORTFOLIO TRADING. It is anticipated that the Global Equity Fund's portfolio turnover rate will not exceed 100% in any one year and the Global Income Fund's portfolio turnover rate will not exceed 250% in any one year. However, as it is difficult to anticipate actual portfolio turnover, no guarantee can be given that the actual portfolio turnover rates of the Funds will not be greater or less than these predictions. A 100% turnover rate would occur, for example, if 100% of the securities held in the Fund's portfolio (excluding all securities whose maturities at acquisition were one year or less) were sold and replaced within one year. SECURITY LOANS. Consistent with applicable regulatory requirements and procedures adopted by the Board of Directors, each Fund may lend its portfolio securities to brokers, dealers and other financial institutions, provided that such loans are callable at any time by the Fund (subject to notice provisions described below), and are at all times secured by cash or cash equivalents, which are maintained in a segregated account pursuant to applicable regulations and that are equal to at least the market value, determined daily, of the loaned securities. The advantage of such loans is that the Fund continues to receive the income on the loaned securities while at the same time earning interest on the cash amounts deposited as collateral, which will be invested in short-term obligations. A loan may be terminated by the borrower on one business day's notice, or by the Fund on five business days' notice. If the borrower fails to deliver the loaned securities within five days after receipt of notice, the Fund could use the collateral to replace the securities while holding the borrower liable for any excess of replacement cost over collateral. As with any extensions of credit, there are risks of delay in recovery and in some cases, even loss of rights in the collateral should the borrower of the securities fail financially. However, these loans of portfolio securities will only be made to firms deemed by the Fund's management to be creditworthy and when the income which can be earned from such loans justifies the attendant risks. Upon termination of the loan, the borrower is required to return the securities to the Fund. Any gain or loss in the market price during the loan period would inure to the Fund. A Fund will pay reasonable finder's, administrative and custodial fees in connection with a loan of its securities. The creditworthiness of firms to which each Fund lends its portfolio securities will be monitored on an ongoing basis by its Board of Directors. When voting or consent rights which accompany loaned securities pass to the borrower, each Fund will follow the policy of calling the loaned securities, to be delivered within one day after notice, to permit the exercise of such rights if the matters involved would have a material effect on the Fund's investment in such loaned securities. Neither Fund will lend portfolio securities with a value in excess of one-third of its total assets at the time of the loan. REPURCHASE AGREEMENTS. When cash may be available for only a few days, it may be invested by each Fund in repurchase agreements until such time as it may otherwise be invested or used for payments of obligations of the Fund. Repurchase agreements, which may be viewed as a type of secured lending by a Fund, typically involve the acquisition by the Fund of government securities or other securities from a selling financial institution such as a bank, savings and loan association or broker-dealer. The agreement provides that the Fund will sell back to the institution, and that the 6 institution will repurchase, the underlying security ("collateral") at a specified price and at a fixed time in the future, usually not more than seven days from the date of purchase. The Fund will accrue interest from the institution until the time when the repurchase is to occur. Although such date is deemed by the Fund to be the maturity date of a repurchase agreement, the maturities of securities subject to repurchase agreements are not subject to any limits and may exceed one year. While repurchase agreements involve certain risks not associated with direct investments in debt securities, the Funds follow procedures designed to minimize such risks. These procedures include effecting repurchase transactions only with large, well capitalized and well established financial institutions under guidelines established and monitored by the Directors of the Fund. In addition, the collateral will be maintained in a segregated account and will be marked-to-market daily to determine that the full value of the collateral, as specified in the agreement, does not decrease below the purchase price plus accrued interest. If such decrease occurs, additional collateral will be requested and, when received, added to maintain full collateralization. In the event of a default or bankruptcy by a selling financial institution, the Fund will seek to liquidate such collateral. However, the exercise of the Fund's right to liquidate such collateral could involve certain costs or delays and, to the extent that proceeds from any sale upon a default of the obligation to repurchase were less than the repurchase price, the Fund could suffer a loss. It is the current policy of each Fund not to invest in repurchase agreements that do not mature within seven days if any such investment, together with any other illiquid assets held by the Fund, amount to more than 15% of its total assets. The Funds' investments in repurchase agreements may at times be substantial when, in the view of Quest Advisors, liquidity or other considerations warrant. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS. As discussed in the Prospectus, from time to time, in the ordinary course of business, the Funds may purchase securities on a when-issued or delayed delivery basis and may purchase or sell securities on a forward commitment basis. When such transactions are negotiated, the price is fixed at the time of the commitment, but delivery and payment can take place a month or more after the date of the commitment. The securities so purchased are subject to market fluctuation and no interest accrues to the purchaser during this period. While each Fund will only purchase securities on a when-issued, delayed delivery or forward commitment basis with the intention of acquiring the securities, the Fund may sell the securities before the settlement date, if it is deemed advisable. At the time a Fund makes the commitment to purchase securities on a when-issued or delayed delivery basis, the Fund will record the transaction and thereafter reflect the value, each day, of such security in determining the net asset value of the Fund. At the time of delivery of the securities, the value may be more or less than the purchase price. Each Fund will also establish a segregated account with the Fund's custodian bank in which it will continuously maintain cash or U.S. Government securities or other high grade debt portfolio securities equal in value to commitments for such when-issued or delayed delivery securities; subject to this requirement, each Fund may purchase securities on such basis without limit. An increase in the percentage of a Fund's assets committed to the purchase of securities on a when-issued or delayed delivery basis may increase the volatility of the Fund's net asset value. Each Fund's 7 management and Directors do not believe that such Fund's net asset value or income will be adversely affected by its purchases of securities on such basis. SECURITY SELECTION PROCESS. The allocation of assets of each Fund between U.S. and foreign markets will vary from time to time as deemed appropriate by Quest Advisors. It is a dynamic process based on an on-going analysis of economic and political conditions, the growth potential of the securities markets throughout the world, currency exchange considerations and the availability of attractively priced securities within the respective markets. In all markets, security selection is designed to reduce risk through a value oriented approach in which emphasis is placed on identifying well-managed companies which, in the case of the Global Equity Fund, represent exceptional values in terms of such factors as assets, earnings and growth potential. While the U.S. securities markets represented more than 50% of the capitalization of the global securities markets in the late 1970s, a combination of factors reduced that percentage to approximately 33% as of December 31, 1994. Moreover, the relative performance of the securities markets of different countries, expressed in terms of United States dollars, varies widely. A global portfolio provides U.S. investors with the opportunity to participate in these markets, diversifying their domestic portfolios so that their investments will not be influenced solely by the political, economic and fiscal events affecting the U.S. HEDGING. As stated in the Prospectus, the Global Equity and Global Income Funds may engage in transactions in options and futures. Information about the options and futures transactions the Funds may enter into is set forth below. FINANCIAL FUTURES. The Global Equity and Global Income Funds may purchase and sell futures contracts that are currently traded, or may in the future be traded, on U.S. and foreign commodity exchanges on common stocks, such underlying fixed-income securities as U.S. Treasury bonds, notes, and bills and/or any foreign government fixed-income security ("interest rate" futures), on various currencies ("currency" futures) and on such indexes of U.S. or foreign equity and fixed-income securities as may exist or come into being, such as the Standard & Poor's 500 Index or the Financial Times Equity Index ("index" futures). No price is paid or received upon the purchase of a financial future. Upon entering into a futures transaction, a Fund will be required to deposit an initial margin payment equal to a specified percentage of the contract value. Initial margin payments will be deposited with the Fund's custodian bank in an account registered in the futures commission merchant's name; however, the futures commission merchant can gain access to that account only under specified conditions. As the future is marked to market to reflect changes in its market value, subsequent payments, called variation margin, will be made to or from the futures commission merchant on a daily basis. Prior to expiration of the future, if the Fund elects to close out its position by taking an opposite position, a final determination of variation margin is made, additional cash is required to be paid by or released to the Fund, and any loss or gain is realized for tax purposes. Although financial futures by their terms call for the actual delivery or acquisition of the specified debt security, in most cases the obligation is fulfilled by closing out the position. 8 INFORMATION ON PUTS AND CALLS. Each Fund is authorized to write covered put and call options and purchase put and call options on the securities in which it may invest. When a Fund writes a call, it receives a premium and agrees to sell the callable securities to a purchaser of a corresponding call during the call period (usually not more than 9 months) at a fixed exercise price (which may differ from the market price of the underlying securities) regardless of market price changes during the call period. If the call is exercised, the fund forgoes any possible profit from an increase in market price over the exercise price. The Fund may, in the case of listed options, purchase calls in "closing purchase transactions" to terminate a call obligation. A profit or loss will be realized, depending upon whether the net of the amount of option transaction costs and the premium received on the call written is more or less than the price of the call subsequently purchased. A profit may be realized if the call lapses unexercised, because the Fund retains the underlying security and the premium received. Sixty percent of any such profits are considered long-term gains and forty percent are considered short-term gains for tax purposes. If, due to a lack of a market, the Fund could not effect a closing purchase transaction, it would have to hold the callable securities until the call lapsed or was exercised. The Funds' custodian, or a securities depository acting for the custodian, will act as the Funds' escrow agent, through the facilities of the Options Clearing Corporation ("OCC") in connection with listed calls, as to the securities on which the Funds have written calls, or as to other acceptable escrow securities, so that no margin will be required for such transaction. OCC will release the securities on the expiration of the calls or upon the Fund's entering into a closing purchase transaction. When a Fund purchases a call (other than in a closing purchase transaction), it pays a premium and has the right to buy the underlying investment from a seller of a corresponding call on the same investment during the call period (or on a certain date for OTC options) at a fixed exercise price. A Fund benefits only if the call is sold at a profit or if, during the call period, the market price of the underlying investment is above the call price plus the transaction costs and the premium paid for the call and the call is exercised. If a call is not exercised or sold (whether or not at a profit), it will become worthless at its expiration date and the Fund will lose its premium payment and the right to purchase the underlying investment. With OTC options, such variables as expiration date, exercise price and premium will be agreed upon between a Fund and the transacting dealer, without the intermediation of a third party such as the OCC. If a transacting dealer fails to make delivery on the securities underlying an option it has written, in accordance with the terms of the option as written, the Fund could lose the premium paid for the option as well as any anticipated benefit of the transaction. The Global Equity Fund will engage in OTC option transactions only with primary U.S. Government securities dealers recognized by the Federal Reserve Bank of New York. In the event that any OTC option transaction is not subject to a forward price at which the Fund has the absolute right to repurchase the OTC option which it has sold, the value of the OTC option purchased and of the Fund assets used to "cover" the OTC option will be considered "illiquid securities" and will be subject to the 10% limit on illiquid securities. The "formula" on which the forward price will be based may vary among contracts with different primary dealers, but it will be based on a multiple of the premium received by the Fund for 9 writing the option plus the amount, if any, of the option's intrinsic value, i.e., current market value of the underlying securities minus the option's strike price. A put option gives the purchaser the right to sell, and the writer the obligation to buy, the underlying investment at the exercise price during the option period (or on a certain date for OTC options). The investment characteristics of writing a put covered by segregated liquid assets equal to the exercise price of the put are similar to those of writing a covered call. The premium paid on a put written by a Fund represents a profit, as long as the price of the underlying investment remains above the exercise price. However, the Fund has also assumed the obligation during the option period to buy the underlying investment from the buyer of the put at the exercise price, even though the value of the investment may fall below the exercise price. If the put expires unexercised, the Fund (as writer) realizes a gain in the amount of the premium. If the put is exercised, the Fund must fulfill its obligation to purchase the underlying investment at the exercise price, which will usually exceed the market value of the investment at that time. In that case, the Fund may incur a loss upon disposition, equal to the sum of the sale price of the underlying investment and the premium received minus the sum of the exercise price and any transaction costs incurred. When writing put options, to secure its obligation to pay for the underlying security, the Fund will deposit in escrow liquid assets with a value equal to at least the exercise price of the option. As a result, the Fund forgoes the opportunity of investing the segregated assets or writing calls against those assets. As long as the Fund's obligation as a put writer continues, the Fund may be assigned an exercise notice by the broker-dealer through whom such option was sold, requiring the Fund to purchase the underlying security at the exercise price. The Fund has no control over when it may be required to purchase the underlying security, since it may be assigned an exercise notice at any time prior to the termination of its obligation as the writer of the put. This obligation terminates upon the earlier of the expiration of the put, or the consummation by the Fund of a closing purchase transaction by purchasing a put of the same series as that previously sold. Once the Fund has been assigned an exercise notice, it is thereafter not allowed to effect a closing purchase transaction. A Fund may effect a closing purchase transaction to realize a profit on an outstanding put option it has written or to prevent an underlying security from being put to it. Furthermore, effecting such a closing purchase transaction will permit the Fund to write another put option to the extent that the exercise price thereof is secured by the deposited assets, or to utilize the proceeds from the sale of such assets for other investments by the Fund. The Fund will realize a profit or loss from a closing purchase transaction if the cost of the transaction is less or more than the premium received from writing the option. When a Fund purchases a put, it pays a premium and has a right to sell the underlying investment at a fixed exercise price to a seller of a corresponding put on the same investment during the put period if it is a listed option (or on a certain date if it is an OTC option). Buying a put on securities or futures held by it permits 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. In the event of a decline in 10 the market, the Fund could exercise, or sell the put option at a profit that would offset some or all of its loss on the portfolio securities. If the market price of the underlying investment is above the exercise price and as a result, the put is not exercised, the put will become worthless at its expiration date and the purchasing Fund will lose the premium paid and the right to sell the underlying securities; the put may, however, be sold prior to expiration (whether or not at a profit). Purchasing a put on futures or securities not held by it permits the Fund to protect its portfolio securities against a decline in the market to the extent that the prices of the future or securities underlying the put move in a similar pattern to the prices of the securities in the Fund's portfolio. An option position may be closed out only on a market which provides secondary trading for options of the same series, and there is no assurance that a liquid secondary market will exist for any particular option. A Fund's option activities may affect its turnover rate and brokerage commissions. The exercise of calls written by a Fund may cause that Fund to sell from its portfolio securities to cover the call, thus increasing its turnover rate in a manner beyond the Fund's control. The exercise of puts on securities or futures will increase portfolio turnover. Although such exercise is within a Fund's control, holding a put might cause that Fund to sell the underlying investment for reasons which would not exist in the absence of the put. The Fund will pay a brokerage commission every time it purchases and sells a put or a call or purchases or sells a related investment in connection with the exercise of a put or a call. Each Fund may purchase and write call and put options on futures contracts which are traded on an exchange and enter into closing transactions with respect to such options to terminate an existing position. An option on a futures contract gives the purchaser the right (in return for the premium paid) to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during the term of the option. Upon exercise of the option, the delivery of the futures position by the writer of the option to the holder of the option is accompanied by delivery of the accumulated balance in the writer's futures margin account, which represents the amount by which the market price of the futures contract at the time of exercise exceeds, in the case of a call, or is less than, in the case of a put, the exercise price of the option on the futures contract. A Fund may purchase and write options on futures contracts for hedging purposes. The purchase of a call option on a futures contract is similar in some respects to the purchase of a call option on an individual security. Depending on the pricing of the option compared to either the price of the futures contract upon which it is based or the price of the underlying securities, it may or may not be less risky than ownership of the futures contract or underlying securities. As with the purchase of futures contracts, when a Fund is not fully invested it may purchase a call option on a futures contract to hedge against an anticipated increase in securities prices. The writing of a call option on a futures contract constitutes a partial hedge against declining prices of the security which is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is below the exercise price, the Fund will retain the full amount of the option 11 premium which provides a partial hedge against any decline that may have occurred in the Fund's portfolio holdings. The writing of a put option on a futures contract constitutes a partial hedge against increasing prices of the security which is deliverable upon exercise of the futures contract. If the futures price at expiration of the option is higher than the exercise price, the Fund will retain the full amount of the option premium which provides a partial hedge against any increase in the price of securities which the Fund intends to purchase. If a put or call option the Fund has written is exercised, the Fund will incur a loss which will be reduced by the amount of the premium it receives. Depending on the degree of correlation between changes in the value of its portfolio securities and changes in the value of its futures positions, the Fund's losses from existing options may to some extent be reduced or increased by changes in the value of portfolio securities. The purchase of a put option on a futures contract is similar in some respects to the purchase of protective put options on portfolio securities. For example, a Fund may purchase a put option on a futures contract to hedge the Fund's portfolio against the risk of a decline in securities prices. The amount of risk a Fund assumes when it purchases an option on a futures contract is the premium paid for the option plus related transaction costs. In addition to the correlation risks discussed above, the purchase of an option also entails the risk that changes in the value of the underlying futures contract will not be fully reflected in the value of the option purchased REGULATORY ASPECTS OF HEDGING INSTRUMENTS. Transactions in options by a Fund are subject to limitations established (and changed from time to time) by each of the exchanges governing the maximum number of options which may be written or held by a single investor or group of investors acting in concert, regardless of whether the options were written or purchased on the same or different exchanges or are held in one or more accounts or through one or more different exchanges or through one or more brokers. Thus, the number of options which a fund may write or hold may be affected by options written or held by other investment companies and discretionary accounts of the manager, including other investment companies having the same or an affiliated investment advisor. An exchange may order the liquidation of positions found to be in violation of those limits and may impose certain other sanctions. Due to requirements under the Investment Company Act of 1940 (the "1940 Act"), when a Fund sells a future, it will maintain in a segregated account or accounts with its custodian bank, cash or readily marketable short-term (maturing in one year or less) debt instruments in an amount equal to the market value of such future, less the margin deposit applicable to it unless the Fund holds an offsetting position. Each Fund must operate within certain restrictions as to its long and short positions in futures and options thereon under a rule ("CFTC Rule") adopted by the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange Act (the "CEA"), which excludes the Fund from registration with the CFTC as a "commodity pool operator" (as defined under the CEA). Under those restrictions a fund may not enter into any financial futures or options contract unless such 12 transactions are for bona fide hedging purposes, or for other purposes only if the aggregate initial margins and premiums required to establish such non- hedging positions would not exceed 5% of the liquidation value of its assets. A fund may use futures and options thereon for bona fide hedging or for other purposes within the meaning and intent of the applicable provisions of the CEA. TAX ASPECTS OF HEDGING INSTRUMENTS. Each Fund intends to qualify as a "regulated investment company" under the Internal Revenue Code. One of the tests for such qualification is that at least 90% of its gross income must be derived from dividends, interest and gains from the sale or other disposition of securities. Another test is that less than 30% of its gross income must be derived from gains realized on the sale of securities held for less than three months. In connection with the 90% test, the Internal Revenue Code specifies that income from options, futures and other gains derived from investments in securities is qualifying income under the 90% test. Due to the 30% limitation, each Fund will limit the extent to which it engages in the following activities, but, except as otherwise set forth herein or in the Prospectus, will not be precluded from them: (i) selling investments, including futures, held for less than three months, whether or not they were purchased on the exercise of a call held by the Fund; (ii) writing or purchasing calls on investments held less than three months; (iii) purchasing calls or puts which expire in less than three months; (iv) effecting closing transactions with respect to calls or puts purchased less than three months previously; and (v) exercising put or calls held by the Fund for less than three months. Regulated futures contracts, options on certain broad-based stock indices, options on stock index futures, certain other futures contracts and options thereon (collectively, "Section 1256 contracts") held by a fund at the end of each taxable year may be required to be "marked to market" for federal income tax purposes (that is, treated as having been sold at that time at market value). Any unrealized gain or loss taxed pursuant to this rule will be added to realized gains or losses recognized on Section 1256 contracts sold by a fund during the year, and the resulting gain or loss will be deemed to consist of 60% long-term capital gain or loss and 40% short-term capital gain or loss. A fund may elect to exclude certain transactions from the mark-to-market rule although doing so may have the effect of increasing the relative proportion of short-term capital gain (taxable as ordinary income) and/or increasing the amount of dividends that must be distributed annually to meet income distribution requirements. It should also be noted that under certain circumstances, the acquisition of positions in hedging instruments may result in the elimination or suspension of the holding period for tax purposes of other assets held by a Fund with the result that the relative proportion of short-term capital gains (taxable as ordinary income) could increase. POSSIBLE RISK FACTORS IN HEDGING. There is a risk in selling futures that the prices of futures will correlate imperfectly with the behavior of the cash (i.e., market value) prices of a fund's securities. The ordinary spreads between prices in the cash and futures markets are subject to distortions due to differences in the natures of those markets. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional margin deposit 13 requirements, investors may close out futures contracts through offsetting transactions which could distort the normal relationship between the cash and futures markets. Second, the liquidity of the futures 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 market. Therefore, increased participation by speculators in the futures market may cause temporary price distortions. If Quest Advisors' investment judgment about the general direction of securities prices is incorrect, a Fund's overall performance would be poorer than if it had not entered into a Hedging Transaction. For example, if a Fund has hedged against the possibility of a decrease in securities prices which would adversely affect the price of securities held in its portfolio and securities prices increase instead, the Fund will lose part or all of the benefit of the increased value of its securities which it has hedged because it will have offsetting losses in its futures positions. In addition, in such situations, if the Fund has insufficient cash, it may have to sell securities from its portfolio to meet daily variation margin requirements. Such sales of securities may be, but will not necessarily be, at increased prices which reflect the rising market. The Fund may have to sell securities at a time when it may be disadvantageous to do so. Also when an options or futures position is a temporary substitute for the purchase of individual securities (long hedging) by buying futures and/or calls on such futures or on a particular security, it is possible that the market may decline. If the Fund then concludes not to invest in such securities at that time because of concerns as to possible further market decline or for other reasons, it will realize a loss on the position that is not offset by a reduction in the price of the securities purchased. OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS INVESTMENTS IN EASTERN EUROPE. Both the Global Equity Fund and the Global Income Fund are authorized to invest in Eastern European countries; however, the Global Equity Fund presently intends not to invest more than 5% of its assets in such securities. Investments in Eastern Europe are speculative and involve a high degree of risk of loss. The emergence of Eastern European capital markets is in part a function of the policies of the former Gorbachev administration. With the recent change in power and restructuring of the Soviet Union there is no assurance that such markets will continue to constitute a viable investment opportunity for the Funds and there may be a high degree of risk of expropriation without compensation. The governments of a number of Eastern European countries previously expropriated large quantities of private property. The claims of many property owners against those governments were never finally settled. There is no assurance that such expropriation will not occur again. If such expropriation were to recur, the Funds could lose all or a substantial portion of its investments in such countries. Further, no accounting standards comparable to those in the U.S. exist in Eastern European countries. Finally, even though certain Eastern European currencies may be convertible into United States dollars, the conversion rates may be artificial to the actual market values and may be adverse to the shareholders of the Funds. 14 The governments of certain Eastern European countries may require that a governmental or quasi-governmental authority act as custodian of the Fund's assets invested in such countries. These authorities may not be qualified to act as foreign custodians under the 1940 Act and as a result, the Fund would not be able to invest in the countries in the absence of exemptive relief from the Securities and Exchange Commission. In addition, the risk of loss through government confiscation may be increased in such countries. RISKS OF DEBT SECURITIES. Each of the Funds is authorized to invest, to the extent specified in the Prospectus, in bonds rated below Baa by Moody's Investor Service Inc. ("Moody's) or BBB by Standard & Poor's Corporation ("S&P") ("high yield bonds," commonly known as "junk bonds"). Securities rated less than Baa by Moody's or BBB by S&P are classified as non-investment grade securities and are considered speculative by those rating agencies. Such bonds may be issued as a consequence of corporate restructurings, such as leveraged buyouts, mergers, acquisitions, debt recapitalizations, or similar events or by smaller or highly leveraged companies. Although the growth of the high yield securities market in the 1980s had paralleled a long economic expansion, recently many issuers have been affected by adverse economic and market conditions. It should be recognized that an economic downturn or increase in interest rates is likely to have a negative effect on (i) the high yield bond market, (ii) the value of high yield securities and (iii) the ability of the securities' issuers to service their principal and interest payment obligations, to meet their projected business goals or to obtain additional financing. When economic conditions appear to be deteriorating, these bonds may decline in market value regardless of prevailing interest rates due to heightened investor concerns over credit quality. In such periods the ability of highly leveraged issuers to service principal and interest payments, to meet their business goals or obtain additional financing could be adversely affected. These bonds may also be affected by legislative and regulatory developments. The market for these bonds may, therefore, be less liquid than for investment grade bonds and their prices more volatile. In addition, there may at times be significant disparities in the prices quoted for such bonds by various dealers, making it difficult for the Funds to rely on such quotes. Also, prices for high yield bonds may be affected by legislative and regulatory developments. For example, new federal rules require that savings and loans gradually reduce their holding of high-yield securities. Also, from time to time, Congress has considered legislation to restrict or eliminate the corporate tax deduction for interest payments or to regulate corporate restructurings such as takeovers, mergers or leveraged buyouts. Such legislation, if enacted, may depress the prices of outstanding high yield bonds. Debt securities rated in the lowest category by Moody's are of poor standing and there may be present elements of danger with respect to principal or interest. Debt securities rated in the lowest category by S&P have a currently identifiable vulnerability to default and are dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal. In the event of adverse business conditions they are not likely to have the capacity to pay interest and repay principal. BRADY BONDS. The Global Income Fund may invest in Brady Bonds and other sovereign debt securities of countries that have restructured or are in the process of restructuring sovereign debt pursuant to the Brady Plan. Brady Bonds are debt securities issued under the framework of the Brady 15 Plan, an initiative introduced by former Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to restructure their outstanding external commercial bank indebtedness. In restructuring its external debt under the Brady Plan, a debtor nation negotiates with its existing bank lenders as well as multilateral institutions such as the World Bank or International Money Fund ("IMF"). As it has developed, the Brady Plan contemplates the exchange of commercial bank debt for newly issued Brady Bonds. Brady Bonds may also be issued in respect of new money being advanced by existing lenders in connection with the debt restructuring. The World Bank and/or the IMF support the restructuring by providing funds pursuant to loan agreements or other arrangements which enable the debtor nation to collateralize the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under these arrangements with the World Bank and/or IMF, debtor nations have been required to agree to implement certain domestic monetary and fiscal reforms. Such reforms have included the liberalization of trade and foreign investment, the privatization of state-owned enterprises and the setting of targets for public spending and borrowing. These policies and programs seek to promote the debtor country's ability to service its external obligations and promote its economic growth and development. Investors should be aware that the Brady Plan only sets forth general guidelines for economic reform and debt reduction, emphasizing that solutions must be negotiated on a case-by-case basis between debtor nations and their creditors. Quest Advisors believes that economic reforms undertaken by countries in connection with the issuance of Brady Bonds make the debt of countries which have issued or have announced plans to issue Brady Bonds an attractive opportunity for investment. Investors should recognize that Brady Bonds have been issued only recently and, accordingly, do not have a long payment history. Agreements implemented under the Brady Plan to date are designed to achieve debt and debt-service reduction through specific options negotiated by a debtor nation with its creditors. As a result, the financial packages offered by each country differ. Variations have included but are not limited to the exchange of outstanding commercial bank debt for: (1) bonds issued at 100% of the face value of such debt, which carry a below-market stated rate of interest (generally known as par bonds); (2) bonds issued at a discount from the face value of such debt (generally known as discount bonds); (3) bonds bearing an interest rate which increases over time; and (4) bonds issued in exchange for the advancement of new money by existing lenders. Regardless of the stated face amount and stated interest rate of the various types of Brady Bonds, the Global Income Fund may purchase Brady Bonds in secondary markets in which the price and yield to the investor reflect market conditions at the time of purchase. (Brady Bonds issued to date are purchased and sold in secondary markets through U.S. securities dealers and other financial institutions and are generally maintained through European transnational securities depositories.) Certain Brady Bonds have been collateralized as to principal due at maturity by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity of such Brady Bonds, although the collateral is not available to investors until the final maturity of the Brady Bonds. Collateral purchases are financed by the IMF, the World Bank and the debtor nations' reserves. Interest payments on certain types of Brady Bonds may be collateralized by cash or high-grade securities in amounts that typically represent between twelve and eighteen months of interest accruals on these instruments with the balance of the interest accruals being uncollateralized. The Global Income Fund may purchase Brady Bonds with limited or no 16 collateralization and will be relying primarily on the willingness and ability of the foreign government to make payment of interest and principal (except in the case of principal collateralized Brady Bonds) in accordance with the terms of the Brady Bonds. A substantial portion of the Brady Bonds and other sovereign debt securities in which the Global Income Fund invests are likely to be acquired at a discount. Pursuant to the Internal Revenue Code, the Fund is required to accrue a portion of any original issue or market discount with respect to such securities as income each year even though the Fund does not receive interest payments in cash during the year which reflect the discount so accrued. As a result, the Fund may make distributions of net investment income in excess of the total amount of cash interest actually received. SOVEREIGN DEBT. The Global Income Fund may purchase sovereign debt instruments issued or guaranteed by foreign governments, their political subdivisions, agencies, instrumentalities or central banks. Sovereign debt may be in the form of conventional securities or other types of debt instruments such as loans or loan participations. Governmental entities responsible for repayment of the debt may be unable or unwilling to repay principal and interest when due, and may require renegotiation or rescheduling of debt payments. Prospects for repayment of principal and interest may depend on the political climate in the relevant country as well as economic factors. A governmental entity's willingness or ability to repay principal and interest in a timely manner may be affected by, among other things, its cash flow situation, the extent of its foreign reserves, the availability of sufficient foreign exchange on the date a payment is due, the relative size of the debt service burden to the economy as a whole, the governmental entity's policy toward the IMF, and the political constraints to which a governmental entity may be subject. Such entities may also be dependent on expected disbursements from foreign governments, multilateral agencies and others abroad to reduce principal and interest arrearage on their debt. The commitment on the part of these governments, agencies and others to make such disbursements may be conditioned on a governmental entity's implementation of economic reforms and/or economic performance and the timely service of such debtor's obligations. Failure to implement such reforms, achieve such levels of performance or repay principal or interest when due may result in the cancellation of such third parties' commitments to lend funds to the governmental entity, which may further impair such debtor's ability or willingness to service its debts in a timely manner. Consequently, governmental entities may default on government securities. Holders of foreign government securities, including the Fund, may be requested to participate in the rescheduling of such debt and to extend further loans to governmental entities. There is no bankruptcy proceeding by which defaulted foreign government securities may be collected in whole or in part. RIGHTS AND WARRANTS. As mentioned in the Prospectus, each of the Funds may invest in rights and warrants which entitle the holder to buy equity securities at a specified price for a specific period of time. Such securities do not entitle a holder to dividends or voting rights with respect to the securities which may be purchased, nor do they represent any rights to the assets of the issuing company. The value of a right or warrant may be more volatile than the value of the underlying securities. Also, their value does not necessarily change with the value of the underlying securities and 17 a right or warrant ceases to have value if it is not exercised prior to the expiration date. Rights and warrants purchased by a Fund which expire without being exercised will result in a loss to the Fund. FOREIGN CUSTODY. Rules adopted under the 1940 Act permit each Fund to maintain its securities and cash in the custody of certain eligible banks and securities depositories. The Funds' portfolios of securities of issuers located outside of the U.S. will be held by their sub-custodians who will be approved by the directors in accordance with such Rules. Such determination will be made pursuant to such Rules following a consideration of a number of factors, including, but not limited to, the reliability and financial stability of the institution; the ability of the institution to perform custodial services for the Fund; the reputation of the institution in its national market; the political and economic stability of the country in which the institution is located; and the risks of potential nationalization or expropriation of the Fund's assets. However, no assurances can be given that the directors' appraisal of the risks in connection with foreign custodial arrangements will always be correct or that expropriation, nationalization, freezes (including currency blockage), or confiscations of assets that would affect assets of the Fund will not occur, and shareholders bear the risk of losses arising from those or other similar events. BORROWING. As discussed in the Prospectus, the Funds will not borrow money except as a temporary measure for extraordinary or emergency purposes. Such borrowing shall not exceed 33 1/3% of the value of a Fund's assets, provided that a Fund will make no additional investments while such borrowing exceeds 5% of its assets. Borrowing may exaggerate the effect of any increase or decrease in the value of the portfolio securities on a Fund's net asset value and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining average balances) which may or may not exceed the income received from the securities purchased with borrowed funds. ADDITIONAL RISKS. Securities in which the Funds may invest are subject to the provisions of bankruptcy, insolvency or other laws affecting the rights and remedies of creditors, such as the federal Bankruptcy Code, and laws, if any, which may be enacted by Congress or the state legislatures extending the time for payment of principal or interest, or both or imposing other constraints upon enforcement of such obligations. INVESTMENT RESTRICTIONS The Funds' significant investment restrictions are described in the Prospectus. The following are also fundamental policies and, together with the restrictions and other fundamental policies described in the Prospectus, cannot be changed without the vote of a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act. Such a majority is defined as the lesser of (a) 67% or more of the shares of the Fund present at a meeting of shareholders of the Fund, if the holders of more than 50% of the outstanding shares of the Fund are present or represented by Proxy or (b) more than 50% of the outstanding shares of the Fund. For purposes of the following restrictions and those contained in the Prospectus: (i) all percentage limitations apply immediately after a purchase or 18 initial investment; (ii) any subsequent change in any applicable percentage resulting from market fluctuations or other changes in the amount of total assets does not require elimination of any security from the Fund; and (iii) the term "industry" does not include the U.S. Government and agencies and instrumentalities of the U.S. Government, although a foreign government is deemed to be an "industry." Unless otherwise noted, the restrictions apply to both Funds. Under these additional restrictions, the Funds cannot: (a) Invest in physical commodities or physical commodity contracts or speculate in financial commodity contracts, but may purchase and sell financial futures contracts and options on such futures contracts exclusively for hedging and other non- speculative purposes; (b) Invest in real estate; however, the Funds may purchase securities of issuers which engage in real estate operations and securities which are secured by real estate or interests therein; (c) Purchase securities on margin (except for such short-term loans as are necessary for the clearance of purchases of portfolio securities) or make short sales of securities. (Collateral arrangements in connection with transactions in futures and options are not deemed to be margin transactions.) (d) Underwrite securities of other companies except insofar as the Fund may be deemed to be an underwriter under the Securities Act of 1933 in disposing of a security (except that each Fund may in the future invest all of its investable assets in an open-end management investment company with substantially the same investment objective and restrictions as the respective Fund); (e) Invest more than 10% of its assets in securities of other investment companies or more than 5% of its assets in the securities of one investment company or more than 3% of the outstanding voting securities of such company, provided that the foregoing restrictions on investment company purchases and holdings by both Funds are inapplicable to acquisitions in connection with a merger, consolidation, reorganization or acquisition of assets (except that each Fund may in the future invest all of its investable assets in an open-end management investment company with substantially the same investment objective and restrictions as the respective Fund); (f) Invest in interests in oil, gas or other mineral exploration or development programs; (g) Invest in securities of any issuer if, to the knowledge of the Fund, any officer or director of the Fund or any officer or director of Quest Advisors owns more than 1/2 of 1% of the outstanding securities of such issuer, and such officers and directors who own more than 1/2 of 1% own in the aggregate more than 5% of the outstanding securities of such issuer; (h) Pledge its assets or assign or otherwise encumber its assets in excess of 33 1/3% of its net assets (taken at market value at the time of pledging) and then only to secure borrowings effected within the limitations set forth in the Prospectus; (i) Invest for the purpose of exercising control or management of another company (except that each Fund may in the future invest all of its investable assets in an open-end management investment company with substantially the same investment objective and restrictions as the respective Fund); and (j) Issue senior securities as defined in the 1940 Act except insofar as the Fund may be deemed to have issued a senior security by reason of: (1) entering into any repurchase agreement; (2) borrowing money in accordance with restrictions described in the Prospectus; or (3) lending portfolio securities. In addition, the Global Equity Fund may not with respect to 75% of its assets, invest more than 5% of the value of its total assets in the securities of any one issuer (except that each Fund may in the future invest all of its investable assets in an open-end management investment company with substantially the same investment objective and restrictions as the respective Fund). In addition, as a non-fundamental investment restriction, the Funds (i) may not purchase 19 warrants if as a result the Fund would then have either more than 5% of its total assets (determined at the time of investment) invested in warrants or more than 2% of its total assets invested in warrants not listed on the New York or American Stock Exchange; (ii) may not invest in real estate limited partnership programs; (iii) may not invest in oil, gas or mineral leases; (iv) may not invest more than 15% of its assets in restricted securities, foreign equity securities not listed on an exchange, illiquid securities, securities for which market quotations are not readily available and repurchase agreements in excess of seven days; and (v) more than 5% of its assets in unseasoned issues. In addition, to comply with a state's securities laws, the Funds may not make loans to any person or individual (except that portfolio securities may be loaned within the limitations set forth in the Prospectus). DIRECTORS AND OFFICERS The directors and officers of the Funds, and their principal occupations during the past five years, are set forth below. Directors who are "interested persons", as defined in the 1940 Act, are denoted by an asterisk. The address of each is One World Financial Center, New York, New York 10281, except as noted. As of January 31, 1995 all of the Directors and Officers of the Funds as a group owned less than 1% of the outstanding shares of each of the Global Equity Fund and Global Income Fund. JOSEPH M. LA MOTTA, CHAIRMAN OF THE BOARD OF DIRECTORS AND PRESIDENT* President of Oppenheimer Capitaland Chairman of Quest for Value Advisors, registered investment advisers; Chairman of the Board and President of Quest Cash Reserves, Inc., Quest for Value Accumulation Trust, Quest for Value Family of Funds, and Quest for Value Fund, Inc., and Chairman of the Board of The Saratoga Advantage Trust, open-end investment companies, and Quest for Value Dual Purpose Fund, Inc., a closed-end investment company. PAUL Y. CLINTON, DIRECTOR 946 Morris Avenue Bryn Mawr, Pennsylvania 19010 Director, External Affairs, Kravco Corporation, a national real estate owner and property management corporation; formerly President of Essex Management Corporation, a management consulting company; Trustee of Capital Cash Management Trust, Prime Cash Fund and Short Term Asset Reserves, each of which is a money- market fund; Director of Quest Cash Reserves, Inc., Quest for Value Global Equity Fund, Inc. and Quest for Value Global Funds, Inc., Trustee of Quest for Value Accumulation Trust and Quest for Value Family of Funds, all of which are open-end investment companies. Formerly a general partner of Capital Growth Fund, a venture capital partnership; formerly a general partner of Essex Limited Partnership, an investment partnership; formerly President of Geneve Corp., a venture capital fund; formerly Chairman of Woodland Capital Corp., a small business investment company; formerly Vice President of W.R. Grace & Co. 20 THOMAS W, COURTNEY, C.F.A., DIRECTOR P.O. Box 580 Sewickley, Pennsylvania 15143 Principal of Courtney Associates, Inc., a venture capital firm; former General Partner of Trivest Venture Fund, a private venture capital fund; former President of Investment Counseling Federated Investors, Inc.; Trustee of Cash Assets Trust, a money market fund; Director of Quest for Value Fund, Inc. and Quest Cash Reserves, Inc., Trustee of Quest for Value Accumulation Trust and Quest for Value Family of Funds, all of which are open-end investment companies; former President of Boston Company Institutional Investors; Trustee of Hawaiian Tax-Free Trust and Tax Free Trust of Arizona, tax-exempt bond funds; Director of several privately owned corporations; former Director of Financial Analysts Federation. LACY B. HERRMANN, DIRECTOR 380 Madison Avenue, Suite 2300 New York, New York 10017 President and Chairman of the Board of Aquila Management Corporation (since 1984) and of Incap Management Corporation (since 1982), the sponsoring organizations and Administrator and/or Sub-Advisor to the following open-end investment companies, and Chairman of the Board of Trustees and President of each; Churchill Cash Reserves Trust (since 1985), Short Term Asset Reserves (since 1984), Cash Assets Trust (since 1984), U.S. Treasuries Cash Assets Trust (since 1988), Tax-Free Cash Assets Trust (since 1988), Prime Cash Fund (since 1982), Oxford Cash Management Fund (1982-1988) and Trinity Liquid Assets Trust (1982-1985), each of which is a money market fund, and of Churchill Tax-Free Fund of Kentucky (since 1986), Tax-Free Fund of Colorado (since 1986), Tax-Free Trust of Oregon (since 1985), Tax-Free Trust of Arizona (since 1985), and Hawaiian Tax-Free Trust (since 1984), each of which is a tax-free municipal bond fund; Vice President, Director, Secretary, and formerly Treasurer of Aquila Distributors, Inc. (since 1981), distributor of most of the above funds; President and Chairman of the Board of Trustees of Capital Cash Management Trust ("CCMT") a money market fund (since 1981) and an Officer and Trustee/Director of its predecessors (since 1974); President and Director of STCM Management Company, Inc., sponsor and Sub-Advisor to CCMT; General Partner of Tamarack Associates (1966-1984), a private investment partnership and Chairman of the Board and President of various of its subsidiaries through 1986. Director of the Quest for Value Fund, Inc. and Quest Cash Reserves, Inc., and Trustee of the Quest for Value Accumulation Trust, Quest for Value Family of Funds and The Saratoga Advantage Trust, each of which is an open-end investment company. 21 GEORGE LOFT, DIRECTOR 51 Herrick Road Sharon, Connecticut 06069 Private Investor; Director of Quest for Value Fund, Inc. and Quest Cash Reserves, Inc., Trustee of Quest for Value Accumulation Trust, Quest for Value Family of Funds and The Saratoga Advantage Trust, all of which are open-end investment companies, and Director of the Quest for Value Dual Purpose Fund, Inc., a closed-end investment company. ROBERT J. BLUESTONE, VICE PRESIDENT, GLOBAL INCOME FUND Managing Director, Oppenheimer Capital; Vice President, Quest for Value Accumulation Trust, Quest Cash Reserves, Inc., and Quest for Value Family of Funds, open-end investment companies. MARIA CAMACHO, ASSISTANT SECRETARY Assistant Vice President of Oppenheimer Capital since 1994 and Registrations Department Administrator with Oppenheimer Capital since 1989; Assistant Secretary of Quest For Value Fund, Inc., Quest Cash Reserves, Inc., Quest For Value Global Equity Fund, Inc., Quest For Value Global Funds, Inc. and The Saratoga Advantage Trust, open-end investment companies. PIERRE DAVIRON, VICE PRESIDENT AND PORTFOLIO MANAGER, GLOBAL EQUITY FUND Senior Vice President, Oppenheimer Capital; President and Chief Investment Officer, Oppenheimer Capital International, a division of Oppenheimer Capital. Previously Chairman and Chief Executive Officer at Indosuez Gartmore Asset Management, a division of Banque Indosuez, Paris, France. Previously Managing Director in Mergers and Acquisitions at J.P. Morgan. BERNARD H. GARIL, VICE PRESIDENT President and Chief Operating Officer of Quest for Value Advisors; Vice President of Quest for Value Accumulation Trust, Quest Cash Reserves, Inc. and Quest for Value Family of Funds, open-end investment companies, and Vice President of Quest for Value Dual Purpose Fund, Inc., a closed-end investment company. RICHARD J. GLASEBROOK, II, VICE PRESIDENT AND PORTFOLIO MANAGER, GLOBAL EQUITY FUND Managing Director, Oppenheimer Capital; Vice President and Portfolio Manager, Quest for Value Family of Funds and Quest for Value Accumulation Trust, open-end investment companies; formerly Vice President and Director of Delafield Asset Management. 22 RICHARD A. GLUCK, VICE PRESIDENT AND PORTFOLIO MANAGER, GLOBAL INCOME FUND Vice President, Oppenheimer Capital; previously a Global Fixed Income Portfolio Manager with Dean Witter InterCapital and Clemente Capital. THOMAS E. DUGGAN, ASSISTANT SECRETARY General Counsel and Secretary, Oppenheimer Capital and Quest for Value Advisors, Secretary of Quest for Value Dual Purpose Fund, Inc., a closed-end investment company; Assistant Secretary of Quest Cash Reserves, Inc., , Quest for Value Family of Funds, Quest for Value Global Equity Fund, Inc., Quest for Value Global Funds, Inc. And The Saratoga Advantage Trust, open-end investment companies. DEBORAH KABACK, SECRETARY Senior Vice President, Oppenheimer Capital; Secretary of Quest for Value Accumulation Trust, Quest Cash Reserves, Inc., Quest for Value Family of Funds, Quest for Value Fund, Inc. and The Saratoga Advantage Trust, open-end investment companies, and Assistant Secretary of Quest for Value Dual Purpose Fund, Inc., a closed-end investment company. LESLIE KLEIN, ASSISTANT TREASURER Vice President of Oppenheimer Capital; Assistant Treasurer of Quest for Value Accumulation Trust, Quest Cash Reserves, Inc., Quest for Value Family of Funds, Quest for Value Fund, Inc. and The Saratoga Advantage Trust, open-end investment companies, and Quest for Value Dual Purpose Fund, Inc., a closed-end investment company. SHELDON M. SIEGEL, TREASURER Managing Director of Oppenheimer Capital; Treasurer of Quest for Value Advisors; Treasurer of Quest for Value Accumulation Trust, Quest Cash Reserves, Inc., Quest for Value Family of Funds, Quest for Value Fund, Inc. and The Saratoga Advantage Trust, open-end investment companies, and Quest for Value Dual Purpose Fund, Inc., a closed-end investment company. REMUNERATION OF OFFICERS AND DIRECTORS. All officers of the Fund are officers or directors of Oppenheimer Capital and receive no salary or fee from the Fund. The Directors, other than Mr. La Motta, are paid an annual fee of $3000 plus $250 for each directors' meeting attended and $100 for each committee meeting attended. During the fiscal year ended October 31, 1994 the Fund accrued or paid a directors' fee of $4,200 to each independent Director. The independent directors also serve as directors/trustees for other funds in the Advisor's Fund Complex. During the last fiscal year of such funds, Mr. Clinton earned aggregate directors fees of $_68,100 with respect to 18 investment companies in the Advisor's Fund Complex; Mr. Courtney earned aggregate directors fees of $66,600 23 with respect to 18 investment companies in the Advisor's Fund Complex; Mr. Herrmann earned aggregate directors fees of $67,350 with respect to 18 investment companies in the Advisor's Fund Complex; and Mr. Loft earned aggregate directors fees of $74,800 with respect to 19 investment companies in the Advisor's Fund Complex. During such periods the independent Directors received fees from three investment companies for which they no longer serve as directors and which are no longer part of the Advisor's Fund Complex but for which the Advisor currently serves as subadviser. In addition during such periods, Mr. Clinton and Mr. Courtney each served as director with respect to three investment companies in the Advisor's Fund Complex for which they received no fees; Mr. Loft and Mr. Herrmann each served as director with respect to 10 investment companies for which they received no fees. For the purpose of this paragraph, a portfolio of an investment company organized in series form is considered to be an investment company. AMA FAMILY OF FUNDS INDEMNIFICATION. In connection with the combination of each of the Global Equity Fund and Global Income Fund with a portfolio of the AMA Family of Funds, Inc., each Fund has agreed to assume the obligation of such portfolio of AMA Family of Funds, Inc. to indemnify the directors of the AMA Family of Funds, Inc. to the fullest extent permitted by law and the By-Laws of the AMA Family of Funds, Inc. INVESTMENT MANAGEMENT AND OTHER SERVICES THE INVESTMENT ADVISORY AGREEMENTS. Under an Investment Advisory Agreement with each Fund (the "Advisory Agreements"), Quest Advisors is required to, through consultation with its own portfolio management staff: (i) regularly provide investment advice and recommendations to each Fund with respect to its investments, investment policies and the purchase and sale of securities; (ii) supervise continuously the securities purchased or sold by each Fund and the portion, if any, of the Fund's assets to be held uninvested; and (iii) arrange for the purchase of securities and other investments by the Funds and the sale of securities and other investments held by the Funds. The Advisory Agreements provide that in the absence of willful misfeasance, bad faith, gross negligence or reckless disregard for its obligations thereunder, Quest Advisors is not liable for any act or omission in the course of, or in connection with, the rendition of services thereunder. The Agreements permit Quest Advisors to act as investment adviser for any person, firm or corporation and to use the name "Quest for Value" in connection with other investment companies for which it may act as investment adviser or general distributor. If Quest Advisors shall no longer act as investment adviser to a Fund, the right of the Fund to use the name "Quest for Value" as part of its name may be withdrawn. The Advisory Agreements provide that Quest Advisors may enter into sub- advisory agreements with other affiliated or unaffiliated investment advisors in order to obtain specialized services for the Fund provided that the Fund is not required to pay any additional fees for such services. Pursuant to a Sub- Advisory Agreement, Clay Finlay, in the case of the Global Equity Fund, 24 had been retained, subject to the overall supervision of Quest Advisors and the Directors of the Global Equity Fund, to continuously furnish investment advice concerning individual security selections, asset allocations and overall economic trends outside of the U.S., to, jointly with Quest Advisors, allocate the Global Equity Fund's assets among geographic regions, and manage the portion of the Global Equity Fund's portfolio invested in securities of issuers located outside of the U.S. This agreement was terminated December 31, 1993, and the responsibility for management of all assets of the Global Equity Fund was assumed by Quest Advisors effective January 1, 1994. The Advisory Agreements were initially approved by the Boards of Directors, including a majority of the Directors who are not "interested persons" of the Funds (as defined in the 1940 Act) and who have no direct or indirect financial interest in such Agreements, and by Oppenheimer Capital as the sole shareholder of each Fund on June 21, 1990 with respect to the Global Equity Fund and on July 29, 1991 with respect to the Global Income Fund. The shareholders of the Global Equity Fund approved its Advisory Agreement on January 13, 1992. Each Agreement may be terminated by a Fund at any time without penalty on sixty days notice by the Directors of the Fund or by the holders of a majority (as defined in the 1940 Act) of the outstanding shares of the Fund and terminates in the event of its assignment (as defined in the 1940 Act). For the fiscal year ended November 30, 1992, the total advisory fees accrued or paid by the Global Equity Fund were $943,392, of which $103,795 was waived by Quest Advisors. For the fiscal year ended November 30, 1993, the total advisory fees accrued or paid by the Global Equity Fund were $940,930, of which $187,345 was waived by Quest Advisors. For the fiscal year ended November 30, 1994, the total advisory fees accrued or paid by the Global Equity Fund were $1,166,949, of which $15,349 was waived by Quest Advisors. Quest Advisors has informed the Global Equity Fund that the total subadvisory fees paid by Quest Advisors to Clay Finlay with respect to the Global Equity Fund were, $257,648, $376,794 and $25,534 (net of reimbursements), respectively, for each of the aforementioned periods. For the period December 2, 1991 (commencement of operations) to November 30, 1992, the total investment advisory fees accrued or paid by the Global Income Fund were $97,609, of which $7,616 was waived by Quest Advisors. For the fiscal year ended November 30, 1993, the total investment advisory fees accrued or paid by the Global Income Fund were $106,028, of which $83,745 was waived by Quest Advisors. For the fiscal year ended November 30, 1994, the total advisory fees accrued or paid by the Global Income Fund were $99,506, all of which was waived by Quest Advisors. In addition, Quest Advisors reimbursed the Global Income Fund for $40,330 of other operating expenses. Under their terms, the Agreements will continue in effect for two years from the date of their execution and from year to year thereafter, provided continuance of the agreements is approved at least annually by the vote of the holders of a majority, as defined in the 1940 Act, of the outstanding shares of the Fund, or by the Directors of the Fund; provided that in either event such continuances are approved annually by the vote of a majority of the Directors of the Fund who are not parties to the Agreement or "interested persons" (as defined in the 1940 Act) of any such party (the "Independent 25 Directors"), which votes must be cast in person at a meeting called for the purpose of voting on such approval. THE ADMINISTRATION AGREEMENT. Quest Advisors acts as each Fund's administrator pursuant to Administration Agreements between Quest Advisors and the Funds. The Administration Agreements were approved by the Global Equity Fund's directors and its initial shareholder on June 21, 1990 and by the Global Income Fund's directors and its initial shareholder on July 29, 1991. The shareholders of the Global Equity Fund approved the Administration Agreement on January 13, 1992. Each Administration Agreement will remain in effect for two years from the date of its execution and may be continued annually thereafter if approved by a majority vote of the Directors who are neither interested persons of the Fund nor have any direct or indirect financial interest in the Administration Agreement, cast in person at a meeting called for the purpose of voting on such approval. For the fiscal years ended November 30, 1992, 1993 and 1994, the total administrative fees accrued or paid by the Global Equity Fund were $314,464, 313,644 and $388,983, respectively. For the period December 2, 1991 (commencement of operations) to November 30, 1992, the fiscal years ended November 30, 1993 and 1994, the total administrative fees accrued or paid by the Global Income Fund were $48,804, $53,014 and $49,753, respectively. FUND EXPENSES. Expenses of each Fund not expressly assumed by Quest Advisors under the Advisory Agreements or Administration Agreements or by Quest for Value Distributors (the "Distributor") are paid by each respective Fund. Each Fund is responsible for bearing certain expenses attributable to the Fund but not to a particular class ("Fund Expenses"), including deferred organization expenses; taxes; registration fees; typesetting of prospectuses and financial reports required for distribution to shareholders; brokerage commissions; fees and related expenses of trustees or directors who are not interested persons; legal, accounting and audit expenses; custodian fees; insurance premiums; and trade association dues. Fund Expenses will be allocated based on the total net assets of each class. Each class of shares of each Fund will also be responsible for certain expenses attributable only to that class ("Class Expenses"). These Class Expenses may include distribution and service fees, transfer and shareholder servicing agent fees, professional fees, printing and postage expenses for materials distributed to current shareholders, state registration fees and shareholder meeting expenses. Such items are considered Class Expenses provided such fees and expenses relate solely to such Class. A portion of printing expenses, such as typesetting costs, will be divided equally among the Funds, while other printing expenses, such as the number of copies printed, will be considered Class Expenses. Under the Advisory Agreement, Quest Advisors guarantees that the expenses of each Fund in any fiscal year, exclusive of taxes, interest, brokerage fees and distribution expenses, shall not exceed, and Quest Advisors undertakes to pay or refund to the Fund any amount by which such expenses do exceed, the most restrictive state law provisions in effect in states where shares of the Fund are qualified to be sold and under such circumstances the payment of the management fee at the end of any month will be reduced. Quest Advisors will comply with the applicable state regulations which may require Quest Advisors to assume expenses of a Fund in the event that the Fund's aggregate operating expenses incurred in any fiscal year exceed the most restrictive state law provisions in effect in states where shares of the Fund are qualified to be sold. Quest Advisors has agreed to limit Fund Expenses 26 (as defined above) so that annualized operating Fund Expenses, exclusive of Class Expenses (as defined above) of the Global Income Fund do not exceed 1.45% of average daily net assets. PORTFOLIO TRANSACTIONS. Portfolio decisions are based upon recommendations of Quest Advisors. Purchases and sales of securities on a stock exchange are effected through brokers who charge a commission for their services. Transactions in debt obligations and in equity securities in the over-the- counter market are generally effected on a net basis with non-affiliated dealers acting as principal for their own accounts without a stated commission although the price usually includes a profit to the dealer. Prices of portfolio securities purchased from underwriters of new issues include a commission or concession paid by the issuer to the underwriter, and prices of debt securities purchased from dealers include a spread between the bid and asked prices. Quest Advisors seeks to obtain prompt execution of orders at the most favorable net price. If Quest Advisors believes such prices and execution are obtainable from more than one broker or dealer, it may give consideration to placing portfolio transactions with those brokers and dealers who furnish brokerage and research services to the Funds and/or Quest Advisors. In addition, transactions may be directed to dealers during the course of an underwriting in return for their execution and research services. Such services are intangible and no dollar value can be placed thereon. The information may or may not be useful to the Funds and/or other accounts of Quest Advisors. Such information may be in written or oral form and includes information on particular companies and industries as well as market, economic or institutional activity areas. It serves to broaden the scope and supplement the research activities of Quest Advisors, to make available additional views for consideration and comparison, and to enable Quest Advisors to obtain market information for the valuation of securities held in the Funds' assets. Such services and information may be used by Quest Advisors in servicing all of their accounts, but all such services and information may not be used for each Fund. Sales of shares of the Funds, subject to applicable rules covering the Distributor's activities in this area, will also be considered as a factor in the direction of portfolio transactions to dealers, but only in conformity with the price, execution and other considerations and practices discussed above. The Funds will not purchase any securities from or sell any securities to Oppenheimer & Co., Inc. ("Opco"), an affiliate of Quest Advisors, acting as principal for its own account. Quest Advisors currently serves as investment manager to a number of clients including other investment companies, and may in the future act as investment manager or adviser to others. It is the practice of Quest Advisors to cause purchase or sale transactions to be allocated among the Funds and others whose assets it manages in such manner as it deems equitable. In making such allocations among the Funds and other client accounts, the main factors considered are the respective investment objectives, the relative size of portfolio holdings of the same or comparable securities, the availability of cash for investment, the size of investment commitments generally held and the opinions of the persons responsible for managing the portfolios of the Funds and other client accounts. When orders to purchase or sell the same security on identical terms are placed by more than one of the Funds and/or other advisory accounts managed by Quest Advisors or its affiliates, the transactions are generally 27 executed as received, although a Fund or advisory account that does not direct trades to a specific broker ("free trades") usually will have its order executed first. Purchases are combined where possible for the purpose of negotiating brokerage commissions, which in some cases might have a detrimental effect on the price or volume of the security in a particular transaction as far as the Funds are concerned. Orders placed by accounts that direct trades to a specific broker will generally be executed after the free trades. All orders placed on behalf of the Funds are considered free trades. However, having an order placed first in the market does not necessarily guarantee the most favorable price. Consistent with the policy described above, brokerage transactions may be effected through Opco. The commissions, fees or other remuneration received by Opco must be reasonable and fair compared to the commissions, fees or other remuneration paid to other brokers in connection with comparable transactions involving similar securities being purchased or sold on an exchange during a comparable period of time. The Board of Directors of each Fund, including a majority of the Directors who are not "interested" persons of the Fund, (as defined in the 1940 Act) have adopted procedures which are reasonably designed to provide that any commissions, fees or other remuneration paid to Opco is consistent with the foregoing standard. Opco may be paid for effecting the Funds' portfolio transactions on an exchange of which it is a member only if the floor execution is by a broker which is not an associated person of Opco and if (as is the case) there is a contract with the Funds permitting Opco to be paid for such transactions. The following table presents information as to the allocation of brokerage commissions paid by the Global Equity Fund for the fiscal years ended November 30, 1992, 1993 and 1994:
------------------------------------------------------------------------------------------------- Fiscal year ended Total Brokerage Brokerage Commissions Total Amount of Transactions Commissions Paid Paid to Opco Where Brokerage Commissions Paid to Opco (1) ------------------------------------------------------------------------------------------------- Dollar Amounts % Dollar Amounts % ------------------------------------------------------------------------------------------------- 11/30/92 275,868 85,751 31.08 57,807,717 40.90 ------------------------------------------------------------------------------------------------- 11/30/93 200,029 18,503 9.25 102,916,572 15.91 ------------------------------------------------------------------------------------------------- 11/30/94 566,615 16,402 2.89 13,811,383 8.3 ------------------------------------------------------------------------------------------------- (1) The Global Equity Fund does not effect principal transactions with Opco. When the Fund effects principal transactions with other broker-dealers, commissions are imputed. During the fiscal year ended November 30, 1994, the Global Equity Fund directed $65,558,341 of brokerage transactions to brokers because of research services provided. The commissions related to such transactions were $234,399.
28 The following table presents information as to the allocation of brokerage commissions paid by the Global Income Fund for the period from 12/2/91 (commencement of operations) to 11/30/92 and for the fiscal years ended November 30, 1993 and November 30, 1994:
-------------------------------------------------------------------------------------------------------------------- For the period Total Brokerage Brokerage Commissions Total Amount of Transactions Commissions Paid Paid to Opco Where Brokerage Commissions Paid to Opco (1) -------------------------------------------------------------------------------------------------------------------- Dollar Amounts % Dollar Amounts % -------------------------------------------------------------------------------------------------------------------- 12/2/91 (commencement of 2,629 0 0 0 0 operations) to 11/30/92 -------------------------------------------------------------------------------------------------------------------- Fisca year ended 11/30/93 0 0 0 0 0 -------------------------------------------------------------------------------------------------------------------- Fiscal year ended 11/30/94 0 0 0 0 0 -------------------------------------------------------------------------------------------------------------------- (1) The Global Income Fund does not effect principal transactions with Opco. When the Fund effects principal transactions with other broker-dealers, commissions are imputed.
DETERMINATION OF NET ASSET VALUE The net asset value per share of each Fund is determined each day the New York Stock Exchange (the "Exchange") is open, as of the close of the regular trading session of the Exchange that day (currently 4:00 p.m. Eastern Time), by dividing the value of the Fund's net assets by the number of its shares outstanding. Although the legal rights of Class A, B and C shares are identical, the different expenses borne by each class may result in differing net asset values and dividends for each class. The Exchange's most recent annual announcement (which is subject to change) states that it will close on New Year's Day, Presidents' Day, Good Friday, Memorial Day, July 4, Labor Day, Thanksgiving and Christmas Day. It may also close on other days. Securities listed on a national securities exchange or on the national market system are valued at the last reported sale price on that day. If there has been no sale on such day or on the previous day on which the Exchange was open (if a week has not elapsed between such days), then the value of such security is taken to be the reported bid price at the time as of which the value is being ascertained. Securities traded in the over-the-counter market but not listed on the national market system are valued at their last quoted bid price. Any securities or other assets for which current market quotations are not readily available are valued at their fair value as determined in good faith under procedures established by and under the general supervision and responsibility of each Fund's Board of Directors. The value of a foreign security is determined in its national currency and that value is then converted into its U.S. dollar equivalent at the foreign exchange rate in effect on the date of valuation. 29 Each Fund's Board of Directors has approved the use of nationally recognized bond pricing services for the valuation of the Fund's debt securities. The service selected by Quest Advisors creates and maintains price matrices of U.S. Government and other securities from which individual holdings are valued shortly after the close of business each trading day. Debt securities not covered by the pricing service are valued based upon bid prices obtained from dealers who maintain an active market therein or, if no readily available market quotations are available from dealers, such securities (including restricted securities and OTC options) are valued at fair value under the Board's procedures. Short-term (having a maturity of 60 days or less) debt securities are valued at amortized cost. Puts and calls are valued at the last sales price thereof, or, if there are no transactions, at the last reported sales price that is within the spread between the closing bid and asked prices on the valuation date. Futures are valued based on their daily settlement value. When a Fund writes a call, an amount equal to the premium received is included in the Fund's statement of Assets and Liabilities as an asset, and an equivalent deferred credit is included in the liability section. The deferred credit is adjusted ("marked-to- market") to reflect the current market value of the call. If a call written by a Fund is exercised, the proceeds on the sale of the underlying securities are increased by the premium received. If a call or put written by a Fund expires on its stipulated expiration date or if a Fund enters into a closing transaction, it will realize a gain or loss depending on whether the premium was more or less than the transaction costs, without regard to unrealized appreciation or depreciation on the underlying securities. If a put held by a Fund is exercised by it, the amount the Fund receives on its sale of the underlying investment is reduced by the amount of the premium paid by the Fund. PERFORMANCE INFORMATION As discussed in the Prospectus, from time to time the Global Income Fund may quote its yield and each Fund may quote its total return in advertisements and sales literature. YIELDS. Yield information may be useful to investors in reviewing the Global Income Fund's performance. However, a number of factors should be considered before using yield information as a basis for comparison with other investments. An investment in the Fund is not insured; yield is not guaranteed and normally will fluctuate on a daily basis. The yield for any given past period is not an indication or representation of future yields or rates of return. Yield is affected by portfolio quality, portfolio maturity, type of instruments held and operating expenses. When comparing the Fund's yield with that of other investments, investors should understand that certain other investment alternatives such as money-market instruments or bank accounts provide fixed yields and also that bank accounts may be insured. Current yield is calculated according to the following formula: x YIELD = 2(--- + 1)TO THE POWER OF 6 - 1 cd 30 Where: x = daily net investment income, based upon the subtraction of daily accrued expenses from daily accrued income of the portfolio. Income is accrued daily for each day of the indicated period based upon yield-to-maturity of each obligation held in the portfolio as of the day before the beginning of any thirty-day period or as of contractual settlement date for securities acquired during the period. Mortgage and other receivables-backed securities calculate income using coupon rate and outstanding principal amount. c = the average daily number of shares outstanding during the period that were entitled to receive dividends. d = the maximum offering price per share on the last day of the period. Yield may also be calculated by substituting the net asset value or lower offering price per share for the maximum offering price per share in representing the yield to those persons or groups who are entitled to purchase shares at lower than offering prices or net asset value without sales charge. Yield does not reflect capital gains or losses, non-recurring or irregular income. Gain or loss attributable to actual monthly paydowns on mortgage or other receivables-backed obligations purchased at a discount or premium is reflected as an increase or decrease in interest income during the period. A Funds' average annual total return represents an annualization of the Fund's total return ("T" in the formula below), over a particular period and is computed by finding the current percentage rate which will result in the ending redeemable value ("ERV" in the formula below). Of a $1,000 investment, ("P" in the formula below) made at the beginning of a one, five or ten year period, or for the period from the date of commencement of the Fund's operation, if shorter ("N" in the formula below). The following formula will be used to compute the average annual total return for each Fund: P (1 + T)TO THE POWER OF N = ERV 31 AVERAGE ANNUAL TOTAL RETURN
From commencement of operations* to For the Fiscal Year Ended November 30, 1994 November 30, 1994 ----------------- ----------------- Reflecting Without Reflecting Without Deduction of Deduction of Deduction of Deduction of Maximum Maximum Maximum Maximum Sales Charge Sales Charge Sales Charge Sales Charge ------------ ------------ ------------ ------------ Global Equity (1) Class A 5.49% 6.85% 2.41% 8.37% Class B 1.63 4.82 2.84 7.84 Class C 4.76 4.76 6.77 7.77 Global Income (1) Class A (1, 2) .24% 1.27% -6.15% -3.24% Class B -5.63 -2.71 -8.52 -3.99 Class C -2.84 -2.84 -5.11 -4.20 * The Global Equity Fund commenced operations on July 2, 1990; the Global Income Fund on December 2, 1991. Class B and C shares of the Funds were initially offered on September 2, 1993. (1) Reflects the waiver of certain advisory fees for the Global Equity Fund and the waiver of advisory fees and reimbursement of certain operating expenses for the Global Income Fund. Without such waivers and reimbursements, the average annual total returns would have been lower. (2) Effective May 4, 1992, the maximum sales load on purchases of shares of Class A shares the Global Income Fund was changed from 4.75% to 3.00%. In accordance with SEC guidelines, the performance quoted above was calculated as if the new sales load had been in effect from the inception of the Fund.
The preceding table assumes that a $1,000 payment was made at the beginning of the period shown, that no further payments were made, that any distributions from the assets of each Fund were reinvested. The table reflects the historical rates of return and deductions for all charges, expenses and fees of each Fund. In addition to the foregoing, each Fund may advertise its total return over different periods of time by means of aggregate, average, year by year or other types of total return figures. Total returns quoted in advertising reflect all aspects of a Fund's return, including the effect of reinvesting dividends and capital gain distributions, and any change in the Fund's net asset value per share over the period. Average annual returns are calculated by determining the growth or decline in 32 value of a hypothetical investment in a fund over a stated period, and then calculating the annually compounded percentage rate that would have produced the same result if the rate of growth or decline in value had been constant over the period. For example, a cumulative return of 100% over ten years would produce an average annual return of 7.18%, which is the steady annual return that would equal 100% growth on a compounded basis in ten years. In addition to average annual returns, each Fund may quote unaveraged or cumulative total returns reflecting the simple change in value of an investment over a stated period. Average annual and cumulative total returns may be quoted as a percentage or as a dollar amount and may be calculated for a single investment, a series of investments and/or a series of redemptions over any time period. Total returns and other performance information may be quoted numerically or in a table, graph or similar illustration. Total returns may be quoted with or without taking a Fund's sales charge into account. Excluding a Fund's sales charge from a total return calculation produces a higher total return figure. The total return on an investment made in Class A, B and C shares of the Funds for the period from commencement of public sale through November 30, 1994 is as follows: AGGREGATE TOTAL RETURN FROM COMMENCEMENT OF OPERATIONS* TO NOVEMBER 30, 1994 (2)
Reflecting Deduction of Without Deduction of Maximum Sales Charge(1) Maximum Sales Charge ----------------------- -------------------- Global Equity Fund Class A 26.66% 34.04% Class B(3) 2.04% 6.04% Class C(3) 5.97% 5.97% Global Income Fund Class A .73% 3.84% Class B(3) -6.97% -3.36% Class C(3) -3.52% -3.52% * The Global Equity Fund commenced operations on 7/2/90; the Global Income Fund on 12/2/91. Class B and C shares of the Funds were initially offered on 9/2/93. (1) Effective May 4, 1992, the maximum sales load on purchases of shares of the Global Income Fund was changed from 4.75% to 3.00%. In accordance with SEC guidelines, the performance quoted above was calculated as if the new sales load had been in effect from the inception of the Fund. (2) Reflects the waiver of certain advisory fees and the reimbursement of certain expenses. Without such waiver, the inception to date total return for the Global Equity and Global Income Funds would have been lower.
33 From time to time the Funds may refer in advertisements to rankings and performance statistics published by (1) recognized mutual fund performance rating services including but not limited to Lipper Analytical Services, Inc. and Morningstar, Inc., (2) recognized indexes including but not limited to the Standard & Poors Composite Stock Price Index, Dow Jones Industrial Average, Consumer Price Index, EAFE Index, J.P. Morgan Emerging Markets Bond Index, the Morgan Stanley World Index, J.P. Morgan Latin Eurobond Index, Lehman Brothers Global Bond Index, Lehman Brothers Global Intermediate Bond Index, Salomon Brothers World Government Bond Index and Salomon Brothers Hedged World Government Bond Index, and (3) Money Magazine and other financial publications including but not limited to magazines, newspapers and newsletters. Performance statistics may include total returns, measures of volatility or other methods of portraying performance based on the method used by the publishers of the information. In addition, comparisons may be made between yields on certificates of deposit and U.S. government securities and corporate bonds, and may refer to current or historic financial or economic trends or conditions. The Global Income Fund also may publish its distribution rate, which is computed in the same manner as yield except that actual income dividends declared per share during the period in question is substituted for net investment income per share. The performance of the Funds may be compared to the performance of other mutual funds in general, or to the performance of particular types of mutual funds. These comparisons may be expressed as mutual fund rankings prepared by Lipper Analytical Services, Inc. ("Lipper"), and Morningstar, Inc. ("Morningstar"), independent services located in Summit, New Jersey and Chicago, Illinois, respectively, that monitor the performance of mutual funds. Lipper and Morningstar generally rank funds on the basis of total return, assuming reinvestment of distributions, but do not take sales charges or redemption fees into consideration, and are prepared without regard to tax consequences. In addition to the mutual fund rankings, performance may be compared to mutual fund performance indices prepared by Lipper. From time to time, a Fund's performance also may be compared to other mutual funds tracked by financial or business publications and periodicals. For example, the Fund may quote Morningstar in its advertising materials . Morningstar rates mutual funds on a one star to five star scale on the basis of risk-adjusted performance. Quest For Value Distributors may provide information designed to help individuals understand their investment goals and explore various financial strategies such as general principles of investing, such as asset allocation, diversification, risk tolerance, goal setting, and a questionnaire designed to help create a personal financial profile. Ibbotson Associates of Chicago, Illinois (Ibbotson) provides historical returns of the capital markets in the United States, including common stocks, small capitalization stocks, long-term corporate bonds, intermediate-term government bonds, long-term government bonds, Treasury bills, 34 the U.S. rate of inflation (based on CPI), and combinations of various capital markets. The performance of these capital markets is based on the returns of different indices. Quest for Value Distributors may use the performance of these capital markets in order to demonstrate general risk-versus-reward investment scenarios. Performance comparisons may also include the value of a hypothetical investment in any of these capital markets. The risks associated with the security types in any capital market may or may not correspond directly to those of the Funds. The Funds may also compare performance to that of other compilations or indices that may be developed and made available in the future. In advertising materials, Quest For Value Distributors may reference or discuss its products and services, which may include: other Quest funds; retirement investing; brokerage products and services; the effects of dollar- cost averaging and saving for college; and the risk of marketing timing. In addition, Quest for Value Distributors may quote financial or business publications and periodicals, including model portfolios or allocations, as they relate to fund management, investment philosophy, and investment techniques. Quest for Value Distributors may also reprint, and use as advertising and sales literature, articles from RE: QUEST, a quarterly magazine provided free of charge to Quest fund shareholders. The Funds may present their fund number, Quotron symbol, CUSIP number, and discuss or quote their current portfolio manager. VOLATILITY. The Funds may quote various measures of volatility and benchmark correlation in advertising. In addition, the Funds may compare these measures to those of other funds. Measures of volatility seek to compare a fund's historical share price fluctuations or total returns to those of a benchmark. Measures of benchmark correlation indicate how valid a comparative benchmark may be. All measures of volatility and correlation are calculated using averages of historical data. Momentum Indicators indicate the Fund's price movements over specific periods of time. Each point on the momentum indicator represents the Fund's percentage change in price movements over that period. The Funds may advertise examples of the effects of periodic investment plans, including the principle of dollar cost averaging. In such a program, an investor invests a fixed dollar amount in a fund at periodic intervals, thereby purchasing fewer shares when prices are high and more shares when prices are low. While such a strategy does not assure a profit or guard against a loss in a declining market, the investor's average cost per share can be lower than if fixed numbers of shares are purchased at the same intervals. In evaluating such a plan, investors should consider their ability to continue purchasing shares during period of low price levels. The Fund may be available for purchase through retirement plans or other programs offering deferral of or exemption from income taxes, which may produce superior after-tax returns over time. 35 For example, a $1,000 investment earning a taxable return of 10% annually would have an after-tax of $1,949 after ten years, assuming tax was deducted from the return each year at a 28% rate. An equivalent tax-deferred investment would have an after-tax value of $2,100 after ten years, assuming tax was deducted at a 31% rate from the tax-deferred earnings at the end of the ten-year plan. DISTRIBUTION EXPENSE PLAN Each class of shares of each Fund has a Plan and Agreement of Distribution (the "Plan(s)") pursuant to which it is permitted to compensate the Distributor in connection with the distribution of shares. Each Plan was adopted in accordance with the requirements of Rule 12b-1 under the 1940 Act, and was initially approved by the Fund's Board of Directors (who found that there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders), including a majority of the Directors who are not "interested persons" of the Fund as defined in the 1940 Act and who have no direct or indirect financial interest in the operation of the Plan or in any agreement related to the Plan ("Disinterested Directors") and by Oppenheimer Capital as then sole shareholder of each Fund on June 21, 1990 with respect to the Global Equity Fund and on July 29, 1991 with respect to the Global Income Fund. The shareholders of the Global Equity Fund approved the Plan on January 13, 1992. Under each Plan, each class of shares of each Fund pays the Distributor a monthly fee for services and expenses in connection with the distribution of the Fund's shares at the following percentage rates of average daily net assets on an annual basis: Global Equity Fund, Class A shares - .25%, Class B and C shares - - .75%; Global Income Fund, Class A shares - .05%, Class B and C shares - .75%. Each class of shares of each Fund also pays a service fee of .25% of average daily net assets. For the fiscal year ended November 30, 1994, the total distribution fee accrued or paid by Class A, B and C shares of the Global Equity Fund were $742,304, $59,822 and $11,502, respectively. For the fiscal year ended November 30, 1994, the total distribution fees accrued or paid by the Class A, B and C shares of Global Income Fund were $46,739, $10,182 and $1,874, respectively. The activities, services and expenditures authorized to be provided by the Distributor under each Plan shall include one or more of the following: (1) compensation to sales representatives, to the Distributor and other broker- dealers for activities related to sales of Shares and servicing existing shareholders; (2) sales incentives and bonuses to the Distributor's sales representatives and to marketing personnel in connection with promoting sales of Shares; (3) expenses incurred in connection with promoting sales of Shares and servicing existing shareholders; (4) printing reports and prospectuses for potential investors in the Shares; (5) preparing and distributing sales literature; and (6) providing advertising and promotional activities, including direct mail solicitation and television, radio, newspaper, magazine and other media advertisements. Each Plan states the Treasurer of the Fund shall provide, and that the Disinterested Directors shall review, quarterly reports setting forth the amounts expended pursuant to the Plan in connection with the distribution of the Fund's shares and the purpose for which the amounts were expended. It further provides that, as long as the Plan remains in effect, the selection and nomination of Directors of the 36 Fund who are not "interested persons" shall be committed to the discretion of the Directors then in office who are not "interested persons" of the Fund. The Plans can be terminated at any time, without penalty by the vote of a majority of the Disinterested Directors or by the vote of the holders of a majority of the outstanding voting securities of the Fund. Finally, each Plan cannot be amended to increase materially the amount to be spent by the Fund without shareholder approval, and all material amendments are required to be approved by the vote of the Board of Directors of that Fund, including a majority of the Disinterested Directors, cast in person at a meeting called for that purpose. A rule of the National Association of Securities Dealers, Inc. limits the total aggregate asset based, front end and deferred sales charges (excluding service fees) to 6.25% of a fund's new gross sales. It is estimated that the Distributor spent approximately the following amounts with respect to Class A, B and C shares of the Global Equity and Global Income Funds for the fiscal year ended November 30, 1994.
Printing and mailing of Prospectuses to Sales Material other than and current Compensation to Compensation to Advertising shareholders Dealers Sales Personnel Other (1) ----------- ------------ ------- --------------- --------- Global Equity Fund Class A $154,958 $94,017 $590,774 $360,944 $204,049 Class B 40,559 26,237 343,744 97,485 55,223 Class C 28,114 17,762 17,122 66,896 37,844 Global Income Fund Class A $40,474 $24,666 $47,993 $93,776 $87,219 Class B 26,620 16,253 42,666 62,207 35,177 Class C 24,720 15,196 832 58,143 32,801 (1) Includes costs of telephone and overhead.
During the fiscal year ended November 30, 1994, the Distributor received the following compensation with repect to the Funds: PORTION OF SALES COMPENSATION ON FUND CHARGE ON CLASS A SHARES REDEMPTIONS (CDSC'S) Global Equity 84,018 $7,300 Global Income 9,504 $ 600 37 ADDITIONAL INFORMATION DESCRIPTION OF THE FUNDS. The Global Equity Fund is a corporation formed under the laws of Maryland on April 25, 1990. The Global Income Fund is the only existing series of the Quest for Value Global Funds, Inc., a corporation formed under the laws of Maryland on June 12, 1991. It is not contemplated that regular annual meetings of shareholders of either corporation will be held; however, a meeting will be held if requested by the holders of 10% of each corporation's voting securities. In addition, 10 shareholders holding the lesser of shares having a net asset value of at least $25,000 or 1% of a Fund's outstanding shares may advise the Board of Directors in writing that they wish to communicate with other shareholders of that Fund for the purpose of requesting a meeting to remove a director. The Board of Directors will then either give the applicants access to the Fund's shareholder list or mail the applicant's communication to all other shareholders at the applicant's expense. When issued, the shares of each class of the Fund are fully paid and have no preemptive, conversion, or other subscription rights. Each class of shares represents identical interests in the applicable Fund's investment portfolio. As such, they have the same rights, privileges and preferences, except with respect to: (a) the designation of each class, (b) the effect of the respective sales charges, if any, for each class, (c) the distribution fees borne by each class, (d) the expenses allocable exclusively to each class, (e) voting rights on matters exclusively affecting a single class and (f) the exchange privilege of each class. Upon liquidation of the Fund, shareholders are entitled to share pro rata in the net assets available for distribution to shareholders after all debts and expenses have been paid. The shares do not have cumulative voting rights. Each of the Funds may in the future seek to achieve its investment objective by investing all of its investable assets in a no-load diversified open-end management investment company with the same portfolio manager, investment objective and investment restrictions as the respective Fund. The shareholders of the Funds authorized such investment by approving changes to the investment restrictions of the Fund at a Special Meeting of Shareholders held in 1994. Such investment would only be made if the Directors feel that the aggregate per share expenses of the Fund and such other investment company would be less than or approximately equal to the expenses which the Fund would incur if the Fund were to continue its present investment policies. It is expected that such an investment in another investment company will have no preference, preemptive, conversion or similar rights, and will be fully-paid and non-assessable. It is expected that the investment company will not be required to hold annual meetings, but will hold special meetings of shareholders when, in the judgment of the Directors, it is necessary or desirable to submit matters for shareholder vote. REDUCED SALES CHARGES. Sales are made at reduced sales charges to certain persons described under "Reduced Sales Charges" in the Prospectus because of economies of scale and/or because there is little or no sales effort required to make sales to such persons. 38 POSSIBLE ADDITIONAL PORTFOLIO SERIES. The Boards of Directors are empowered to create additional portfolios of each corporation. If additional portfolios are created by the Board of Directors, shares of each such portfolio will be entitled to vote as a class only to the extent permitted by the 1940 Act (see below) or as permitted by the Board of Directors. Expenses not otherwise identified with a particular portfolio will be allocated fairly among two or more portfolios by the Board of Directors. Under Rule 18f-2 of the 1940 Act, any matter required to be submitted to a vote of shareholders of any investment company which has two or more series outstanding is not deemed to have been effectively acted upon unless approved by the holders of a "majority" (as defined in that Rule) of the voting securities of each series affected by the matter. Such separate voting requirements do not apply to the election of directors or the ratification of the selection of accountants. Approval of an investment management or distribution plan and a change in fundamental policies would be regarded as matters requiring separate voting by each portfolio. The Rule contains special provisions for cases in which an advisory contract is approved by one or more, but not all, series. A change in investment policy may go into effect as to one or more series whose holders so approve the change even though the required vote is not obtained as to the holders of other affected series. DISTRIBUTION AGREEMENT. Under the Distribution Agreement between each Fund and the Distributor, the Distributor acts as the Fund's agent in the continuous public offering of its shares. Expenses normally attributable to sales, other than those paid under the Distribution Expense Plan, are borne by the Distributor. INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York, are the independent accountant of the Funds; their services include examining the annual financial statements of the Funds as well as other related services. Price Waterhouse LLP also serves as independent accountants for Quest Advisors and some of its affiliates. CUSTODIAN. State Street Bank and Trust Company acts as custodian of the assets, transfer agent and shareholder servicing agent of the Funds. DISTRIBUTION OPTIONS. Shareholders may change their distribution options by giving the Transfer Agent three days prior notice in writing. SHAREHOLDER SERVICING AGENT FOR CERTAIN SHAREHOLDERS. Unified Management Corporation (1-800-346-4601) is the shareholder servicing agent for former shareholders of the AMA Family of Funds and clients of AMA Investment Advisers, Inc. (which acted as the investment advisor to the AMA Family of Funds) who acquire shares of any Quest Fund, and for former shareholders of the Unified Funds and Liquid Green Trusts, accounts which participated or participate in a retirement plan for which Unified Investment Advisers, Inc. or an affiliate acts as custodian or trustee, accounts which have a Money Manager brokerage account, and other accounts for which Unified Management Corporation is the dealer of record. 39 TAX INFORMATION. The Federal tax treatment of the Funds' dividends and distributions is explained in the Prospectus under the heading "Tax Status." Each Fund will be subject to a nondeductible 4% excise tax to the extent that it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gains net income for the one year period ending on October 31 of that year. CAPITAL LOSS CARRYOVERS. For the year ended November 30, 1994, Global Income had net capital loss carryovers of $1,077,004, of which $204,539, $214,944 and $657,521 will be available to offset future net capital gains realized through fiscal years ending 1998, 2001 and 2002, to the extent provided by regulations. Capital and currency losses incurred after October 31, 1994 are deemed to arise on the first business day of the following tax year. Accordingly, for the fiscal year ended November 30, 1994, Global Income incurred and elected to defer $52,073 and $127,100 in net capital and net currency losses, respectively. RETIREMENT PLANS. Quest for Value Distributors may print advertisements and brochures concerning retirement plans, lump sum distributions and 401-k plans. These materials may include descriptions of tax rules, strategies for reducing risk and descriptions of the 401-k program offered by Quest for Value Distributors. From time to time hypothetical investment programs illustrating various tax-deferred investment strategies will be used in brochures, sales literature, and omitting prospectuses. The following examples illustrate the general approaches that will be followed. These hypotheticals will be modified with different investment amounts, reflecting the amounts that can be invested in different types of retirement programs, different assumed tax rates, and assumed rates of return. They should not be viewed as indicative of past or future performance of any Quest for Value product. 40 EXAMPLES
- --------------------------------------------------------------------------------------------------- Benefits of Long Term Tax-Free Compounding - Benefits of Long Term Tax-Free Compounding - Single Sum Periodic Investment - --------------------------------------------------------------------------------------------------- Amount of Contribution: $100,000 Amount Invested Annually: $2,000 - --------------------------------------------------------------------------------------------------- Rates of Return Rates of Return Years ----------------------------------------- Years ----------------------------------------- 8.00% 10.00% 12.00% 8.00% 10.00% 12.00% ----------------------------------------- ----------------------------------------- Value at End Value at End - --------------------------------------------------------------------------------------------------- 5 $ 146,933 $ 161,051 $ 176,234 5 $ 12,672 $ 13,431 $ 14,230 - --------------------------------------------------------------------------------------------------- 10 $ 215,892 $ 259,374 $ 310,585 10 $ 31,291 $ 35,062 $ 39,309 - --------------------------------------------------------------------------------------------------- 15 $ 317,217 $ 417,725 $ 547,357 15 $ 58,649 $ 69,899 $ 83,507 - --------------------------------------------------------------------------------------------------- 20 $ 466,096 $ 672,750 $ 964,629 20 $ 98,846 $126,005 $161,397 - --------------------------------------------------------------------------------------------------- 25 $ 684,848 $1,083,471 $1,700,006 25 $157,909 $216,364 $298,668 - --------------------------------------------------------------------------------------------------- 30 $1,006,266 $1,744,940 $2,995,992 30 $244,692 $361,887 $540,585 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------- Comparison of Taxable and Tax-Free Investing -- Periodic Investments (Assumed Tax Rate : 28%) - --------------------------------------------------------------------------------------------------- Amount of Annual Contribution (Pre-Tax):$2,000 Annual Contribution (After Tax): $1,440 - --------------------------------------------------------------------------------------------------- Tax Deferred Rates of Return Fully Taxed Rates of Return Years ----------------------------------------- Years ----------------------------------------- 8.00% 10.00% 12.00% 5.76% 7.20% 8.64% ----------------------------------------- ----------------------------------------- Value at End Value at End - --------------------------------------------------------------------------------------------------- 5 $ 12,672 $ 13,431 $ 14,230 5 $ 8,544 $ 8,913 $ 9,296 - --------------------------------------------------------------------------------------------------- 10 $ 31,291 $ 35,062 $ 39,309 10 $ 19,849 $ 21,531 $ 23,364 - --------------------------------------------------------------------------------------------------- 15 $ 58,649 $ 69,899 $ 83,507 15 $ 34,807 $ 39,394 $ 44,654 - --------------------------------------------------------------------------------------------------- 20 $ 98,846 $126,005 $161,397 20 $ 54,598 $ 64,683 $ 76,874 - --------------------------------------------------------------------------------------------------- 25 $157,909 $216,364 $298,668 25 $ 80,785 $100,485 $125,635 - --------------------------------------------------------------------------------------------------- 30 $244,692 $361,887 $540,585 30 $115,435 $151,171 $199,429 - --------------------------------------------------------------------------------------------------- - --------------------------------------------------------- Comparison of Tax Deferred Investing -- Deducting Taxes at End (Assumed Tax Rate at End: 28%) - --------------------------------------------------------- Amount of Annual Contribution: $2,000 - --------------------------------------------------------- Tax Deferred Rates of Return Years ------------------------------------------------- 8.00% 10.00% 12.00% ------------------------------------------------- Value at End - --------------------------------------------------------- 5 $ 11,924 $ 12,470 $ 13,046 - --------------------------------------------------------- 10 $ 28,130 $ 30,485 $ 33,903 - --------------------------------------------------------- 15 $ 50,627 $ 58,728 $ 68,525 - --------------------------------------------------------- 20 $ 82,369 $101,924 $127,406 - --------------------------------------------------------- 25 $127,694 $169,782 $229,041 - --------------------------------------------------------- 30 $192,978 $277,359 $406,021 - ---------------------------------------------------------
41 APPENDIX A -- RATINGS DESCRIPTION OF MOODY'S CORPORATE RATINGS Aaa. Bonds which are rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt edged." Interest payments are protected by a large or by an exceptionally stable margin and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa. Bonds which are rated Aa are judged to be of high quality by all standards. Together with the Aaa group they comprise what are generally known as high grade bonds. They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities, or fluctuation of protective elements may be of greater amplitude, or there may be other elements present which made the long-term risks appear somewhat larger than in Aaa securities. A. Bonds which are rated A possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future. Baa. Bonds which are rated Baa are considered as medium grade obligations, (i.e.; they are neither highly protected nor poorly secured). Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well. Ba. Bonds which are rated Ba are judges to have speculative elements and their future cannot be considered as well assured. Often the protection of interest and principal payments may be very moderate, and therefore not well safeguarded during both good and bad times. Uncertainty of position characterizes bonds in this class. B. Bonds which are rated B generally lack the characteristics of a desirable investment. Assurance of interest and principal payments or of other terms of the contract over long periods may be small. Caa. Bonds which are rated Caa are of poor standing. Such issues may be in default or there may be elements of danger present with respect to principal or interest. Ca. Bonds which are rated Ca represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. A-1 C. Bonds which are rated C are the lowest rated class of bonds and issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing. DESCRIPTION OF S&P'S CORPORATE RATINGS AAA. Debt rated AAA has the highest rating assigned by S&P. Capacity to pay interest and repay principal is extremely strong. AA. Debt rated AA has a very strong capacity to pay interest and repay principal and differs from the highest rated issues only in small degree. A. Debt rated A has a strong capacity to pay interest and repay principal and differs from the higher rated issues only in small degree. BBB. Debt rated BBB is regarded as having adequate capacity to pay interest and repay principal. Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category. BB. Debt rated BB has less near-term vulnerability to default than other speculative grade debt. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to inadequate capacity to meet timely interest and principal payment. The BB rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BBB- rating. B. Debt rated B has a greater vulnerability to default but presently has the capacity to meet interest and principal payments. Adverse business, financial or economic conditions would likely impair capacity or willingness to pay interest and repay principal. The B rating category is also used for debt subordinated to senior debt that is assigned an actual or implied BB or BB- rating CCC. Debt rated CCC has a current identifiable vulnerability to default and is dependent upon favorable business, financial and economic conditions to meet timely payments of principal. In the event of adverse business, financial or economic conditions, it is not likely to have the capacity to pay interest and repay principal. The CCC rating category is also used for debt subordinated to senior debt that is assigned an actual or implied CCC rating. CC. The rating CC is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC rating. A-2 C. The rating C is typically applied to debt subordinated to senior debt that is assigned an actual or implied CCC- debt rating. The C rating may be used to cover a situation where a bankruptcy petition has been filed, but debt service payments are continued. CI. The rating CI is reserved for income bonds on which no interest is being paid. D. Debt rated D is in payment default. The D rating category is used when interest payments or principal payments are not made on the date due even if the applicable grace period has not expired, unless S & P believes that such payments will be made during such grace period. The D rating also will be used upon the filing of a bankruptcy petition if debt service payments are jeopardized. DESCRIPTION OF COMMERCIAL PAPER RATINGS Commercial paper rated Prime-1 by Moody's are judged by Moody's to be of the best quality. Their short-term debt obligations carry the smallest degree of investment risk. Margins of support for current indebtedness are large or stable with cash flow and asset protection well assured. Current liquidity provides ample coverage of near-term liabilities and unused alternative financing arrangements are generally available. While protective elements may change over the intermediate or longer term, such changes are most unlikely to impair the fundamentally strong position of short-term obligations. Issuers (or related supporting institutions) rated Prime-2 have a strong capacity for repayment of short-term promissory obligations. This will normally be evidenced by many of the characteristics cited above but to a lesser degree. Earnings trends and coverage ratios, while sound, will be more subject to variation. Capitalization characteristics, while still appropriate, may be more affected by external conditions. Ample alternate liquidity is maintained. Commercial paper rated A by S&P have the following characteristics. Liquidity ratios are better than industry average. Long-term debt rating is A or better. The issuer has access to at least two additional channels of borrowing. Basic earnings and cash flow are in an upward trend. Typically, the issuer is a strong company in a well-established industry and has superior management. Issuers rated A are further refined by use of numbers 1, 2, and 3 to denote relative strength within this highest classification. Those issuers rated A-1 that are determined by S&P to possess overwhelming safety characteristics are denoted with a plus (+) sign designation. Fitch's commercial paper ratings represent Fitch's assessment of the issuer's ability to meet its obligations in a timely manner. The assessment places emphasis on the existence of liquidity. Ratings range from F-1+ which represents exceptionally strong credit quality to F-4 which represents weak credit quality. Duff & Phelps' short-term ratings apply to all obligations with maturities of under one year, including commercial paper, the uninsured portion of certificates of deposit, unsecured bank loans, master notes, bankers acceptances, irrevocable letters of credit and current maturities of long-term A-3 debt. Emphasis is placed on liquidity. Ratings range from Duff 1+ for the highest quality to Duff 5 for the lowest, issuers in default. Issues rated Duff 1+ are regarded as having the highest certainty of timely payment. Issues rated Duff 1 are regarded as having very high certainty of timely payment. A-4 NOVEMBER 30, 1994 SCHEDULES OF INVESTMENTS GLOBAL EQUITY FUND
SHARES VALUE - -------------------------------------------------------------------------------- COMMON STOCKS--86.6% ARGENTINA--1.3% - -------------------------------------------------------------------------------- ENERGY--0.6% 40,000 YPF Sociedad Anonima ADR . . . . . . . . . $ 905,000 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS--0.7% 46,000 Quilmes Industrial SA ADR. . . . . . . . . 1,216,700 ------------ Total Argentinean Common Stocks. . . . . . . . . . . . . . . . . 2,121,700 ------------ AUSTRALIA--2.7% - -------------------------------------------------------------------------------- METALS/MINING--1.9% 405,000 Comalco Ltd. . . . . . . . . . . . . . . . 1,510,381 280,000 Western Mining Corp. Holdings Ltd. . . . . 1,593,233 ------------ 3,103,614 ------------ PUBLIC SERVICES--0.8% 250,000 Mayne Nickless Ltd.. . . . . . . . . . . . 1,207,228 ------------ Total Australian Common Stocks . . . . . . . . . . . . . . . . . 4,310,842 ------------ AUSTRIA--1.5% - -------------------------------------------------------------------------------- BUILDING & CONSTRUCTION 35,000 Flughafen Wien AG. . . . . . . . . . . . . 1,503,504 2,800 Wienerberger Baustoffindustrie AG. . . . . 964,522 ------------ Total Austrian Common Stocks . . . . . . . . . . . . . . . . . . 2,468,026 ------------ DENMARK--2.1% - -------------------------------------------------------------------------------- CONGLOMERATES--1.1% 20,000 Sophus Berendsen AS. . . . . . . . . . . . 1,667,074 ------------ TELECOMMUNICATIONS--1.0% 31,200 Tele Danmark AS (Class B). . . . . . . . . 1,630,476 ------------ Total Danish Common Stocks . . . . . . . . . . . . . . . . . . . 3,297,550 ------------ FINLAND--2.6% - -------------------------------------------------------------------------------- EXPORTING--1.7% 20,000 Oy Nokia AB. . . . . . . . . . . . . . . . 2,730,263 ------------ RETAIL--0.9% 30,700 Oy Stockmann AB. . . . . . . . . . . . . . 1,439,063 ------------ Total Finnish Common Stocks. . . . . . . . . . . . . . . . . . . 4,169,326 ------------ FRANCE--4.5% - -------------------------------------------------------------------------------- AEROSPACE--0.7% 2,410 Sagem. . . . . . . . . . . . . . . . . . . 1,184,394 ------------ AUTOMOTIVE--0.6% 27,000 Renault SA . . . . . . . . . . . . . . . . 909,368 ------------ ENERGY--1.8% 38,340 Elf Aquitaine, Inc. ADS. . . . . . . . . . 1,303,560 24,710 Total SA . . . . . . . . . . . . . . . . . 1,547,820 ------------ 2,851,380 ------------ MACHINERY & ENGINEERING--1.4% 30,000 Michelin (CGDE). . . . . . . . . . . . . . 1,154,275 15,300 Schneider SA . . . . . . . . . . . . . . . 1,103,420 ------------ 2,257,695 ------------ Total French Common Stocks.. . . . . . . . . . . . . . . . . . . 7,202,837 ------------ GERMANY--4.3% - -------------------------------------------------------------------------------- BANKING--1.6% 4,000 Deutsche Bank AG . . . . . . . . . . . . . 1,889,583 2,700 Dresdner Bank AG . . . . . . . . . . . . . 704,004 ------------ 2,593,587 ------------ COMPUTER SERVICES--0.9% 2,500 SAP AG . . . . . . . . . . . . . . . . . . 1,467,073 ------------ HEALTH & PERSONAL CARE--1.1% 2,700 Schering AG. . . . . . . . . . . . . . . . 1,692,018 ------------ MACHINERY & ENGINEERING--0.7% 2,000 Linde AG . . . . . . . . . . . . . . . . . 1,142,420 ------------ Total German Common Stocks . . . . . . . . . . . . . . . . . . . 6,895,098 ------------ INDONESIA--0.9% - -------------------------------------------------------------------------------- TELECOMMUNICATIONS 37,500 Indonesian Satellite ADR . . . . . . . . . 1,425,000 ------------ ITALY--1.9% - -------------------------------------------------------------------------------- TELECOMMUNICATIONS--0.9% 690,000 Telecom Italia . . . . . . . . . . . . . . 1,430,118 ------------ TEXTILES/APPAREL--0.7% 170,000 Marzotto & Figli . . . . . . . . . . . . . 1,167,481 ------------ UTILITIES--0.3% 114,000 Edison S.p.A.. . . . . . . . . . . . . . . 476,087 ------------ Total Italian Common Stocks. . . . . . . . . . . . . . . . . . . 3,073,686 ------------ JAPAN--17.2% - -------------------------------------------------------------------------------- AEROSPACE--1.1% 250,000 Mitsubishi Heavy Industries Ltd. . . . . . 1,855,597 ------------ APPLIANCES & HOUSEHOLD DURABLES--2.0% 101,000 Sharp Corp.. . . . . . . . . . . . . . . . 1,756,699 29,000 Sony Corp. . . . . . . . . . . . . . . . . 1,539,590 ------------ 3,296,289 ------------ AUTOMOTIVE--0.9% 145,000 Mitsubishi Motors. . . . . . . . . . . . . 1,373,900 ------------ B-1 NOVEMBER 30, 1994 SCHEDULES OF INVESTMENTS GLOBAL EQUITY FUND (CONT'D) SHARES VALUE - -------------------------------------------------------------------------------- JAPAN (CONT'D) BANKING--1.0% 160,000 The Mitsui Trust & Banking Co., Ltd. . . . $ 1,634,139 ------------ BUILDING & CONSTRUCTION--0.8% 114,000 Sekisui House Ltd. . . . . . . . . . . . . 1,325,716 ------------ CONSUMER PRODUCTS--0.9% 91,000 Yakult Honsha Co.. . . . . . . . . . . . . 1,407,928 ------------ DRUGS & MEDICAL PRODUCTS--1.0% 150,000 Fujisawa Pharmaceutical Co.. . . . . . . . 1,638,184 ------------ ELECTRONICS--3.6% 80,000 Hitachi Maxell Co. . . . . . . . . . . . . 1,391,445 24,000 Kyocera Corp.. . . . . . . . . . . . . . . 1,781,373 88,000 NEC Corp.. . . . . . . . . . . . . . . . . 1,023,359 75,000 Nippondenso Co., Ltd.. . . . . . . . . . . 1,532,005 ------------ 5,728,182 ------------ INSURANCE--1.1% 150,000 Tokio Marine & Fire Insurance Co., Ltd.. . 1,729,194 ------------ MERCHANDISING--2.1% 45,000 Ito Yokado Co., Ltd. . . . . . . . . . . . 2,389,018 85,400 Simree Co., Ltd. . . . . . . . . . . . . . 1,001,760 ------------ 3,390,778 ------------ MISCELLANEOUS FINANCIAL SERVICES--1.5% 8,000 Japan Associated Finance Co., Ltd. . . . . 1,100,212 85,000 Toyo Tec Co., Ltd. . . . . . . . . . . . . 1,246,334 ------------ 2,346,546 ------------ RECREATION--1.2% 110,000 Canon, Inc.. . . . . . . . . . . . . . . . 1,902,114 ------------ Total Japanese Common Stocks . . . . . . . . . . . . . . . . . . 27,628,567 ------------ MEXICO--0.9% - -------------------------------------------------------------------------------- MISCELLANEOUS FINANCIAL SERVICES--0.3% 125,000 Grupo Finance Del Norte (Class B). . . . . 494,330 ------------ RETAIL--0.2% 120,000 Cifra SA de CV . . . . . . . . . . . . . . 324,513 ------------ TELECOMMUNICATIONS--0.4% 13,000 Telefonos De Mexico SA ADR . . . . . . . . 689,000 ------------ Total Mexican Common Stocks. . . . . . . . . . . . . . . . . . . 1,507,843 ------------ NETHERLANDS--5.5% - -------------------------------------------------------------------------------- BUILDING & CONSTRUCTION--1.0% 19,500 Kondor Wessels Groep NV. . . . . . . . . . 505,296 46,000 NBM Amstelland NV. . . . . . . . . . . . . 484,652 22,500 Sphinx Kon Gustavsberg--CVA. . . . . . . . 694,516 ------------ 1,684,464 ------------ ELECTRONICS--1.0% 50,833 Getronics NV . . . . . . . . . . . . . . . 1,676,195 ------------ INSURANCE--1.3% 44,127 International Nederlanden. . . . . . . . . 2,075,796 ------------ MISCELLANEOUS FINANCIAL SERVICES--1.0% 19,855 Hagemeyer. . . . . . . . . . . . . . . . . 1,566,101 ------------ PUBLISHING--1.2% 26,844 Wolters Kluwer . . . . . . . . . . . . . . 1,895,698 ------------ Total Netherlands Common Stocks. . . . . . . . . . . . . . . . . 8,898,254 ------------ SINGAPORE--0.3% - -------------------------------------------------------------------------------- ELECTRONICS 700,000 IPC Corp . . . . . . . . . . . . . . . . . 497,268 ------------ SPAIN--1.7% - -------------------------------------------------------------------------------- BUILDING & CONSTRUCTION--1.1% 17,000 Fomento de Construcione Y Contra . . . . . 1,684,082 ------------ UTILITIES--0.6% 200,000 Sevillana De Electric. . . . . . . . . . . 970,762 ------------ Total Spanish Common Stocks. . . . . . . . . . . . . . . . . . . 2,654,844 ------------ SWEDEN--3.8% - -------------------------------------------------------------------------------- DRUGS & MEDICAL PRODUCTS--1.0% 60,000 ASTRA AB . . . . . . . . . . . . . . . . . 1,616,757 ------------ MACHINERY & ENGINEERING--2.8% 20,000 ASEA AB. . . . . . . . . . . . . . . . . . 1,422,958 125,000 Atlas Copco AB . . . . . . . . . . . . . . 1,609,456 130,000 Kalmar Industries. . . . . . . . . . . . . 1,527,158 ------------ 4,559,572 ------------ Total Swedish Common Stocks. . . . . . . . . . . . . . . . . . . 6,176,329 ------------ SWITZERLAND--1.9% - -------------------------------------------------------------------------------- BANKING--0.8% 2,900 Bil GT Gruppe AG . . . . . . . . . . . . . 1,345,023 ------------ BUILDING & CONSTRUCTION--1.1% 2,300 Holderbank Financiere Glaris AG. . . . . . 1,784,842 ------------ Total Swiss Common Stocks. . . . . . . . . . . . . . . . . . . . 3,129,865 ------------ B-2 SHARES VALUE - -------------------------------------------------------------------------------- UNITED KINGDOM--3.1% - -------------------------------------------------------------------------------- PUBLIC SERVICES--1.2% 240,000 British Airport Authority PLC. . . . . . . $ 1,892,807 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS--1.0% 221,000 Guinness PLC . . . . . . . . . . . . . . . 1,582,777 ------------ UTILITIES--0.9% 187,400 National Power PLC . . . . . . . . . . . . 1,456,675 ------------ Total United Kingdom Common Stocks . . . . . . . . . . . . . . . 4,932,259 ------------ UNITED STATES--30.4% - -------------------------------------------------------------------------------- AEROSPACE--3.5% 35,000 McDonnell Douglas Corp.. . . . . . . . . . 4,882,500 15,300 Sundstrand Corp. . . . . . . . . . . . . . 654,075 ------------ 5,536,575 ------------ BANKING--6.4% 20,000 First Interstate Bancorp.. . . . . . . . . 1,410,000 169,215 Mellon Bank Corp.. . . . . . . . . . . . . 5,605,247 23,000 Wells Fargo & Co.. . . . . . . . . . . . . 3,320,625 ------------ 10,335,872 ------------ CHEMICALS--2.9% 21,000 Hercules, Inc. . . . . . . . . . . . . . . 2,401,875 31,000 Monsanto Co. . . . . . . . . . . . . . . . 2,232,000 ------------ 4,633,875 ------------ CONGLOMERATES--1.1% 20,000 General Electric Co. . . . . . . . . . . . 920,000 10,000 ITT Corp.. . . . . . . . . . . . . . . . . 796,250 ------------ 1,716,250 ------------ CONSUMER PRODUCTS--1.3% 35,000 Avon Products, Inc.. . . . . . . . . . . . 2,165,625 ------------ DRUGS & MEDICAL PRODUCTS--3.7% 70,000 Becton, Dickinson & Co.. . . . . . . . . . 3,307,500 34,000 Warner-Lambert Co. . . . . . . . . . . . . 2,630,750 ------------ 5,938,250 ------------ ENERGY--0.6% 20,000 MAPCO, Inc.. . . . . . . . . . . . . . . . 1,002,500 ------------ INSURANCE--3.4% 70,000 EXEL Ltd.. . . . . . . . . . . . . . . . . 2,625,000 61,000 Transamerica Corp. . . . . . . . . . . . . 2,889,875 ------------ 5,514,875 ------------ METALS/MINING--0.8% 875 Freeport McMoRan Copper & Gold (Class A) . . . . . . . . . . . . . . . . 17,609 70,000 Freeport McMoRan, Inc. . . . . . . . . . . 1,198,750 ------------ 1,216,359 ------------ MISCELLANEOUS FINANCIAL SERVICES--4.7% 110,000 American Express Co. . . . . . . . . . . . 3,258,750 87,000 Federal Home Loan Mortgage Corp. . . . . . 4,339,125 ------------ 7,597,875 ------------ TECHNOLOGY--1.2% 30,000 Intel Corp.. . . . . . . . . . . . . . . . 1,893,750 ------------ TELECOMMUNICATIONS--0.8% 44,000 Sprint Corp. . . . . . . . . . . . . . . . 1,314,500 ------------ Total United States Common Stocks. . . . . . . . . . . . . . . . 48,866,306 ------------ Total Common Stocks (cost--$121,902,041) . . . . . . . . . . . . $139,255,600 ------------ - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- WARRANTS VALUE - -------------------------------------------------------------------------------- WARRANTS--0.0% SWITZERLAND - -------------------------------------------------------------------------------- Building & Construction 11,500 Holderbank Financiere Glaris AG, 12/20/94, strike @ CHF 620 *. . . . . . . $ 17,779 ------------ B-3 NOVEMBER 30, 1994 SCHEDULES OF INVESTMENTS GLOBAL EQUITY FUND (CONT'D) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- CONVERTIBLE BONDS--0.3% SWEDEN - -------------------------------------------------------------------------------- MISCELLANEOUS FINANCIAL SERVICES 2,200,000 SEK Investor AB 8.00%, 6/21/01 (cost--$359,464). . . . . . . . . . . . . $ 385,473 ------------ REPURCHASE AGREEMENT--13.0% 20,800,000 US$ Prudential Securities, 5.65%, 12/01/94, (proceeds at maturity: $20,803,264, collateralized by $21,445,000 par, $21,219,828 value, U.S. Treasury Notes 3.875%, 8/31/95) (cost--$20,800,000). . . $ 20,800,000 ------------ LOCAL CURRENCY VALUE - -------------------------------------------------------------------------------- FOREIGN CURRENCY CALL ACCOUNTS**--0.5% - -------------------------------------------------------------------------------- STATE STREET BANK & TRUST CO. 966,524,112 Italian Lira 7.25% . . . . . . . . . . . . . $ 597,986 159,642 Pound Sterling 4.25% . . . . . . . . . . . . 250,183 9,431 Australian Dollar 5.50%. . . . . . . . . . . 7,252 11,966 Danish Krone 3.50% . . . . . . . . . . . . . 1,948 ------------ TOTAL FOREIGN CURRENCY CALL ACCOUNTS (cost--$856,895). . . . . . $ 857,369 ------------ TOTAL INVESTMENTS (cost--$143,918,400) . . . . . . 100.4% $161,316,221 OTHER LIABILITIES IN EXCESS OF OTHER ASSETS. . . . (0.4) (589,606) ----- ------------ TOTAL NET ASSETS . . . . . . . . . . . . . . . . . 100.0% $160,726,615 ----- ------------ ----- ------------ * Non-income producing security. ** Variable rate accounts have interest reset twice a week.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. B-4
GLOBAL INCOME FUND PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- AUSTRALIA--11.3% - -------------------------------------------------------------------------------- GOVERNMENT NOTES--4.7% 100,000 A$ Queensland Treasury Corp. 8.00%, 5/14/97 . $ 73,673 1,000,000 Western Australia Treasury Corp. 10.00%, 1/15/97 . . . . . . . . . . . . . 769,753 ------------ 843,426 ------------ EURONOTES--6.6% 500,000 Mobil Australia Finance, Ltd. 12.00%, 4/18/97 . . . . . . . . . . . . . 398,164 1,000,000 Unilever Australia, Ltd. 12.00%, 4/08/98 . . . . . . . . . . . . . 802,576 ------------ 1,200,740 ------------ Total Australia. . . . . . . . . . . . . . . . . . . . . . . . . 2,044,166 ------------ BELGIUM--3.0% - -------------------------------------------------------------------------------- GOVERNMENT NOTE 17,000,000 BEL Kingdom of Belgium 9.00%, 6/27/01 (A). . . 551,169 ------------ CANADA--4.8% - -------------------------------------------------------------------------------- GOVERNMENT NOTE 1,200,000 CD$ Government of Canada 8.50%, 3/01/00 (A). . 861,670 ------------ DENMARK--7.1% - -------------------------------------------------------------------------------- GOVERNMENT NOTE 7,750,000 DKK Kingdom of Denmark 9.00%, 11/15/98 (A) . . 1,295,136 ------------ GERMANY--5.6% - -------------------------------------------------------------------------------- Government Notes 1,000,000 DM German Unity Fund 8.50%, 2/20/01 (A) . . . 674,487 500,000 Republic of Germany 8.50%, 8/21/00 (A) . . 337,881 ------------ Total Germany. . . . . . . . . . . . . . . . . . . . . . . . . . 1,012,368 ------------ IRELAND--2.5% - -------------------------------------------------------------------------------- GOVERNMENT NOTE 325,000 IEP Irish Treasury Bond 6.25%, 4/01/99 . . . . 460,151 ------------ NEW ZEALAND--4.3% - -------------------------------------------------------------------------------- GOVERNMENT NOTE 1,250,000 NZD Government of New Zealand 9.00%, 11/15/96. . . . . . . . . . . . . . . . . 779,042 ------------ PORTUGAL--5.3% - -------------------------------------------------------------------------------- GOVERNMENT NOTE 950,000 ECU Republic of Portugal 6.00%, 2/16/04. . . . 970,283 ------------ SPAIN--9.8% - -------------------------------------------------------------------------------- GOVERNMENT NOTES Government of Spain 95,000,000 Pt 9.00%, 2/28/97 (A). . . . . . . . . . . . 709,459 137,000,000 11.85%, 8/30/96 (A) . . . . . . . . . . . 1,076,836 ------------ Total Spain. . . . . . . . . . . . . . . . . . . . . . . . . . . 1,786,295 ------------ UNITED KINGDOM--4.5% - -------------------------------------------------------------------------------- GOVERNMENT NOTE 500,000 L U.K. Exchequer 9.50%, 1/15/99 (A). . . . . 813,205 ------------ UNITED STATES--39.0% - -------------------------------------------------------------------------------- CORPORATE NOTES--5.3% 500,000 US$ Healthtrust, Inc. 10.25%, 4/15/04. . . . . 527,500 500,000 Wheeling-Pittsburg Corp. 9.375%, 11/15/03. . . . . . . . . . . . . . . . . 433,750 ------------ 961,250 ------------ GOVERNMENT NOTE--4.7% 900,000 U.S. Treasury Note 4.75%, 2/15/97. . . . . 850,077 ------------ EURONOTES--28.0% 500,000 Colombia Financiera Energetica Nacional 6.625%, 12/13/96. . . . . . . . . . . . . 480,500 500,000 Grupo Industrial Durango 12.00%, 7/15/01 . . . . . . . . . . . . . 487,500 500,000 Minas Gerais 7.875%, 2/10/99 . . . . . . . 407,500 500,000 National Power Corp. (Philippines) 7.625%, 11/15/00. . . . . . . . . . . . . 440,000 500,000 Philippine Long Distance Telephone 10.625%, 6/02/04. . . . . . . . . . . . . 496,875 B-5 NOVEMBER 30, 1994 SCHEDULES OF INVESTMENTS GLOBAL INCOME FUND (CONT'D) PRINCIPAL AMOUNT VALUE - -------------------------------------------------------------------------------- EURONOTES (CONT'D) 1,000,000 US$ Republic of Argentina 6.50%, 3/31/05 (B). . . . . . . . . . . . $ 710,625 490,000 Republic of Brazil (IDU's) 6.0625%, 1/01/01 (B). . . . . . . . . . . 414,050 500,000 Republic of the Philippines 5.25%, 12/01/17 (C) . . . . . . . . . . . 310,625 500,000 Telefonica de Argentina 11.875%, 11/01/04 . . . . . . . . . . . . 486,250 United Mexican States 500,000 5.8125%, 12/31/19 Series D (B). . . . . . 433,125 500,000 6.76563%, 12/31/19 Series B (B) . . . . . 433,125 ------------ 5,100,175 ------------ REPURCHASE AGREEMENT--1.0% 184,000 US$ Prudential Securities, 5.65%, 12/01/94, (proceeds at maturity: $184,029, collateralized by $195,000 par, $191,685 value, U.S. Treasury Notes, 5.125%, 3/31/96) . . . . . . . . . 184,000 ------------ TOTAL UNITED STATES. . . . . . . . . . . . . . . . . . . . . . . 7,095,502 ------------ Total Investments (cost--$17,865,440). . . . . . . 97.2% $17,668,987 Other Assets in Excess of Other Liabilities. . . . 2.8 508,032 ----- ------------ Total Net Assets . . . . . . . . . . . . . . . . . 100.0% $18,177,019 ----- ------------ ----- ------------ (A) Securities segregated (full or partial) as collateral for open forward currency contracts. The market value of such segregated securities is $6,319,844. (B) Represents a floating interest rate bond, subject to change on respective semi-annually coupon dates, based on the current six month LIBOR rate plus 81.25 basis points. (C) Coupon will pay quarterly at 5.25% until 12/94, then will "step-up" and pay semi-annually at the following annual rates; 5.75% until 12/95, 6.25% until 12/97 and 6.50% until maturity.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. B-6
NOVEMBER 30, 1994 STATEMENTS OF ASSETS AND LIABILITIES Global Equity Global Income Fund Fund ------------- ------------- ASSETS Investments, at value (cost--$123,118,400 and $17,865,440, respectively) . . . . . $140,516,221 $ 17,668,987 Repurchase Agreement (cost--$20,800,000 and $0, respectively). . . . . . . . . . . 20,800,000 -- Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,774 467 Receivable for fund shares sold. . . . . . . . . . . . . . . . . . . . . . . . . . 266,353 2,815 Dividends receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201,011 -- Withholding taxes reclaimable. . . . . . . . . . . . . . . . . . . . . . . . . . . 146,744 7,029 Deferred organization expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 22,859 48,826 Interest receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,453 537,677 Receivable from adviser. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 8,493 Deposits for securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . 7,186,089 -- Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83,662 75,301 ------------ ------------ Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,268,166 18,349,595 ------------ ------------ LIABILITIES Payable for investments purchased. . . . . . . . . . . . . . . . . . . . . . . . . 1,162,467 -- Payable for fund shares redeemed . . . . . . . . . . . . . . . . . . . . . . . . . 96,431 70,515 Investment advisory fee payable... . . . . . . . . . . . . . . . . . . . . . . . . 16,487 -- Withholding taxes payable... . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,929 2,928 Distribution fee payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,858 763 Administration fee payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,496 620 Net unrealized depreciation on forward currency contracts. . . . . . . . . . . . . -- 34,888 Deposits for securities loaned . . . . . . . . . . . . . . . . . . . . . . . . . . 7,186,089 -- Other payables and accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . 48,794 62,862 ------------ ------------ Total Liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,541,551 172,576 ------------ ------------ NET ASSETS Capital stock. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113,533 21,411 Paid-in-surplus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130,055,046 20,502,349 Accumulated undistributed net investment income. . . . . . . . . . . . . . . . . . 44,024 -- Accumulated undistributed net realized gain (loss) on investments. . . . . . . . . 14,611,225 (1,129,077) Accumulated net realized loss on foreign currency transactions . . . . . . . . . . (1,391,636) (989,174) Distributions in excess of net realized gains. . . . . . . . . . . . . . . . . . . (110,149) -- Net unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies. . . . . . . . . . 17,404,572 (228,490) ------------ ------------ Total Net Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,726,615 $ 18,177,019 ------------ ------------ ------------ ------------ CLASS A: Fund shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,451,819 1,976,697 ------------ ------------ Net asset value per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14.16 $ 8.49 ------------ ------------ ------------ ------------ Maximum offering price per share*. . . . . . . . . . . . . . . . . . . . . . . . . $ 14.98 $ 8.75 ------------ ------------ ------------ ------------ CLASS B: Fund shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 729,671 138,425 ------------ ------------ Net asset value and offering price per share . . . . . . . . . . . . . . . . . . . $ 14.07 $ 8.49 ------------ ------------ ------------ ------------ CLASS C: Fund shares outstanding. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171,805 25,963 ------------ ------------ Net asset value and offering price per share . . . . . . . . . . . . . . . . . . . $ 14.06 $ 8.49 ------------ ------------ ------------ ------------ * Sales charges decrease on purchases of $50,000 or higher for the Global Equity Fund and $100,000 or higher for the Global Income Fund.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. B-7
YEAR ENDED NOVEMBER 30, 1994 STATEMENTS OF OPERATIONS Global Equity Global Income Fund Fund ------------- ------------- INVESTMENT INCOME Dividends (net of foreign withholding taxes of $123,756 and $0, respectively). . . $ 2,432,732 $ -- Interest (net of foreign withholding taxes of $0 and $5,395, respectively) . . . . 642,446 1,613,541 ------------ ------------ Total investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,075,178 1,613,541 ------------ ------------ OPERATING EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment advisory fees (note 2a) . . . . . . . . . . . . . . . . . . . . . . . . 1,166,949 99,506 Distribution fees (note 2d). . . . . . . . . . . . . . . . . . . . . . . . . . . . 813,628 58,795 Administration fees (note 2c). . . . . . . . . . . . . . . . . . . . . . . . . . . 388,983 49,753 Transfer and dividend disbursing agent fees (note 1k). . . . . . . . . . . . . . . 215,541 37,527 Custodian fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186,082 59,220 Registration fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76,349 78,747 Auditing, consulting and tax return preparation fees . . . . . . . . . . . . . . . 58,509 35,551 Reports and notices to shareholders. . . . . . . . . . . . . . . . . . . . . . . . 58,063 21,071 Amortization of deferred organization expenses (note 1c) . . . . . . . . . . . . . 39,179 24,356 Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,219 -- Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,973 11,229 Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,028 2,400 ------------ ------------ Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,046,503 478,155 Less: Investment advisory fees waived and expense reimbursements (note 2a) . . . (15,349) (139,836) ------------ ------------ Net operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,031,154 338,319 ------------ ------------ Net investment income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,024 1,275,222 ------------ ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY TRANSACTIONS--NET Net realized gain (loss) on investments. . . . . . . . . . . . . . . . . . . . . . 14,460,917 (654,971) Net realized loss on foreign currency transactions . . . . . . . . . . . . . . . . (1,391,636) (989,174) Net realized gain (loss) on futures transactions . . . . . . . . . . . . . . . . . 150,308 (33,622) ------------ ------------ Net realized gain (loss) on investments and foreign currency transactions. . . .. 13,219,589 (1,677,767) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies . . . . . . . . . (1,833,491) (267,788) ------------ ------------ Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,386,098 (1,945,555) ------------ ------------ Net increase (decrease) in net assets resulting from operations. . . . . . . . . . $ 11,430,122 $ (670,333) ------------ ------------ ------------ ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. B-8
STATEMENTS OF CHANGES IN NET ASSETS Global Equity Fund Global Income Fund Year Ended November 30, Year Ended November 30, --------------------------- -------------------------- 1994 1993* 1994 1993 ------------ ------------ ----------- ----------- OPERATIONS Net investment income. . . . . . . . . . . . . . . . . . . . . $ 44,024 $ 46,115 $ 1,275,222 $ 1,423,757 Net realized gain (loss) on investments. . . . . . . . . . . . 14,611,225 5,952,817 (688,593) 252,205 Net realized loss on foreign currency transactions . . . . . . (1,391,636) (107,988) (989,174) (748,097) Net change in unrealized appreciation (depreciation) on investments and translation of other assets and liabilities denominated in foreign currencies . . . . . . . . . . . . . . (1,833,491) 15,536,595 (267,788) 1,082,353 ------------ ------------ ----------- ----------- Net increase (decrease) in net assets resulting from operations. . . . . . . . . . . . . . . . . . . . . . . . . . 11,430,122 21,427,539 (670,333) 2,010,218 ------------ ------------ ----------- ----------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- Class A . . . . . . . . . . . . . . . -- (1,133,661) (179,857) (378,564) Net investment income -- Class B . . . . . . . . . . . . . . . -- -- (8,671) (974) Net investment income -- Class C . . . . . . . . . . . . . . . -- -- (1,531) (372) Net realized gain -- Class A . . . . . . . . . . . . . . . . . (4,944,320) (7,944,237) -- -- Net realized gain -- Class B . . . . . . . . . . . . . . . . . (66,298) -- -- -- Net realized gain -- Class C . . . . . . . . . . . . . . . . . (10,738) -- -- -- Distributions in excess of net realized gains -- Class A . . . -- (179,902) -- -- Distributions in excess of net realized gains -- Class B . . . -- -- -- -- Distributions in excess of net realized gains -- Class C . . . -- -- -- -- Tax return of capital -- Class A . . . . . . . . . . . . . . . -- -- (1,026,915) (1,158,775) Tax return of capital -- Class B . . . . . . . . . . . . . . . -- -- (49,507) (2,983) Tax return of capital -- Class C . . . . . . . . . . . . . . . -- -- (8,741) (1,139) ------------ ------------ ----------- ----------- Total dividends and distributions to shareholders. . . . . . (5,021,356) (9,257,800) (1,275,222) (1,542,807) ------------ ------------ ----------- ----------- FUND SHARE TRANSACTIONS CLASS A Net proceeds from sales. . . . . . . . . . . . . . . . . . . . 30,817,260 30,701,048 2,641,672 5,441,056 Reinvestment of dividends and distributions. . . . . . . . . . 4,682,941 8,963,937 1,088,618 1,341,142 Cost of shares redeemed. . . . . . . . . . . . . . . . . . . . (29,503,784) (27,477,571) (7,582,775) (4,259,950) ------------ ------------ ----------- ----------- Net increase (decrease) -- Class A . . . . . . . . . . . . . 5,996,417 12,187,414 (3,852,485) 2,522,248 ------------ ------------ ----------- ----------- CLASS B Net proceeds from sales. . . . . . . . . . . . . . . . . . . . 9,192,969 1,868,775 745,568 762,602 Reinvestment of dividends and distributions. . . . . . . . . . 64,143 -- 45,001 3,572 Cost of shares redeemed. . . . . . . . . . . . . . . . . . . . (659,275) (146,699) (217,068) (61,617) ------------ ------------ ----------- ----------- Net increase -- Class B. . . . . . . . . . . . . . . . . . . 8,597,837 1,722,076 573,501 704,557 ------------ ------------ ----------- ----------- CLASS C Net proceeds from sales. . . . . . . . . . . . . . . . . . . . 2,476,331 249,911 91,369 150,714 Reinvestment of dividends and distributions. . . . . . . . . . 10,736 -- 9,804 1,510 Cost of shares redeemed. . . . . . . . . . . . . . . . . . . . (299,932) -- (15,084) -- ------------ ------------ ----------- ----------- Net increase -- Class C. . . . . . . . . . . . . . . . . . . 2,187,135 249,911 86,089 152,224 ------------ ------------ ----------- ----------- Total increase (decrease) in net assets from fund share transactions. . . . . . . . . . . . . . . . . . . . . . . 16,781,389 14,159,401 (3,192,895) 3,379,029 ------------ ------------ ----------- ----------- Total increase (decrease) in net assets. . . . . . . . . . . . 23,190,155 26,329,140 (5,138,450) 3,846,440 NET ASSETS Beginning of year. . . . . . . . . . . . . . . . . . . . . . . 137,536,460 111,207,320 23,315,469 19,469,029 ------------ ------------ ----------- ----------- End of year (including undistributed net investment income (loss) of $44,024, ($344,025), $0 and $1,341,754, respectively) . . . . . . . . . . . . . . . . . . . . . . . . $160,726,615 $137,536,460 $18,177,019 $23,315,469 ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- * Dividends and Distributions to Shareholders has been restated to reflect Statement of Position 93-2. See note 1e in the notes to financial statements.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. B-9 NOVEMBER 30, 1994 NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Quest for Value Global Funds (collectively, the "Funds") are registered under the Investment Company Act of 1940 as diversified, open-end management investment companies. The Quest for Value Global Equity Fund, Inc. ("Global Equity") commenced investment operations on July 2, 1990. The Global Income Fund ("Global Income"), a series of Quest for Value Global Funds, Inc., commenced investment operations on December 2, 1991. Quest for Value Advisors (the "Adviser") serves as the Funds' investment adviser and administrator. Quest for Value Distributors (the "Distributor") serves as the Funds' distributor. Both the Adviser and Distributor are majority-owned (99%) subsidiaries of Oppenheimer Capital. Clay Finlay, Inc. (the "Sub-Adviser") had primary responsibility for non-U.S. investment decisions for Global Equity through December 31, 1993. Effective January 1, 1994, the Adviser assumed responsibility for all non-U.S. investment decisions for Global Equity. Prior to September 1, 1993, the Funds issued only one class of shares which were redesignated Class A shares. Subsequent to that date, the Funds were authorized to issue Class A, Class B and Class C shares. Shares of each Class represent an identical interest in the investment portfolio of their respective fund and generally have the same rights, but are offered under different sales charge and distribution fee arrangements. Furthermore, Class B shares will automatically convert to Class A shares of the same fund eight years after their respective purchase. The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements: (a) VALUATION OF INVESTMENTS Investment securities listed on a U.S. or foreign stock exchange and securities traded in the over-the-counter National Market System are valued at the last reported sale price on the valuation date; if there are no such sales, the securities are valued at their last quoted bid price. Other investments traded over-the-counter and not part of the National Market System are valued at the last quoted bid price. Investment debt securities (other than short-term obligations) are valued each day by an independent pricing service (approved by the Board of Directors) using methods which include current market quotations from a major market maker in the securities and trader reviewed "matrix" prices. Short-term debt securities having a remaining maturity of sixty days or less are valued at amortized cost or amortized value, which approximates market value. Any security or other asset for which market quotations are not readily available is valued at its fair value as determined under procedures established by the Funds' Board of Directors. Investments in countries in which the Funds may invest may involve certain considerations and risks not typically associated with domestic investments as a result of, among others, the possibility of future political and economic developments and the level of governmental supervision and regulation of foreign securities markets. (b) FEDERAL INCOME TAXES It is the Funds' policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders; accordingly, no Federal income tax provision is required. (c) DEFERRED ORGANIZATION EXPENSES Costs incurred by Global Equity and Global Income in connection with their organization approximated $194,000 and $122,000, respectively. These costs have been deferred and are being amortized to expense on a straight line basis over sixty months from commencement of the Funds' operations. (d) INVESTMENT TRANSACTIONS AND OTHER INCOME Investment transactions are accounted for on the trade date. In determining the gain or loss from the sale of investments, the cost of investments sold is determined on the basis of identified cost. Dividend income and other distributions are recorded on the ex-dividend date, except certain dividends or other distributions from foreign securities which are recorded as soon as the information is available after the ex-dividend date. Interest income is accrued as earned. Discounts on debt securities purchased are accreted to interest income over the lives of the respective securities. B-10 (e) DIVIDENDS AND DISTRIBUTIONS Each fund records dividends and distributions to its shareholders on the ex-dividend date.The following table summarizes the Funds' income dividend and capital gain declaration policy:
INCOME SHORT-TERM LONG-TERM DIVIDENDS CAPITAL GAINS CAPITAL GAINS --------- ------------- ------------- Global Equity. . . . annually annually annually Global Income. . . . daily* annually annually * paid monthly.
During the fiscal year ended November 30, 1994, the Funds' adopted Statement of Position 93-2: Determination, Disclosure and Financial Statement Presentation of Income, Capital Gain and Return of Capital Distributions by Investment Companies. The amount of dividends and distributions from net investment income, net realized foreign currency gains and net realized capital gains are determined in accordance with Federal income tax regulations, which may differ from generally accepted accounting principles. These "book-tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their Federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income, net realized foreign currency gains and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income, dividends in excess of net realized foreign currency gains or distributions in excess of net realized capital gains, respectively. To the extent distributions exceed current and accumulated earnings and profits for Federal income tax purposes, they are reported as distributions of paid-in-surplus or tax return of capital. Accordingly, permanent book-tax differences relating to shareholder distributions have been reclassified to paid-in-surplus. Net investment income(loss), net realized foreign currency gain(loss), net realized gain(loss) and net assets were not affected by this change. The following table discloses the cumulative effect of such differences reclassified from accumulated undistributed net investment income(loss), accumulated undistributed net realized foreign currency gain(loss) and accumulated undistributed net realized gain(loss) on investments to paid-in-surplus:
ACCUMULATED ACCUMULATED ACCUMULATED UNDISTRIBUTED NET REALIZED UNDISTRIBUTED PAID NET INVESTMENT FOREIGN CURRENCY NET REALIZED IN INCOME LOSS GAIN (LOSS) SURPLUS -------------- ---------------- ------------- ------- Global Equity. . . . . . . . . $344,025 $397,015 ($83,763) ($657,277) Global Income. . . . . . . . . (1,341,754) 1,310,676 -- 31,078
(f) FOREIGN CURRENCY TRANSLATION The books and records of the Funds are maintained in U.S. dollars as follows: (1) the foreign currency market value of investment securities, other assets and liabilities and forward contracts stated in foreign currencies are translated at the exchange rates at the end of the period; and (2) purchases, sales, income and expenses are translated at the rate of exchange prevailing on the respective dates of such transactions. The resultant exchange gains and losses are included in the Funds' Statements of Operations. Since the net assets of the Funds are presented at the foreign exchange rates and market prices at the close of the period, the Funds do not isolate that portion of the results of operations arising as a result of changes in the exchange rates from fluctuations arising from changes in the market prices of securities. (g) FORWARD CURRENCY CONTRACTS As part of its investment program, the Funds may utilize forward currency contracts for hedging purposes. The use of these contracts involves, to varying degrees, elements of market risk. Risks arise from the possible movements in foreign exchange rates and security values underlying these instruments. In addition, credit risk may arise from the potential inability of counterparties to meet the terms of their contracts. Forward currency contracts are recorded at market value. Realized gains and losses arising from such transactions are included in net realized gain or loss on foreign currency transactions in the results of operations. At November 30, 1994, there were no forward currency contracts outstanding for Global Equity. Outstanding contracts at November 30, 1994 for Global Income are as follows: B-11 NOVEMBER 30, 1994 NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Contract to Settlement -------------------------------------------------- Unrealized Date Deliver Receive Gain (Loss) ---------- -------------------- -------------------- -------------------- 12/09/94 DM 1,000,000 US$ 644,870 US$ 7,249 12/14/94 DM 1,300,000 US$ 847,126 US$ 18,135 01/09/95 CD$ 700,000 US$ 515,806 US$ 6,585 01/27/95 DM 1,500,000 US$ 944,912 US$ (4,170) 01/27/95 US$ 653,240 DM 1,000,000 US$ (23,299) 02/06/95 DM 1,000,000 US$ 658,892 US$ 20,450 02/17/95 Ffr 2,900,000 US$ 546,345 US$ 6,638 02/27/95 DM 460,000 US$ 296,315 US$ 2,449 02/28/95 ESP 90,000,000 US$ 685,767 US$ 714 02/28/95 Ffr 4,000,000 US$ 746,129 US$ 1,555 04/20/95 DM 1,140,000 US$ 660,985 US$ (8,455) 04/20/95 US$ 642,550 DM 1,000,000 US$ (62,739) -------------------- US$ (34,888) -------------------- --------------------
Net unrealized depreciation of $34,888 on these contracts at November 30, 1994 is included in the accompanying financial statements. (h) FUTURES ACCOUNTING POLICIES Futures contracts are agreements between two parties to buy and sell a financial instrument at a set price on a future date. Upon entering into such a contract, a fund is required to pledge to the broker an amount of cash or U.S. Government securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, a fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the fund as unrealized appreciation or depreciation. When a contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed and reverses any unrealized appreciation or depreciation previously recorded. (i) REPURCHASE AGREEMENTS The Funds' custodian takes possession of the collateral pledged for investments in repurchase agreements. The underlying collateral is valued daily on a mark-to-market basis to ensure that the value, including accrued interest, is at least equal to the repurchase price. In the event of default of the obligor to repurchase, the Funds have the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. (j) SECURITY LENDING PROCEDURES Global Equity periodically lends securities through a lending program run by its custodian, State Street Bank and Trust Company, for its participating clients. Under the program, the bank makes available to select qualified brokerage firms or other borrowing institutions the use of the participants securities for a period of time. Security loans are collateralized with U.S. Government securities or cash equal to at least 105% of the market value of the securities at the time of the loan. The securities loaned are marked-to-market daily and collateral is adjusted daily to reflect any fluctuations in value. Global Equity earns income from the borrower which is generally the difference between the interest earned on the collateral and the rebate paid to the borrower. Global Equity pays State Street Bank and Trust Company 35% of the net interest earned as a fee for administering the security lending program. For the year ended November 30, 1994, Global Equity earned $2,247 from security lending. At November 30, 1994, Global Equity had the following securities on loan: B-12
MARKET VALUE MARKET VALUE SECURITY SHARES OF SHARES COLLATERAL OF COLLATERAL - ----------------------------- -------- ------------ --------------- ------------- Linde Ag (Germany) 1,960 $1,119,572 U.S. Dollars $1,174,530 Mitsubishi Motors (Japan) 142,000 1,345,474 U.S. Dollars 1,420,000 Nippondenso Co., Ltd. (Japan) 30,000 612,802 U.S. Dollars 645,000 Scheinder SA (France) 14,994 1,081,352 U.S. Dollars 1,135,796 Telecom Italia (Italy) 676,200 1,401,516 U.S. Dollars 1,521,450 Total SA (France) 19,677 1,232,556 U.S. Treasuries 1,289,313 ---------- ---------- $6,793,272 $7,186,089 ---------- ---------- ---------- ----------
(k) ALLOCATION OF EXPENSES Expenses specifically identifiable to a particular fund or class are borne by that fund or class. Other expenses are allocated to each fund or class based on its net assets in relation to the total net assets of all applicable funds or classes or on another reasonable basis. For the year ended November 30, 1994, transfer and dividend disbursing agent fees accrued to classes A, B and C were $198,935, $12,410 and $4,196, respectively, for Global Equity, and $34,699, $1,941 and $887, respectively, for Global Income. 2. INVESTMENT ADVISORY FEE, SUB-ADVISORY FEE, ADMINISTRATION FEE AND OTHER TRANSACTIONS WITH AFFILIATES (a) The investment advisory fee is payable monthly to the Adviser and is computed as a percentage of each fund's net assets as of the close of business each day at the following annual rates: .75% for Global Equity and .50% for Global Income. For the year ended November 30, 1994, the Adviser voluntarily waived $15,349 and $99,506 in investment advisory fees for Global Equity and Global Income, respectively. The Adviser also reimbursed Global Income $40,330 in other operating expenses. Effective January 7, 1994, the Adviser discontinued its voluntary waiver of investment advisory fees for Global Equity. (b) The Adviser paid the Sub-Adviser fees through December 31, 1993 at an annual rate of .375% of Global Equity's average net assets. (c) The administration fees are payable monthly to the Adviser and are computed on each fund's average daily net assets at the annual rate of .25%. (d) The Funds have adopted a Plan and Agreement of Distribution (the "Plan") pursuant to which they are permitted to compensate the Distributor in connection with the distribution of fund shares. Under the Plan, the Distributor has entered into agreements with securities dealers and other financial institutions and organizations to obtain various sales-related services in rendering distribution assistance. To compensate the Distributor for the services it and other dealers under the Plan provide and for the expenses they bear under the Plan, the Funds pay the Distributor compensation, accrued daily and payable monthly, on the daily net assets for Class A shares at the following annual rates: .25% for Global Equity and .05% for Global Income. The Funds' Class A shares also pay a service fee at an annual rate of .25%. Although Global Income's Plan for Class A shares authorizes it to pay a maximum service fee of .25% and a distribution fee of .05%, the Board of Directors has set a maximum .25% total fee under the Plan. Compensation for Class B and Class C shares of each fund is at an annual rate of .75% of average daily net assets. Each fund's Class B and Class C shares also pay a service fee at the annual rate of .25% of average daily net assets. Distribution and service fees may be paid by the Distributor to broker-dealers or others for providing personal service, maintenance of accounts and ongoing sales or shareholder support functions in connection with the distribution of fund shares. While payments under the plan may not exceed the stated percentage of average daily net assets on an annual basis, the payments are not limited to the amounts actually paid or expenses actually incurred by the Distributor. For the year ended November 30, 1994, distribution and service fees charged to classes A, B and C were $742,304, $59,822 and $11,502, respectively, for Global Equity, and $46,739, $10,182 and $1,874, respectively, for Global Income. B-13 NOVEMBER 30, 1994 NOTES TO FINANCIAL STATEMENTS (CONTINUED) (e) Total brokerage commissions paid by Global Equity during the year ended November 30, 1994 amounted to $566,615, of which $16,402 was paid to Oppenheimer & Co., Inc., an affiliate of the Adviser. (f) Oppenheimer & Co., Inc. has informed the Funds that it received approximately $252,000 and $24,000, from Global Equity and Global Income, respectively, in connection with the sale of Class A shares for the year ended November 30, 1994. (g) The Distributor has informed the funds that it received contingent deferred sales charges on the redemption of Class B and Class C shares of approximately $7,300 and $600 for Global Equity and Global Income, respectively, for the year ended November 30, 1994. 3. FUND SHARE TRANSACTIONS The following table summarizes the fund share activity for the two years ended November 30, 1994:
GLOBAL EQUITY FUND GLOBAL INCOME FUND YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30, --------------------------- -------------------------- 1994 1993* 1994 1993 ------------ ------------ ----------- ----------- CLASS A Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,167,814 2,374,953 290,147 585,048 Dividends and distributions reinvested . . . . . . . . . . . . 344,081 758,804 123,568 144,981 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,079,717) (2,156,199) (837,949) (458,116) ------------ ------------ ----------- ----------- Net increase (decrease)--Class A . . . . . . . . . . . . . . 432,178 977,558 (424,234) 271,913 ------------ ------------ ----------- ----------- CLASS B * Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 647,583 134,395 82,174 80,836 Dividends and distributions reinvested . . . . . . . . . . . . 4,716 -- 5,164 381 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (46,590) (10,433) (23,568) (6,562) ------------ ------------ ----------- ----------- Net increase--Class B. . . . . . . . . . . . . . . . . . . . 605,709 123,962 63,770 74,655 ------------ ------------ ----------- ----------- CLASS C * Issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174,051 18,037 10,411 15,993 Dividends and distributions reinvested . . . . . . . . . . . . 789 -- 1,118 161 Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . . . (21,072) -- (1,720) -- ------------ ------------ ----------- ----------- Net increase--Class C. . . . . . . . . . . . . . . . . . . . 153,768 18,037 9,809 16,154 ------------ ------------ ----------- ----------- Total net increase (decrease). . . . . . . . . . . . . . . 1,191,655 1,119,557 (350,655) 362,722 ------------ ------------ ----------- ----------- ------------ ------------ ----------- ----------- * Initial offering September 2, 1993.
B-14 4. DIVIDENDS AND DISTRIBUTIONS The following table summarizes the per share dividends and distributions made for the two years ended November 30, 1994:
GLOBAL EQUITY FUND GLOBAL INCOME FUND YEAR ENDED NOVEMBER 30, YEAR ENDED NOVEMBER 30, --------------------------- -------------------------- 1994 1993* 1994 1993 ------------ ------------ ----------- ----------- NET INVESTMENT INCOME: Class A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- $0.119 $0.085 $0.168 Class B *. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 0.075 0.030 Class C *. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 0.072 0.031 NET REALIZED GAINS: Class A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $0.494 0.900 -- -- Class B *. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.494 -- -- -- Class C *. . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.494 -- -- -- TAX RETURN OF CAPITAL: Class A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 0.485 0.513 Class B *. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 0.426 0.091 Class C *. . . . . . . . . . . . . . . . . . . . . . . . . . . . -- -- 0.411 0.095 * Initial offering September 2, 1993.
5. PURCHASES AND SALES OF SECURITIES For the year ended November 30, 1994, purchases and sales of investment securities, other than short-term securities, were as follows:
PURCHASES SALES ----------- ------------ Global Equity. . . . . . . . . . . $97,066,487 $98,504,257 Global Income. . . . . . . . . . . 26,188,485 28,990,912
6. UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL INCOME TAX PURPOSES At November 30, 1994, the composition of unrealized appreciation (depreciation) of investment securities and the cost of investments for Federal income tax purposes were as follows:
APPRECIATION (DEPRECIATION) NET TAX COST ------------ -------------- ----------- ------------ Global Equity. . . . . . . . . . . . . . . . . . . . . $20,499,912 ($3,260,543) $17,239,369 $144,076,852 Global Income. . . . . . . . . . . . . . . . . . . . . 178,922 (375,375) (196,453) 17,865,440
7. AUTHORIZED FUND SHARES AND PAR VALUE PER SHARE
AUTHORIZED PAR VALUE FUND SHARES PER SHARE ----------- ----------- Global Equity. . . . . . . . . . . 100,000,000 $0.01 Global Income. . . . . . . . . . . 100,000,000 0.01
B-15 NOVEMBER 30, 1994 NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CAPITAL LOSS CARRYFORWARDS For the year ended November 30, 1994, Global Income had net capital loss carryfowards of $1,077,004, of which $204,539, $214,944 and $657,521 will be available to offset future net capital gains realized through fiscal years ending 1998, 2001 and 2002, respectively, to the extent provided by regulations. Capital and currency losses incurred after October 31, 1994 are deemed to arise on the first business day of the following tax year. Accordingly, for the fiscal year ended November 30, 1994, Global Income incurred and elected to defer $52,073 and $127,100 in net capital and net currency losses, respectively. 9. SUBSEQUENT EVENTS On December 5, 1994, Global Equity declared net realized short-term and long-term capital gain distributions of $0.3296 and $0.8985, respectively, per share, for each class, payable December 5, 1994 to shareholders of record on the opening of business December 5, 1994. B-16 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
GLOBAL EQUITY FUND INCOME FROM INVESTMENT OPERATIONS -------------------------------------------------- NET REALIZED NET ASSET NET AND VALUE, INVESTMENT UNREALIZED TOTAL FROM BEGINNING INCOME GAIN (LOSS) INVESTMENT OF PERIOD (LOSS) ON INVESTMENTS OPERATIONS CLASS A YEAR ENDED NOVEMBER 30, 1994 $13.54 $0.01 $1.10 $1.11 1993 12.30 -- 2.26 2.26 1992 11.25 0.12 0.93 1.05 1991 10.57 (0.04) 0.85 0.81 JULY 2, 1990 (3) TO NOV. 30, 1990 12.05 (4) 0.05 (1.53) (1.48) CLASS B YEAR ENDED NOV. 30, 1994 13.52 (0.06) 1.10 1.04 SEPT. 2, 1993 (5) TO NOV. 30, 1993 13.75 (4) (0.02) (0.21) (0.23) CLASS C YEAR ENDED NOV. 30, 1994 13.52 (0.08) 1.11 1.03 SEPT. 2, 1993 (5) TO NOV. 30, 1993 13.75 (4) (0.02) (0.21) (0.23)
DIVIDENDS AND DISTRIBUTIONS -------------------------------------------------------- DIVIDENDS TO DISTRIBUTIONS TO SHAREHOLDERS SHAREHOLDERS TAX TOTAL FROM NET FROM NET RETURN DIVIDENDS INVESTMENT REALIZED GAIN OF AND INCOME ON INVESTMENTS CAPITAL DISTRIBUTIONS CLASS A YEAR ENDED NOVEMBER 30, 1994 -- ($0.49) -- ($0.49) 1993 ($0.12) (0.90) -- (1.02) 1992 -- -- -- -- 1991 (0.05) (0.08) -- (0.13) JULY 2, 1990 (3) TO NOV. 30, 1990 -- -- -- -- CLASS B YEAR ENDED NOV. 30, 1994 -- (0.49) -- (0.49) SEPT. 2, 1993 (5) TO NOV. 30, 1993 -- -- -- -- CLASS C YEAR ENDED NOV. 30, 1994 -- (0.49) -- (0.49) SEPT. 2, 1993 (5) TO NOV. 30, 1993 -- -- -- --
RATIOS ------------------------------------------ RATIO OF NET RATIO OF NET NET ASSET NET ASSETS OPERATING INVESTMENT VALUE, END OF EXPENSES INCOME (LOSS) PORTFOLIO END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE CLASS A YEAR ENDED NOVEMBER 30, 1994 $14.16 8.37% $148,044 1.92%(1,2) 0.05%(1,2) 70% 1993 13.54 19.72% 135,616 1.76%(2) 0.04%(2) 46% 1992 12.30 9.33% 111,207 1.76%(2) 0.72%(2) 62% 1991 11.25 7.72% 46,937 2.09% (0.27%) 41% JULY 2, 1990 (3) TO NOV. 30, 1990 10.57 (12.28%) 58,087 2.11%(6) 0.92%(6) 2% CLASS B YEAR ENDED NOV. 30, 1994 14.07 7.84% 10,268 2.50%(1,2) (0.44%)(1,2) 70% SEPT. 2, 1993 (5) TO NOV. 30, 1993 13.52 (1.67%) 1,676 2.26%(2,6) (0.76%)(2,6) 46% CLASS C YEAR ENDED NOV. 30, 1994 14.06 7.77% 2,415 2.66%(1,2) (0.59%)(1,2) 70% SEPT. 2, 1993 (5) TO NOV. 30, 1993 13.52 (1.67%) 244 2.26%(2,6) (0.69%)(2,6) 46% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED NOVEMBER 30, 1994 FOR CLASS A, CLASS B AND CLASS C WERE $148,460,823, $5,982,186 AND $1,150,224, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED A PORTION OF ITS FEES. IF SUCH WAIVERS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 1.93% AND 0.04%, RESPECTIVELY, FOR THE YEAR ENDED NOVEMBER 30, 1994, 1.91% AND (0.11%), RESPECTIVELY, FOR THE YEAR ENDED NOVEMBER 30, 1993 AND 1.84% AND 0.64%, RESPECTIVELY, FOR THE YEAR ENDED NOVEMBER 30, 1992. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 2.51% AND (0.45%), RESPECTIVELY, FOR CLASS B AND 2.66% AND (0.59%), RESPECTIVELY, FOR CLASS C, FOR THE YEAR ENDED NOVEMBER 30, 1994 AND 2.32% AND (0.82%), ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 2.35% AND (0.78%), ANNUALIZED, RESPECTIVELY, FOR CLASS C, FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO NOVEMBER 30, 1993. (3) COMMENCEMENT OF OPERATIONS. (4) INITIAL OFFERING PRICE. (5) INITIAL OFFERING OF CLASS B AND CLASS C SHARES, RESPECTIVELY. (6) ANNUALIZED. - --------------- * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
B-17 FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) (CONTINUED)
GLOBAL INCOME FUND INCOME FROM INVESTMENT OPERATIONS -------------------------------------------------- NET REALIZED NET ASSET NET AND VALUE, INVESTMENT UNREALIZED TOTAL FROM BEGINNING INCOME GAIN (LOSS) INVESTMENT OF PERIOD (LOSS) ON INVESTMENTS OPERATIONS CLASS A YEAR ENDED NOVEMBER 30, 1994 $9.36 $0.57 ($0.87) ($0.30) 1993 9.14 0.63 0.27 0.90 DEC. 2, 1991(3) TO NOV. 30, 1992 10.00(4) 0.77 (1.00) (0.23) CLASS B YEAR ENDED NOV. 30, 1994 9.36 0.50 (0.87) (0.37) SEPT. 2, 1993 (5) TO NOV. 30, 1993 9.42(4) 0.12 (0.06) 0.06 CLASS C YEAR ENDED NOV. 30, 1994 9.36 0.48 (0.87) (0.39) SEPT. 2, 1993 (5) TO NOV. 30, 1993 9.42(4) 0.13 (0.06) 0.07
DIVIDENDS AND DISTRIBUTIONS -------------------------------------------------------- DIVIDENDS TO DISTRIBUTIONS TO SHAREHOLDERS SHAREHOLDERS TAX TOTAL FROM NET FROM NET RETURN DIVIDENDS INVESTMENT REALIZED GAIN OF AND INCOME ON INVESTMENTS CAPITAL DISTRIBUTIONS CLASS A YEAR ENDED NOVEMBER 30, 1994 ($0.08) -- ($0.49) ($0.57) 1993 (0.17) -- (0.51) (0.68) DEC. 2, 1991(3) TO NOV. 30, 1992 (0.63) -- -- (0.63) CLASS B YEAR ENDED NOV. 30, 1994 (0.07) -- (0.43) (0.50) SEPT. 2, 1993 (5) TO NOV. 30, 1993 (0.03) -- (0.09) (0.12) CLASS C YEAR ENDED NOV. 30, 1994 (0.07) -- (0.41) (0.48) SEPT. 2, 1993 (5) TO NOV. 30, 1993 (0.03) -- (0.10) (0.13)
RATIOS ------------------------------------------ RATIO OF NET RATIO OF NET NET ASSET NET ASSETS OPERATING INVESTMENT VALUE, END OF EXPENSES INCOME (LOSS) PORTFOLIO END OF TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE CLASS A YEAR ENDED NOVEMBER 30, 1994 $8.49 (3.24%) $16,781 1.65%(1,2) 6.45%(1,2) 144% 1993 9.36 10.20% 22,465 1.70%(2) 6.73%(2) 114% DEC. 2, 1991(3) TO NOV. 30, 1992 9.14 (2.60%) 19,469 1.84%(2,6) 7.93%(2,6) 360% CLASS B YEAR ENDED NOV. 30, 1994 8.49 (3.99%) 1,176 2.41%(1,2) 5.71%(1,2) 144% SEPT. 2, 1993 (5) TO NOV. 30, 1993 9.36 0.65% 699 2.45%(2,6) 4.38%(2,6) 114% CLASS C YEAR ENDED NOV. 30, 1994 8.49 (4.20%) 220 2.70%(1,2) 5.48%(1,2) 144% SEPT. 2, 1993 (5) TO NOV. 30, 1993 9.36 0.71% 151 2.45%(2,6) 5.16%(2,6) 114% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED NOVEMBER 30, 1994 FOR CLASS A, CLASS B AND CLASS C WERE $18,695,485, $1,018,251 AND $187,397, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED ALL OR A PORTION OF ITS FEES AND REIMBURSED THE FUND FOR A PORTION OF ITS OPERATING EXPENSES. IF SUCH WAIVERS AND REIMBURSMENTS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 2.35% AND 5.75%, RESPECTIVELY, FOR THE YEAR ENDED NOVEMBER 30, 1994, 2.09% AND 6.34%, RESPECTIVELY, FOR THE YEAR ENDED NOVEMBER 30, 1993 AND 1.88% AND 7.89%, ANNUALIZED, RESPECTIVELY, FOR THE PERIOD DECEMBER 2, 1991 (COMMENCEMENT OF OPERATIONS) TO NOVEMBER 30, 1992. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 3.12% AND 5.00%, RESPECTIVELY, FOR CLASS B AND 3.39% AND 4.79%, RESPECTIVELY, FOR CLASS C, FOR YEAR ENDED NOVEMBER 30, 1994 AND 2.88% AND 3.95%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 2.84% AND 4.77%, ANNUALIZED, RESPECTIVELY, FOR CLASS C, FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO NOVEMBER 30, 1993. (3) COMMENCEMENT OF OPERATIONS. (4) INITIAL OFFERING PRICE. (5) INITIAL OFFERING OF CLASS B AND CLASS C SHARES, RESPECTIVELY. (6) ANNUALIZED. - --------------- * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
B-18 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of Quest for Value Global Equity Fund, Inc.: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Quest for Value Global Equity Fund, Inc. (the "Fund") at November 30, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the four years in the period then ended and for the period July 2, 1990 (commencement of operations) to November 30, 1990, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsiblilty of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at November 30, 1994 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP 1177 Avenue of Americas New York, New York January 25, 1995 To the Shareholders and Board of Directors of Global Income Fund: In our opinion, the accompanying statement of assets and liabilities, including the schedule of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of Global Income Fund (a series of Quest for Value Global Funds, Inc. hereafter referred to as the "Fund") at November 30, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the two years in the period then ended and for the period December 2, 1991 (commencement of operations) to November 30, 1992, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsiblilty of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at November 30, 1994 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP 1177 Avenue of Americas New York, New York January 25, 1995 B-19 TAX INFORMATION We are required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise you within 60 days of the Funds' fiscal year end (November 30, 1994) as to the Federal tax status of dividends and distributions received by shareholders during such fiscal year. Accordingly, we are advising you that during the fiscal year ended November 30, 1994, the Funds paid per share dividends and distributions to shareholders as follows:
TAXABLE AS ORDINARY INCOME --------------------------------- TAX NET INVESTMENT SHORT-TERM LONG-TERM RETURN OF INCOME CAPITAL GAINS CAPITAL GAINS CAPITAL -------------- ------------- ------------- --------- GLOBAL EQUITY FUND Class A. . . . . . . . . . . . . . -- $0.0707 $0.4228 -- Class B. . . . . . . . . . . . . . -- 0.0707 0.4228 -- Class C. . . . . . . . . . . . . . -- 0.0707 0.4228 -- GLOBAL INCOME FUND Class A. . . . . . . . . . . . . . $0.0850 -- -- $0.4853 Class B. . . . . . . . . . . . . . 0.0747 -- -- 0.4264 Class C. . . . . . . . . . . . . . 0.0719 -- -- 0.4106
Since each fund's fiscal year is not the calendar year, another notification will be sent in respect to calendar year 1994. In January 1995, you will be advised on IRS Form 1099 DIV as to the Federal tax status of the dividends and distributions received by you in calendar 1994. The amounts that will be reported, will be the amounts to use on your 1994 Federal income tax return and probably will differ from the amounts which we must report for each fund's fiscal year ended November 30, 1994. Shareholders are advised to consult with their own tax advisers as to the Federal, state and local tax status of each funds' income and realized gain distributions received. B-20 QUEST FOR VALUE ANNUAL REPORT OCTOBER 31, 1994 DECEMBER 12, 1994 DEAR SHAREHOLDER: The fiscal year ended October 31, 1994 was a hectic and unsettled period in the investment markets, following three years of exceptionally strong returns. Both the stock and bond markets were affected by rising interest rates and investor concerns about the outlook for inflation. Stocks outperformed bonds. After declining in the first fiscal half, equity prices turned upward in the second half. The Standard & Poor's 500 Index including dividends (S&P 500) showed a return of 3.9% for the year and 6.3% for the second fiscal half. This positive performance was quite good, given the jittery mood which seemed to characterize the stock market much of the year. As measured by the Lehman Corporate Bond Index, bonds had a negative total return of 5.2% for the fiscal year and a negative total return of 0.1% for the second half. By fiscal year end, bond prices appeared to have stabilized and, in fact, turned upward in the weeks after the end of the year. Our equity funds performed well during the fiscal year, in each case exceeding the returns on relevant market indices, with less portfolio risk. Our fixed income funds had negative returns, as did virtually all fixed income investments. We are conservative, long-term investors in both bonds and stocks and use our value disciplines to control risk. We remain dedicated to preserving capital and making it grow over time through a variety of market conditions. Detailed information on the performance and holdings of each of the funds in the Quest for Value Family is presented in the Investment Review and financial statements that follow. STOCK MARKET CONDITIONS AND OUTLOOK The bond market peaked in October 1993 and the stock market three months later, triggered by rising interest rates and investor concerns about the inflation outlook. By the end of the fiscal year, an expanding economy was adding to an uncertain near-term investment outlook by draining liquidity from financial markets. While a further stock market correction is possible, we do not believe the ingredients are in place for a major bear market. Neither do we see much upside potential for the stock market in the near term. The most likely prospect, in our view, is a continued trading range into the beginning of 1995. In this environment, we believe we are well positioned with our value approach to preserve capital and generate above-average returns for shareholders. As always, we rely on our stock-selection skills to invest in companies with superior investment characteristics. Moreover, because of the uncertain near-term market outlook, our equity funds generally have above-average cash reserves which are available for investment in quality companies at reasonable prices when market conditions warrant. We feel comfortable with our conservative portfolio posture and believe it will serve shareholders well in the weeks and months ahead. SM- Quest for Value is a registered service mark of Oppenheimer Capital. QUEST FOR VALUE FUNDS ONE WORLD FINANCIAL CENTER NEW YORK, NY 10281 EQUITY FUNDS - ------------ QUEST FOR VALUE FUND GLOBAL EQUITY FUND OPPORTUNITY FUND SMALL CAPITALIZATION FUND GROWTH AND INCOME FUND FIXED INCOME FUNDS - ------------------ TAXABLE U.S. GOVERNMENT INCOME FUND INVESTMENT QUALITY INCOME FUND GLOBAL INCOME FUND TAX-EXEMPT NATIONAL TAX-EXEMPT FUND CALIFORNIA TAX-EXEMPT FUND NEW YORK TAX-EXEMPT FUND MONEY MARKET FUNDS - ------------------ QUEST CASH RESERVES: TAXABLE PRIMARY PORTFOLIO GOVERNMENT PORTFOLIO TAX-EXEMPT GENERAL MUNICIPAL PORTFOLIO CALIFORNIA MUNICIPAL PORTFOLIO NEW YORK MUNICIPAL PORTFOLIO FOR MORE INFORMATION OR ASSISTANCE WITH YOUR ACCOUNT PLEASE CALL: 1-800-232-3863 BOND MARKET CONDITIONS AND OUTLOOK Bond prices have been battered during the past year in one of the worst selloffs in history, driven primarily by a series of short-term rate increases by the Federal Reserve. Prices have fallen sharply to a point where bonds may now be oversold and where yields are well in excess of inflation. Prices of fixed income securities have been hurt during the past year not only by rising interest rates, but also by an unusually long list of other problems, including the decline of the U.S. dollar, fears that inflation may increase and fears that economic improvement will push interest rates still higher. Each of these concerns is valid. None is new, however, and all are reflected in the current level of bond rates. Now that yields on long-term Treasury bonds have climbed to approximately 8% from 5.8% a year ago, we wonder if the mood pendulum has finally reached the end of its arc and is ready to change direction. Do today's bond yields offer an attractive buying opportunity? Is the 15% decline in long-term Treasury prices enough to satisfy the fears of investors? Obviously, only time will tell. While our route to success is to identify the best relative values, not to attempt to predict the future, currently we view the markets as offering good value. PROPOSED AMERICAN DREAM SAVINGS ACCOUNT We would like to call your attention to the impending debate in Congress over tax incentives for savings. The savings rate in the United States remains dangerously low and is well below that of many other industrial nations. To address this national problem, the Republican Contract with America contains a proposal which would create new tax incentives to encourage savings for retirement, educating one's children and the first-time purchase of a home. This proposal would establish the American Dream Savings Account, a new type of IRA, which would be available to millions of families. We at Quest for Value believe it is important that people be given appropriate incentives to provide for their own financial security and that of their families. We urge you to contact your representatives in Congress as well as the White House to voice your support for this important proposal. SUMMARY We remain alert to opportunities to buy quality securities at attractive prices. The past year has been a challenging one for investors. As long-term investors know, however, market conditions change and the current unsettled environment will not last forever. Today's environment is one where we believe our conservative, value-oriented investment skills can serve investors well. We at Quest for Value remain dedicated to meeting your investment needs by preserving capital and delivering superior long-term performance. Thank you for investing with us. Sincerely, Joseph M. La Motta President 2 - -------------------------------------------------------------------------------- INVESTMENT REVIEW - -------------------------------------------------------------------------------- QUEST FOR VALUE FUND, INC. OBJECTIVE Seeks capital appreciation through investment primarily in equity securities of companies believed to be undervalued in the marketplace in terms of assets, earnings, growth potential and cash flow. ANNUAL REVIEW The Fund, which has consistently been rated A+ by FORBES magazine for down market performance, continued to perform well in the latest fiscal year. Its Class A shares provided a total return of 3.8% in the six months ended October 31, 1994 and a total return of 5.0% in the 12 months ended October 31, 1994, below the performance of the S&P 500 for the six months and above the S&P 500 for the year. The Fund's 12-month results substantially exceeded the average return of 1.7% for the 580 growth funds monitored by Morningstar, Inc., a leading independent reporter of mutual fund performance. Since its inception in April 1980, the Fund has delivered a total return of 1,013.5%, or a compound annual return of 18.1%, well in excess of the S&P 500. During the six months ended October 31, 1994, portfolio holdings which contributed most to the Fund's performance were the common stocks of Becton, Dickinson & Co., McDonnell Douglas Corp., American Express Co., Alliant Techsystems, Inc. and Warner-Lambert Co. Underperforming stocks which detracted most from the Fund's results were MAPCO, Inc., Sprint Corp., Venture Stores, Inc., John Alden Financial Corp. and EXEL, Ltd. The Fund seeks to control risk in two ways: by purchasing quality companies that are less vulnerable to market declines, and by purchasing these superior companies inexpensively. As of October 31, 1994, the average return on equity of the Fund's portfolio companies was well in excess of the average return on equity of the S&P 500 companies (indicating the quality of the Fund's portfolio companies), while the average price-earnings ratio of the stocks in the Fund's portfolio was considerably lower than the price-earnings ratio of the S&P 500 (indicating the relative value of the portfolio). The Fund emphasizes investments in companies which generate substantial free cash flow and use this cash to create value for shareholders. These companies create value by investing in operations, making astute acquisitions or returning capital to their shareholders through dividend payments or the repurchase of shares. In the stock market today, many companies, with the cash flow characteristics we like, are buying back their shares, thereby increasing the inherent value of the shares that continue to be outstanding. Some of the portfolio companies that are benefiting from significant share repurchase programs include Avon Products, Inc., Becton, Dickinson & Co., McDonnell Douglas Corp., Monsanto Co., Morgan Stanley Group, Inc., Sara Lee Corp. and Transamerica Corp. As of October 31, 1994, 89.9% of the Fund's portfolio was invested in common stocks and securities convertible into common stocks and 10.1% in cash and cash equivalents. During the six months ended October 31, 1994, the Fund increased its holdings or added new positions in such stocks as AlliedSignal, Inc., Case Corp., Citicorp, Countrywide Credit Industries, Inc., EXEL, Ltd., Intel Corp., John Alden Financial Corp., May Department Stores Co., Pall Corp., Progressive Corp., Ohio, and Security Capital Realty, Inc. We were diligent about taking profits in stocks that met our price objectives, reducing or eliminating the Fund's holdings of common stocks such as Alliant Techsystems, Inc., Johnson & Johnson Co., Unitrin, Inc. and Warner-Lambert Co. 3 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (continued) - -------------------------------------------------------------------------------- QUEST FOR VALUE FUND, INC. (CONT'D) PORTFOLIO HOLDINGS Major industry positions as of October 31, 1994 were in the insurance, financial services, aerospace and consumer products sectors. The Fund's five largest equity holdings were: EXEL LTD. Strongly capitalized specialty insurance company Becton, Dickinson & Co. Worldwide producer of medical products and diagnostic test systems McDonnell Douglas Corp. Largest manufacturer of military aircraft and an important competitor in commercial aircraft Hasbro, Inc. Well diversified marketer of toys Federal Home Loan Mortgage Corp. (Freddie Mac) The second largest insurer of home mortgages COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT* IN QUEST FOR VALUE FUND, INC. (CLASS A) FROM INCEPTION (4/30/80) THROUGH 10/31/94 AND TOTAL RETURN ON S&P 500 INDEX** EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
QFV Fund S&P 500 Apr-80 $9,450 $10,000 Oct-80 $12,058 $12,309 Oct-81 $14,935 $12,376 Oct-82 $20,083 $14,395 Oct-83 $29,232 $16,416 Oct-84 $31,596 $19,501 Oct-85 $37,943 $23,378 Oct-86 $47,575 $31,136 Oct-87 $45,629 $33,126 Oct-88 $54,564 $36,001 Oct-89 $63,098 $46,071 Oct-90 $54,826 $44,476 Oct-91 $75,352 $59,373 Oct-92 $89,255 $65,284 Oct-93 $100,204 $75,096
CDSC = contingent deferred sales charge Performance of B and C classes will differ from performance of A class shown above based on differences in loads and fees paid by shareholders of the different classes. 4 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- OPPORTUNITY FUND OBJECTIVE Seeks capital appreciation by looking for opportunities in the equity and fixed income markets; the balance between stocks, bonds and cash will vary, based on an assessment of the best relative opportunities under prevailing market conditions. ANNUAL REVIEW The Opportunity Fund continued as one of the top-performing funds in its industry category. The Fund's Class A shares provided a total return of 6.0% in the six months ended October 31, 1994, slightly below the S&P 500, and 8.4% in the fiscal year ended October 31, 1994, well in excess of the S&P 500. The Fund's 12-month performance far exceeded the negative average return of 0.2% for the 87 asset allocation funds in the Morningstar universe. The Fund has provided a compound annual return of 15.4% since inception in January 1989, exceeding the S&P 500. The Fund invests in stocks, bonds and cash equivalents, seeking an appropriate allocation among each class of assets to preserve capital and generate the best total return over time. During the six months ended October 31, 1994, the Fund reduced its holdings of common stocks and increased its cash reserves. At fiscal year end, the Fund's asset mix was 76.5% common stocks, 1.5% Treasury notes, 1.1% convertible preferred stocks and 20.9% cash and cash equivalents. As with our other funds, investment in quality securities at reasonable prices is fundamental to the Opportunity Fund's philosophy. At October 31, 1994, the average price-earnings ratio of the stocks in the Fund was significantly below the price-earnings ratio for the S&P 500, while the average annual return on equity of the portfolio companies was well in excess of the average annual return on equity of the S&P 500. We believe this combination of low valuation and high return on equity provides a degree of protection against severe price declines, as well as an opportunity for significant investment profit. During the six months ended October 31, 1994, the Fund established new positions in the common stocks of Collins & Aikman Corp., Countrywide Credit Industries, Inc. and Intel Corp. The Fund increased its holdings of the common stocks of such companies as Federal Home Loan Mortgage Corp., Lehman Brothers Holdings, Inc., McDonnell Douglas Corp., Triton Energy Corp. and Wells Fargo & Co. Holdings of such stocks as First Interstate Bancorp, General Electric Co. and MAPCO, Inc. were eliminated. PORTFOLIO HOLDINGS Major industry positions as of October 31, 1994 were in the financial services, banking, aerospace, and drugs and medical products sectors. The Fund's five largest equity holdings were: McDonnell Douglas Corp. Largest manufacturer of military aircraft and an important competitor in commercial aircraft Mellon Bank Corp. Major money center bank 5 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (continued) - -------------------------------------------------------------------------------- OPPORTUNITY FUND (CONT'D) Federal Home Loan Mortgage Corp. (Freddie Mac) The second largest insurer of home mortgages Wells Fargo & Co. Leading West Coast bank Hercules, Inc. Specialty chemical producer that is investing in highly profitable core businesses and divesting non-core operations COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT* IN QUEST FOR VALUE OPPORTUNITY FUND (CLASS A) FROM INCEPTION (1/01/89) THROUGH 10/31/94 AND TOTAL RETURN ON S&P 500 INDEX** EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
QFV OPP S&P 500 Dec-88 $9,450 $10,000 Oct-89 $10,953 $12,603 Oct-90 $9,570 $11,660 Oct-90 $14,398 $15,566 Oct-92 $17,556 $17,116 Oct-93 $20,074 $19,672 Oct-94 21762 20431
CDSC = contingent deferred sales charge Performance of B and C classes will differ from performance of A class shown above based on differences in loads and fees paid by shareholders of the different classes. 6 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SMALL CAPITALIZATION FUND OBJECTIVE Seeks capital appreciation by investing in a diversified portfolio of undervalued stocks, primarily of companies with market capitalizations under $1 billion. ANNUAL REVIEW The Small Capitalization Fund's Class A shares had a total return of 0.6% in the six months ended October 31, 1994, somewhat below the 1.8% total return of the Russell 2000 Index, a widely followed benchmark which includes smaller capitalization stocks. For the 12 months ended October 31, 1994, the Class A shares had a flat performance (0.0% total return), slightly exceeding the negative total return of 0.2% for the Russell index. The 12-month results compare with an average total return of 1.9% for the 201 funds in Morningstar's small company fund category. In general, smaller capitalization companies underperformed larger capitalization stocks in both the six months and the fiscal year. Small cap stocks have traditionally provided high investment returns over time, although subject to volatility. The Fund invests conservatively in this sector, seeking to control volatility and achieve superior long-term capital appreciation by investing in companies that are well established and have a combination of strong market positions, shareholder-oriented managements, excellent balance sheets and cash flow, and above-average returns on equity and assets. The Fund's portfolio contains an eclectic group of securities selected to meet our value criteria. For instance, we continue to see a number of opportunities among niche-oriented financial service companies, such as AmeriCredit Corp. and Cash America International, Inc., two special situations. As is true of all our holdings, these companies enjoy high returns on capital and have seasoned, shareholder-oriented managements. Both companies generate significant recurring cash because of unique characteristics of their respective businesses, yet sell at reasonable prices relative to their peers and to the market. At October 31, 1994, 86.3% of the Fund's portfolio was invested in common stocks, 1.6% in corporate notes and bonds, 0.2% in convertible preferred stocks and 11.9% in cash and cash equivalents. During the fiscal year, we added to our professional team, increasing our research coverage of companies with market capitalizations in a range of $500 million to $1 billion. In the six months, we established new or increased positions in the common stocks of such companies as Aquila Gas Pipeline Corp., Commerce Clearing House, Inc. (Class B), Community Health Systems, Inc., Foote, Cone & Belding Communications, Inc., D.R. Horton, Inc., Martin Marietta Materials, Inc., Security Capital Industrial Trust, Inc. and Sybron International Corp. We eliminated or reduced the Fund's holdings of such stocks as Carlisle Plastics, Inc., Exabyte Corp., Foamex International, Inc., Noel Group, Inc., Penn America Group, Inc., SPI Holdings, Inc. and United Stationers, Inc. 7 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (continued) - -------------------------------------------------------------------------------- SMALL CAPITALIZATION FUND (CONT'D) PORTFOLIO HOLDINGS Major industry positions as of October 31, 1994 were in the real estate, energy, technology and manufacturing sectors. The Fund's five largest equity holdings were: Stratus Computer, Inc. Worldwide leader in fault-tolerant, high-availability computer systems Foote, Cone & Belding Communications, Inc. Well-known advertising agency Nu-Kote Holdings, Inc. (Class A) Manufacturer and distributor of office printing supplies and other office supply products Sybron International Corp. Manufacturer of laboratory supplies and dental products Dionex Corp. Designs and manufactures ion chromatography systems used by chemists in many industries COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT* IN QUEST FOR VALUE SMALL CAPITALIZATION FUND (CLASS A) FROM INCEPTION (1/01/89) THROUGH 10/31/94 AND TOTAL RETURN ON RUSSELL 2000 INDEX** EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
QFV OPP RUSSELL 2000 Dec-88 $9,450 $10,000 Oct-89 $10,310 $11,504 Oct-90 $8,421 $8,363 Oct-90 $13,053 $13,265 Oct-92 $14,566 $14,523 Oct-93 $18,967 $19,227 Oct-94 18975 19180
CDSC = contingent deferred sales charge Performance of B and C classes will differ from performance of A class shown above based on differences in loads and fees paid by shareholders of the different classes. 8 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- GROWTH AND INCOME FUND OBJECTIVE Seeks total return by investing in a combination of attractively valued quality stocks and fixed income securities. ANNUAL REVIEW The Growth and Income Fund is designed for investors who want to participate in the equity market for total return with above-average income. Compared with our other equity funds, it tends to be somewhat more active in selling portfolio securities when prices rise and buying on price weakness. The Fund's Class A shares delivered a total return of 5.4% in the six months ended October 31, 1994, slightly below the S&P 500, and 8.6% in the 12 months ended October 31, 1994, well above the S&P 500. The Fund's 12-month return substantially exceeded the average return of 2.0% for the 326 funds in the Morningstar growth and income category. Income dividends paid in the year ended October 31, 1994, came to $.3193 per Class A share. In managing the Fund, we seek to maintain a diversified portfolio that balances the need for protection of principal with the pursuit of long-term capital appreciation and income. The portfolio is structured around three broad segments: common stocks, which provide growth potential and some income; higher-yielding bonds, which generate relatively more income but are also selected for their potential for capital appreciation; and fixed income securities which are convertible into common stocks. By separating the portfolio into these segments, we can select common stocks based almost exclusively on their prospects for total return without regard to income. As of October 31, 1994, 52.6% of the Fund's portfolio was invested in common stocks, 18.5% in convertible securities, 11.2% in notes and bonds and 17.7% in cash and cash equivalents, representing a significant increase in cash reserves since the beginning of the fiscal year. This shift is intended to protect principal in a potentially adverse market environment and to provide cash for reinvestment at more favorable prices in the future. The cash reserve was further increased to approximately 25% shortly after the close of the fiscal year, primarily through the sale of common stocks. Significant new common stock positions during the six months included Freeport McMoRan, Inc., Intel Corp., General Motors Corp. and Countrywide Credit Industries, Inc. We added significantly to the Fund's existing position in PepsiCo, Inc. Holdings that were eliminated or significantly reduced included EXEL, Ltd., General Electric Co., Johnson & Johnson Co., Martin Marietta Corp., Transamerica Corp. and VF Corp. In the higher-yielding segment of the Fund's portfolio, new positions were added in Alza Corp. and Time Warner, Inc. (zero coupon convertible securities) and investments in the convertible preferred stocks of Flagstar Companies, Inc. and Gerrity Oil & Gas Corp. were increased. The Fund's holding of USX Marathon Group, Inc. convertible preferred stock was sold. 9 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (continued) - -------------------------------------------------------------------------------- GROWTH AND INCOME FUND (CONT'D) PORTFOLIO HOLDINGS Major industry positions as of October 31, 1994 were in the tobacco/beverages/food products, financial services, energy and aerospace sectors. The Fund's five largest equity holdings were: McDonnell Douglas Corp. Largest manufacturer of military aircraft and an important competitor in commercial aviation Gerrity Oil & Gas Corp. convertible preferred U.S. oil and gas exploration and production company Flagstar Companies, Inc. convertible preferred Operator of Denny's Restaurants with good potential for turnaround PepsiCo, Inc. Leading beverage, snack food and convenience restaurant company Countrywide Credit Industries, Inc. Leading mortgage company COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT* IN QUEST FOR VALUE GROWTH AND INCOME FUND (CLASS A) FROM INCEPTION (11/04/91) THROUGH 10/31/94 AND TOTAL RETURN ON S&P 500 INDEX** EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
QFV Growth S&P 500 Nov-91 $9,525 $10,000 Oct-92 $10,558 $11,028 Oct-93 $11,605 $12,675 Oct-94 12620 13164
CDSC = contingent deferred sales charge Performance of B and C classes will differ from performance of A class shown above based on differences in loads and fees paid by shareholders of the different classes. 10 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- U.S. GOVERNMENT INCOME FUND OBJECTIVE Seeks to provide shareholders with a high level of current income together with protection of capital; invests in debt obligations issued or guaranteed by the U.S. government, its agencies or intermediaries and in related futures, options and repurchase agreements. ANNUAL REVIEW The Fund paid total dividends of $.593 on its Class A shares in the fiscal year ended October 31, 1994. The Class A shares had a negative total return of 0.4% in the six months ended October 31, 1994 and a negative total return of 4.1% in the 12 months ended October 31, 1994, reflecting the impact of a decline in the Fund's per-share net asset value (NAV) due to the general weakness of the bond market. The 12-month results compare with a negative total return of 1.7% for the Lehman Brothers Intermediate Government Bond Index and negative 4.2% for the 271 funds in the Morningstar general government bond fund category. Unlike many other government bond funds, the U.S. Government Income Fund invests primarily in intermediate-term securities and places a high priority on maintaining a relatively stable net asset value (NAV) per share. The volatility of the Fund, that is the amount of price movement of the NAV, is similar to the volatility of a five-year Treasury note. This sector of the bond market was especially hard hit in the past year's market downturn. We took a number of steps to improve the Fund's performance without compromising our dedication to low price volatility and protection of principal. For instance, we generated record income of $.147 per Class A share during the year from the Fund's option overwriting program. Because of market volatility, option premiums increased and we were able to take advantage of this opportunity. In addition, we continued to reduce the Fund's holdings of mortgage-backed government agency securities, which were poor performers, and increased its holdings of Treasury notes and bonds. As of October 31, 1994, 47.5% of the Fund's portfolio was invested in Treasuries. We remain dedicated to generating a high cash yield for shareholders from a conservatively structured portfolio, while protecting principal. The integrity of the portfolio and the Fund's investment process is demonstrated by a total return of 57.7%, or 7.3% annualized, from the Fund's inception in May 1988 through October 31, 1994. One way for shareholders to maximize their returns and reduce the impact of short-term fluctuations in the NAV is by reinvesting dividends in additional shares, thereby acquiring more shares at low prices in down markets. 11 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (continued) - -------------------------------------------------------------------------------- U.S. GOVERNMENT INCOME FUND (CONT'D) COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT* IN QUEST FOR VALUE U.S. GOVERNMENT INCOME FUND (CLASS A) FROM 5/31/88 THROUGH 10/31/94 AND TOTAL RETURN ON LEHMAN INTERMEDIATE GOVERNMENT BOND INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
QFV Govt Lehman May-88 $9,525 $10,000 Oct-88 $9,978 $10,464 Oct-89 $10,918 $11,552 Oct-90 $11,789 $12,456 Oct-91 $13,368 $14,115 Oct-92 $14,435 $15,505 Oct-93 $15,670 $16,933 Oct-94 15020 16645
CDSC = contingent deferred sales charge Performance of B and C classes will differ from performance of A class shown above based on differences in loads and fees paid by shareholders of the different classes. 12 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- INVESTMENT QUALITY INCOME FUND OBJECTIVE Seeks to provide as high a level of current income as possible, consistent with conservation of principal; invests primarily in fixed income obligations, with at least 80% of its holdings being rated A or better and none being below investment grade. ANNUAL REVIEW The Investment Quality Income Fund had consistently ranked among the top mutual funds in its category for nearly three years. However, we were disappointed with the Fund's performance in the fiscal year ended October 31, 1994. The Fund paid dividends of $.68 per Class A share during the fiscal year. On an annualized basis, the monthly distribution yield on the net asset value (NAV) of the Class A shares was 7.2% at October 31, 1994. However, the Class A shares had a negative total return of 2.6% in the six months ended October 31, 1994 and negative 9.6% in the 12 months ended October 31, 1994, reflecting a decline in the Fund's per-share NAV. The 12-month performance compared with a negative total return of 5.2% for the Lehman Brothers Corporate Bond Index and a negative return of 2.5% for the 134 funds in the Morningstar quality corporate bond category. The single most important factor in the Fund's recent poor performance was its portfolio duration of approximately 7.4 years. This relatively long duration helped the Fund's performance when bond prices were rising, but dampened performance when bond prices declined. The Fund has been a strong performer over time and we remain confident of our ability to deliver favorable returns from quality fixed income securities. The Fund provides a convenient means to invest in a diversified portfolio of quality, longer term fixed income securities of corporate America. In addition, about one-sixth of the portfolio is invested in dollar-denominated bonds of foreign issuers, including sovereign and high-grade corporate debt, which provide attractive yields and favorable relative value. We continue to seek the best relative value in the bond market and have recently been shifting some assets from industrial issues to utilities. We have also increased the Fund's investment in callable bonds, which we believe offer better return opportunities at this time than noncallable securities. An effective way for shareholders to maximize their returns from the Fund and minimize the impact of short-term fluctuations in the NAV is by reinvesting dividends, thus buying more shares at low prices in down markets. 13 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (continued) - -------------------------------------------------------------------------------- INVESTMENT QUALITY INCOME FUND (CONT'D) COMPARISON OF CHANGE IN VALUE OF $10,000 INVESTMENT* IN QUEST FOR VALUE INVESTMENT QUALITY INCOME FUND (CLASS A) FROM 12/31/90 THROUGH 10/31/94 AND TOTAL RETURN ON LEHMAN BROTHERS CORP. BOND INDEX EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
QFV Growth S&P 500 Dec-90 $9,525 $10,000 Oct-91 $10,273 $11,364 Oct-92 $11,425 $12,627 Oct-93 $13,555 $14,541 Oct-94 12252 13785
CDSC = contingent deferred sales charge Performance of B and C classes will differ from performance of A class shown above based on differences in loads and fees paid by shareholders of the different classes. 14 OCTOBER 31, 1994 SCHEDULES OF INVESTMENTS QUEST FOR VALUE FUND, INC.
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- U.S. TREASURY BILLS -- 0.1% $ 350,000 5.06%, 4/06/95 (cost -- $342,326) $ 342,031 ------------ SHORT-TERM CORPORATE NOTES -- 10.7% BANKING -- 3.3% $ 8,632,000 Norwest Financial, Inc. 4.95%, 12/05/94 $ 8,591,645 ------------ ENERGY -- 0.8% 2,000,000 Chevron Oil Finance Co. 4.91%, 11/28/94 1,992,635 ------------ INSURANCE -- 0.9% 2,300,000 Prudential Funding Corp. 4.85%, 11/14/94 2,295,972 ------------ MACHINERY & ENGINEERING -- 3.1% 7,900,000 Deere (John) Capital Corp. 4.92%, 11/07/94 7,893,522 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 2.6% 1,470,000 Beneficial Corp. 4.88%, 11/21/94 1,466,015 1,300,000 Commercial Credit Co. 4.85%, 11/21/94 1,296,497 4,000,000 Household Finance Corp. 4.97%, 12/01/94 3,983,433 ------------ 6,745,945 ------------ Total Short-Term Corporate Notes (cost -- $27,519,719) $ 27,519,719 ------------ CONVERTIBLE CORPORATE BONDS -- 0.8% REAL ESTATE $ 2,310,156 Security Capital Realty, Inc. 12.00%, 6/30/14 (cost -- $2,177,494) (A) $ 1,997,340 ------------ - ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS -- 1.1% METALS/MINING 60,000 Freeport McMoRan, Inc. $4.375 Conv. Pfd. (cost -- $2,654,325) $ 2,880,000 ------------ - ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- COMMON STOCKS -- 88.0% AEROSPACE -- 10.1% 215,000 AlliedSignal, Inc. $ 7,444,375 129,000 Martin Marietta Corp. 5,917,875 59,000 McDonnell Douglas Corp. 8,319,000 90,000 Sundstrand Corp. 4,095,000 ------------ 25,776,250 ------------ BANKING -- 6.1% 75,000 Citicorp 3,581,250 68,000 First Interstate Bancorp 5,440,000 120,810 Mellon Bank Corp. 6,720,056 ------------ 15,741,306 ------------ CHEMICALS -- 3.1% 27,000 Hercules, Inc. 3,152,250 64,000 Monsanto Co. 4,872,000 ------------ 8,024,250 ------------ CONGLOMERATES -- 1.7% 90,200 General Electric Co. 4,408,525 ------------ CONSUMER PRODUCTS -- 7.5% 80,000 Avon Products, Inc. 5,060,000 252,000 Hasbro, Inc. 8,316,000 50,000 Unilever N.V. 5,937,500 ------------ 19,313,500 ------------ DRUGS & MEDICAL PRODUCTS -- 5.4% 213,000 Becton, Dickinson & Co. 10,064,250 48,000 Warner-Lambert Co. 3,660,000 ------------ 13,724,250 ------------ ELECTRONICS -- 2.6% 177,000 Arrow Electronics, Inc.* 6,681,750 ------------ INSURANCE -- 20.5% 82,000 American International Group, Inc. 7,677,250 411,000 EXEL Ltd. 16,183,125 38,500 General Reinsurance Corp. 4,312,000 205,000 John Alden Financial Corp. 6,150,000 202,500 Progressive Corp., Ohio 7,695,000 101,000 Transamerica Corp. 4,961,625 121,000 UNUM Corp. 5,550,875 ------------ 52,529,875 ------------ MANUFACTURING -- 4.2% 260,000 Case Corp. 5,460,000 290,000 Pall Corp. 5,256,250 ------------ 10,716,250 ------------
* Non-income producing security. 15 OCTOBER 31, 1994 SCHEDULES OF INVESTMENTS
- ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- METALS/MINING -- 1.7% 2,844 Freeport McMoRan, Copper & Gold (Class A) $ 64,701 227,000 Freeport McMoRan, Inc. 4,171,125 ------------ 4,235,826 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 9.9% 200,000 American Express Co. 6,150,000 340,000 Countrywide Credit Industries, Inc. 5,015,000 152,000 Federal Home Loan Mortgage Corp. 8,284,000 90,000 Morgan Stanley Group, Inc. 5,883,750 ------------ 25,332,750 ------------ REAL ESTATE -- 1.1% 3,050 Security Capital Realty, Inc. (A) 2,758,036 ------------ RETAIL -- 3.5% 213,000 May Department Stores Co. 8,014,125 21,000 Mercantile Stores Co., Inc. 955,500 ------------ 8,969,625 ------------ TECHNOLOGY -- 3.1% 127,000 Intel Corp. 7,889,875 ------------ TELECOMMUNICATIONS -- 1.9% 344 Bell Atlantic Corp. 18,017 145,200 Sprint Corp. 4,737,150 ------------ 4,755,167 ------------ TEXTILES/APPAREL -- 2.1% 280,600 Warnaco Group, Inc. (Class A)* 5,296,325 ------------ - ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- TOBACCO/BEVERAGES/FOOD PRODUCTS -- 3.5% 116,000 Dole Food Co. $ 3,117,500 240,000 Sara Lee Corp. 5,910,000 ------------ 9,027,500 ------------ Total Common Stocks (cost -- $192,374,371) $225,181,060 ------------ Total Investments (cost -- $225,068,235) 100.7% $257,920,150 Other Liabilities in Excess of Other Assets (0.7) (1,881,015) ----- ------------- TOTAL NET ASSETS 100.0 % $256,039,135 ----- ------------ ----- ------------
OPPORTUNITY FUND
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- SHORT-TERM CORPORATE NOTES -- 20.6% AUTOMOTIVE -- 0.7% $ 1,450,000 Ford Motor Credit Co. 4.91%, 11/28/94 $ 1,444,660 ------------ BANKING -- 4.9% 10,600,000 Norwest Financial, Inc. 4.95%, 12/05/94 10,550,445 ------------ CONGLOMERATES -- 0.5% 950,000 General Electric Capital Corp. 4.90%, 11/14/94 948,319 ------------ ENERGY -- 3.5% Chevron Oil Finance Co. 6,100,000 4.82%, 11/28/94 6,077,949 1,450,000 4.91%, 11/28/94 1,444,661 ------------ 7,522,610 ------------ INSURANCE -- 0.6% 1,300,000 Prudential Funding Corp. 5.00%, 11/14/94 1,297,653 ------------
* Non-income producing security. (A) Restricted Securities (the Fund will not bear any costs, including those involved in registration under the Securities Act of 1933, in connection with the disposition of these securities.):
Date of Par Valuation as of Description Acquisition Amount Shares Unit Cost October 31, 1994 - -------------------------------------------------------------------------------------------------------- Security Capital Realty, Inc. 12.00%, 6/30/14 9/15/94 $2,310,156 -- $ .94 $ .86 Security Capital Realty, Inc. Common Stock 9/15/94 -- 3,050 926 904
16
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- MACHINERY & ENGINEERING -- 1.8% Deere (John) Capital Corp. $ 800,000 4.83%, 11/21/94 $ 797,853 3,100,000 4.92%, 11/07/94 3,097,458 ------------ 3,895,311 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 8.6% Beneficial Corp. 4,950,000 4.88%, 11/21/94 4,936,580 1,100,000 5.00%, 11/07/94 1,099,083 1,800,000 CIT Group Holdings, Inc. 5.05%, 11/07/94 1,798,485 1,200,000 Commercial Credit Co. 4.85%, 11/21/94 1,196,767 Household Finance Corp. 2,500,000 4.52%, 11/02/94 2,499,686 6,100,000 4.85%, 11/28/94 6,077,811 800,000 4.88%, 11/14/94 798,590 ------------ 18,407,002 ------------ Total Short-Term Corporate Notes (cost -- $44,066,000) $ 44,066,000 ------------ U.S. TREASURY NOTES -- 1.5% $ 1,000,000 7.50%, 11/15/01 $ 992,030 1,000,000 7.50%, 5/15/02 990,470 550,000 7.875%, 4/15/98 560,054 550,000 7.875%, 8/15/01 557,304 ------------ Total U.S. Treasury Notes cost -- $3,149,370) $ 3,099,858 ------------ - ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS -- 1.1% METALS/MINING 50,000 Freeport McMoRan, Inc. $4.375 Conv. Pfd. (cost -- $2,211,938) $ 2,400,000 ------------ COMMON STOCKS -- 76.5% AEROSPACE -- 8.9% 115,000 McDonnell Douglas Corp. $ 16,215,000 60,000 Sundstrand Corp. 2,730,000 ------------ 18,945,000 ------------ - ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ BANKING -- 15.2% 120,000 Citicorp $ 5,730,000 34,000 First Empire State Corp. 5,108,500 226,000 Mellon Bank Corp. 12,571,250 10,000 U.S. Bancorp 240,000 60,000 Wells Fargo & Co. 8,917,500 ------------ 32,567,250 ------------ CHEMICALS -- 4.7% 75,000 Hercules, Inc. 8,756,250 18,000 Monsanto Co. 1,370,250 ------------ 10,126,500 ------------ CONSUMER PRODUCTS -- 3.8% 60,000 Avon Products, Inc. 3,795,000 50,000 Hasbro, Inc. 1,650,000 92,500 Mattel, Inc. 2,705,625 ------------ 8,150,625 ------------ DRUGS & MEDICAL PRODUCTS -- 5.9% 120,000 Becton, Dickinson & Co. 5,670,000 90,000 Warner-Lambert Co. 6,862,500 ------------ 12,532,500 ------------ ENERGY -- 5.4% 139,200 Tenneco, Inc. 6,159,600 149,300 Triton Energy Corp.* 5,300,150 ------------ 11,459,750 ------------ HEALTHCARE SERVICES -- 2.9% 435,000 National Health Laboratories, Inc. 6,253,125 ------------ INSURANCE -- 5.3% 160,000 EXEL Ltd. 6,300,000 60,000 Transamerica Corp. 2,947,500 60,000 Travelers, Inc. 2,085,000 ------------ 11,332,500 ------------ MANUFACTURING -- 1.3% 160,000 Collins & Aikman Corp.* 1,420,000 100,100 Shaw Industries, Inc. 1,463,962 ------------ 2,883,962 ------------
* Non-income producing security. 17 OCTOBER 31, 1994 SCHEDULES OF INVESTMENTS OPPORTUNITY FUND (CONT'D)
- ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- MISCELLANEOUS FINANCIAL SERVICES -- 16.5% 240,000 American Express Co. $ 7,380,000 321,700 Countrywide Credit Industries, Inc. 4,745,075 210,000 Federal Home Loan Mortgage Corp. 11,445,000 55,000 Federal National Mortgage Assoc. 4,180,000 110,000 Lehman Brothers Holdings, Inc. 1,705,000 90,000 Morgan Stanley Group, Inc. 5,883,750 ------------ 35,338,825 ------------ TECHNOLOGY -- 4.8% 70,000 Alliant Techsystems, Inc.* 2,406,250 110,000 Intel Corp. 6,833,750 50,500 Unitrode Corp.* 972,125 ------------ 10,212,125 ------------ TELECOMMUNICATIONS -- 1.8% 120,100 Sprint Corp. 3,918,263 ------------ Total Common Stocks (cost -- $149,478,552) $163,720,425 ------------ Total Investments (cost -- $198,905,860) 99.7% $213,286,283 Other Assets in Excess of Other Liabilities 0.3 659,462 ----- ------------ Total Net Assets 100.0% $213,945,745 ----- ------------ ----- ------------
SMALL CAPITALIZATION FUND
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- SHORT-TERM CORPORATE NOTES -- 8.5% AUTOMOTIVE -- 0.7% $1,038,000 Ford Motor Credit Co. 4.91%, 11/28/94 $ 1,034,178 ------------ BANKING -- 5.0% 7,041,000 Norwest Financial, Inc. 4.95%, 12/05/94 7,008,083 ------------ CONGLOMERATES -- 0.7% 930,000 General Electric Capital Corp. 4.82%, 11/21/94 927,510 ------------ - ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- INSURANCE -- 1.1% $1,468,000 Prudential Funding Corp. 4.85%, 11/28/94 $ 1,462,660 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 1.0% 925,000 Beneficial Corp. 4.88%, 11/21/94 922,492 475,000 Federal National Mortgage Assoc. 4.75%, 11/01/94 475,000 ------------ 1,397,492 ------------ Total Short-Term Corporate Notes (cost -- $11,829,923) $ 11,829,923 ------------ CORPORATE NOTES & BONDS -- 0.7% ENERGY -- 0.3% $ 375,000 Global Marine, Inc. 12.75%, 12/15/99 $ 405,000 ------------ PRINTING & PUBLISHING -- 0.4% 700,000 U.S. Banknote Corp. 10.375%, 6/01/02 602,000 ------------ Total Corporate Notes & Bonds (cost -- $1,104,862) $ 1,007,000 ------------ CONVERTIBLE CORPORATE BONDS -- 0.9% REAL ESTATE $1,363,500 Security Capital Realty, Inc. 12.00%, 6/30/14 (cost -- $1,285,200) (A) $ 1,178,870 ------------
- ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS -- 0.2% RETAIL 36,000 Family Bargain Corp. $0.95 Conv. Pfd. (cost -- $360,000) $ 346,500 ------------ COMMON STOCKS -- 86.3% ADVERTISING -- 4.7% 100,000 Foote, Cone & Belding Communications, Inc. 4,475,000 39,000 Omnicom Group, Inc. 2,076,750 ------------ 6,551,750 ------------ AEROSPACE -- 1.2% 200,000 BE Aerospace, Inc.* 1,737,500 ------------ AUTOMOTIVE -- 0.2% 126,000 Collins Industries, Inc.* 283,500 ------------ BUILDING & CONSTRUCTION -- 3.9% 146,000 CRSS, Inc. 1,642,500 102,600 D.R. Horton, Inc. 1,346,625 120,000 Martin Marietta Materials, Inc. 2,475,000 ------------ 5,464,125 ------------ CHEMICALS -- 2.0% 141,400 OM Group, Inc. 2,828,000 ------------
* Non-income producing security. 18
- ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- COMPUTER SERVICES -- 4.1% 147,700 BancTec, Inc.* $ 2,954,000 34,600 Globalink, Inc.* 484,400 90,000 National Data Corp. 1,867,500 70,000 Sudbury, Inc.* 481,250 ------------ 5,787,150 ------------ DRUGS & MEDICAL PRODUCTS -- 3.6% 40,000 Beckman Instruments, Inc. 1,175,000 108,900 Sybron International Corp.* 3,770,662 ------------ 4,945,662 ------------ ELECTRICAL EQUIPMENT -- 0.7% 80,000 Instrument Systems Corp.* 600,000 16,000 Marshall Industries* 418,000 ------------ 1,018,000 ------------ ENERGY -- 9.5% 136,800 Aquila Gas Pipeline Corp. 1,043,100 195,500 BWIP Holdings, Inc. (Class A) 3,519,000 330,155 Global Natural Resources, Inc.* 2,476,162 125,000 Nahama & Weagant Energy Co.* 54,687 137,500 Noble Drilling Corp.* 1,014,063 72,000 St. Mary Land & Exploration Co. 967,500 65,000 Triton Energy Corp.* 2,307,500 92,530 UGI Corp. 1,862,166 ------------ 13,244,178 ------------ HEALTHCARE SERVICES -- 1.7% 90,000 Community Health Systems, Inc.* 2,362,500 ------------ INSURANCE -- 3.3% 123,300 Financial Security Assurance Holdings, Ltd. 2,758,838 112,500 Guaranty National Corp. 1,884,375 ------------ 4,643,213 ------------ LEISURE -- 0.7% 43,700 Club Med, Inc. 977,787 ------------ MANUFACTURING -- 6.8% 89,000 Collins & Aikman Corp.* 789,875 97,000 Exabyte Corp.* 2,134,000 50,000 Giddings & Lewis, Inc. 775,000 181,300 Interlake Corp.* 430,587 65,100 Masland Corp. 1,049,738 170,000 North American Watch Co. 2,210,000 85,600 Welbilt Corp.* 2,118,600 ------------ 9,507,800 ------------ MEDIA/BROADCASTING -- 0.6% 25,000 Pulitzer Publishing Co. 893,750 ------------ METALS/MINING -- 0.5% 50,000 Olympic Steel, Inc.* 737,500 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 3.6% 221,400 SafeCard Services, Inc. 3,542,400 100,800 Union Corp.* 1,499,400 ------------ 5,041,800 ------------ - ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- PAPER PRODUCTS -- 0.7% 61,500 CSS Industries, Inc.* $ 1,022,438 ------------ PRINTING & PUBLISHING -- 3.8% 72,000 Commerce Clearing House, Inc. (Class B) 1,206,000 216,300 Nu-Kote Holdings, Inc. (Class A)* 4,028,588 ------------ 5,234,588 ------------ REAL ESTATE -- 10.6% 151,800 Cousins Properties, Inc. 2,352,900 44,000 Post Properties, Inc. 1,292,500 219,750 Property Trust of America 3,543,469 230,000 Security Capital Industrial Trust, Inc. 3,507,500 1,800 Security Capital Realty, Inc. (A) 1,627,848 239,000 Taubman Centers, Inc. 2,479,625 ------------ 14,803,842 ------------ RETAIL -- 4.3% 190,000 AmeriCredit Corp.* 1,258,750 72,700 Brookstone, Inc.* 1,090,500 350,700 Cash America International, Inc. 2,893,275 15,600 Finish Line, Inc. 113,100 52,500 Fred's, Inc. 603,750 ------------ 5,959,375 ------------ SECURITY/INVESTIGATION SERVICES -- 0.5% 202,910 Automated Security Holdings PLC ADS 532,639 498,184 Holmes Protection Group, Inc. 187,409 ------------ 720,048 ------------ TECHNOLOGY -- 8.1% 100,400 Dionex Corp.* 3,714,800 202,000 Rational Software Corp.* 505,000 130,000 Stratus Computer, Inc.* 4,842,500 113,100 Unitrode Corp.* 2,177,175 ------------ 11,239,475 ------------ TEXTILES/APPAREL -- 3.5% 18,000 Blair Corp. 756,000 70,000 Dyersburg Corp. 437,500 42,700 Fab Industries, Inc. 1,318,363 128,000 Warnaco Group, Inc. (Class A)* 2,416,000 ------------ 4,927,863 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS -- 2.1% 70,900 Morningstar Group, Inc. 514,025 220,118 Sylvan Food Holdings, Inc.* 2,366,268 ------------ 2,880,293 ------------ TRANSPORTATION -- 2.0% 183,700 Interpool, Inc.* 2,525,875 18,000 MTL, Inc. 279,000 ------------ 2,804,875 ------------ UTILITIES -- 1.7% 221,200 Sithe Energies, Inc.* 2,322,600 ------------
*Non-income producing security. 19 OCTOBER 31, 1994 SCHEDULES OF INVESTMENTS SMALL CAPITALIZATION FUND (CONT'D)
- ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- OTHER -- 1.9% 142,000 McGrath RentCorp. $ 2,165,500 89,200 National Education Corp.* 434,850 ------------ 2,600,350 ------------ Total Common Stocks (cost -- $114,775,894) $120,539,962 ------------ Total Investments (cost -- $129,355,879) 96.6% $134,902,255 Other Assets in Excess of Other Liabilities 3.4 4,687,545 ----- ------------ TOTAL NET ASSETS 100.0% $139,589,800 ----- ------------ ----- ------------
GROWTH AND INCOME FUND
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- SHORT-TERM CORPORATE NOTES -- 13.5% AUTOMOTIVE -- 3.4% $ 1,150,000 Ford Motor Credit Co. 4.76%, 11/07/94 $ 1,149,088 ------------ CONGLOMERATES -- 2.6% 885,000 General Electric Capital Corp. 4.72%, 11/04/94 884,652 ------------ ENERGY -- 4.1% 1,415,000 Chevron Oil Finance Co. 4.70%, 11/01/94 1,415,000 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 3.4% 1,150,000 Household Finance Corp. 4.77%, 11/08/94 1,148,933 ------------ Total Short-Term Corporate Notes (cost -- $4,597,673) $ 4,597,673 ------------ - ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- CORPORATE NOTES & BONDS -- 11.2% CONTAINERS -- 3.0% $ 1,000,000 Stone Container Corp. 11.875%, 12/01/98 $ 1,030,000 ------------ ENERGY -- 3.8% 1,750,000 Triton Energy Corp. Zero Coupon, 11/01/97 1,279,687 ------------ TELECOMMUNICATIONS -- 4.4% 3,000,000 Nextel Communications, Inc. 0.00%/11.50%, 9/01/03** 1,515,000 ------------ Total Corporate Notes & Bonds (cost -- $4,187,052) $ 3,824,687 ------------ CONVERTIBLE CORPORATE BONDS -- 6.2% DRUGS & MEDICAL PRODUCTS -- 1.7% $ 1,692,000 Alza Corp. Zero Coupon, 7/14/14 $ 568,935 ------------ MEDIA/BROADCASTING -- 4.5% 5,000,000 Time Warner, Inc. Zero Coupon, 12/17/12 1,525,000 ------------ Total Convertible Corporate Bonds (cost -- $2,173,746) $ 2,093,935 ------------ - ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- CONVERTIBLE PREFERRED STOCKS -- 12.3% ENERGY -- 5.4% 130,000 Gerrity Oil & Gas Corp. $1.50 Conv. Pfd. $ 1,820,000 ------------ RETAIL -- 2.2% 20,000 Venture Stores, Inc. $3.25 Conv. Pfd. 760,000 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS -- 4.7% 80,000 Flagstar Companies, Inc. $2.25 Conv. Pfd. 1,590,000 ------------ Total Convertible Preferred Stocks (cost -- $4,878,620) $ 4,170,000 ------------ COMMON STOCKS -- 52.6% AEROSPACE -- 6.2% 15,000 McDonnell Douglas Corp. $ 2,115,000 ------------
* Non-income producing security. ** Represents a step-up floater which will receive 0.00% interest until 9/01/98, then will "step-up"to 11.50% until maturity. (A) Restricted Securities (the Fund will not bear any costs, including those involved in registration under the Securities Act of 1933, in connection with the disposition of these securities.):
DATE OF PAR VALUATION AS OF DESCRIPTION ACQUISITION AMOUNT SHARES UNIT COST OCTOBER 31, 1994 - -------------------------------------------------------------------------------------------------- Security Capital Realty, Inc. 12.00%, 6/30/14 6/16/94 $1,363,500 -- $ .94 $ .86 Security Capital Realty, Inc. Common Stock 8/02/93 -- 1,800 684 904
20
- ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- AUTOMOTIVE -- 3.2% 27,000 General Motors Corp. $ 1,066,500 ------------ BANKING -- 2.7% 7,000 Citicorp 334,250 4,000 Wells Fargo & Co. 594,500 ------------ 928,750 ------------ CONGLOMERATES -- 1.0% 20,000 Canadian Pacific Ltd. 320,000 ------------ CONSUMER PRODUCTS -- 0.9% 5,000 Avon Products, Inc. 316,250 ------------ ENERGY -- 3.1% 5,000 McMoRan Oil & Gas Corp. 18,750 20,000 Triton Energy Corp.* 710,000 15,000 Union Texas Petroleum Holdings, Inc. 313,125 ------------ 1,041,875 ------------ INSURANCE -- 7.0% 16,000 Equitable Co. 312,000 10,000 Progressive Corp., Ohio 380,000 35,000 TIG Holdings, Inc. 673,750 20,000 Travelers, Inc. 695,000 7,000 UNUM Corp. 321,125 ------------ 2,381,875 ------------ METALS/MINING -- 4.4% 1,562 Freeport McMoRan, Copper & Gold (Class A) 35,536 80,000 Freeport McMoRan, Inc. 1,470,000 ------------ 1,505,536 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 9.7% 26,000 American Express Co. 799,500 100,000 Countrywide Credit Industries, Inc. 1,475,000 17,000 Federal Home Loan Mortgage Corp. 926,500 5,200 Lehman Brothers Holdings, Inc. 80,600 ------------ 3,281,600 ------------ RETAIL -- 1.1% 10,000 May Department Stores Co. 376,250 ------------ TECHNOLOGY -- 3.7% 20,000 Intel Corp. 1,242,500 ------------ TELECOMMUNICATIONS -- 1.9% 20,000 Sprint Corp. 652,500 ------------ - ------------------------------------------------------- SHARES VALUE - ------------------------------------------------------- TOBACCO/BEVERAGES/FOOD PRODUCTS -- 7.7% 45,000 PepsiCo, Inc. $ 1,575,000 17,000 Philip Morris Companies, Inc. 1,041,250 ------------ 2,616,250 ------------ Total Common Stocks (cost -- $16,287,790) $ 17,844,886 ------------ Total Investments (cost -- $32,124,881) 95.8% $ 32,531,181 Other Assets in Excess of Other Liabilities 4.2 1,428,001 ----- ------------ TOTAL NET ASSETS 100.0 % $ 33,959,182 ----- ------------ ----- ------------
U.S. GOVERNMENT INCOME FUND
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- REPURCHASE AGREEMENT -- 0.1% $ 100,000 Prudential Bache, 4.70%, 11/01/94 (proceeds at maturity: $100,013, collateralized by $105,000 par, $103,373 value, U.S. Treasury Notes 4.625%, 2/29/96) (cost -- $100,000) $ 100,000 ------------ FEDERAL HOME LOAN MORTGAGE CORPORATION -- 0.6% $ 817,404 9.50%, 12/01/02 - 11/01/03 (cost -- $823,662) $ 846,773 ------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION I -- 51.6% $40,573,258 7.00%, 2/15/22 - 11/15/23 (A) $ 36,363,783 16,903,209 7.50%, 2/15/22 - 2/15/24 15,693,446 3,819,011 8.00%, 4/15/02 - 2/15/23 3,711,053 11,354,828 8.50%, 6/15/01 - 9/15/24 (A) 11,222,631 690,831 10.50%, 1/15/98 - 12/15/00 740,481 ------------ Total Government National Mortgage Association I (cost -- $75,692,773) $ 67,731,394 ------------ U.S. TREASURY BONDS -- 2.9% $ 4,000,000 7.625%, 11/15/22 (cost -- $4,740,548) $ 3,804,360 ------------
* Non-income producing security. (A) Securities segregated (full or partial) as collateral for written options outstanding. The aggregate market value of such segregated securities is $20,087,482. 21 OCTOBER 31, 1994 SCHEDULES OF INVESTMENTS U.S. GOVERNMENT INCOME FUND (CONT'D)
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- U.S. TREASURY NOTES -- 44.6% $60,000,000 6.875%, 8/31/99 (cost -- $58,889,522) $ 58,565,400 ------------ Total Investments (cost -- $140,246,505) 99.8% $131,047,927 ----- ------------ - ------------------------------------------------------- PRINCIPAL AMOUNT SUBJECT TO CALL VALUE - ------------------------------------------------------- WRITTEN CALL OPTIONS OUTSTANDING -- (0.1%) $10,000,000 Government National Mortgage Association I, 7.00%, expiring Dec. '94, strike @ 89.22 $ (115,625) 10,000,000 Government National Mortgage Association I, 8.50%, expiring Dec. '94, strike @ 98.78 (75,000) ------------ Total Written Call Options Outstanding (premiums received: $142,188) $ (190,625) ------------ Other Assets in Excess of Other Liabilities 0.3 436,494 ----- ------------ Total Net Assets 100.0% $131,293,796 ----- ------------ ----- ------------
INVESTMENT QUALITY INCOME FUND
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- SHORT-TERM CORPORATE NOTES -- 9.4% CONGLOMERATES -- 3.7% $ 2,075,000 General Electric Capital Corp. 4.72%, 11/14/94 $ 2,071,463 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 5.7% 2,075,000 Amercian Express Credit Corp. 4.75%, 11/07/94 2,073,357 1,150,000 Household Finance Corp. 4.68%, 11/02/94 1,149,851 ------------ 3,223,208 ------------ Total Short-Term Corporate Notes (cost -- $5,294,671) $ 5,294,671 ------------ - ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- CORPORATE NOTES & BONDS -- 88.2% AEROSPACE -- 3.6% $ 2,000,000 United Technologies Corp. 8.875%, 11/15/19 $ 2,007,420 ------------ AIRLINES -- 2.6% 1,000,000 American Airlines 9.73%, 9/29/14 916,910 550,000 Delta Air Lines, Inc. 10.375%, 2/01/11 538,351 ------------ 1,455,261 ------------ BANKING -- 6.4% 70,000 NatWest Bancorp, Inc. 9.375%, 11/15/03 74,378 1,300,000 NCNB Corp. 10.20%, 7/15/15 1,439,139 500,000 RBSG Capital Corp. 10.125%, 3/01/04 547,640 1,500,000 Westpac Banking Corp. 9.125%, 8/15/01 1,555,020 ------------ 3,616,177 ------------ CHEMICALS -- 0.9% 500,000 Rohm & Haas Co. 9.50%, 4/01/21 521,470 ------------ CONGLOMERATES -- 5.1% 2,000,000 Canadian Pacific Ltd. 9.45%, 8/01/21 2,082,160 1,000,000 ITT Financial Corp. 6.50%, 5/01/11 786,860 ------------ 2,869,020 ------------ ENERGY -- 5.9% 3,000,000 Occidental Petroleum Corp. 11.125%, 6/01/19 3,312,990 ------------ ENTERTAINMENT -- 4.8% 3,000,000 Time Warner, Inc. 9.15%, 2/01/23 2,670,390 ------------ EQUIPMENT LEASING -- 2.7% 1,600,000 Ryder Systems, Inc. 8.75%, 3/15/17 1,522,832 ------------ INSURANCE -- 11.1% 1,000,000 Aetna Life & Casualty Co. 8.00%, 1/15/17 879,780 1,200,000 Capital Holding Corp. 8.75%, 1/15/17 1,172,700 2,000,000 CNA Financial Corp. 7.25%, 11/15/23 1,595,120 3,000,000 Torchmark, Inc. 7.875%, 5/15/23 2,606,610 ------------ 6,254,210 ------------
22
- ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- MACHINERY & ENGINEERING -- 3.3% $ 1,750,000 Caterpillar, Inc. 9.75%, 6/01/19 $ 1,825,810 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 12.6% 20,000 Beneficial Corp. 12.875%, 8/01/13 23,754 1,500,000 BHP Finance USA Ltd. 8.50%, 12/01/12 1,467,105 Lehman Brothers, Inc. 865,000 9.875%, 10/15/00 910,732 115,000 10.00%, 5/15/99 121,464 205,000 Midland American Capital Corp. 12.75%, 11/15/03 237,845 800,000 Paine Webber Group, Inc. 9.25%, 12/15/01 816,216 3,000,000 Prudential Funding Corp. 6.75%, 9/15/23 2,274,780 1,250,000 Source One Mortgage Services Corp. 9.00%, 6/01/12 1,233,887 ------------ 7,085,783 ------------ PAPER PRODUCTS -- 0.2% 100,000 Union Camp Corp. 10.00%, 5/01/19 109,261 ------------ RETAIL -- 1.3% May Department Stores Co. 250,000 9.875%, 6/01/17 246,032 405,000 10.625%, 11/01/10 465,957 ------------ 711,989 ------------ - ------------------------------------------------------- PRINCIPAL AMOUNT VALUE - ------------------------------------------------------- TELECOMMUNICATIONS -- 12.2% $ 420,000 GTE Corp. 10.25%, 11/01/20 $ 464,386 2,500,000 New York Telephone Co. 9.375%, 7/15/31 2,532,600 2,000,000 Pacific Bell 8.50%, 8/15/31 1,894,220 2,000,000 Southern New England Telephone Co. 8.70%, 8/15/31 1,978,300 ------------ 6,869,506 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS -- 3.2% 2,000,000 American Brands, Inc. 7.875%, 1/15/23 1,779,260 ------------ UTILITIES -- 9.7% 2,000,000 Hydro-Quebec 8.50%, 12/01/29 1,862,400 2,000,000 Southern California Edison Co. 8.875%, 6/01/24 1,915,060 1,500,000 TransCanada Pipelines Ltd. 9.875%, 1/01/21 1,642,635 ------------ 5,420,095 ------------ OTHER -- 2.6% 1,500,000 Nova Scotia (Province of) 8.875%, 7/01/19 1,431,825 ------------ Total Corporate Notes & Bonds (cost -- $53,153,893) $ 49,463,299 ------------ Total Investments (cost -- $58,448,564) 97.6 % $ 54,757,970 Other Assets in Excess of Other Liabilities 2.4 1,352,181 ----- ------------ TOTAL NET ASSETS 100.0 % $ 56,110,151 ----- ------------ ----- ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 23 OCTOBER 31, 1994 - -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES - --------------------------------------------------------------------------------
------------ ------------ ------------ ------------ ------------ ------------ QUEST FOR SMALL GROWTH U.S. INVESTMENT VALUE FUND, OPPORTUNITY CAPITALIZATION AND GOVERNMENT QUALITY INC. FUND FUND INCOME FUND INCOME FUND INCOME FUND ------------ ------------ ------------ ------------ ------------ ------------ ASSETS Investments, at value (cost -- $225,068,235, $198,905,860, $129,355,879, $32,124,881, $140,246,505 and $58,448,564, respectively)................ $257,920,150 $213,286,283 $134,902,255 $32,531,181 $131,047,927 $54,757,970 Cash.......................... 490,615 495,564 347,062 8,772 14,763 25,873 Receivable for investments sold......................... 3,452,070 -- 1,212,440 1,339,806 168,384 -- Receivable for investments sold to affiliates........... -- -- 3,506,625 -- -- -- Receivable for fund shares sold......................... 482,019 2,000,491 516,512 637,310 163,696 113,417 Dividends receivable.......... 387,321 470,950 90,453 65,264 -- -- Interest receivable........... 7,084 80,497 103,317 49,276 1,314,298 1,455,316 Deferred organization expenses..................... -- -- -- 38,509 -- 13,971 Other assets.................. 42,588 18,959 16,622 24,165 34,935 19,197 ------------ ------------ ------------ ------------ ------------ ------------ Total Assets................ 262,781,847 216,352,744 140,695,286 34,694,283 132,744,003 56,385,744 ------------ ------------ ------------ ------------ ------------ ------------ LIABILITIES Written options outstanding, at value (premiums received: $142,188).................... -- -- -- -- 190,625 -- Payable for investments purchased.................... 6,159,929 2,049,446 676,409 648,600 6,250 -- Payable for fund shares redeemed..................... 414,843 207,962 298,489 25,979 1,007,182 108,561 Investment advisory fee payable...................... 41,691 34,437 22,858 4,563 12,963 632 Distribution fee payable...... 22,304 21,278 13,023 2,509 7,401 4,568 Dividends payable............. -- 7,778 -- -- 117,133 108,198 Other payables and accrued expenses..................... 103,945 86,098 94,707 53,450 108,653 53,634 ------------ ------------ ------------ ------------ ------------ ------------ Total Liabilities........... 6,742,712 2,406,999 1,105,486 735,101 1,450,207 275,593 ------------ ------------ ------------ ------------ ------------ ------------ NET ASSETS Par value..................... 20,348,156 108,790 85,536 33,650 121,636 58,013 Paid-in-surplus............... 184,710,613 191,026,174 130,829,389 31,830,359 145,717,507 60,695,612 Accumulated undistributed net investment income (loss)..... 1,464,120 1,291,867 (238,336) 127,460 -- -- Accumulated undistributed net realized gain (loss) on investments.................. 16,664,331 7,139,720 3,366,835 1,768,686 (5,000,871) (952,880) Distributions in excess of net realized gains............... -- (1,229) -- (207,273) (297,461) -- Net unrealized appreciation (depreciation) on investments.................. 32,851,915 14,380,423 5,546,376 406,300 (9,247,015) (3,690,594) ------------ ------------ ------------ ------------ ------------ ------------ Total Net Assets............ $256,039,135 $213,945,745 $139,589,800 $33,959,182 $131,293,796 $56,110,151 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ CLASS A: Fund shares outstanding....... 18,914,850 8,295,463 7,353,210 3,029,071 11,418,654 4,851,201 ------------ ------------ ------------ ------------ ------------ ------------ Net asset value per share..... $ 12.59 $ 19.69 $ 16.33 $ 10.09 $ 10.79 $ 9.67 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ Maximum offering price per share*....................... $ 13.32 $ 20.84 $ 17.28 $ 10.59 $ 11.33 $ 10.15 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ CLASS B: Fund shares outstanding....... 1,147,382 2,211,377 994,342 290,685 631,471 682,943 ------------ ------------ ------------ ------------ ------------ ------------ Net asset value and offering price per share.............. $ 12.53 $ 19.59 $ 16.24 $ 10.07 $ 10.79 $ 9.67 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ CLASS C: Fund shares outstanding....... 285,924 372,202 206,006 45,206 113,464 267,089 ------------ ------------ ------------ ------------ ------------ ------------ Net asset value and offering price per share.............. $ 12.52 $ 19.58 $ 16.23 $ 10.07 $ 10.79 $ 9.67 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ *Sales charges decrease on purchases of $50,000 or higher.
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 24 YEAR ENDED OCTOBER 31, 1994 - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS - --------------------------------------------------------------------------------
----------- ----------- -------------- ----------- ----------- ----------- QUEST FOR SMALL GROWTH U.S. INVESTMENT VALUE OPPORTUNITY CAPITALIZATION AND GOVERNMENT QUALITY FUND, INC. FUND FUND INCOME FUND INCOME FUND INCOME FUND ----------- ----------- -------------- ----------- ----------- ----------- INVESTMENT INCOME Dividends.................... $4,621,105 $3,199,658 $ 1,319,209 $ 845,665 $ -- $ -- Interest..................... 1,393,271 1,078,724 874,396 709,375 10,262,496 4,659,644 ----------- ----------- -------------- ----------- ----------- ----------- Total investment income.... 6,014,376 4,278,382 2,193,605 1,555,040 10,262,496 4,659,644 ----------- ----------- -------------- ----------- ----------- ----------- OPERATING EXPENSES Investment advisory fee (note 2a)......................... 2,479,887 1,555,477 1,260,578 263,469 962,940 359,792 Distribution fee -- Class A (note 2c)................... 1,189,613 683,116 576,382 116,449 465,840 215,221 Distribution fee -- Class B (note 2c)................... 83,411 162,157 94,008 15,858 43,485 41,770 Distribution fee -- Class C (note 2c)................... 17,249 27,089 13,806 2,983 8,616 19,831 Transfer and dividend disbursing agent fees -- Class A..................... 247,831 117,250 133,738 41,065 130,793 50,526 Transfer and dividend disbursing agent fees -- Class B..................... 12,766 23,295 20,668 2,659 4,321 4,992 Transfer and dividend disbursing agent fees -- Class C..................... 3,313 4,335 4,637 1,253 1,658 2,288 Accounting services fee (note 2b)......................... -- 108,245 122,578 123,117 135,876 119,080 Registration fees............ 84,876 79,103 75,433 66,221 67,461 65,474 Reports and notices to shareholders................ 60,447 37,637 45,104 27,802 39,689 31,342 Custodian fees............... 42,485 31,578 32,790 17,672 74,885 27,532 Auditing, consulting and tax return preparation fees..... 23,051 18,100 18,101 14,600 38,501 17,100 Directors' (Trustees') fees and expenses................ 17,200 17,200 17,200 8,810 17,200 17,200 Legal fees................... 11,120 6,829 7,410 5,355 7,021 5,752 Amortization of deferred organization expenses (note 1c)......................... -- 2,461 2,394 19,148 -- 12,374 Miscellaneous................ 14,902 7,146 7,114 5,243 10,727 3,951 ----------- ----------- -------------- ----------- ----------- ----------- Total operating expenses... 4,288,151 2,881,018 2,431,941 731,704 2,009,013 994,225 Less: Investment advisory fees waived (note 2a)..... -- -- -- (142,772) (38,486) (180,934) ----------- ----------- -------------- ----------- ----------- ----------- Net operating expenses... 4,288,151 2,881,018 2,431,941 588,932 1,970,527 813,291 ----------- ----------- -------------- ----------- ----------- ----------- Net investment income (loss).................. 1,726,225 1,397,364 (238,336) 966,108 8,291,969 3,846,353 ----------- ----------- -------------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS -- NET Net realized gain (loss) on security transactions....... 16,722,091 7,139,720 3,506,967 1,768,686 (6,439,027) (1,053,662) Net realized gain on option transactions (note 1f)...... -- -- 38,999 -- 2,072,188 264,063 Net realized loss on futures transactions (note 1g)...... (57,760) -- (179,131) -- -- (163,281) ----------- ----------- -------------- ----------- ----------- ----------- Net realized gain (loss) on investments............... 16,664,331 7,139,720 3,366,835 1,768,686 (4,366,839) (952,880) Net change in unrealized appreciation (depreciation) on investments.............. (6,250,090) 4,721,481 (3,118,979) (189,442) (11,007,688) (9,068,979) ----------- ----------- -------------- ----------- ------------ ----------- Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments............... 10,414,241 11,861,201 247,856 1,579,244 (15,374,527) (10,021,859) ----------- ----------- -------------- ----------- ----------- ----------- Net increase (decrease) in net assets resulting from operations.................. $12,140,466 $13,258,565 $ 9,520 $2,545,352 $(7,082,558) $(6,175,506) ----------- ----------- -------------- ----------- ----------- ----------- ----------- ----------- -------------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 25 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS - --------------------------------------------------------------------------------
---------------------------- ---------------------------- QUEST FOR VALUE FUND, INC. OPPORTUNITY FUND ---------------------------- ---------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, ---------------------------- ---------------------------- 1994 1993 1994 1993 ------------- ------------- ------------- ------------- OPERATIONS Net investment income (loss).............................. $ 1,726,225 $ 815,957 $ 1,397,364 $ 2,369,084 Net realized gain (loss) on investments................... 16,664,331 9,419,025 7,139,720 1,539,178 Net change in unrealized appreciation (depreciation) on investments.............................................. (6,250,090) 11,586,419 4,721,481 6,462,200 ------------- ------------- ------------- ------------- Net increase (decrease) in net assets................... 12,140,466 21,821,401 13,258,565 10,370,462 ------------- ------------- ------------- ------------- DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- Class A.......................... (819,873) (608,320) (2,269,483) (220,172) Net investment income -- Class B.......................... (11,801) -- (98,258) -- Net investment income -- Class C.......................... (2,040) -- (21,098) -- Net realized gains -- Class A............................. (9,227,704) (6,984,843) (1,497,052) (945,122) Net realized gains -- Class B............................. (115,604) -- (30,460) -- Net realized gains -- Class C............................. (11,081) -- (11,467) -- Distributions in excess of net realized gains -- Class A........................................................ -- -- (1,196) -- Distributions in excess of net realized gains -- Class B........................................................ -- -- (24) -- Distributions in excess of net realized gains -- Class C........................................................ -- -- (9) -- ------------- ------------- ------------- ------------- Total dividends and distributions to shareholders....... (10,188,103) (7,593,163) (3,929,047) (1,165,294) ------------- ------------- ------------- ------------- FUND SHARE TRANSACTIONS CLASS A Net proceeds from sales................................... 61,908,256 115,189,954 90,332,759 92,938,735 Net proceeds from Fund acquisitions (note 9).............. -- 8,793,860 -- -- Reinvestment of dividends and distributions............... 9,385,655 7,044,627 3,405,284 1,050,792 Cost of shares redeemed................................... (80,014,950) (42,885,888) (65,200,453) (16,545,512) ------------- ------------- ------------- ------------- Net increase (decrease) -- Class A...................... (8,721,039) 88,142,553 28,537,590 77,444,015 ------------- ------------- ------------- ------------- CLASS B Net proceeds from sales................................... 12,409,864 2,121,588 40,604,196 2,225,538 Reinvestment of dividends and distributions............... 123,599 -- 124,021 -- Cost of shares redeemed................................... (544,061) (97,971) (1,026,439) (99,998) ------------- ------------- ------------- ------------- Net increase -- Class B................................. 11,989,402 2,023,617 39,701,778 2,125,540 ------------- ------------- ------------- ------------- CLASS C Net proceeds from sales................................... 3,521,667 222,635 6,945,412 315,179 Reinvestment of dividends and distributions............... 13,020 -- 32,567 -- Cost of shares redeemed................................... (271,901) -- (254,081) -- ------------- ------------- ------------- ------------- Net increase -- Class C................................. 3,262,786 222,635 6,723,898 315,179 ------------- ------------- ------------- ------------- Total net increase (decrease) in net assets from fund share transactions....................................... 6,531,149 90,388,805 74,963,266 79,884,734 ------------- ------------- ------------- ------------- Total increase (decrease) in net assets................. 8,483,512 104,617,043 84,292,784 89,089,902 NET ASSETS Beginning of year......................................... 247,555,623 142,938,580 129,652,961 40,563,059 ------------- ------------- ------------- ------------- End of year (including undistributed net investment income (loss) of $1,464,120, $549,014; $1,291,867, $2,283,342; ($238,336); ($315,524); $127,460, $99,804; $0, ($242,693) and $0, $0; respectively................................. $ 256,039,135 $ 247,555,623 $ 213,945,745 $ 129,652,961 ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 26 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
- ----------------------------- ---------------------------- ---------------------------- ---------------------------- SMALL CAPITALIZATION FUND GROWTH AND INCOME FUND U.S. GOVERNMENT INCOME FUND INVESTMENT QUALITY INCOME FUND - ----------------------------- ---------------------------- ---------------------------- ---------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, - ----------------------------- ---------------------------- ---------------------------- ---------------------------- 1994 1993 1994 1993 1994 1993 1994 1993 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- $ (238,336) $ (271,130) $ 966,108 $ 633,084 $ 8,291,969 $ 9,429,304 $ 3,846,353 $ 2,883,555 3,366,835 8,302,299 1,768,686 4,437,702 (4,366,839) 4,231,587 (952,880) 376,772 (3,118,979) 8,854,657 (189,442) (2,998,170) (11,007,688) 520,464 (9,068,979) 4,549,804 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 9,520 16,885,826 2,545,352 2,072,616 (7,082,558) 14,181,355 (6,175,506) 7,810,131 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- -- -- (936,128) (536,051) (8,071,564) (9,762,803) (3,482,793) (2,877,023) -- -- (41,545) (1,573) (196,735) (3,601) (244,424) (5,737) -- -- (7,305) (631) (39,362) (769) (119,136) (795) (8,036,736) (3,584,330) (4,079,198) (245,866) (2,925,946) (2,276,286) (367,910) (163,898) (160,831) -- (145,217) -- (38,935) (956) (10,112) -- (19,543) -- (18,475) -- (6,494) (105) (637) -- -- -- (199,276) -- (292,913) -- -- -- -- -- (7,094) -- (3,898) -- -- -- -- -- (903) -- (650) -- -- -- - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- (8,217,110) (3,584,330) (5,435,141) (784,121) (11,576,497) (12,044,520) (4,225,012) (3,047,453) - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 127,081,752 71,051,819 5,937,491 9,582,299 17,007,814 95,566,875 12,621,718 36,729,933 -- -- -- 16,543,558 -- -- -- -- 7,215,556 3,294,382 5,008,623 741,804 9,588,703 10,124,750 2,758,350 2,116,388 (111,134,238) (22,419,670) (6,040,040) (7,744,229) (74,313,512) (69,938,914) (20,364,228) (12,033,169) - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 23,163,070 51,926,531 4,906,074 19,123,432 (47,716,995) 35,752,711 (4,984,160) 26,813,152 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 15,275,222 1,837,990 2,763,975 319,565 6,748,251 1,386,323 6,440,954 1,582,773 148,570 -- 188,513 1,383 187,137 3,658 185,172 3,747 (811,203) (104,955) (260,750) (4,377) (964,994) (99,835) (800,932) (107,360) - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 14,612,589 1,733,035 2,691,738 316,571 5,970,394 1,290,146 5,825,194 1,479,160 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 3,345,761 233,009 341,819 101,192 1,424,484 140,626 3,141,700 100,200 18,810 -- 26,593 631 46,127 866 93,436 786 (229,505) -- (4,696) -- (289,465) -- (422,838) -- - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 3,135,066 233,009 363,716 101,823 1,181,146 141,492 2,812,298 100,986 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 40,910,725 53,892,575 7,961,528 19,541,826 (40,565,455) 37,184,349 3,653,332 28,393,298 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- 32,703,135 67,194,071 5,071,739 20,830,321 (59,224,510) 39,321,184 (6,747,186) 33,155,976 106,886,665 39,692,594 28,887,443 8,057,122 190,518,306 151,197,122 62,857,337 29,701,361 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- $ 139,589,800 $ 106,886,665 $ 33,959,182 $ 28,887,443 $ 131,293,796 $ 190,518,306 $ 56,110,151 $ 62,857,337 - -------------- ------------- ------------- ------------- ------------- ------------- ------------- ------------- - -------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
27 OCTOBER 31, 1994 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Quest for Value Funds are registered under the Investment Company Act of 1940, as diversified, open-end management investment companies. Quest for Value Fund, Inc. ("Quest for Value") is a Maryland Corporation. Opportunity Fund ("Opportunity"), Small Capitalization Fund ("Small Capitalization"), Growth and Income Fund ("Growth and Income"), U.S. Government Income Fund ("U.S. Government") and Investment Quality Income Fund ("Investment Quality") are five of eight funds currently offered in the Quest for Value Family of Funds, a Massachusetts business trust. Quest for Value Advisors (the "Adviser") serves as investment adviser and provides accounting and administrative services to each fund. Quest for Value Distributors (the "Distributor") serves as each fund's distributor. Both the Advisor and Distributor are majority-owned (99%) subsidiaries of Oppenheimer Capital. Prior to September 1, 1993, the funds only issued one class of shares which were redesignated Class A shares. Subsequent to that date all funds were authorized to issue Class A, Class B and Class C shares. Shares of each Class represent an identical interest in the investment portfolio of their respective fund and generally have the same rights, but are offered under different sales charge and distribution fee arrangements. Furthermore, Class B shares will automatically convert to Class A shares of the same fund eight years after their respective purchase. The following is a summary of significant accounting policies consistently followed by each fund in the preparation of its financial statements: (A) VALUATION OF INVESTMENTS Investment securities listed on a national securities exchange and securities traded in the over-the-counter National Market System are valued at the last reported sale price on the valuation date; if there are no such reported sales, the securites are valued at the last quoted bid price. Other securities traded over-the-counter and not part of the National Market System are valued at the last quoted bid price. Investment debt securities (other than short-term obligations) are valued each day by an independent pricing service approved by the Board of Directors (Trustees) using methods which include current market quotations from a major market maker in the securities and trader-reviewed "matrix" prices. Futures contracts are valued based upon their daily settlement value as of the close of the exchange upon which they trade. OTC options are valued based upon a formula which utilizes the market value of the underlying securities, strike prices and expiration of the options. Short-term debt securities having a remaining maturity of sixty days or less are valued at amortized cost or amortized value, which approximates market value. Any securities or other assets for which market quotations are not readily available are valued at their fair value as determined in good faith under procedures established by each fund's Board of Directors (Trustees). The ability of issuers of debt securities held by the funds to meet their obligations may be affected by economic or political developments in a specific state, industry or region. (B) FEDERAL INCOME TAXES It is each fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders; accordingly, no Federal income tax provision is required. (C) DEFERRED ORGANIZATION EXPENSES In connection with each fund's organization, the following approximate costs were incurred: Opportunity -- $74,000, Small Capitalization -- $72,000, Growth and Income -- $96,000 and Investment Quality -- $62,000. These costs have been deferred and are being amortized to expense on a straight-line basis over sixty months from commencements of each fund's operations. (D) SECURITY TRANSACTIONS AND OTHER INCOME Security transactions are accounted for on the trade date. In determining the gain or loss from the sale of securities, the cost of securities sold is determined on the basis of identified cost. Dividend income is recorded on the ex-dividend date and interest income is accrued as earned. Discounts or premiums on debt securities purchased are accreted or 28 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- amortized to interest income over the lives of the respective securities. Net investment income, other than class specific expenses and unrealized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets, as defined, of each class. (E) DIVIDENDS AND DISTRIBUTIONS The following table summarizes each fund's dividend and capital gain declaration policy: SHORT-TERM LONG-TERM INCOME CAPITAL CAPITAL DIVIDENDS GAINS GAINS --------- ------------ ------------ Quest for Value annually annually annually Opportunity annually annually annually Small Capitalizatoin annually annually annually Growth and Income quarterly annually annually U.S. Government daily * quarterly annually Investment Quality daily * annually annually * paid monthly. Each fund records dividends and distributions to its shareholders on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book-tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains, respectively. To the extent distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as distributions of paid-in-surplus or tax return of capital. Accordingly, permanent book-tax differences relating to shareholder distributions have been reclassified to paid-in-surplus. Net investment income(loss), net realized gain(loss) and net assets were not affected by this change. During the fiscal year ended October 31, 1994, the Funds adopted Statement of Position 93-2 Determination, Disclosure, and Financial Statement Presentation of Income, Capital Gain, and Return of Capital Distributions by Investment Companies. The following table discloses the cumulative effect of such differences reclassified from undistributed accumulated net investment income(loss) and accumulated undistributed capital gain(loss) on investments to paid-in-surplus: ACCUMULATED ACCUMULATED UNDISTRIBUTED UNDISTRIBUTED PAID NET INVESTMENT NET REALIZED IN INCOME (LOSS) GAIN (LOSS) SURPLUS -------------- ------------ --------- Quest for Value $ 22,595 $ (50,380) $ 27,785 Opportunity -- 4,061 (4,061) Small Capitalization 315,524 7,934 (323,458) Growth and Income 46,526 (198,668) 152,142 U.S. Government 258,385 102,016 (360,401) Investment Quality -- 3,929 (3,929) (F) OPTIONS ACCOUNTING POLICIES When a fund writes a call option or a put option, an amount equal to the premium received by the fund is included in the fund's Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. If the option expires on its 29 OCTOBER 31, 1994 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- stipulated expiration date or if a fund enters into a closing purchase transaction, the fund will realize a gain (or loss if the cost of a closing purchase transaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option will be extinguished. If a call option which a fund has written is exercised, the fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which a fund has written is exercised, the amount of the premium originally received will reduce the cost of the security which the fund purchases upon exercise of the option. (G) FUTURES ACCOUNTING POLICIES Futures contracts are agreements between two parties to buy and sell a financial instrument at a set price on a future date. Upon entering into such a contract, a fund is required to pledge to the broker an amount of cash or U.S. Government securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, a fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the fund as unrealized appreciation or depreciation. When a contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed and reverses any unrealized appreciation or depreciation previously recorded. (H) REPURCHASE AGREEMENTS U.S. Government enters into repurchase agreements as part of its investment program. The fund's custodian takes possession of collateral pledged by the counterparty. The collateral is marked-to-market daily to ensure that the value, plus accrued interest, is at least equal to the repurchase price. In the event of default by the obligor to repurchase, the fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. (I) EXPENSES Expenses specifically identifiable to a particular fund or class are borne by that fund or class. Other expenses are allocated to each fund or class based on its net assets in relation to the total net assets of all applicable funds or classes or on another reasonable basis. 2. INVESTMENT ADVISORY FEE, ACCOUNTING SERVICES FEE, DISTRIBUTION FEE AND OTHER TRANSACTIONS WITH AFFILIATES (a) The investment advisory fee is payable monthly to the Adviser, and is computed as a percentage of each fund's net assets as of the close of business each day at the following annual rates: 1.00% for Quest for Value, Opportunity and Small Capitalization, respectively; .85% for Growth and Income and .60% for U.S. Government and Investment Quality, respectively. For the year ended October 31, 1994, the Adviser voluntarily waived $142,772, $38,486 and $180,934 in investment advisory fees for Growth and Income, U.S. Government and Investment Quality, respectively. (b) A portion of the accounting services fee for Opportunity, Small Capitalization, Growth and Income, U.S. Government and Investment Quality is payable monthly to the Adviser. Each fund reimburses the Adviser for a portion of the salaries of officers and employees of Oppenheimer Capital based upon the amount of time such persons spend in providing services to each fund in accordance with the provisions of the Investment Advisory Agreement. For the year ended October 31, 1994, the Adviser received $53,245, $67,578, $68,117, $70,876 and $64,080, respectively. (c) The funds have adopted a Plan and Agreement of Distribution (the "Plan") pursuant to which each fund is permitted to compensate the Distributor in connection with the distribution of fund shares. Under the Plan, the 30 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Distributor has entered into agreements with securities dealers and other financial institutions and organizations to obtain various sales-related services in rendering distribution assistance. To compensate the Distributor for the services it and other dealers under the Plan provide and for the expenses they bear under the Plan, the funds pay the Distributor compensation, accrued daily and payable monthly on each fund's average daily net assets for Class A shares at the following annual rates: .25% for Quest for Value, Opportunity and Small Capitalization, respectively; .05% for U.S. Government and .15% for Investment Quality and Growth and Income, respectively. Each fund's Class A shares also pay a service fee at the annual rate of .25%. Compensation for Class B and Class C shares of each fund is at an annual rate of .75% of average daily net assets. Each fund's Class B and Class C shares also pay a service fee at the annual rate of .25%. Distribution and service fees may be paid by the Distributor to broker dealers or others for providing personal service, maintenance of accounts and ongoing sales or shareholder support functions in connection with the distribution of fund shares. While payments under the Plan may not exceed the stated percentage of average daily net assets on an annual basis, the payments are not limited to the amounts actually incurred by the Distributor. (d) Total brokerage commissions paid by Quest for Value, Opportunity, Small Capitalization and Growth and Income were $318,014, $189,860, $300,037 and $74,334, respectively, of which Oppenheimer & Co., Inc., an affiliate of the Adviser, received $162,914, $94,589, $143,991 and $55,911, respectively, for the year ended October 31, 1994. (e) Oppenheimer & Co., Inc. has informed the funds that it received approximately $344,000, $441,000, $353,000, $43,000, $237,000 and $114,000 in connection with the sale of Class A shares for Quest for Value, Opportunity, Small Capitalization, Growth and Income, U.S. Government and Investment Quality, respectively, for the year ended October 31, 1994. The Distributor has informed the funds that it received contingent deferred sales charges on the redemption of Class B and Class C shares of approximately $10,000, $21,000, $10,000, $1,000, $10,000, and $18,000 for Quest for Value, Opportunity, Small Capitalization, Growth and Income, U.S. Government and Investment Quality, respectively, for the year ended October 31, 1994. 3. PURCHASES AND SALES OF SECURITIES For the year ended October 31, 1994, purchases and sales of investment securities, other than short-term securities, were as follows:
QUEST FOR SMALL GROWTH AND U.S. INVESTMENT VALUE OPPORTUNITY CAPITALIZATION INCOME GOVERNMENT QUALITY ----------- ----------- -------------- ----------- ----------- ----------- Purchases $124,679,001 $96,908,415 $ 101,529,934 $32,706,665 $197,990,061 $26,304,890 Sales 104,609,292 57,124,087 72,829,845 35,060,309 213,763,796 17,448,246
The following table summarizes activity in written option transactions for Small Capitalization and U.S. Government for the year ended October 31, 1994:
SMALL CAPITALIZATION U.S. GOVERNMENT -------------------- ----------------------- CONTRACTS PREMIUMS CONTRACTS PREMIUMS --------- --------- --------- ------------ Option contracts written: Outstanding beginning of year 400 $ 38,999 5 $ 263,438 Options written 450 113,460 51 3,941,836 Options terminated in closing purchase transactions -- -- (22) (1,991,406) Options exercised (450) (113,460) (6) (245,000) Options expired (400) (38,999) (26) (1,826,680) --------- -------- ---- ----------- Options contracts written: Outstanding end of year 0 $ 0 2 $ 142,188 --------- -------- ---- ----------- --------- -------- ---- -----------
31 OCTOBER 31, 1994 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- 4. FUND SHARE TRANSACTIONS The following tables summarize the fund share activity for the two years ended October 31, 1994.
QUEST FOR VALUE OPPORTUNITY SMALL CAPITALIZATION ------------------------- ------------------------- ------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, ------------------------- ------------------------- ------------------------- 1994 1993 1994 1993 1994 1993 ----------- ----------- ----------- ----------- ----------- ----------- CLASS A Issued................................... 5,077,999 9,558,313 4,781,210 5,232,397 7,804,081 4,355,629 Fund acquisitions*....................... -- 754,190 -- -- -- -- Dividends and distributions reinvested... 797,941 605,158 186,714 60,873 450,409 218,171 Redeemed................................. (6,566,112) (3,516,427) (3,470,990) (919,793) (6,835,042) (1,357,953) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease)................ (690,172) 7,401,234 1,496,934 4,373,477 1,419,448 3,215,847 ----------- ----------- ----------- ----------- ----------- ----------- CLASS B** Issued................................... 1,020,362 168,973 2,145,988 118,495 936,328 105,179 Dividends and distributions reinvested... 10,514 -- 6,821 -- 9,286 -- Redeemed................................. (44,566) (7,901) (54,500) (5,427) (50,575) (5,876) ----------- ----------- ----------- ----------- ----------- ----------- Net increase........................... 986,310 161,072 2,098,309 113,068 895,039 99,303 ----------- ----------- ----------- ----------- ----------- ----------- CLASS C** Issued................................... 289,679 17,648 367,367 16,726 205,454 13,299 Dividends and distributions reinvested... 1,106 -- 1,789 -- 1,176 -- Redeemed................................. (22,509) -- (13,680) -- (13,923) -- ----------- ----------- ----------- ----------- ----------- ----------- Net increase........................... 268,276 17,648 355,476 16,726 192,707 13,299 ----------- ----------- ----------- ----------- ----------- ----------- Total net increase................... 564,414 7,579,954 3,950,719 4,503,271 2,507,194 3,328,449 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
GROWTH AND INCOME U.S. GOVERNMENT INVESTMENT QUALITY ------------------------- ------------------------- ------------------------- YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, YEAR ENDED OCTOBER 31, ------------------------- ------------------------- ------------------------- 1994 1993 1994 1993 1994 1993 ----------- ----------- ----------- ----------- ----------- ----------- CLASS A Issued................................... 591,037 877,614 1,484,549 7,920,117 1,194,443 3,363,019 Fund acquisitions*....................... -- 1,549,022 -- -- -- -- Dividends and distributions reinvested... 506,743 68,314 839,276 840,464 263,168 192,408 Redeemed................................. (600,435) (709,066) (6,552,668) (5,796,668) (1,940,417) (1,087,300) ----------- ----------- ----------- ----------- ----------- ----------- Net increase (decrease)................ 497,345 1,785,884 (4,228,843) 2,963,913 (482,806) 2,468,127 ----------- ----------- ----------- ----------- ----------- ----------- CLASS B** Issued................................... 269,571 28,678 594,901 114,413 614,495 136,798 Dividends and distributions reinvested... 19,104 125 16,698 302 18,150 327 Redeemed................................. (26,407) (386) (86,599) (8,244) (77,488) (9,339) ----------- ----------- ----------- ----------- ----------- ----------- Net increase........................... 262,268 28,417 525,000 106,471 555,157 127,786 ----------- ----------- ----------- ----------- ----------- ----------- CLASS C** Issued................................... 33,894 9,027 123,553 11,593 290,357 8,698 Dividends and distributions reinvested... 2,697 57 4,123 72 9,047 68 Redeemed................................. (469) -- (25,877) -- (41,081) -- ----------- ----------- ----------- ----------- ----------- ----------- Net increase........................... 36,122 9,084 101,799 11,665 258,323 8,766 ----------- ----------- ----------- ----------- ----------- ----------- Total net increase (decrease)........ 795,735 1,823,385 (3,602,044) 3,082,049 330,674 2,604,679 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- *See note 9 **Initial offering September 2, 1993.
32 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 5. UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL INCOME TAX PURPOSES At October 31, 1994, the composition of unrealized appreciation (depreciation) of investment securities and the cost of investments for Federal income tax purposes were as follows: APPRECIATION (DEPRECIATION) NET TAX COST ------------ -------------- ------------ ------------ Quest for Value $34,762,698 $ (2,034,414) $ 32,728,284 $225,191,866 Opportunity 16,932,676 (2,553,482) 14,379,194 198,907,089 Small Capitalization 11,588,568 (6,208,644) 5,379,924 129,522,331 Growth and Income 1,808,807 (1,464,506) 344,301 32,186,880 U.S. Government 72,722 (14,977,671) (14,904,949) 145,952,876 Investment Quality 330,434 (4,021,028) (3,690,594) 58,448,564 6. AUTHORIZED FUND SHARES AND PAR VALUE PER SHARE
QUEST SMALL GROWTH U.S. INVESTMENT FOR VALUE OPPORTUNITY CAPITALIZATION AND INCOME GOVERNMENT QUALITY ---------- ----------- -------------- ---------- ---------- ---------- Authorized fund shares 35,000,000 unlimited unlimited unlimited unlimited unlimited Par value per share $1.00 $.01 $.01 $.01 $.01 $.01
7. DIVIDENDS AND DISTRIBUTIONS The following tables summarize the per share dividends and distributions made for the two years ended October 31, 1994: QUEST FOR SMALL VALUE OPPORTUNITY CAPITALIZATION -------------- -------------- -------------- YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, --------------- -------------- -------------- 1994 1993 1994 1993 1994 1993 ------- ------ ------ ------ ------ ------ NET INVESTMENT INCOME: Class A $ 0.040 $ 0.047 $ 0.326 $ 0.069 -- -- Class B* 0.031 -- 0.313 -- -- -- Class C* 0.033 -- 0.312 -- -- -- NET REALIZED GAINS: Class A $ 0.469 $ 0.545 $ 0.219 $ 0.317 $ 1.331 $ 1.137 Class B* 0.469 -- 0.219 -- 1.331 -- Class C* 0.469 -- 0.219 -- 1.331 -- GROWTH AND U.S. INVESTMENT INCOME GOVERNMENT QUALITY -------------- -------------- -------------- YEAR ENDED YEAR ENDED YEAR ENDED OCTOBER 31, OCTOBER 31, OCTOBER 31, --------------- -------------- -------------- 1994 1993 1994 1993 1994 1993 ------- ------ ------ ------ ------ ------ NET INVESTMENT INCOME: Class A $ 0.319 $ 0.264 $ 0.593 $ 0.676 $ 0.680 $ 0.683 Class B* 0.265 0.070 0.510 0.076 0.609 0.081 Class C* 0.261 0.070 0.509 0.082 0.608 0.092 NET REALIZED GAINS: Class A $ 1.669 $ 0.333 $ 0.213 $ 0.155 $ 0.069 $ 0.056 Class B* 1.669 -- 0.213 0.009 0.069 -- Class C* 1.669 -- 0.213 0.009 0.069 -- *Initial offering September 2, 1993. 33 OCTOBER 31, 1994 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (continued) - -------------------------------------------------------------------------------- 8. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS At October 31, 1994, U.S. Government had written options outstanding. Written options have elements of risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The fund, as a writer of an option, has no control over whether the option is exercised. The underlying security may be sold and, as a result, the fund bears the market risk of an unfavorable change in the price of the security underlying the written option. 9. FUND ACQUISITIONS On December 21, 1992, Growth and Income acquired, in a tax free reorganization, the net assets of the Unified Income Fund and Unified Mutual Shares Fund in exchange for 289,151 and 1,259,871 shares, respectively. At that date, net assets for the Unified Income Fund and Unified Mutual Shares Fund amounted to $3,088,136 and $13,455,422, respectively, which included $211,357 and $2,822,919, respectively, in unrealized appreciation. These assets were combined with the net assets of Growth and Income which were $7,881,811, immediately prior to reorganization. Expenses incurred in connection with this acquisition approximated $34,000 which include legal costs and independent accountants' fees. Growth and Income also received $1,168,033 in capital loss carryovers which can be used as a reduction against future net capital gains. These carryovers are limited by Section 382 of the Internal Revenue Code to $188,067 annually as a result of the reorganization. On December 28, 1992, Quest for Value acquired the net assets of the Unified Growth Fund in exchange for 754,190 shares. At that date, net assets for Unified Growth Fund amounted to $8,793,860, which included $486,279 in unrealized appreciation. These assets were combined with the assets of Quest for Value which were $157,183,979, immediately prior to reorganization. Expenses incurred in connection with the acquisition approximated $17,000 which include legal costs and independent auditors' fees. Quest for Value also received and used $82,350 in capital loss carryovers to be used as a reduction against future net capital gains realized before the fiscal year ended 2000. 10. NET CAPITAL LOSS CARRYOVER For the fiscal year ended October 31, 1994, Growth and Income will utilize $188,067 of net capital loss carryovers. Growth and Income has net capital loss carryovers of $791,899 of which $558,150, $177,811 and $55,938 will be available through the fiscal years ending 1995, 1996 and 2000, respectively, to offset net capital gains, to the extent provided by regulations. However, due to the reorganization described in Note 9, the loss carryovers are further limited by IRC Section 382 to $188,067 annually. To the extent that the capital loss carryovers are used to offset net capital gains, it is probable that the gains so offset will not be distributed to shareholders. Also, at October 31, 1994, Investment Quality had a net capital loss carryover of $952,880 available as a reduction against future net capital gains realized before the end of fiscal 2002 to the extent provided by regulations. 11. SUBSEQUENT EVENTS On December 5, 1994, the following funds declared net realized short-term and long-term capital gain distributions, payable December 5, 1994 to shareholders of record on the opening of business December 5, 1994 at the following rates per share, per class: SHORT-TERM GAIN LONG-TERM GAIN --------------- --------------- Quest for Value $0.0924 $0.7355 Opportunity 0.2077 0.4058 Small Capitalization 0.3195 0.0959 Growth and Income 0.2351 0.1864 U.S. Government -- 0.0126 34 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD) - --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ---------------------------------------- ------------------------------------------------ NET REALIZED DISTRIBUTIONS AND DIVIDENDS TO TO NET ASSET NET UNREALIZED SHAREHOLDERS SHAREHOLDERS VALUE, INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET FROM NET TOTAL DIVIDENDS BEGINNING INCOME ON INVESTMENT INVESTMENT REALIZED GAIN AND OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME ON INVESTMENTS DISTRIBUTIONS QUEST FOR VALUE FUND, INC. Class A, YEAR ENDED OCTOBER 31, 1994 $ 12.51 $ 0.09 $ 0.50 $ 0.59 $ (0.04) $ (0.47) $ (0.51) 1993 11.71 0.05 1.34 1.39 (0.05) (0.54) (0.59) 1992 10.61 0.04 1.77 1.81 (0.07) (0.64) (0.71) 1991 7.84 0.09 2.84 2.93 (0.16) -- (0.16) 1990(2) 9.85 0.18 (1.38) (1.20) (0.26) (0.55) (0.81) Class B, YEAR ENDED OCTOBER 31, 1994 12.51 0.02 0.50 0.52 (0.03) (0.47) (0.50) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.66(3) (0.01) (0.14) (0.15) -- -- -- Class C, YEAR ENDED OCTOBER 31, 1994 12.50 0.01 0.51 0.52 (0.03) (0.47) (0.50) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.66(3) (0.01) (0.15) (0.16) -- -- -- RATIOS ------------------------------------- RATIO OF RATIO OF NET NET INVESTMENT NET ASSETS OPERATING INCOME NET ASSET END OF EXPENSES (LOSS) PORTFOLIO VALUE, END TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER OF PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE QUEST FOR VALUE FUND, INC. Class A, YEAR ENDED OCTOBER 31, 1994 $ 12.59 5.01% $ 238,085 1.71%(1) 0.72%(1) 49% 1993 12.51 12.27% 245,320 1.75% 0.40% 27% 1992 11.71 18.45% 142,939 1.75% 0.53% 41% 1991 10.61 37.94% 79,914 1.83% 1.06% 48% 1990(2) 7.84 (13.43%) 49,740 1.82% 1.71% 51% Class B, YEAR ENDED OCTOBER 31, 1994 12.53 4.43% 14,373 2.24%(1) 0.14%(1) 49% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.51 (1.19%) 2,015 2.27%(5) (1.19%)(5) 27% Class C, YEAR ENDED OCTOBER 31, 1994 12.52 4.45% 3,581 2.28%(1) 0.09%(1) 49% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.50 (1.26%) 221 2.27%(5) (0.90%)(5) 27% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED OCTOBER 31, 1994, FOR CLASSES A, B, AND C WERE $237,922,657, $8,341,111, AND $1,724,870, RESPECTIVELY. (2) SHARE AND PER SHARE DATA HAVE BEEN RETROACTIVELY RESTATED TO REFLECT A 200% STOCK DIVIDEND AS OF JULY 1, 1991. (3) OFFERING PRICE. (4) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (5) ANNUALIZED.
OPPORTUNITY FUND
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ---------------------------------------- ------------------------------------------------ NET REALIZED DISTRIBUTIONS AND DIVIDENDS TO TO NET ASSET NET UNREALIZED SHAREHOLDERS SHAREHOLDERS VALUE, INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET FROM NET TOTAL DIVIDENDS BEGINNING INCOME ON INVESTMENT INVESTMENT REALIZED GAIN AND OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME ON INVESTMENTS DISTRIBUTIONS Class A, YEAR ENDED OCTOBER 31, 1994 $ 18.71 $ 0.18 $ 1.35 $ 1.53 $ (0.33) $ (0.22) $ (0.55) 1993 16.73 0.35 2.02 2.37 (0.07) (0.32) (0.39) 1992 14.29 0.09 2.93 3.02 (0.03) (0.55) (0.58) 1991 9.74 0.03 4.78 4.81 (0.23) (0.03) (0.26) 1990 11.59 0.25 (1.64) (1.39) (0.22) (0.24) (0.46) Class B, YEAR ENDED OCTOBER 31, 1994 18.70 0.08 1.34 1.42 (0.31) (0.22) (0.53) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 18.73(3) 0.02 (0.05) (0.03) -- -- -- Class C, YEAR ENDED OCTOBER 31, 1994 18.70 0.08 1.33 1.41 (0.31) (0.22) (0.53) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 18.73(3) 0.02 (0.05) (0.03) -- -- -- RATIOS ------------------------------------- RATIO OF RATIO OF NET NET INVESTMENT NET ASSETS OPERATING INCOME NET ASSET END OF EXPENSES (LOSS) PORTFOLIO VALUE, END TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER OF PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE Class A, YEAR ENDED OCTOBER 31, 1994 $ 19.69 8.41% $ 163,340 1.78%(1) 0.96%(1) 42% 1993 18.71 14.34% 127,225 1.83% 2.69% 24% 1992 16.73 21.93% 40,563 2.27% 0.72% 32% 1991 14.29 50.44% 8,446 2.35%(2) 0.30%(2) 88% 1990 9.74 (12.62%) 4,570 2.00%(2) 2.30%(2) 206% Class B, YEAR ENDED OCTOBER 31, 1994 19.59 7.84% 43,317 2.34%(1) 0.43%(1) 42% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 18.70 (0.16%) 2,115 2.52%(5) 1.32%(5) 24% Class C, YEAR ENDED OCTOBER 31, 1994 19.58 7.78% 7,289 2.35%(1) 0.43%(1) 42% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 18.70 (0.16%) 313 2.52%(5) 1.13%(5) 24% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED OCTOBER 31, 1994, FOR CLASSES A, B, AND C WERE $136,623,124, $16,215,716, AND $2,708,865, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED ITS FEES AND REIMBURSED THE FUND FOR A PORTION OF ITS OPERATING EXPENSES. IF SUCH WAIVERS AND REIMBURSEMENTS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 3.33% AND (0.68%), RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1991 AND 3.69% AND 0.61%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1990. (3) OFFERING PRICE. (4) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (5) ANNUALIZED. - ---------------------------------- * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
35 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD--CONTINUED) - --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ---------------------------------------- ------------------------------------------------ NET REALIZED DISTRIBUTIONS AND DIVIDENDS TO TO NET ASSET NET UNREALIZED SHAREHOLDERS SHAREHOLDERS VALUE, INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET FROM NET TOTAL DIVIDENDS BEGINNING INCOME ON INVESTMENT INVESTMENT REALIZED GAIN AND OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME ON INVESTMENTS DISTRIBUTIONS SMALL CAPITALIZATION FUND Class A, YEAR ENDED OCTOBER 31, 1994 $ 17.68 $ (0.03) $ 0.01 $ (0.02) $ -- $ (1.33) $ (1.33) 1993 14.60 (0.04) 4.26 4.22 -- (1.14) (1.14) 1992 13.52 0.00 1.50 1.50 -- (0.42) (0.42) 1991 8.80 (0.05) 4.85 4.80 (0.08) -- (0.08) 1990 10.91 0.07 (2.04) (1.97) (0.08) (0.06) (0.14) Class B, YEAR ENDED OCTOBER 31, 1994 17.66 (0.11) 0.02 (0.09) -- (1.33) (1.33) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 17.19(3) (0.02) 0.49 0.47 -- -- -- Class C, YEAR ENDED OCTOBER 31, 1994 17.67 (0.13) 0.02 (0.11) -- (1.33) (1.33) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 17.19(3) (0.02) 0.50 0.48 -- -- -- RATIOS ------------------------------------- RATIO OF RATIO OF NET NET INVESTMENT NET ASSETS OPERATING INCOME NET ASSET END OF EXPENSES (LOSS) PORTFOLIO VALUE, END TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER OF PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE SMALL CAPITALIZATION FUND Class A, YEAR ENDED OCTOBER 31, 1994 $ 16.33 0.04% $ 120,102 1.88%(1) (0.14%)(1) 67% 1993 17.68 30.21% 104,898 1.89% (0.36%) 74% 1992 14.60 11.60% 39,693 2.11% (0.04%) 95% 1991 13.52 55.01% 20,686 2.25%(2) (0.41%)(2) 103% 1990 8.80 (18.33%) 1,880 2.00%(2) 0.71%(2) 18% Class B, YEAR ENDED OCTOBER 31, 1994 16.24 (0.39%) 16,144 2.48%(1) (0.70%)(1) 67% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 17.66 2.73% 1,754 2.57%(5) (1.15%)(5) 74% Class C, YEAR ENDED OCTOBER 31, 1994 16.23 (0.51%) 3,344 2.59%(1) (0.81%)(1) 67% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 17.67 2.79% 235 2.57%(5) (1.20%)(5) 74% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED OCTOBER 31, 1994, FOR CLASSES A, B, AND C WERE $115,276,454, $9,400,776, AND $1,380,547, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED ITS FEES AND REIMBURSED THE FUND FOR A PORTION OF ITS OPERATING EXPENSES. IF SUCH WAIVERS AND REIMBURSEMENTS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 3.27% AND (1.43%), RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1991 AND 5.82% AND (3.11%), RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1990. (3) OFFERING PRICE. (4) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (5) ANNUALIZED.
GROWTH AND INCOME FUND
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ---------------------------------------- ------------------------------------------------ NET REALIZED DISTRIBUTIONS AND DIVIDENDS TO TO NET ASSET NET UNREALIZED SHAREHOLDERS SHAREHOLDERS VALUE, INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET FROM NET TOTAL DIVIDENDS BEGINNING INCOME ON INVESTMENT INVESTMENT REALIZED GAIN AND OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME ON INVESTMENTS DISTRIBUTIONS Class A, YEAR ENDED OCTOBER 31, 1994 $ 11.24 $ 0.32 $ 0.55 $ 0.87 $ (0.32) $ (1.70) $ (2.02) 1993 10.80 0.30 0.73 1.03 (0.26) (0.33) (0.59) NOVEMBER 4, 1991 (3) TO OCTOBER 31, 1992 10.00(4) 0.28 0.80 1.08 (0.28) -- (0.28) Class B, YEAR ENDED OCTOBER 31, 1994 11.23 0.25 0.56 0.81 (0.27) (1.70) (1.97) SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.21(4) 0.04 0.05 0.09 (0.07) -- (0.07) Class C, YEAR ENDED OCTOBER 31, 1994 11.23 0.24 0.56 0.80 (0.26) (1.70) (1.96) SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.21(4) 0.04 0.05 0.09 (0.07) -- (0.07) RATIOS ------------------------------------- RATIO OF RATIO OF NET NET INVESTMENT NET ASSETS OPERATING INCOME NET ASSET END OF EXPENSES (LOSS) PORTFOLIO VALUE, END TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER OF PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE Class A, YEAR ENDED OCTOBER 31, 1994 $ 10.09 8.64% $ 30,576 1.86%(1,2) 3.16%(1,2) 113% 1993 11.24 9.93% 28,466 1.90%(2) 2.66%(2) 192% NOVEMBER 4, 1991 (3) TO OCTOBER 31, 1992 10.80 10.84% 8,057 2.23%(2,6) 2.73%(2,6) 77% Class B, YEAR ENDED OCTOBER 31, 1994 10.07 7.96% 2,928 2.47%(1,2) 2.53%(1,2) 113% SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.23 0.81% 319 2.49%(2,6) 1.83%(2,6) 192% Class C, YEAR ENDED OCTOBER 31, 1994 10.07 7.91% 455 2.62%(1,2) 2.39%(1,2) 113% SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.23 0.81% 102 2.49%(2,6) 2.18%(2,6) 192% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED OCTOBER 31, 1994, FOR CLASSES A, B, AND C WERE $29,112,348, $1,585,755, AND $298,294, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED A PORTION OF ITS FEE. IF SUCH WAIVER HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 2.32% AND 2.70%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1994, 2.18% AND 2.38%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1993 AND 2.98% AND 1.98%, ANNUALIZED, RESPECTIVELY, FOR THE PERIOD NOVEMBER 4, 1991 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1992. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 2.93% AND 2.07%, RESPECTIVELY, FOR CLASS B AND 3.10% AND 1.91%, RESPECTIVELY, FOR CLASS C, FOR THE YEAR ENDED OCTOBER 31, 1994 AND 2.88% AND 1.44%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 2.87% AND 1.80%, ANNUALIZED, RESPECTIVELY, FOR CLASS C, FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO OCTOBER 31, 1993. (3) COMMENCEMENT OF OPERATIONS. (4) OFFERING PRICE. (5) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (6) ANNUALIZED. - ---------------------------------- * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
36 - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ---------------------------------------- ------------------------------------------------ NET REALIZED DISTRIBUTIONS AND DIVIDENDS TO TO NET ASSET NET UNREALIZED SHAREHOLDERS SHAREHOLDERS VALUE, INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET FROM NET TOTAL DIVIDENDS BEGINNING INCOME ON INVESTMENT INVESTMENT REALIZED GAIN AND OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME ON INVESTMENTS DISTRIBUTIONS U.S. GOVERNMENT INCOME FUND Class A, YEAR ENDED OCTOBER 31, 1994 $ 12.08 $ 0.59 $ (1.08) $ (0.49) $ (0.59) $ (0.21) $ (0.80) 1993 11.92 0.65 0.35 1.00 (0.68) (0.16) (0.84) 1992 11.80 0.74 0.18 0.92 (0.74) (0.06) (0.80) 1991 11.35 0.85 0.61 1.46 (0.86) (0.15) (1.01) 1990 11.50 0.93 (0.06) 0.87 (0.93) (0.09) (1.02) Class B, YEAR ENDED OCTOBER 31, 1994 12.08 0.51 (1.08) (0.57) (0.51) (0.21) (0.72) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.13(3) 0.08 (0.04) 0.04 (0.08) (0.01) (0.09) Class C, YEAR ENDED OCTOBER 31, 1994 12.08 0.51 (1.08) (0.57) (0.51) (0.21) (0.72) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.13(3) 0.08 (0.04) 0.04 (0.08) (0.01) (0.09) RATIOS ------------------------------------- RATIO OF RATIO OF NET NET INVESTMENT NET ASSETS OPERATING INCOME NET ASSET END OF EXPENSES (LOSS) PORTFOLIO VALUE, END TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER OF PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE U.S. GOVERNMENT INCOME FUND Class A, YEAR ENDED OCTOBER 31, 1994 $ 10.79 (4.15%) $ 123,257 1.20%(1,2) 5.19%(1,2) 126% 1993 12.08 8.55% 189,091 1.15%(2) 5.33%(2) 315% 1992 11.92 7.98% 151,197 1.15%(2) 6.26%(2) 207% 1991 11.80 13.40% 82,400 1.15%(2) 7.24%(2) 309% 1990 11.35 7.98% 52,742 1.15%(2) 8.21%(2) 101% Class B, YEAR ENDED OCTOBER 31, 1994 10.79 (4.84%) 6,813 1.92%(1,2) 4.53%(1,2) 126% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.08 0.29% 1,286 1.85%(2,5) 3.07%(2,5) 315% Class C, YEAR ENDED OCTOBER 31, 1994 10.79 (4.84%) 1,224 1.94%(1,2) 4.57%(1,2) 126% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.08 0.34% 141 1.85%(2,5) 3.89%(2,5) 315% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED OCTOBER 31, 1994, FOR CLASSES A, B, AND C WERE $155,279,927, $4,348,538, AND $861,570, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED A PORTION OF ITS FEES. IF SUCH WAIVERS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 1.23% AND 5.16%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1994, 1.20% AND 5.28%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1993, 1.17% AND 6.24%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1992, 1.46% AND 6.93%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1991 AND 1.44% AND 7.92%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1990. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.93% AND 4.52%, RESPECTIVELY, FOR CLASS B AND 1.95% AND 4.56%, RESPECTIVELY, FOR CLASS C, FOR THE YEAR ENDED OCTOBER 31, 1994 AND 1.96% AND 2.96%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 1.96% AND 3.78%, ANNUALIZED, RESPECTIVELY, FOR CLASS C, FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO OCTOBER 31, 1993. (3) OFFERING PRICE. (4) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (5) ANNUALIZED.
INVESTMENT QUALITY INCOME FUND
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ---------------------------------------- ------------------------------------------------ NET REALIZED DISTRIBUTIONS AND DIVIDENDS TO TO NET ASSET NET UNREALIZED SHAREHOLDERS SHAREHOLDERS VALUE, INVESTMENT GAIN (LOSS) TOTAL FROM FROM NET FROM NET TOTAL DIVIDENDS BEGINNING INCOME ON INVESTMENT INVESTMENT REALIZED GAIN AND OF PERIOD (LOSS) INVESTMENTS OPERATIONS INCOME ON INVESTMENTS DISTRIBUTIONS Class A, YEAR ENDED OCTOBER 31, 1994 $ 11.49 $ 0.68 $ (1.75) $ (1.07) $ (0.68) $ (0.07) $ (0.75) 1993 10.36 0.68 1.19 1.87 (0.68) (0.06) (0.74) 1992 10.06 0.80 0.30 1.10 (0.80) -- (0.80) DECEMBER 18, 1990 (3) TO OCTOBER 31, 1991 10.00(4) 0.71 0.06 0.77 (0.71) -- (0.71) Class B, YEAR ENDED OCTOBER 31, 1994 11.49 0.61 (1.75) (1.14) (0.61) (0.07) (0.68) SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.52(4) 0.08 (0.03) 0.05 (0.08) -- (0.08) Class C, YEAR ENDED OCTOBER 31, 1994 11.49 0.61 (1.75) (1.14) (0.61) (0.07) (0.68) SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.52(4) 0.09 (0.03) 0.06 (0.09) -- (0.09) RATIOS ------------------------------------- RATIO OF RATIO OF NET NET INVESTMENT NET ASSETS OPERATING INCOME NET ASSET END OF EXPENSES (LOSS) PORTFOLIO VALUE, END TOTAL PERIOD TO AVERAGE TO AVERAGE TURNOVER OF PERIOD RETURN* (000'S) NET ASSETS NET ASSETS RATE Class A, YEAR ENDED OCTOBER 31, 1994 $ 9.67 (9.61%) $ 46,922 1.29%(1,2) 6.47%(1,2) 33% 1993 11.49 18.64% 61,288 1.20%(2) 6.07%(2) 12% 1992 10.36 11.21% 29,701 0.95%(2) 7.62%(2) 18% DECEMBER 18, 1990 (3) TO OCTOBER 31, 1991 10.06 8.11% 17,235 0.82%(2,6) 8.25%(2,6) 19% Class B, YEAR ENDED OCTOBER 31, 1994 9.67 (10.22%) 6,605 1.92%(1,2) 5.85%(1,2) 33% SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.49 0.45% 1,468 1.84%(2,6) 3.68%(2,6) 12% Class C, YEAR ENDED OCTOBER 31, 1994 9.67 (10.23%) 2,583 1.90%(1,2) 6.01%(1,2) 33% SEPTEMBER 2, 1993 (5) TO OCTOBER 31, 1993 11.49 0.55% 101 1.84%(2,6) 4.83%(2,6) 12% (1) AVERAGE NET ASSETS FOR THE YEAR ENDED OCTOBER 31, 1994, FOR CLASSES A, B, AND C WERE $53,805,286, $4,176,936, AND $1,983,143, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED ALL OR A PORTION OF ITS FEES AND REIMBURSED THE FUND FOR A PORTION OF ITS OPERATING EXPENSES. IF SUCH WAIVERS AND REIMBURSEMENTS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 1.59% AND 6.17%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1994, 1.50% AND 5.77%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1993, 1.72% AND 6.85%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1992, AND 2.11% AND 6.96%, ANNUALIZED, RESPECTIVELY, FOR THE PERIOD DECEMBER 18, 1990 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1991. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 2.23% AND 5.54%, RESPECTIVELY, FOR CLASS B AND 2.21% AND 5.70%, RESPECTIVELY, FOR CLASS C, FOR THE YEAR ENDED OCTOBER 31, 1994 AND 2.07% AND 3.45%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 2.06% AND 4.61%, ANNUALIZED, RESPECTIVELY, FOR CLASS C FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO OCTOBER 31, 1993. (3) COMMENCEMENT OF OPERATIONS. (4) OFFERING PRICE. (5) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (6) ANNUALIZED. - ---------------------------------- * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
37 - -------------------------------------------------------------------------------- INDEPENDENT AUDITORS' REPORT - -------------------------------------------------------------------------------- To the Shareholders and Board of Directors Quest for Value Fund, Inc.: We have audited the accompanying statement of assets and liabilities of Quest for Value Fund, Inc. including the schedule of investments as of October 31, 1994 and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two year period then ended and the financial highlights for each of the years in the five year period then ended. 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 as of October 31, 1994 by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Quest for Value Fund, Inc. as of October 31, 1994, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two year period then ended, and the financial highlights for each of the years in the five year period then ended in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP New York, New York December 9, 1994 38 - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Shareholders and Trustees of Quest for Value Family of Funds: In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Opportunity Fund, the Small Capitalization Fund, the Growth and Income Fund, the U.S. Government Income Fund, and the Investment Quality Income Fund (constituting part of Quest for Value Family of Funds, hereafter referred to as the "Fund") at October 31, 1994, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period then ended and the financial highlights for each of the periods indicated, in conformity with generally accepted accounting principles. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at October 31, 1994 by correspondence with the custodian and brokers and the application of alternative auditing procedures where confirmations from brokers were not received, provide a reasonable basis for the opinion expressed above. PRICE WATERHOUSE LLP 1177 Avenue of the Americas New York, New York 10036 December 16, 1994 39 - -------------------------------------------------------------------------------- TAX INFORMATION - -------------------------------------------------------------------------------- We are required by Subchapter M of the Internal Revenue Code of 1986, as amended, to advise you within 60 days of the funds' fiscal year end (October 31, 1994) as to the Federal tax status of dividends and distributions received by shareholders during such fiscal year. Accordingly, we are advising you that during the fiscal year ended October 31, 1994, the funds paid per share dividends and distributions to shareholders as follows:
TAXABLE AS ORDINARY INCOME ------------------------------ NET INVESTMENT SHORT-TERM LONG-TERM INCOME CAPITAL GAINS CAPITAL GAINS --------------- ------------- ------------- QUEST FOR VALUE FUND, INC. Class A..................................... $ 0.0404 $ 0.1184 $ 0.3509 Class B..................................... 0.0306 0.1184 0.3509 Class C..................................... 0.0325 0.1184 0.3509 OPPORTUNITY FUND Class A..................................... 0.3260 0.0630 0.1560 Class B..................................... 0.3127 0.0630 0.1560 Class C..................................... 0.3116 0.0630 0.1560 SMALL CAPITALIZATION FUND Class A..................................... -- 0.8590 0.4720 Class B..................................... -- 0.8590 0.4720 Class C..................................... -- 0.8590 0.4720 GROWTH AND INCOME FUND Class A..................................... 0.3193 0.6435 1.0556 Class B..................................... 0.2651 0.6435 1.0556 Class C..................................... 0.2605 0.6435 1.0556 U.S. GOVERNMENT INCOME FUND Class A..................................... 0.5926 0.1739 0.0395 Class B..................................... 0.5102 0.1739 0.0395 Class C..................................... 0.5094 0.1739 0.0395 INVESTMENT QUALITY INCOME FUND Class A..................................... 0.6799 0.0560 0.0130 Class B..................................... 0.6094 0.0560 0.0130 Class C..................................... 0.6077 0.0560 0.0130
Since each funds' fiscal year is not the calendar year, another notification will be sent in respect to calendar year 1994. In January 1995, you will be advised on IRS Form 1099 DIV as to the Federal tax status of the dividends and distributions received by you in calendar 1994. The amounts that will be reported, will be the amounts to use on your 1994 Federal income tax return and probably will differ from the amounts which we must report for each funds' fiscal year ended October 31, 1994. Shareholders are advised to consult with their own tax advisers as to the Federal, state and local tax status of each funds' income dividends and realized gain distributions received. 40 QUEST FOR VALUE DIRECTORS (TRUSTEES) AND OFFICERS Joseph M. La Motta Director (Trustee), President Paul Y. Clinton Director (Trustee) Thomas W. Courtney Director (Trustee) Lacy B. Herrmann Director (Trustee) George Loft Director (Trustee) Bernard H. Garil Vice President Robert J. Bluestone Vice President Richard J. Glasebrook, Vice President II Colin Glinsman Vice President Vikki Hanges Vice President Jenny Beth Jones Vice President Eileen P. Rominger Vice President George Tilghman Vice President Sheldon Siegel Treasurer Deborah Kaback Secretary Leslie Klein Assistant Treasurer Thomas E. Duggan Assistant Secretary INVESTMENT ADVISER Quest for Value Advisors One World Financial Center New York, NY 10281 DISTRIBUTOR Quest for Value Distributors Two World Financial Center New York, NY 10080-6116 TRANSFER AND SHAREHOLDER SERVICING AGENT State Street Bank and Trust Company P.O. Box 8505 Boston, MA 02266 CUSTODIAN State Street Bank and Trust Company P.O. Box 351 Boston, MA 02101 - -------------------------------------------------- Table of Contents President's Letter............................ 1 Investment Review............................. 3 Schedules of Investments...................... 15 Statements of Assets and Liabilities.......... 24 Statements of Operations...................... 25 Statements of Changes in Net Assets........... 26 Notes to Financial Statements................. 28 Financial Highlights.......................... 35 Independent Auditors' Report.................. 38 Report of Independent Accountants............. 39 Tax Information............................... 40 - -------------------------------------------------- This report is authorized for distribution only to shareholders and to others who have received a copy of the prospectus. QUEST FOR VALUE SM- JUNE 21, 1995 DEAR SHAREHOLDER: As you may have read in the press, Quest for Value Advisors and Oppenheimer Management Corporation are discussing a transaction that would involve the Quest for Value funds. Oppenheimer Management Corporation and its affiliates manage funds with assets of more than $35 billion, held in more than 2.4 million shareholder accounts. Although at one time Oppenheimer Management Corporation was affiliated with Oppenheimer Capital, the parent of Quest for Value Advisors, that is not currently the case. Under the proposed transaction, the Quest for Value Fund, the Small Capitalization Fund, the Opportunity Fund and the Growth and Income Fund would enter into an Investment Advisory Agreement with Oppenheimer Management. Quest for Value Advisors would continue to provide portfolio management services to the funds under a Subadvisory Agreement with Oppenheimer Management. Under the proposal, there would be no change in portfolio managers of the four funds. Eileen Rominger would continue as portfolio manager for the Quest for Value Fund, Richard J. Glasebrook II for the Opportunity Fund, Jenny Beth Jones and Louis Goldstein for the Small Capitalization Fund, and Colin Glinsman for the Growth and Income Fund. The Quest for Value U.S. Government Income Fund and Investment Quality Income Fund would be merged into Oppenheimer Management's U.S. Government Bond Fund and Investment Grade Bond Fund, respectively. The transaction is subject to the signing of a definitive agreement by Oppenheimer Management Corporation and Quest for Value Advisors and approval of the funds' boards and shareholders. SIX-MONTH RESULTS While we are excited about the future, in this report we want to bring you up to date on the performance of your investment in the six months ended April 30, 1995, an excellent period for investors in both the stock and bond markets. The results of the funds in the Quest for Value Family were generally gratifying, with several ranking in the upper echelon of their respective Morningstar categories. Detailed information on the performance and holdings of each fund is presented in the Investment Review and financial statements that follow. FINANCIAL MARKET PERFORMANCE The stock market, as measured by the Standard & Poor's 500 Index including dividends (S&P 500), advanced 10.5% in the six months. As usual, there were significant crosscurrents within the market. In general, technology, health care and financial services stocks were strong performers, while many cyclical issues were flat to down. Moreover, stocks of smaller companies generally lagged the performance of large-capitalization issues, as indicated by the total return of 5.4% on the Russell 2000 Index including dividends. The Russell 2000 is a widely followed benchmark which includes smaller capitalization stocks. QUEST FOR VALUE FUNDS ONE WORLD FINANCIAL CENTER NEW YORK, NY 10281 EQUITY FUNDS QUEST FOR VALUE FUND GLOBAL EQUITY FUND OPPORTUNITY FUND SMALL CAPITALIZATION FUND GROWTH AND INCOME FUND FIXED INCOME FUNDS TAXABLE U.S. GOVERNMENT INCOME FUND INVESTMENT QUALITY INCOME FUND GLOBAL INCOME FUND TAX-EXEMPT NATIONAL TAX-EXEMPT FUND CALIFORNIA TAX-EXEMPT FUND NEW YORK TAX-EXEMPT FUND MONEY MARKET FUNDS QUEST CASH RESERVES: TAXABLE PRIMARY PORTFOLIO GOVERNMENT PORTFOLIO TAX-EXEMPT GENERAL MUNICIPAL PORTFOLIO CALIFORNIA MUNICIPAL PORTFOLIO NEW YORK MUNICIPAL PORTFOLIO FOR MORE INFORMATION OR ASSISTANCE WITH YOUR ACCOUNT PLEASE CALL: 1-800-232-3863 SM-Quest for Value is a registered service mark of Oppenheimer Capital. Our equity philosophy is to preserve capital and make it grow by investing in superior companies at reasonable prices. Superior companies, in our view, include those that hold strong competitive positions, earn high returns on invested capital and use their cash flow to create value for shareholders. These companies create value by investing in operations, making astute acquisitions or returning capital to their shareholders through dividend payments or the repurchase of shares. We think our philosophy makes sense, and it works. Prices of fixed income securities also increased significantly during the six months, reversing the sharp declines of the prior year. As measured by the Lehman Brothers Aggregate Bond Index, the bond market delivered a 7.0% total return in the six months ended April 30, 1995. Six months ago, in our fiscal 1994 annual report, we wrote, "Now that yields on long-term Treasury bonds have climbed to approximately 8% from 5.8% a year ago, we wonder if the mood pendulum has finally reached the end of its arc and is ready to change direction. Do today's bond yields offer an attractive buying opportunity?" The answer, it turned out, was yes. We were well positioned for this turnaround and remain generally optimistic about the bond market outlook at this time. SUMMARY In our search for value in the markets, we seek to identify quality securities that are underpriced and offer the potential for superior returns over time. We are conservative, long-term investors and strive to preserve your capital and make it grow. Thank you for your support. Together with Oppenheimer Management Corporation, we at Quest for Value remain dedicated to meeting your future investment needs. Sincerely, [/S/JOSEPH M. LA MOTTA] Joseph M. La Motta President - -------------------------------------------------------------------------------- INVESTMENT REVIEW QUEST FOR VALUE FUND, INC. OBJECTIVE Seeks capital appreciation through investment primarily in equity securities of companies believed to be undervalued in the marketplace in terms of assets, earnings, growth potential and cash flow. SIX-MONTH REVIEW The Fund's Class A shares provided a total return of 9.5% in the six months ended April 30, 1995, well in excess of the average return of 6.3% for the 764 growth funds monitored by Morningstar, Inc., a leading independent reporter of mutual fund performance, but below the 10.5% return on the S&P 500. The Fund has been a consistent performer over time, in both up and down markets. Since its inception in April 1980, the Fund has delivered a total return of 1,119.6%, or a compound annual return of 18.1%, exceeding by a wide margin the 15.4% average return for the S&P 500 over the same period. The Fund seeks to control risk and generate favorable returns in two ways: by purchasing superior companies that are less vulnerable to market declines, and by purchasing these superior companies inexpensively. As of April 30, 1995, 87.0% of the Fund's portfolio was invested in common stocks and securities convertible into common stocks and 13.0% in cash and cash equivalents. During the six months, the Fund's performance was driven primarily by its substantial holdings of financial services companies, including EXEL Ltd., Federal Home Loan Mortgage Corp. (Freddie Mac), Mellon Bank Corp. and American International Group, Inc. As prices rose, we took profits in several of our financial service holdings, reducing the Fund's investments in Countrywide Credit Industries, Inc., General Reinsurance Corp., Morgan Stanley Group, Inc. and others. We also reduced the Fund's positions in such stocks as Avon Products, Inc., Becton, Dickinson & Co. and John Alden Financial Corp. and eliminated its investment in Pall Corp. We increased the Fund's investments in several retailing companies, including May Department Stores Co. and Mercantile Stores Co., Inc., and established a new position in J.C. Penney Co. These high-quality retailing companies earn attractive returns on investment, and we believe the stocks are reasonably priced. The Fund added new positions, as well, in Shaw Industries, Inc. and Temple-Inland, Inc. PORTFOLIO HOLDINGS Major industry positions as of April 30, 1995 were in the insurance, miscellaneous financial services, retail and aerospace sectors. The Fund's five largest equity holdings were: EXEL Ltd. Strongly capitalized specialty insurance company May Department Stores Co. Leading retailer McDonnell Douglas Corp. Largest manufacturer of military aircraft and an important competitor in commercial aircraft Intel Corp. Major producer of computer chips Federal Home Loan Mortgage Corp. (Freddie Mac) The second largest insurer of home mortgages 3 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (CONTINUED) OPPORTUNITY FUND OBJECTIVE Seeks capital appreciation by looking for opportunities in the equity and fixed income markets; the balance between stocks, bonds and cash will vary, based on an assessment of the best relative opportunities under prevailing market conditions. SIX-MONTH REVIEW The Opportunity Fund continued its excellent performance as one of the top-rated funds in its industry category. The Fund's Class A shares delivered a total return of 12.7% in the six months ended April 30, 1995, exceeding both the 5.3% average return for the 156 asset allocation funds monitored by Morningstar, Inc. and the 10.5% return of the S&P 500. The Fund has provided a compound annual return of 16.2% since its inception in January 1989, exceeding the 13.7% annual return of the S&P 500 for that period. The Fund's performance in the six months was driven in large measure by its significant holdings of financial services stocks, one of the market's strongest sectors during the period. Investments in banking and miscellaneous financial services stocks accounted for 26.4% of the Fund's net assets as of April 30, 1995. Also contributing to performance were McDonnell Douglas Corp., up more than 30% in price during the six months, and Intel Corp., up more than 60%. In managing the Fund, we take a long-term perspective. The Fund's philosophy is based on the premise that common stocks provide the best returns over time, so there is a bias in the Fund toward owning common stocks. The Fund also invests in bonds and cash equivalents, which can be valuable tools for preserving capital. At April 30, 1995, the Fund's asset mix was 84.1% common stocks, 0.9% Treasury notes, and 15.0% cash and cash equivalents. As with our other funds, in managing the Opportunity Fund we seek to buy companies that generate high cash flow and use it to increase shareholder value - -- and we want to buy these companies at reasonable prices. During the six months, the Fund established new positions in the common stocks of Champion International Corp., Northrop Grumman Corp., Promus Companies, Inc. and Reebok International Ltd. and increased its holdings of such stocks as Citicorp, EXEL Ltd., Intel Corp. and Mattel, Inc. The Fund eliminated its positions in Hasbro, Inc., Lehman Brothers Holdings, Inc., Monsanto Co., Morgan Stanley Group, Inc. and U.S. Bancorp and reduced its investment in Warner-Lambert Co. PORTFOLIO HOLDINGS Major industry positions as of April 30, 1995 were in the banking, miscellaneous financial services, aerospace and electronics sectors. The Fund's five largest equity holdings were: McDonnell Douglas Corp. Largest manufacturer of military aircraft and an important competitor in commercial aircraft Citcorp Leading banking and financial services company Intel Corp. Major producer of computer chips Mellon Bank Corp. Major money center bank Federal Home Loan Mortgage Corp. (Freddie Mac) The second largest insurer of home mortgages 4 - -------------------------------------------------------------------------------- SMALL CAPITALIZATION FUND OBJECTIVE Seeks capital appreciation by investing in a diversified portfolio of undervalued stocks, primarily of companies with market capitalizations under $1 billion. SIX-MONTH REVIEW During the six months ended April 30, 1995, small capitalization stocks lagged the performance of large capitalization issues. The total return of the Russell 2000 Index, a widely followed benchmark which includes many small cap issues, was 5.4%, about half the total return of the S&P 500. The Fund's Class A shares had a total return of 1.7%, compared with an average return of 5.6% for the 280 small company funds in the Morningstar universe. There were two main reasons for the Fund's underperformance. First, the Fund was significantly underweighted in the technology, financial services and health care sectors, which delivered some of the highest returns in the small cap market. Second, several individual holdings dragged down the Fund's performance. These included John Alden Financial Corp., Fingerhut Cos., Inc. and Sithe Energies, Inc. We remain optimistic about our ability to improve performance and generate favorable returns for shareholders. Since its inception in January 1989, the Fund has delivered a compound annual return of 11.9%, compared with an 11.8% annual return for the Russell 2000 during the same period. The small cap market has traditionally provided high investment returns over time, subject to short-term volatility. Our strategy is to capture the market's dynamic returns and control risk by investing in established smaller companies with sound financial positions and strong market shares. We continue our active, in-depth research programs to identify quality smaller companies that are underpriced in the market. At April 30, 1995, 78.3% of the Fund's portfolio was invested in common stocks, 1.1% in convertible securities, 0.4% in corporate notes and bonds, and 20.2% in cash and cash equivalents. The Fund's portfolio contains an eclectic group of securities selected to meet our value criteria. During the six months, we added new positions in or increased existing holdings of stocks such as Arrow Electronics, Inc., Crane Co., D.R. Horton, Inc., Katz Media Group, Inc., Marshall Industries and Sybron International Corp. We reduced our holdings of B.E. Aerospace, Inc., Brookstone, Inc. and Dionex Corp. and eliminated our investments in National Data Corp. and Stratus Computer, Inc., among others. 5 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (CONTINUED) SMALL CAPITALIZATION FUND (CONT'D) PORTFOLIO HOLDINGS Major industry positions as of April 30, 1995 were in the real estate, electronics, oil and gas, and machinery and engineering sectors. The Fund's five largest equity holdings were: Crane Co. Manufacturer and/or distributor of numerous products, including aerospace systems and building products Marshall Industries Distributor of electronic components True North Communications Well-known advertising agency; formerly called Foote, Cone & Belding Communications, Inc. Sybron International Corp. Manufacturer of laboratory supplies and dental products Security Capital Industrial Trust, Inc. Real estate investment trust GROWTH AND INCOME FUND OBJECTIVE Seeks total return by investing in a combination of attractively valued quality stocks and fixed income securities. SIX-MONTH REVIEW The Fund's Class A shares provided a total return of 9.1% in the six months ended April 30, 1995, exceeding the 7.8% average return of the 403 funds in the Morningstar growth and income category. Income dividends paid by the Fund during the six months totaled $.1824 per Class A share. The Growth and Income Fund is designed for investors who want to participate in the equity market for total return with above-average income. In managing the Fund, we seek to maintain a diversified portfolio that balances the need for protection of principal with the pursuit of long-term capital appreciation and income. The portfolio is structured around three broad segments: common stocks, which provide growth potential and some income; higher-yielding bonds, which generate relatively more income but are also selected for their potential for capital appreciation; and fixed income securities which are convertible into common stocks. By participating in these three segments, we can usually select common stocks based almost exclusively on their prospects for total return while still delivering a high level of income. 6 - -------------------------------------------------------------------------------- The Fund performed well in the six months despite a conservative investment posture in a rising market. As of April 30, 1995, 53.7% of the Fund's portfolio was invested in common stocks, 9.9% in securities convertible into common stocks, 8.6% in notes and bonds, and 27.8% in cash and cash equivalents. Because of its relatively high cash holdings, the Fund is currently generating more income than normal. The Fund's income level is likely to decline when cash is reinvested in the stock market. Portfolio activity during the six months was dominated by sales of common stocks, as we raised cash to protect principal. We eliminated our investments in American Express Co., Avon Products, Inc., Equitable Cos., Lehman Brothers Holdings, Inc., May Department Stores Co., PepsiCo, Inc., Philip Morris Companies, Inc., TIG Holdings, Inc., UNUM Corp. and Wells Fargo & Co. On the purchase side, we added new positions in stocks such as AFLAC, Inc., Boeing Co., First Interstate Bancorp, Premark International, Inc., Shaw Industries, Inc. and Temple-Inland, Inc. Existing positions in the common stocks of Canadian Pacific Ltd., Citicorp and Sprint Corp. were increased, as was our investment in Gerrity Oil & Gas Corp. convertible preferred stock. PORTFOLIO HOLDINGS Major industry positions as of April 30, 1995 were in the miscellaneous financial services, oil and gas, telecommunications and aerospace sectors. The Fund's five largest equity holdings were: Gerrity Oil & Gas Corp. convertible preferred U.S. oil and gas exploration and production company Freeport McMoRan Copper & Gold (Class A) Major copper and gold producer from a mine in Irian Jaya in the South Pacific Sprint Corp. Leading long-distance telephone company Temple-Inland, Inc. Manufacturer of paperboard and other forest products McDonnell Douglas Corp. Largest manufacturer of military aircraft and an important competitor in commercial aviation U.S. GOVERNMENT INCOME FUND OBJECTIVE Seeks to provide shareholders with a high level of current income together with protection of capital; invests in debt obligations issued or guaranteed by the U.S. Government, its agencies or intermediaries and in related futures, options and repurchase agreements. 7 - -------------------------------------------------------------------------------- INVESTMENT REVIEW (CONTINUED) U.S. GOVERNMENT INCOME FUND (CONT'D) SIX-MONTH REVIEW The Fund paid total income dividends of $.322 per Class A share in the six months ended April 30, 1995, up from $.284 in the first six months of the prior fiscal year. For the six months ended April 30, 1995, the Class A shares produced a total return of 5.5%. This performance compares with an average total return of 5.4% for the 352 funds in the Morningstar general government bond fund category and a total return of 7.5% for the Lehman Brothers Intermediate Government Bond Index. Since its inception in May 1988, the Fund has provided a compound annual return of 7.6%. Unlike many other government bond funds, the U.S. Government Income Fund invests primarily in intermediate-term securities and places a high priority on maintaining a relatively stable net asset value (NAV) per share. The volatility of the Fund, that is the amount of price movement of the NAV, is similar to the volatility of a five-year Treasury note. As of April 30, 1995, the Fund's assets were allocated 34.7% to Treasuries, 48.2% to mortgage-backed government agency securities and 17.3% to net cash and short-term securities. Call options were written on 0.2% of the Fund's assets. Although the Fund writes call options, it does not own any of the complex derivatives that have caused problems for many other bond funds during the past year. Because of the Fund's intermediate-term nature, it did not participate fully during the past six months in the rally of long-term bonds, the market's strongest sector. To improve performance while maintaining an average maturity of five years, we adopted a "barbell" strategy: we invested a portion of assets in short-term securities and a portion in long-term issues. Toward the end of the six months, we moved back into intermediates. Going forward, we intend to manage the Fund's portfolio more actively, becoming more strategic in capturing what the market offers at any given time. Given the increased volatility of fixed income markets generally, we will be more opportunistic in seeking to capture the benefits of this volatility without compromising our dedication to a relatively stable NAV and protection of principal. INVESTMENT QUALITY INCOME FUND OBJECTIVE Seeks to provide as high a level of current income as possible, consistent with conservation of principal; invests primarily in fixed income obligations, with at least 80% of its holdings, at time of their purchase, being rated A or better and none being below investment grade. SIX-MONTH REVIEW The Investment Quality Income Fund enjoyed a strong performance in the six months ended April 30, 1995. Its Class A shares produced a total return of 9.3%, exceeding both the 5.0% average return for the 183 funds in the Morningstar high-quality corporate bond category and the 8.4% return of the Lehman Brothers Corporate Bond Index. 8 - -------------------------------------------------------------------------------- The Fund paid income dividends of $.362 per Class A share during the six months, up from $.332 in the first six months of the prior fiscal year. On an annualized basis, the monthly distribution yield on the net asset value (NAV) of the Class A shares was 6.95% at April 30, 1995. Since its inception in December 1990, the Fund has produced a compound annual total return of 8.2%. The Fund provides a convenient means to invest in a diversified portfolio of quality, longer term fixed income securities of corporate America. The average maturity of the portfolio was 24.3 years as of April 30, 1995. Included in the portfolio are the securities of such companies as Boeing Co., New York Telephone Company and Occidental Petroleum Corp. In addition, about one-fifth of the portfolio is invested in dollar-denominated bonds of foreign issuers, primarily Canadian, which provide attractive yields and favorable relative value. 9 APRIL 30, 1995 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (UNAUDITED) QUEST FOR VALUE FUND, INC.
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ SHORT-TERM CORPORATE NOTES -- 12.9% AUTOMOTIVE -- 0.7% Ford Motor Credit Co. $ 1,300,000 5.98%, 5/01/95 $ 1,300,000 578,000 5.98%, 5/15/95 576,656 ------------ 1,876,656 ------------ BANKING -- 4.6% 13,000,000 Norwest Financial, Inc. 5.94%, 5/30/95 12,937,795 ------------ COMPUTERS -- 0.5% IBM Credit Corp. 800,000 5.95%, 5/30/95 796,165 700,000 5.99%, 5/08/95 699,185 ------------ 1,495,350 ------------ INSURANCE -- 2.1% 6,000,000 Prudential Funding Corp. 5.98%, 5/08/95 5,993,023 ------------ MACHINERY & ENGINEERING -- 1.3% 3,800,000 Deere (John) Capital Corp. 5.94%, 5/30/95 3,781,817 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 2.9% 4,800,000 Commercial Credit Co. (A) 5.85%, 5/09/95 4,794,447 Household Finance Corp. 487,000 5.97%, 5/15/95 485,869 3,000,000 5.97%, 5/22/95 2,989,553 ------------ 8,269,869 ------------ OIL/GAS -- 0.8% 2,100,000 Chevron Oil Finance Co. 5.97%, 5/01/95 2,100,000 ------------ Total Short-Term Corporate Notes (cost -- $36,454,510) $ 36,454,510 ------------
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ CONVERTIBLE CORPORATE BONDS -- 0.8% REAL ESTATE $ 2,314,448 Security Capital Realty, Inc. (B) 12.00%, 6/30/14 (cost -- $2,181,786) $ 2,314,448 ------------ - ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ COMMON STOCKS -- 86.2% AEROSPACE -- 8.7% 215,000 AlliedSignal, Inc. $ 8,519,375 177,000 McDonnell Douglas Corp. 10,974,000 90,000 Sundstrand Corp. 4,995,000 ------------ 24,488,375 ------------ APPAREL -- 2.3% 372,600 Warnaco Group, Inc. (Class A)* 6,380,775 ------------ BANKING -- 2.7% 196,215 Mellon Bank Corp. 7,701,439 ------------ CHEMICALS -- 3.3% 81,000 Hercules, Inc. 4,039,875 64,000 Monsanto Co. 5,328,000 ------------ 9,367,875 ------------ CONGLOMERATES -- 1.8% 90,200 General Electric Co. 5,051,200 ------------ CONTAINERS -- 1.4% 90,700 Temple-Inland, Inc. 3,990,800 ------------ COSMETICS/TOILETRIES -- 1.5% 67,800 Avon Products, Inc. 4,288,350 ------------ DRUGS & MEDICAL PRODUCTS -- 4.6% 163,000 Becton, Dickinson & Co. 9,087,250 48,000 Warner-Lambert Co. 3,828,000 ------------ 12,915,250 ------------ ELECTRONICS -- 6.4% 177,000 Arrow Electronics, Inc.* 8,230,500 97,000 Intel Corp. 9,930,375 ------------ 18,160,875 ------------ HOUSEHOLD PRODUCTS -- 0.9% 52,100 Premark International, Inc. 2,513,825 ------------
* Non-income producing security. 10 - --------------------------------------------------------------------------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ INSURANCE -- 16.9% 66,000 American International Group, Inc. $ 7,045,500 434,200 EXEL Ltd. 19,756,100 30,000 General Reinsurance Corp. 3,821,250 212,000 Progressive Corp., Ohio 8,003,000 101,000 Transamerica Corp. 5,719,125 76,000 UNUM Corp. 3,258,500 ------------ 47,603,475 ------------ MACHINERY & ENGINEERING -- 1.4% 160,000 Case Corp. 4,060,000 ------------ METALS/MINING -- 2.5% 8,518 Freeport McMoRan, Copper & Gold (Class A) 177,813 398,000 Freeport McMoRan, Inc. 7,014,750 ------------ 7,192,563 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 11.4% 200,000 American Express Co. 6,950,000 110,000 Citicorp 5,101,250 270,000 Countrywide Credit Industries, Inc. 4,961,250 152,000 Federal Home Loan Mortgage Corp. 9,918,000 50,200 John Alden Financial Corp. 909,875 60,000 Morgan Stanley Group, Inc. 4,170,000 ------------ 32,010,375 ------------ REAL ESTATE -- 1.0% 3,050 Security Capital Realty, Inc. (B) 2,689,844 ------------ RETAIL -- 10.5% 210,000 J.C. Penney Co. 9,187,500 348,000 May Department Stores Co. 12,615,000 175,000 Mercantile Stores Co., Inc. 7,743,750 ------------ 29,546,250 ------------ TELECOMMUNICATIONS -- 1.7% 344 Bell Atlantic Corp. 18,877 145,200 Sprint Corp. 4,791,600 ------------ 4,810,477 ------------ TEXTILES -- 1.4% 300,000 Shaw Industries, Inc. $ 3,937,500 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS -- 3.2% 116,000 Dole Food Co. 3,465,500 200,000 Sara Lee Corp. 5,575,000 ------------ 9,040,500
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ TOYS/GAMES/HOBBY -- 2.6% 232,000 Hasbro, Inc. 7,366,000 ------------ Total Common Stocks (cost -- $193,143,927) $243,115,748 ------------
Total Investments (cost -- $231,780,223) 99.9 % $ 281,884,706 Other Assets in Excess of Other Liabilities 0.1 116,210 --------- ------------- TOTAL NET ASSETS 100.0 % $ 282,000,916 --------- ------------- --------- ------------- OPPORTUNITY FUND - ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ U.S. GOVERNMENT AGENCY -- 1.1% $ 4,020,000 Federal Home Loan Bank 5.93%, 5/01/95 (cost -- $4,020,000) $ 4,020,000 ------------ SHORT-TERM CORPORATE NOTES -- 13.8% AUTOMOTIVE -- 0.4% $ 1,260,000 Ford Motor Credit Co. 5.96%, 5/01/95 $ 1,260,000 ------------ BANKING -- 1.1% Norwest Financial, Inc. 3,630,000 5.96%, 5/22/95 3,617,380 362,000 5.98%, 5/01/95 362,000 ------------ 3,979,380 ------------
* Non-income producing security. (A) Security is segregated as collateral for pending purchase of Security Capital Realty, Inc. (B) Restricted Securities (the Fund will not bear any costs, including those involved in registration under the Securities Act of 1933, in connection with the disposition of these securities):
DATE OF VALUATION AS OF DESCRIPTION ACQUISITION PAR AMOUNT SHARES UNIT COST APRIL 30, 1995 - --------------------------------------------------------------------------- Security Capital Realty, Inc. 12.00%, 6/30/14 9/15/94 $2,314,448 -- $ 94 $100 Security Capital Realty, Inc. Common Stock 9/15/94 -- 3,050 926 882
11 APRIL 30, 1995 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) OPPORTUNITY FUND (CONT'D)
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ COMPUTERS -- 0.1% $ 445,000 IBM Credit Corp. 5.99%, 5/08/95 $ 444,482 ------------ INSURANCE -- 2.3% Prudential Funding Corp. 970,000 5.97%, 5/01/95 970,000 7,027,000 5.98%, 5/08/95 7,018,829 ------------ 7,988,829 ------------ MACHINERY & ENGINEERING -- 0.4% 1,465,000 Deere (John) Capital Corp. 5.92%, 5/22/95 1,459,941 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 8.4% 4,140,000 Beneficial Corp. 5.95%, 5/08/95 4,135,211 13,690,000 Commercial Credit Co. 5.95%, 5/08/95 13,674,161 11,915,000 Household Finance Corp. 5.97%, 5/15/95 11,887,337 ------------ 29,696,709 ------------ OIL/GAS -- 1.1% 990,000 Chevron Oil Finance Co. 5.97%, 5/01/95 990,000 2,960,000 Texaco, Inc. 5.96%, 5/22/95 2,949,709 ------------ 3,939,709 ------------ Total Short-Term Corporate Notes (cost -- $48,769,050) $ 48,769,050 ------------ U.S. TREASURY NOTES -- 0.9% $ 1,000,000 7.50%, 11/15/01 $ 1,027,810 1,000,000 7.50%, 5/15/02 1,030,160 550,000 7.875%, 4/15/98 566,588 550,000 7.875%, 8/15/01 575,867 ------------ Total U.S. Treasury Notes (cost -- $3,146,446) $ 3,200,425 ------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ COMMON STOCKS -- 84.1% AEROSPACE -- 9.6% 400,000 McDonnell Douglas Corp. $ 24,800,000 120,000 Northrop Grumman Corp. 5,955,000 60,000 Sundstrand Corp. 3,330,000 ------------ 34,085,000
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ BANKING -- 16.0% 500,000 Citicorp $ 23,187,500 34,000 First Empire State Corp. 5,457,000 420,000 Mellon Bank Corp. 16,485,000 70,000 Wells Fargo & Co. 11,611,250 ------------ 56,740,750 ------------ CASINOS/GAMING -- 1.1% 100,000 Promus Companies, Inc.* 3,850,000 ------------ CHEMICALS -- 3.2% 225,000 Hercules, Inc. 11,221,875 ------------ CONSUMER PRODUCTS -- 2.6% 300,000 Reebok International Ltd. 9,375,000 ------------ COSMETICS/TOILETRIES -- 1.1% 60,000 Avon Products, Inc. 3,795,000 ------------ DRUGS & MEDICAL PRODUCTS -- 3.3% 105,000 Becton, Dickinson & Co. 5,853,750 75,000 Warner-Lambert Co. 5,981,250 ------------ 11,835,000 ------------ ELECTRONICS -- 8.6% 190,000 Intel Corp. 19,451,250 50,000 Raychem Corp. 1,781,250 445,000 Unitrode Corp.* 9,233,750 ------------ 30,466,250 ------------ HEALTHCARE SERVICES -- 1.8% 435,000 National Health Laboratories, Inc.* 6,525,000 ------------ INSURANCE -- 5.9% 300,000 EXEL Ltd. 13,650,000 60,000 Transamerica Corp. 3,397,500 90,000 Travelers, Inc. 3,723,750 ------------ 20,771,250 ------------ METALS/MINING -- 2.2% 200,000 Freeport McMoRan, Copper & Gold (Class A) 4,175,000 202,500 Freeport McMoRan, Inc. 3,569,062 ------------ 7,744,062 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 10.4% 230,000 American Express Co. 7,992,500 480,000 Countrywide Credit Industries, Inc. 8,820,000 230,000 Federal Home Loan Mortgage Corp. 15,007,500 55,000 Federal National Mortgage Assoc. 4,853,750 ------------ 36,673,750 ------------ * Non-income producing security.
12 - --------------------------------------------------------------------------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ OIL/GAS -- 6.0% 80,000 Mapco, Inc. $ 4,550,000 240,000 Tenneco, Inc. 11,010,000 149,300 Triton Energy Corp.* 5,748,050 ------------ 21,308,050 ------------ PAPER PRODUCTS -- 4.9% 330,000 Champion International Corp. 14,520,000 30,000 Scott Paper Co. 2,673,750 ------------ 17,193,750 ------------ TELECOMMUNICATIONS -- 2.1% 220,000 Sprint Corp. 7,260,000 ------------ TEXTILES -- 2.5% 161,500 Collins & Aikman Corp.* 1,211,250 600,000 Shaw Industries, Inc. 7,875,000 ------------ 9,086,250 ------------ TOYS/GAMES/HOBBY -- 2.3% 350,000 Mattel, Inc. 8,312,500 ------------ OTHER -- 0.5% 50,000 Alliant Techsystems, Inc.* 1,843,750 ------------ Total Common Stocks (cost -- $250,665,773) $298,087,237 ------------
Total Investments (cost -- $306,601,269) 99.9 % $354,076,712 Other Assets in Excess of Other Liabilities 0.1 248,508 -------- ------------ TOTAL NET ASSETS 100.0 % $354,325,220 -------- ------------ -------- ------------
SMALL CAPITALIZATION FUND
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ SHORT-TERM CORPORATE NOTES -- 18.1% AUTOMOTIVE -- 0.2% $ 325,000 Ford Motor Credit Co. 5.96%, 5/01/95 $ 325,000 ------------ BANKING -- 1.7% Norwest Financial, Inc. 1,120,000 5.94%, 5/30/95 1,114,641 1,296,000 5.96%, 5/22/95 1,291,494 ------------ 2,406,135
------------
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ COMPUTERS -- 1.2% IBM Credit Corp. $ 1,123,000 5.93%, 5/22/95 $ 1,119,115 550,000 5.95%, 5/30/95 547,364 ------------ 1,666,479 ------------ CONGLOMERATES -- 1.6% 2,335,000 General Electric Capital Corp. 5.96%, 5/22/95 2,326,882 ------------ INSURANCE -- 3.6% Prudential Funding Corp. 400,000 5.93%, 5/30/95 398,089 4,852,000 5.98%, 5/08/95 4,846,358 ------------ 5,244,447 ------------ MACHINERY & ENGINEERING -- 4.8% 6,910,000 Deere (John) Capital Corp. 5.94%, 5/30/95 6,876,936 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 3.6% Beneficial Corp. 386,000 5.95%, 5/08/95 385,554 1,373,000 5.95%, 5/15/95 1,369,823 Commercial Credit Co. 475,000 5.95%, 5/08/95 474,451 1,500,000 5.97%, 5/22/95 1,494,776 1,432,000 Household Finance Corp. 5.97%, 5/15/95 1,428,675 ------------ 5,153,279 ------------ OIL/GAS -- 1.4% Chevron Oil Finance Co. 875,000 5.94%, 5/30/95 870,813 1,190,000 6.00%, 5/08/95 1,188,612 ------------ 2,059,425 ------------ Total Short-Term Corporate Notes (cost -- $26,058,583) $ 26,058,583 ------------ CORPORATE NOTES & BONDS -- 0.4% AUTOMOTIVE -- 0.0% $ 62,950 Collins Industries, Inc. 8.75%, 1/11/00 $ 55,363 ------------ OIL/GAS -- 0.4% 500,000 Global Marine, Inc. 12.75%, 12/15/99 546,875 ------------ Total Corporate Notes & Bonds (cost -- $587,196) $ 602,238 ------------ * Non-income producing security.
13 APRIL 30, 1995 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) SMALL CAPITALIZATION FUND (CONT'D)
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ CONVERTIBLE CORPORATE BONDS -- 1.0% REAL ESTATE $ 1,385,009 Security Capital Realty, Inc. (A) 12.00%, 6/30/14 (cost -- $1,306,709) $ 1,385,009 ------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ CONVERTIBLE PREFERRED STOCKS -- 0.1% RETAIL 36,000 Family Bargain Corp. $0.95 Conv. Pfd. (cost -- $360,000) $ 207,000 ------------ COMMON STOCKS -- 78.3% ADVERTISING -- 5.4% 57,600 Katz Media Group, Inc. $ 928,800 39,000 Omnicom Group, Inc. 2,169,375 246,200 True North Communications 4,677,800 ------------ 7,775,975 ------------ AEROSPACE -- 0.6% 130,000 BE Aerospace, Inc.* 926,250 ------------ APPAREL -- 1.5% 128,000 Warnaco Group, Inc. (Class A)* 2,192,000 ------------ AUTOMOTIVE -- 1.1% 126,000 Collins Industries, Inc.* 267,750 65,100 Masland Corp. 895,125 70,000 Sudbury, Inc.* 476,875 ------------ 1,639,750 ------------ BUILDING & CONSTRUCTION -- 4.3% 145,000 CRSS, Inc. 1,377,500 132,600 D.R. Horton, Inc. 1,292,850 5,500 Insituform Technologies (Class A)* 70,812 165,000 Martin Marietta Materials, Inc. 3,423,750 ------------ 6,164,912 ------------ CHEMICALS -- 2.3% 141,400 OM Group, Inc. 3,375,925 ------------ COMPUTER SERVICES -- 2.8% 147,700 BancTec, Inc.* 2,510,900 89,000 Exabyte Corp.* 1,123,625 34,600 Globalink, Inc.* 406,550 ------------ 4,041,075
------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ DRUGS & MEDICAL PRODUCTS -- 3.3% 125,900 Sybron International Corp.* $ 4,674,038 ------------ ELECTRONICS -- 6.5% 37,000 Arrow Electronics, Inc.* 1,720,500 37,000 Dionex Corp.* 1,535,500 195,500 Marshall Industries* 5,400,687 35,000 Unitrode Corp.* 726,250 ------------ 9,382,937 ------------ HEALTHCARE SERVICES -- 1.3% 14,000 Community Health Systems, Inc.* 486,500 54,000 Spacelabs Medical, Inc. 1,323,000 ------------ 1,809,500 ------------ INSURANCE -- 2.1% 55,300 Capsure Holdings Corp. 725,813 23,400 E.W. Blanch Holdings, Inc. 438,750 112,500 Guaranty National Corp. 1,856,250 ------------ 3,020,813 ------------ JEWELRY -- 1.6% 170,000 North American Watch Corp. 2,337,500 ------------ LEASING -- 1.3% 121,700 Interpool, Inc.* 1,795,075 ------------ MACHINERY & ENGINEERING -- 5.1% 12,700 Baldwin Technologies Co. 74,612 97,100 BWIP Holdings, Inc. (Class A) 1,711,387 160,000 Crane Co. 5,560,000 ------------ 7,345,999 ------------ MANUFACTURING -- 1.4% 50,000 Giddings & Lewis, Inc. 906,250 55,000 Harmon Industries, Inc. 783,750 131,300 Interlake Corp.* 377,488 ------------ 2,067,488 ------------ METALS/MINING -- 0.5% 70,000 Olympic Steel, Inc.* 682,500 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 4.2% 150,000 AmeriCredit Corp.* 1,350,000 49,700 John Alden Financial Corp. 900,813 200,000 SafeCard Services, Inc. 3,500,000 24,300 Union Corp.* 337,163 ------------ 6,087,976 ------------ * Non-income producing security.
14 - --------------------------------------------------------------------------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ OIL/GAS -- 7.5% 136,800 Aquila Gas Pipeline Corp. $ 1,162,800 300,155 Global Natural Resources, Inc.* 2,964,031 125,000 Nahama & Weagant Energy Co.* 1,250 137,500 Noble Drilling Corp.* 910,937 165,000 Petroleum Heat & Power, Inc. (Class A) 1,196,250 74,400 St. Mary Land & Exploration Co. 948,600 116,200 Tesoro Petroleum Corp. 1,147,475 65,000 Triton Energy Corp.* 2,502,500 ------------ 10,833,843 ------------ PAPER PRODUCTS -- 0.9% 61,500 CSS Industries, Inc.* 1,030,125 40,000 Repap Enterprises, Inc. 281,250 ------------ 1,311,375 ------------ PRINTING/PUBLISHING -- 3.4% 72,000 CCH, Inc. (Class B) 1,161,000 119,100 Nu-Kote Holdings, Inc. (Class A)* 3,275,250 12,250 Pulitzer Publishing Co. 494,594 ------------ 4,930,844 ------------ REAL ESTATE -- 8.7% 151,800 Cousins Properties, Inc. 2,542,650 44,000 Post Properties, Inc. 1,303,500 231,600 Security Capital Industrial Trust, Inc. 3,618,750 199,363 Security Capital Pacific Trust 3,488,853 1,800 Security Capital Realty, Inc. (A) 1,587,600 ------------ 12,541,353 ------------ RETAIL -- 4.0% 18,000 Blair Corp. 623,250 64,700 Brookstone, Inc.* 331,587 304,700 Cash America International, Inc. 2,323,337 173,700 Fingerhut Companies, Inc. 2,019,262 52,500 Freds, Inc. 511,875 ------------ 5,809,311 ------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ SECURITY/INVESTIGATION SERVICES -- 0.3% 202,910 Automated Security Holdings PLC ADS $ 380,456 ------------ TEXTILES -- 4.0% 89,000 Collins & Aikman Corp.* 667,500 15,700 Culp, Inc. 153,075 40,000 Dyersburg Corp. 215,000 42,700 Fab Industries, Inc. 1,286,338 244,900 Mohawk Industries, Inc.* 3,367,375 ------------ 5,689,288 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS -- 1.0% 55,900 Morningstar Group, Inc. 447,200 89,700 Sylvan Food Holdings, Inc.* 1,031,550 ------------ 1,478,750 ------------ UTILITIES -- 2.0% 221,200 Sithe Energies, Inc.* 1,935,500 46,000 UGI Corp. 891,250 ------------ 2,826,750 ------------ OTHER -- 1.2% 107,500 McGrath RentCorp. 1,679,688 ------------ Total Common Stocks (cost -- $110,337,018) $112,801,371 ------------
Total Investments (cost -- $138,649,506) 97.9 % $141,054,201 Other Assets in Excess of Other Liabilities 2.1 3,089,011 --------- ----------- TOTAL NET ASSETS 100.0 % $144,143,212 --------- ----------- --------- ----------- * Non-income producing security.
(A) Restricted Securities (the Fund will not bear any costs, including those involved in registration under the Securities Act of 1933, in connection with the disposition of these securities):
DATE OF VALUATION AS OF DESCRIPTION ACQUISITION PAR AMOUNT SHARES UNIT COST APRIL 30, 1995 - -------------------------------------------------------------------------------------------------- Security Capital Realty, Inc. 12.00%, 6/30/14 6/16/94 $1,385,009 -- $ 94 $ 100 Security Capital Realty, Inc. Common Stock 8/02/93 -- 1,800 684 882
15 APRIL 30, 1995 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) GROWTH AND INCOME FUND
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ U.S. GOVERNMENT AGENCY -- 2.0% $ 755,000 Federal Home Loan Bank 5.93%, 5/01/95 (cost -- $755,000) $ 755,000 ------------ SHORT-TERM CORPORATE NOTES -- 27.2% AUTOMOTIVE -- 3.4% $ 1,295,000 Ford Motor Credit Co. 5.94%, 5/12/95 $ 1,292,650 ------------ COMPUTERS -- 2.6% 1,000,000 IBM Credit Corp. 5.93%, 5/15/95 997,694 ------------ CONGLOMERATES -- 4.7% General Electric Capital Corp. 860,000 5.93%, 5/05/95 859,433 929,000 5.96%, 5/08/95 927,923 ------------ 1,787,356 ------------ MACHINERY/ENGINEERING -- 3.0% 1,133,000 Deere (John) Capital Corp. 5.90%, 5/03/95 1,132,629 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 11.6% 1,729,000 American Express Credit Corp. 5.95%, 5/02/95 1,728,714 CIT Group Holdings, Inc. 715,000 5.89%, 5/08/95 714,181 1,134,000 5.92%, 5/03/95 1,133,627 860,000 Household Finance Corp. 5.94%, 5/05/95 859,432 ------------ 4,435,954 ------------ OIL/GAS -- 1.9% 716,000 Chevron Oil Finance Co. 5.90%, 5/08/95 715,179 ------------ Total Short-Term Corporate Notes (cost -- $10,361,462) $ 10,361,462 ------------ CORPORATE NOTES & BONDS -- 8.6% ENTERTAINMENT -- 4.2% $ 5,000,000 Time Warner, Inc. Zero Coupon, 12/17/12 $ 1,618,750 ------------ TELECOMMUNICATIONS -- 4.4% 3,000,000 Nextel Communications, Inc. 0.00/11.50%, 9/01/03 ** 1,657,500 ------------ Total Corporate Notes & Bonds (cost -- $3,655,626) $ 3,276,250 ------------
- ----------------------------------------------------- SHARES VALUE - ------------------------------------------------------ CONVERTIBLE PREFERRED STOCKS -- 9.9% OIL/GAS -- 6.0% 180,000 Gerrity Oil & Gas Corp. $1.50 Conv. Pfd. $ 2,295,000 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS -- 3.9% 80,000 Flagstar Companies, Inc. $2.25 Conv. Pfd. 1,500,000 ------------ Total Convertible Preferred Stocks (cost -- $4,504,546) $ 3,795,000 ------------ COMMON STOCKS -- 53.7% AEROSPACE -- 7.4% 20,000 Boeing Co. $ 1,100,000 28,000 McDonnell Douglas Corp. 1,736,000 ------------ 2,836,000 ------------ AUTOMOTIVE -- 1.2% 10,000 General Motors Corp. 451,250 ------------ BANKING -- 7.4% 35,000 Citicorp 1,623,125 5,000 First Interstate Bancorp 384,375 10,000 Mellon Bank Corp. 392,500 15,000 U.S. Bancorp 414,375 ------------ 2,814,375 ------------ CONGLOMERATES -- 1.6% 40,000 Canadian Pacific Ltd. 610,000 ------------ CONTAINERS -- 6.2% 30,000 Stone Container Corp.* 596,250 40,000 Temple-Inland, Inc. 1,760,000 ------------ 2,356,250 ------------ ELECTRONICS -- 4.3% 16,000 Intel Corp. 1,638,000 ------------ HEALTHCARE SERVICES -- 1.1% 10,000 Columbia/HCA Healthcare Corp. 420,000 ------------ HOUSEHOLD PRODUCTS -- 4.4% 35,000 Premark International, Inc. 1,688,750 ------------
INSURANCE -- 4.3% 10,000 AFLAC, Inc. 412,500 10,000 Progressive Corp., Ohio 377,500 20,000 Travelers, Inc. 827,500 ------------ 1,617,500 ------------ METALS/MINING -- 5.1% 93,687 Freeport McMoRan, Copper & Gold (Class A) 1,955,716 ------------ * Non-income producing security. ** Represents a step-up floater which will receive 0.00% interest until 9/01/98, then will "step-up" to 11.50% until maturity.
16 - --------------------------------------------------------------------------------
- ------------------------------------------------------ SHARES VALUE - ------------------------------------------------------ METALS/MINING (CONT'D) MISCELLANEOUS FINANCIAL SERVICES -- 2.0% 20,000 Countrywide Credit Industries, Inc. $ 367,500 6,000 Federal Home Loan Mortgage Corp. 391,500 ------------ 759,000 ------------ OIL/GAS -- 1.9% 5,000 McMoRan Oil & Gas Corp. 13,750 10,000 Triton Energy Corp.* 385,000 15,000 Union Texas Petroleum Holdings, Inc. 320,625 ------------ 719,375 ------------ TELECOMMUNICATIONS -- 4.8% 55,000 Sprint Corp. 1,815,000 ------------
TEXTILES -- 2.0% 20,000 Shaw Industries, Inc. 262,500 20,000 Unifi, Inc. 502,500 ------------- 765,000 ------------- Total Common Stocks (cost -- $17,690,285) $ 20,446,216 ------------- Total Investments (cost -- $36,966,919) 101.4% $ 38,633,928 Other Liabilities in Excess of Other Assets (1.4) (536,829) ------- ------------- TOTAL NET ASSETS 100.0 % $ 38,097,099 ------- ------------- ------- -------------
U.S. GOVERNMENT INCOME FUND
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ REPURCHASE AGREEMENT -- 24.1% $30,850,000 Lehman Brothers, 5.90%, 5/02/95 (proceeds at maturity: $30,855,056, collateralized by $19,275,000 and $10,940,000 par, $20,423,790 and $11,051,588 value, U.S. Treasury Notes, 7.50%, 10/31/99 and 6.875%, 8/31/99, respectively.) (cost -- $30,850,000) $ 30,850,000 ------------ FEDERAL HOME LOAN MORTGAGE CORPORATION -- 0.6% $ 735,108 9.50%, 12/01/02 - 11/01/03 (cost -- $740,736) $ 763,593 ------------ - ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ GOVERNMENT NATIONAL MORTGAGE ASSOCIATION I -- 47.6% $20,299,186 7.00%, 10/15/22 - 11/15/23 (A) $ 19,214,398 16,436,078 7.50%, 2/15/22 - 2/15/24 16,030,271 13,594,094 8.00%, 4/15/02 - 2/15/23 (A) 13,617,665 11,189,477 8.50%, 6/15/01 - 9/15/24 (A) 11,412,022 566,178 10.50%, 1/15/98 - 12/15/00 596,961 ------------ Total Government National Mortgage Association I (cost -- $63,765,062) $ 60,871,317 ------------ U.S. TREASURY BOND -- 7.8% $10,000,000 7.50%, 11/15/16 (A) (cost -- $9,314,127) $ 10,045,300 ------------ U.S. TREASURY NOTES -- 26.9% $20,000,000 6.625%, 3/31/97 (A) $ 20,012,400 14,000,000 7.75%, 11/30/99 14,468,160 ------------ (cost -- $34,434,623) $ 34,480,560 ------------
Total Investments (cost -- $139,104,548) 107.0% $137,010,770 ----- ------------ - ------------------------------------------------------ PRINCIPAL AMOUNT SUBJECT TO CALL VALUE - ------------------------------------------------------ WRITTEN CALL OPTIONS OUTSTANDING -- (0.2%) $10,000,000 Government National Mortgage Association I, 7.00%, expiring May '95, strike @ $94.22 $ (68,750) 10,000,000 Government National Mortgage Association I, 8.00%, expiring May '95, strike @ $100.06 (31,250) 10,000,000 Government National Mortgage Association I, 8.50%, expiring May '95, strike @ $101.56 (59,375) 10,000,000 U.S. Treasury Bonds, 7.50%, expiring May '95, strike @ $100.67 (78,125) 20,000,000 U.S. Treasury Notes, 6.625%, expiring May '95, strike @ $100.34 (12,500) ------------ Total Written Call Options Outstanding (premiums received: $301,562) $ (250,000) ------------ Other Liabilities in Excess of Other Assets (6.8 ) (8,710,696) ----- ------------ TOTAL NET ASSETS 100.0 % $128,050,074 ----- ------------ ----- ------------ * Non-income producing security. (A) Securities segregated (full or partial) as collateral for written call options outstanding. The aggregate market value of such segregated securities is $60,393,531.
17 APRIL 30, 1995 - -------------------------------------------------------------------------------- SCHEDULES OF INVESTMENTS (UNAUDITED) (CONTINUED) INVESTMENT QUALITY INCOME FUND
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ SHORT-TERM CORPORATE NOTES -- 5.8% AUTOMOTIVE -- 2.4% $ 1,430,000 Ford Motor Credit Co. 5.92%, 5/09/95 $ 1,428,119 ------------ COMPUTERS -- 0.8% 455,000 IBM Credit Corp. 5.93%, 5/15/95 453,951 ------------ OIL/GAS -- 2.6% 1,500,000 Chevron Oil Finance Co. 5.96%, 5/02/95 1,499,751 ------------ Total Short-Term Corporate Notes (cost -- $3,381,821) $ 3,381,821 ------------ CORPORATE NOTES & BONDS -- 91.5% AEROSPACE -- 3.1% $ 2,000,000 Boeing Co. 7.50%, 8/15/42 $ 1,835,260 ------------ AIRLINES -- 2.8% 1,000,000 American Airlines 9.73%, 9/29/14 1,028,920 550,000 Delta Air Lines, Inc. 10.375%, 2/01/11 598,812 ------------ 1,627,732 ------------ BANKING -- 6.4% 70,000 NatWest Bancorp, Inc. 9.375%, 11/15/03 77,305 1,300,000 NCNB Corp. 10.20%, 7/15/15 1,510,223 500,000 RBSG Capital Corp. 10.125%, 3/01/04 568,735 1,500,000 Westpac Banking Corp. 9.125%, 8/15/01 1,603,080 ------------ 3,759,343 ------------ CHEMICALS -- 0.9% 500,000 Rohm & Haas Co. 9.50%, 4/01/21 554,480 ------------ CONGLOMERATES -- 3.8% 2,000,000 Canadian Pacific Ltd. 9.45%, 8/01/21 2,241,860 ------------ ENTERTAINMENT -- 5.0% 3,000,000 Time Warner, Inc. 9.15%, 2/01/23 2,898,900 ------------ - ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ INSURANCE -- 11.3% $ 1,000,000 Aetna Life & Casualty Co. 8.00%, 1/15/17 $ 937,090 1,200,000 Capital Holding Corp. 8.75%, 1/15/17 1,247,928 2,000,000 CNA Financial Corp. 7.25%, 11/15/23 1,653,300 3,000,000 Torchmark, Inc. 7.875%, 5/15/23 2,759,130 ------------ 6,597,448 ------------ LEASING -- 2.8% 1,600,000 Ryder Systems, Inc. 8.75%, 3/15/17 1,619,008 ------------ MACHINERY & ENGINEERING -- 3.3% 1,750,000 Caterpillar, Inc. 9.75%, 6/01/19 1,940,452 ------------ MISCELLANEOUS FINANCIAL SERVICES -- 13.9% 20,000 Beneficial Corp. 12.875%, 8/01/13 23,819 1,500,000 BHP Finance USA Ltd. 8.50%, 12/01/12 1,557,030 1,000,000 ITT Financial Corp. 6.50%, 5/01/11 808,410 Lehman Brothers, Inc. 865,000 9.875%, 10/15/00 919,063 115,000 10.00%, 5/15/99 121,478 205,000 Midland American Capital Corp. 12.75%, 11/15/03 238,251 800,000 Paine Webber Group, Inc. 9.25%, 12/15/01 835,136 3,000,000 Prudential Funding Corp. 6.75%, 9/15/23 2,400,900 1,250,000 Source One Mortgage Services Corp. 9.00%, 6/01/12 1,212,450 ------------ 8,116,537 ------------ OIL/GAS -- 6.0% 3,000,000 Occidental Petroleum Corp. 11.125%, 6/01/19 3,507,540 ------------ PAPER PRODUCTS -- 0.2% 100,000 Union Camp Corp. 10.00%, 5/01/19 111,152 ------------ PIPELINES -- 3.0% 1,500,000 TransCanada Pipelines Ltd. 9.875%, 1/01/21 1,747,020 ------------
18 - --------------------------------------------------------------------------------
- ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ RETAIL -- 1.3% May Department Stores Co. $ 250,000 9.875%, 6/01/17 $ 272,925 405,000 10.625%, 11/01/10 496,137 ------------ 769,062 ------------ TELECOMMUNICATIONS -- 12.5% 420,000 GTE Corp. 10.25%, 11/01/20 472,492 2,500,000 New York Telephone Co. 9.375%, 7/15/31 2,708,775 2,000,000 Pacific Bell 8.50%, 8/15/31 2,015,700 2,000,000 Southern New England Telephone Co. 8.70%, 8/15/31 2,123,880 ------------ 7,320,847 ------------ TOBACCO/BEVERAGES/FOOD PRODUCTS -- 3.3% 2,000,000 American Brands, Inc. 7.875%, 1/15/23 1,920,560 ------------ - ------------------------------------------------------ PRINCIPAL AMOUNT VALUE - ------------------------------------------------------ UTILITIES -- 6.9% $ 2,000,000 Hydro-Quebec 8.50%, 12/01/29 $ 1,987,680 2,000,000 Southern California Edison Co. 8.875%, 6/01/24 2,039,640 ------------ 4,027,320 ------------ OTHER -- 5.0% 1,468,228 DLJ Mortgage Acceptance Corp. 8.75%, 11/25/24 1,408,122 1,500,000 Nova Scotia (Province of) 8.875%, 7/01/19 1,524,345 ------------ 2,932,467 ------------ Total Corporate Notes & Bonds (cost -- $53,950,659) $ 53,526,988 ------------ Total Investments (cost -- $57,332,480) 97.3 % $ 56,908,809 Other Assets in Excess of Other Liabilities 2.7 1,549,987 ----- ------------ TOTAL NET ASSETS 100.0 % $ 58,458,796 ----- ------------ ----- ------------
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS. 19 APRIL 30, 1995 - -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED)
QUEST FOR SMALL GROWTH U.S. INVESTMENT VALUE FUND, OPPORTUNITY CAPITALIZATION AND GOVERNMENT QUALITY INC. FUND FUND INCOME FUND INCOME FUND INCOME FUND ------------ ------------ ------------- ----------- ------------ ----------- ASSETS Investments, at value (cost -- $231,780,223, $306,601,269, $138,649,506, $36,966,919, $108,254,548 and $57,332,480, respectively)........................ $281,884,706 $354,076,712 $141,054,201 $38,633,928 $106,160,770 $56,908,809 Repurchase agreement (cost -- $30,850,000)......................... -- -- -- -- 30,850,000 -- Cash.................................. 192,917 6,009 7,649 4,785 42,627 7,874 Receivable for investments sold....... 6,121,804 4,960,166 4,386,238 -- -- -- Receivable for fund shares sold....... 1,373,346 7,437,751 530,404 161,403 552,378 344,370 Dividends receivable.................. 490,541 682,550 99,920 106,583 -- -- Interest receivable................... 18,808 80,066 81,628 -- 1,266,952 1,415,841 Receivable for mortgage prepayments... -- -- -- -- 8,659 -- Receivable for options written........ -- -- -- -- 81,250 -- Deferred organization expenses........ -- -- -- 29,014 -- 7,835 Other assets.......................... 43,688 27,106 18,450 22,152 33,006 18,897 ------------ ------------ ------------- ----------- ------------ ----------- Total Assets........................ 290,125,810 367,270,360 146,178,490 38,957,865 138,995,642 58,703,626 ------------ ------------ ------------- ----------- ------------ ----------- LIABILITIES Written call options outstanding, at value (premiums received: $301,562)............................ -- -- -- -- 250,000 -- Payable for investments purchased..... 7,304,992 11,854,122 1,469,403 773,238 10,006,250 -- Payable for fund shares redeemed...... 637,029 825,136 417,908 19,581 466,636 70,490 Investment advisory fee payable....... 38,549 48,250 19,738 4,507 10,495 4,781 Distribution fee payable.............. 36,734 95,043 24,513 5,223 13,601 10,314 Dividends payable..................... -- -- -- -- 96,618 96,734 Other payables and accrued expenses... 107,590 122,589 103,716 58,217 101,968 62,511 ------------ ------------ ------------- ----------- ------------ ----------- Total Liabilities................... 8,124,894 12,945,140 2,035,278 860,766 10,945,568 244,830 ------------ ------------ ------------- ----------- ------------ ----------- NET ASSETS Par value............................. 22,152,829 166,616 89,258 36,874 115,966 57,361 Paid-in-surplus....................... 203,275,875 304,361,426 136,615,872 34,963,133 139,644,958 60,186,256 Accumulated undistributed net investment income.................... 857,581 1,269,754 89,051 116,490 -- -- Accumulated undistributed net realized gain (loss) on investments........... 5,610,148 1,053,210 4,944,336 1,520,866 (9,371,173) (1,361,150 ) Distributions in excess of undistributed net realized gains..... -- (1,229) -- (207,273 ) (297,461) -- Net unrealized appreciation (depreciation) on investments........ 50,104,483 47,475,443 2,404,695 1,667,009 (2,042,216) (423,671 ) ------------ ------------ ------------- ----------- ------------ ----------- Total Net Assets.................... $282,000,916 $354,325,220 $144,143,212 $38,097,099 $128,050,074 $58,458,796 ------------ ------------ ------------- ----------- ------------ ----------- ------------ ------------ ------------- ----------- ------------ ----------- CLASS A: Fund shares outstanding............... 19,766,758 10,873,320 7,345,404 3,189,862 10,497,081 4,499,943 ------------ ------------ ------------- ----------- ------------ ----------- Net asset value per share............. $ 12.74 $ 21.33 $ 16.18 $ 10.34 $ 11.04 $ 10.19 ------------ ------------ ------------- ----------- ------------ ----------- ------------ ------------ ------------- ----------- ------------ ----------- Maximum offering price per share*..... $ 13.48 $ 22.57 $ 17.12 $ 10.86 $ 11.59 $ 10.70 ------------ ------------ ------------- ----------- ------------ ----------- ------------ ------------ ------------- ----------- ------------ ----------- CLASS B: Fund shares outstanding............... 1,881,688 4,838,180 1,225,644 410,588 930,025 911,890 ------------ ------------ ------------- ----------- ------------ ----------- Net asset value and offering price per share................................ $ 12.65 $ 21.16 $ 16.03 $ 10.31 $ 11.04 $ 10.19 ------------ ------------ ------------- ----------- ------------ ----------- ------------ ------------ ------------- ----------- ------------ ----------- CLASS C: Fund shares outstanding............... 504,383 950,086 354,729 86,947 169,500 324,279 ------------ ------------ ------------- ----------- ------------ ----------- Net asset value and offering price per share................................ $ 12.64 $ 21.15 $ 16.03 $ 10.32 $ 11.04 $ 10.19 ------------ ------------ ------------- ----------- ------------ ----------- ------------ ------------ ------------- ----------- ------------ ----------- *Sales charges decrease on purchases of $50,000 or higher. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
20 SIX MONTHS ENDED APRIL 30, 1995 - -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS (UNAUDITED)
QUEST FOR SMALL GROWTH U.S. INVESTMENT VALUE OPPORTUNITY CAPITALIZATION AND GOVERNMENT QUALITY FUND, INC. FUND FUND INCOME FUND INCOME FUND INCOME FUND ----------- ----------- --------------- ------------ ------------ ------------ INVESTMENT INCOME Dividends................... $2,464,480 $2,280,636 $ 1,042,987 $ 460,092 $ -- $ -- Interest.................... 932,852 1,585,855 590,633 507,119 4,558,825 2,416,775 ----------- ----------- --------------- ------------ ------------ ------------ Total investment income... 3,397,332 3,866,491 1,633,620 967,211 4,558,825 2,416,775 ----------- ----------- --------------- ------------ ------------ ------------ OPERATING EXPENSES Investment advisory fees (note 2a).................. 1,277,397 1,301,376 691,364 143,923 377,214 164,771 Distribution fees (note 2c)........................ 695,255 840,342 400,554 79,492 223,379 141,037 Transfer and dividend disbursing agent fees (note 1i)........................ 145,940 121,890 93,680 31,356 62,635 29,006 Accounting service fees (note 2b).................. -- 51,874 54,475 56,400 60,655 52,681 Registration fees........... 24,615 54,230 19,488 15,018 17,130 16,605 Reports and notices to shareholders............... 18,150 14,988 14,257 9,430 13,141 11,207 Custodian fees.............. 16,433 12,971 8,306 9,529 34,387 11,110 Auditing, consulting and tax return preparation fees.... 11,800 9,188 9,858 7,939 18,160 8,652 Directors'(Trustees') fees and expenses............... 8,574 8,535 8,535 4,369 8,534 8,530 Legal fees.................. 5,604 3,720 3,720 2,655 3,490 2,852 Amortization of deferred organization expenses (note 1c)........................ -- -- -- 9,495 -- 6,136 Miscellaneous............... 12,664 10,106 1,996 9,352 13,715 8,818 ----------- ----------- --------------- ------------ ------------ ------------ Total operating expenses................. 2,216,432 2,429,220 1,306,233 378,958 832,440 461,405 Less: Investment advisory fees waived (note 2a).... -- -- -- (41,225) -- (42,245) ----------- ----------- --------------- ------------ ------------ ------------ Net operating expenses............... 2,216,432 2,429,220 1,306,233 337,733 832,440 419,160 ----------- ----------- --------------- ------------ ------------ ------------ Net investment income... 1,180,900 1,437,271 327,387 629,478 3,726,385 1,997,615 ----------- ----------- --------------- ------------ ------------ ------------ REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS -- NET Net realized gain (loss) on security transactions...... 5,717,144 1,058,240 5,111,342 1,177,023 (3,993,026) (299,770) Net realized loss on option transactions (note 1f)..... -- -- -- -- (227,109) -- Net realized loss on futures transactions (note 1g)..... -- -- -- -- -- (108,500) ----------- ----------- --------------- ------------ ------------ ------------ Net realized gain (loss) on investments........... 5,717,144 1,058,240 5,111,342 1,177,023 (4,220,135) (408,270) Net change in unrealized appreciation (depreciation) on investments............. 17,252,568 33,095,020 (3,141,681) 1,260,709 7,204,799 3,266,923 ----------- ----------- --------------- ------------ ------------ ------------ Net realized gain (loss) and change in unrealized appreciation (depreciation) on investments.............. 22,969,712 34,153,260 1,969,661 2,437,732 2,984,664 2,858,653 ----------- ----------- --------------- ------------ ------------ ------------ Net increase in net assets resulting from operations................. $24,150,612 $35,590,531 $ 2,297,048 $ 3,067,210 $ 6,711,049 $ 4,856,268 ----------- ----------- --------------- ------------ ------------ ------------ ----------- ----------- --------------- ------------ ------------ ------------ SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
21 - -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS
QUEST FOR VALUE FUND, INC. OPPORTUNITY FUND SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, 1995* 1994 1995* 1994 ------------ ------------ ------------ ------------ OPERATIONS Net investment income (loss).......... $ 1,180,900 $ 1,726,225 $ 1,437,271 $ 1,397,364 Net realized gain (loss) on investments.......................... 5,717,144 16,664,331 1,058,240 7,139,720 Net change in unrealized appreciation (depreciation) on investments........ 17,252,568 (6,250,090) 33,095,020 4,721,481 ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations... 24,150,612 12,140,466 35,590,531 13,258,565 ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- Class A...... (1,649,576) (819,873) (1,066,642) (2,269,483) Net investment income -- Class B...... (108,497) (11,801) (335,822) (98,258) Net investment income -- Class C...... (29,366) (2,040) (56,920) (21,098) Net realized gains -- Class A......... (15,501,438) (9,227,704) (5,314,298) (1,497,052) Net realized gains -- Class B......... (1,014,005) (115,604) (1,562,718) (30,460) Net realized gains -- Class C......... (255,884) (11,081) (267,734) (11,467) Distributions in excess of net realized gains -- Class A............ -- -- -- (1,196) Distributions in excess of net realized gains -- Class B............ -- -- -- (24) Distributions in excess of net realized gains -- Class C............ -- -- -- (9) ------------ ------------ ------------ ------------ Total dividends and distributions to shareholders....................... (18,558,766) (10,188,103) (8,604,134) (3,929,047) ------------ ------------ ------------ ------------ FUND SHARE TRANSACTIONS CLASS A Net proceeds from sales............... 22,813,206 61,908,256 62,597,373 90,332,759 Reinvestment of dividends and distributions........................ 16,047,556 9,385,655 6,034,648 3,405,284 Cost of shares redeemed............... (29,730,613) (80,014,950) (18,132,883) (65,200,453) ------------ ------------ ------------ ------------ Net increase (decrease) -- Class A.................................. 9,130,149 (8,721,039) 50,499,138 28,537,590 ------------ ------------ ------------ ------------ CLASS B Net proceeds from sales............... 8,806,276 12,409,864 53,070,214 40,604,196 Reinvestment of dividends and distributions........................ 1,045,812 123,599 1,804,130 124,021 Cost of shares redeemed............... (1,208,420) (544,061) (3,356,853) (1,026,439) ------------ ------------ ------------ ------------ Net increase -- Class B............. 8,643,668 11,989,402 51,517,491 39,701,778 ------------ ------------ ------------ ------------ CLASS C Net proceeds from sales............... 2,794,417 3,521,667 11,871,650 6,945,412 Reinvestment of dividends and distributions........................ 280,898 13,020 314,273 32,567 Cost of shares redeemed............... (479,197) (271,901) (809,474) (254,081) ------------ ------------ ------------ ------------ Net increase -- Class C............. 2,596,118 3,262,786 11,376,449 6,723,898 ------------ ------------ ------------ ------------ Total net increase (decrease) in net assets from fund share transactions......................... 20,369,935 6,531,149 113,393,078 74,963,266 ------------ ------------ ------------ ------------ Total increase (decrease) in net assets............................. 25,961,781 8,483,512 140,379,475 84,292,784 NET ASSETS Beginning of period................... 256,039,135 247,555,623 213,945,745 129,652,961 ------------ ------------ ------------ ------------ End of period (including undistributed net investment income (loss) of $857,581, $1,464,120; $1,269,754, $1,291,867; $89,051, ($238,336); $116,490, $127,460; $0, $0 and $0, $0, respectively..................... $282,000,916 $256,039,135 $354,325,220 $213,945,745 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ *Unaudited. SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
22 - --------------------------------------------------------------------------------
SMALL CAPITALIZATION FUND GROWTH AND INCOME FUND SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, 1995* 1994 1995* 1994 ------------ ------------ ------------ ------------ Net investment income (loss).......... $ 327,387 $ (238,336) $ 629,478 $ 966,108 Net realized gain (loss) on investments............................. 5,111,342 3,366,835 1,177,023 1,768,686 Net change in unrealized appreciation (depreciation) on investments........... (3,141,681) (3,118,979) 1,260,709 (189,442) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations........ 2,297,048 9,520 3,067,210 2,545,352 ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- Class A...... -- -- (571,223) (936,128) Net investment income -- Class B...... -- -- (59,120) (41,545) Net investment income -- Class C...... -- -- (10,105) (7,305) Net realized gains -- Class A......... (3,008,172) (8,036,736) (1,274,907) (4,079,198) Net realized gains -- Class B......... (433,897) (160,831) (129,812) (145,217) Net realized gains -- Class C......... (91,772) (19,543) (20,124) (18,475) Distributions in excess of net realized gains -- Class A............... -- -- -- (199,276) Distributions in excess of net realized gains -- Class B............... -- -- -- (7,094) Distributions in excess of net realized gains -- Class C............... -- -- -- (903) ------------ ------------ ------------ ------------ Total dividends and distributions to shareholders............................ (3,533,841) (8,217,110) (2,065,291) (5,435,141) ------------ ------------ ------------ ------------ Fund Share Transactions CLASS A Net proceeds from sales............... 18,655,389 127,081,752 2,360,697 5,937,491 Reinvestment of dividends and distributions........................... 2,840,961 7,215,556 1,765,990 5,008,623 Cost of shares redeemed............... (21,690,503) (111,134,238) (2,560,041) (6,040,040) ------------ ------------ ------------ ------------ Net increase (decrease) -- Class A.. (194,153) 23,163,070 1,566,646 4,906,074 ------------ ------------ ------------ ------------ CLASS B Net proceeds from sales............... 4,874,110 15,275,222 1,175,765 2,763,975 Reinvestment of dividends and distributions........................ 408,265 148,570 174,643 188,513 Cost of shares redeemed............... (1,631,572) (811,203) (185,264) (260,750) ------------ ------------ ------------ ------------ Net increase -- Class B............... 3,650,803 14,612,589 1,165,144 2,691,738 ------------ ------------ ------------ ------------ CLASS C Net proceeds from sales............... 2,624,975 3,345,761 395,836 341,819 Reinvestment of dividends and distributions........................... 88,907 18,810 28,952 26,593 Cost of shares redeemed............... (380,327) (229,505) (20,580) (4,696) ------------ ------------ ------------ ------------ Net increase -- Class C............. 2,333,555 3,135,066 404,208 363,716 ------------ ------------ ------------ ------------ Total net increase (decrease) in net assets from fund share transactions..... 5,790,205 40,910,725 3,135,998 7,961,528 ------------ ------------ ------------ ------------ Total increase (decrease) in net assets.................................. 4,553,412 32,703,135 4,137,917 5,071,739 NET ASSETS Beginning of period................... 139,589,800 106,886,665 33,959,182 28,887,443 ------------ ------------ ------------ ------------ End of period (including undistributed net investment income (loss) of $857,581, $1,464,120; $1,269,754, $1,291,867; $89,051, ($238,336); $116,490, $127,460; $0, $0 and $0, $0, respectively............................ $144,143,212 $139,589,800 $ 38,097,099 $ 33,959,182 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ INVESTMENT QUALITY INCOME U.S. GOVERNMENT INCOME FUND FUND SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, 1995* 1994 1995* 1994 ------------ ------------ ------------ ------------ Net investment income (loss).......... $ 3,726,385 $ 8,291,969 $ 1,997,615 $ 3,846,353 Net realized gain (loss) on investments............................. (4,220,135) (4,366,839) (408,270) (952,880) Net change in unrealized appreciation (depreciation) on investments........... 7,204,799 (11,007,688) 3,266,923 (9,068,979) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets resulting from operations........ 6,711,049 (7,082,558) 4,856,268 (6,175,506) ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS Net investment income -- Class A...... (3,470,735) (8,071,564) (1,649,048) (3,482,793) Net investment income -- Class B...... (220,601) (196,735) (252,908) (244,424) Net investment income -- Class C...... (36,512) (39,362) (95,659) (119,136) Net realized gains -- Class A......... (140,061) (2,925,946) -- (367,910) Net realized gains -- Class B......... (8,675) (38,935) -- (10,112) Net realized gains -- Class C......... (1,431) (6,494) -- (637) Distributions in excess of net realized gains -- Class A............... -- (292,913) -- -- Distributions in excess of net realized gains -- Class B............... -- (3,898) -- -- Distributions in excess of net realized gains -- Class C............... -- (650) -- -- ------------ ------------ ------------ ------------ Total dividends and distributions to shareholders............................ (3,878,015) (11,576,497) (1,997,615) (4,225,012) ------------ ------------ ------------ ------------ Fund Share Transactions CLASS A Net proceeds from sales............... 8,337,955 17,007,814 3,437,254 12,621,718 Reinvestment of dividends and distributions........................... 3,118,963 9,588,703 1,160,982 2,758,350 Cost of shares redeemed............... (21,385,264) (74,313,512) (7,963,295) (20,364,228) ------------ ------------ ------------ ------------ Net increase (decrease) -- Class A.. (9,928,346) (47,716,995) (3,365,059) (4,984,160) ------------ ------------ ------------ ------------ CLASS B Net proceeds from sales............... 3,810,282 6,748,251 2,929,597 6,440,954 Reinvestment of dividends and distributions........................ 163,256 187,137 203,461 185,172 Cost of shares redeemed............... (734,031) (964,994) (846,378) (800,932) ------------ ------------ ------------ ------------ Net increase -- Class B............... 3,239,507 5,970,394 2,286,680 5,825,194 ------------ ------------ ------------ ------------ CLASS C Net proceeds from sales............... 668,202 1,424,484 576,084 3,141,700 Reinvestment of dividends and distributions........................... 36,507 46,127 40,824 93,436 Cost of shares redeemed............... (92,626) (289,465) (48,537) (422,838) ------------ ------------ ------------ ------------ Net increase -- Class C............. 612,083 1,181,146 568,371 2,812,298 ------------ ------------ ------------ ------------ Total net increase (decrease) in net assets from fund share transactions..... (6,076,756) (40,565,455) (510,008) 3,653,332 ------------ ------------ ------------ ------------ Total increase (decrease) in net assets.................................. (3,243,722) (59,224,510) 2,348,645 (6,747,186) NET ASSETS Beginning of period................... 131,293,796 190,518,306 56,110,151 62,857,337 ------------ ------------ ------------ ------------ End of period (including undistributed net investment income (loss) of $857,581, $1,464,120; $1,269,754, $1,291,867; $89,051, ($238,336); $116,490, $127,460; $0, $0 and $0, $0, respectively............................ $128,050,074 $131,293,796 $ 58,458,796 $ 56,110,151 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
23 APRIL 30, 1995 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Quest for Value Funds are registered under the Investment Company Act of 1940, as diversified, open-end management investment companies. Quest for Value Fund, Inc. ("Quest for Value") is a Maryland corporation. Opportunity Fund ("Opportunity"), Small Capitalization Fund ("Small Capitalization"), Growth and Income Fund ("Growth and Income"), U.S. Government Income Fund ("U.S. Government") and Investment Quality Income Fund ("Investment Quality") are five of nine funds currently offered in the Quest for Value Family of Funds, a Massachusetts business trust. Quest for Value Advisors (the "Adviser") serves as investment adviser and provides accounting and administrative services to each fund. Quest for Value Distributors (the "Distributor") serves as each fund's distributor. Both the Advisor and Distributor are majority-owned (99%) subsidiaries of Oppenheimer Capital. Prior to September 1, 1993, the funds issued only one class of shares which were redesignated Class A shares. Subsequent to that date all funds were authorized to issue Class A, Class B and Class C shares. Shares of each Class represent an identical interest in the investment portfolio of their respective fund and generally have the same rights, but are offered under different sales charges and distribution fee arrangements. Furthermore, Class B shares will automatically convert to Class A shares of the same fund eight years after their respective purchase. The following is a summary of significant accounting policies consistently followed by each fund in the preparation of its financial statements: (A) VALUATION OF INVESTMENTS Investment securities listed on a national securities exchange and securities traded in the over-the-counter National Market System are valued at the last reported sale price on the valuation date; if there are no such reported sales, the securites are valued at the last quoted bid price. Other securities traded over-the-counter and not part of the National Market System are valued at the last quoted bid price. Investment debt securities (other than short-term obligations) are valued each day by an independent pricing service approved by the Board of Directors (Trustees) using methods which include current market quotations from a major market maker in the securities and trader-reviewed "matrix" prices. Futures contracts are valued based upon their daily settlement value as of the close of the exchange upon which they trade. OTC options are valued based upon formulas which utilize the market value of the underlying securities, strike prices and expiration dates of the options. Short-term debt securities having a remaining maturity of sixty days or less are valued at amortized cost or amortized value, which approximates market value. Any securities or other assets for which market quotations are not readily available are valued at their fair values as determined in good faith under procedures established by each fund's Board of Directors (Trustees). The ability of issuers of debt securities held by the funds to meet their obligations may be affected by economic or political development in a specific state, industry or region. (B) FEDERAL INCOME TAXES It is each fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders; accordingly, no Federal income tax provision is required. (C) DEFERRED ORGANIZATION EXPENSES The following approximate costs were incurred in connection with their organization: Growth and Income -- $96,000 and Investment Quality -- $62,000. These costs have been deferred and are being amortized to expense on a straight-line basis over sixty months from commencement of each fund's operations. (D) SECURITY TRANSACTIONS AND OTHER INCOME Security transactions are accounted for on the trade date. In determining the gain or loss from the sale of securities, the cost of securities sold is determined on the basis of identified cost. Dividend income is recorded on the ex-dividend date and interest income is accrued as earned. Discounts or premiums on debt securities purchased are accreted or 24 - -------------------------------------------------------------------------------- amortized to interest income over the lives of the respective securities. Net investment income, other than class specific expenses and unrealized gains and losses are allocated daily to each class of shares based upon the relative proportion of net assets, as defined, of each class. (E) DIVIDENDS AND DISTRIBUTIONS The following table summarizes each fund's dividend and capital gain declaration policy:
SHORT-TERM LONG-TERM INCOME CAPITAL CAPITAL DIVIDENDS GAINS GAINS --------- ------------ ------------ Quest for Value annually annually annually Opportunity annually annually annually Small Capitalization annually annually annually Growth and Income quarterly annually annually U.S. Government daily * quarterly annually Investment Quality daily * annually annually * paid monthly.
Each fund records dividends and distributions to its shareholders on the ex-dividend date. The amount of dividends and distributions from net investment income and net realized capital gains are determined in accordance with federal income tax regulations, which may differ from generally accepted accounting principles. These "book-tax" differences are either considered temporary or permanent in nature. To the extent these differences are permanent in nature, such amounts are reclassified within the capital accounts based on their federal tax-basis treatment; temporary differences do not require reclassification. Dividends and distributions which exceed net investment income and net realized capital gains for financial reporting purposes but not for tax purposes are reported as dividends in excess of net investment income or distributions in excess of net realized capital gains, respectively. To the extent distributions exceed current and accumulated earnings and profits for federal income tax purposes, they are reported as distributions of paid-in-surplus or tax return of capital. Accordingly, permanent book-tax differences relating to shareholder distributions have been reclassified to paid-in-surplus. Net investment income(loss), net realized gain(loss) and net assets were not affected by this change. (F) WRITTEN OPTIONS ACCOUNTING POLICIES When a fund writes a call option or a put option, an amount equal to the premium received by the fund is included in the fund's Statement of Assets and Liabilities as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. If the option expires on its stipulated expiration date or if a fund enters into a closing purchase transaction, the fund will realize a gain (or loss if the cost of a closing purchase tranaction exceeds the premium received when the option was written) without regard to any unrealized gain or loss on the underlying security, and the liability related to such option will be extinguished. If a call option which a fund has written is exercised, the fund realizes a gain or loss from the sale of the underlying security and the proceeds from such sale are increased by the premium originally received. If a put option which a fund has written is exercised, the amount of the premium originally received will reduce the cost of the security which the fund purchases upon exercise of the option. (G) FUTURES ACCOUNTING POLICIES Futures contracts are agreements between two parties to buy and sell a financial instrument at a set price on a future date. Upon entering into such a contract, a fund is required to pledge to the broker an amount of cash or U.S. Government securities equal to the minimum "initial margin" requirements of the exchange. Pursuant to the contract, a fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in the value of the contract. Such receipts or payments are known as "variation margin" and are recorded by the fund as unrealized appreciation or 25 APRIL 30, 1995 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) depreciation. When a contract is closed, the fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed and reverses any unrealized appreciation or depreciation previously recorded. (H) REPURCHASE AGREEMENTS U.S. Government enters into repurchase agreements as part of its investment program. The fund's custodian takes possession of collateral pledged by the counterparty. The collateral is marked-to-market daily to ensure that the value, plus accrued interest, is at least equal to the repurchase price. In the event of default by the obligor to repurchase, the fund has the right to liquidate the collateral and apply the proceeds in satisfaction of the obligation. Under certain circumstances, in the event of default or bankruptcy by the other party to the agreement, realization and/or retention of the collateral or proceeds may be subject to legal proceedings. (I) ALLOCATION OF EXPENSES Expenses specifically identifiable to a particular fund or class are borne by that fund or class. Other expenses are allocated to each fund or class based on its net assets in relation to the total net assets of all applicable funds or classes or on another reasonable basis. For the six months ended April 30, 1995, transfer and dividend disbursing agent fees accrued to classes A, B and C were $129,947, $12,171 and $3,822, respectively, for Quest for Value; $75,445, $38,525 and $7,920, respectively, for Opportunity; $68,052, $19,412 and $6,216, respectively, for Small Capitalization; $27,244, $3,447 and $665, respectively, for Growth and Income; $55,832, $4,401 and $2,402, respectively, for U.S. Government and $22,873, $4,242 and $1,891, respectively, for Investment Quality Income. 2. INVESTMENT ADVISORY FEE, ACCOUNTING SERVICES FEE, DISTRIBUTION FEE AND OTHER TRANSACTIONS WITH AFFILIATES (a) The investment advisory fee is payable monthly to the Adviser, and is computed as a percentage of each fund's net assets as of the close of business each day at the following annual rates: 1.00% for Quest for Value, Opportunity and Small Capitalization, respectively; .85% for Growth and Income and .60% for U.S. Government and Investment Quality, respectively. For the six months ended April 30, 1995, the Adviser voluntarily waived $41,225 and $42,245 in investment advisory fees for Growth and Income and Investment Quality, respectively. (b) A portion of the accounting services fee for Opportunity, Small Capitalization, Growth and Income, U.S. Government and Investment Quality is payable monthly to the Adviser. These funds reimburse the Adviser for a portion of the salaries of officers and employees of Oppenheimer Capital based upon the amount of time such persons spend in providing services to each fund in accordance with the provisions of the Investment Advisory Agreement. For the six months ended April 30, 1995, the Adviser received $24,374, $26,976, $28,900, $28,155 and $25,181, respectively. (c) The funds have adopted a Plan and Agreement of Distribution (the "Plan") pursuant to which each fund is permitted to compensate the Distributor in connection with the distribution of fund shares. Under the Plan, the Distributor has entered into agreements with securities dealers and other financial institutions and organizations to obtain various sales-related services in rendering distribution assistance. To compensate the Distributor for the services it and other dealers under the Plan provide and for the expenses they bear under the Plan, the funds pay the Distributor compensation, accrued daily and payable monthly on each fund's average daily net assets for Class A shares at the following annual rates: .25% for Quest for Value, Opportunity and Small Capitalization, respectively, .05% for U.S. Government and .15% for Investment Quality and Growth and Income, respectively. Each fund's Class A shares also pay a service fee at the annual rate of .25%. Compensation for Class B and Class C shares of each fund is at an annual rate of .75% of average daily net assets. Each fund's Class B and Class C shares also pay a service fee at the annual rate of .25%. Distribution and service fees may be paid by the Distributor to broker dealers or others for providing personal service, maintenance of accounts and ongoing sales or shareholder support functions in connection with the distribution of fund shares. While payments under the plan may not exceed the stated percentage of average daily net assets on an annual basis, the payments are not limited to the amounts actually incurred by the Distributor. 26 - -------------------------------------------------------------------------------- For the six months ended April 30, 1995, distribution and service fees charged to classes A, B and C were $582,142, $90,112 and $23,001, respectively, for Quest for Value; $461,034, $320,958 and $58,350, respectively, for Opportunity; $290,811, $87,657 and $22,086, respectively, for Small Capitalization; $59,886, $16,582 and $3,024, respectively, for Growth and Income; $173,704, $42,572 and $7,103, respectively, for for U.S. Government and $89,054, $37,698 and $14,285, respectively, for Investment Quality Income. (d) Total brokerage commissions paid by Quest for Value, Opportunity, Small Capitalization and Growth and Income were $133,585, $220,756, $192,780 and $56,481, respectively, of which Oppenheimer & Co., Inc., an affiliate of the Adviser, received $72,545, $95,213, $87,012 and $37,521, respectively, for the six months ended April 30, 1995. (e) Oppenheimer & Co., Inc. has informed the funds that it received approximately $175,000, $324,000, $122,000, $15,000, $88,000 and $39,000 in connection with the sale of Class A shares for Quest for Value, Opportunity, Small Capitalization, Growth and Income, U.S. Government and Investment Quality, respectively, for the six months ended April 30, 1995. The Distributor has informed the funds that it received contingent deferred sales charges on the redemption of Class C shares of approximately $200, $1,800, $700, $200, and $200 for Quest for Value, Opportunity, Small Capitalization, U.S. Government and Investment Quality, respectively, for the six months ended April 30, 1995. (f) The Distributor has assigned the right to receive the compensation and contingent deferred sales charge on the Class B shares to a bank in return for the banks reimbursement to the Distributor of commissions paid by the Distributor to broker/dealers on Class B shares. 3. PURCHASES AND SALES OF SECURITIES For the six months ended April 30, 1995, purchases and sales of investment securities, other than short-term securities, were as follows:
QUEST FOR SMALL GROWTH AND U.S. INVESTMENT VALUE OPPORTUNITY CAPITALIZATION INCOME GOVERNMENT QUALITY ----------- ----------- -------------- ----------- ----------- ----------- Purchases $38,600,646 $118,902,351 $ 36,306,804 $15,994,318 $220,176,718 $3,096,231 Sales 46,184,287 20,875,977 46,436,460 19,114,061 246,008,186 1,990,980
The following table summarizes activity in written option transactions for U.S. Government for the six months ended April 30, 1995:
CONTRACTS PREMIUMS ---------- ------------ Option contracts written: Outstanding beginning of period 2 $ 142,188 Options written 34 2,465,702 Options terminated in closing purchase transaction (20) (1,501,640) Options exercised (7) (503,125) Options expired (4) (301,563) -- ------------ Option contracts written: Outstanding end of period 5 $ 301,562 -- -- ------------ ------------
27 APRIL 30, 1995 - -------------------------------------------------------------------------------- NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. FUND SHARE TRANSACTIONS The following tables summarize the fund share activity for the six months ended April 30, 1995 and the year ended October 31, 1994:
QUEST FOR VALUE OPPORTUNITY SMALL CAPITALIZATION ---------------------------- ---------------------------- ---------------------------- SIX MONTHS SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, 1995* 1994 1995* 1994 1995* 1994 ------------ ------------ ------------ ------------ ------------ ------------ CLASS A Issued.................... 1,887,076 5,077,999 3,177,603 4,781,210 1,168,097 7,804,081 Dividends and distributions reinvested............... 1,440,961 797,941 328,864 186,714 181,647 450,409 Redeemed.................. (2,476,129) (6,566,112) (928,610) (3,470,990) (1,357,550) (6,835,042) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease)............. 851,908 (690,172) 2,577,857 1,496,934 (7,806) 1,419,448 ------------ ------------ ------------ ------------ ------------ ------------ CLASS B Issued.................... 740,489 1,020,362 2,702,721 2,145,988 308,792 936,328 Dividends and distributions reinvested............... 94,418 10,514 98,923 6,821 26,272 9,286 Redeemed.................. (100,601) (44,566) (174,841) (54,500) (103,762) (50,575) ------------ ------------ ------------ ------------ ------------ ------------ Net increase............ 734,306 986,310 2,626,803 2,098,309 231,302 895,039 ------------ ------------ ------------ ------------ ------------ ------------ CLASS C Issued.................... 231,783 289,679 600,865 367,367 166,967 205,454 Dividends and distributions reinvested............... 25,381 1,106 17,240 1,789 5,721 1,176 Redeemed.................. (38,705) (22,509) (40,221) (13,680) (23,965) (13,923) ------------ ------------ ------------ ------------ ------------ ------------ Net increase............ 218,459 268,276 577,884 355,476 148,723 192,707 ------------ ------------ ------------ ------------ ------------ ------------ Total net increase.... 1,804,673 564,414 5,782,544 3,950,719 372,219 2,507,194 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
GROWTH AND INCOME U.S. GOVERNMENT INVESTMENT QUALITY ---------------------------- ---------------------------- ---------------------------- SIX MONTHS SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, 1995* 1994 1995* 1994 1995* 1994 ------------ ------------ ------------ ------------ ------------ ------------ CLASS A Issued.................... 240,232 591,037 764,507 1,484,549 347,221 1,194,443 Dividends and distributions reinvested............... 186,609 506,743 286,809 839,276 116,979 263,168 Redeemed.................. (266,050) (600,435) (1,972,889) (6,552,668) (815,458) (1,940,417) ------------ ------------ ------------ ------------ ------------ ------------ Net increase (decrease)............. 160,791 497,345 (921,573) (4,228,843) (351,258) (482,806) ------------ ------------ ------------ ------------ ------------ ------------ CLASS B Issued.................... 121,157 269,571 350,917 594,901 294,053 614,495 Dividends and distributions reinvested............... 18,473 19,104 15,011 16,698 20,468 18,150 Redeemed.................. (19,727) (26,407) (67,374) (86,599) (85,574) (77,488) ------------ ------------ ------------ ------------ ------------ ------------ Net increase............ 119,903 262,268 298,554 525,000 228,947 555,157 ------------ ------------ ------------ ------------ ------------ ------------ CLASS C Issued.................... 40,779 33,894 61,226 123,553 58,013 290,357 Dividends and distributions reinvested............... 3,054 2,697 3,354 4,123 4,105 9,047 Redeemed.................. (2,092) (469) (8,544) (25,877) (4,928) (41,081) ------------ ------------ ------------ ------------ ------------ ------------ Net increase............ 41,741 36,122 56,036 101,799 57,190 258,323 ------------ ------------ ------------ ------------ ------------ ------------ Total net increase (decrease)........... 322,435 795,735 (566,983) (3,602,044) (65,121) 330,674 ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------ *Unaudited.
28 - -------------------------------------------------------------------------------- 5. UNREALIZED APPRECIATION (DEPRECIATION) AND COST OF INVESTMENTS FOR FEDERAL INCOME TAX PURPOSES At April 30, 1995, the composition of unrealized appreciation (depreciation) of investment securities and the cost of investments for Federal income tax purposes were as follows:
APPRECIATION (DEPRECIATION) NET TAX COST ------------ ------------- ------------ ------------- Quest for Value $51,733,096 $ (1,752,244) $ 49,980,852 $ 231,903,854 Opportunity 49,286,577 (1,812,363) 47,474,214 306,602,498 Small Capitalization 10,004,767 (7,766,524) 2,238,243 138,815,958 Growth and Income 2,889,041 (1,284,031) 1,605,010 37,028,918 U.S. Government 966,818 (8,766,967) (7,800,149) 144,810,919 Investment Quality 1,588,495 (2,012,166) (423,671) 57,332,480
6. AUTHORIZED FUND SHARES AND PAR VALUE PER SHARE
QUEST SMALL GROWTH U.S. INVESTMENT FOR VALUE OPPORTUNITY CAPITALIZATION AND INCOME GOVERNMENT QUALITY ----------- ------------ --------------- ----------- ----------- ----------- Authorized fund shares 35,000,000 unlimited unlimited unlimited unlimited unlimited Par value per share $1.00 $.01 $.01 $.01 $.01 $.01
7. DIVIDENDS AND DISTRIBUTIONS The following tables summarize the per share dividends and distributions made for the six months ended April 30, 1995 and the year ended October 31, 1994:
QUEST FOR VALUE OPPORTUNITY SMALL CAPITALIZATION ------------------------- ------------------------- ------------------------- SIX MONTHS SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, 1995* 1994 1995* 1994 1995* 1994 ----------- ----------- ----------- ----------- ----------- ----------- NET INVESTMENT INCOME: Class A................... $ 0.083 $ 0.040 $ 0.117 $ 0.326 -- -- Class B................... 0.074 0.031 0.117 0.313 -- -- Class C................... 0.081 0.033 0.117 0.312 -- -- NET REALIZED GAINS: Class A................... $ 0.828 $ 0.469 $ 0.614 $ 0.219 $ 0.415 $ 1.331 Class B................... 0.828 0.469 0.614 0.219 0.415 1.331 Class C................... 0.828 0.469 0.614 0.219 0.415 1.331
GROWTH AND INCOME U.S. GOVERNMENT INVESTMENT QUALITY ------------------------- ------------------------- ------------------------- SIX MONTHS SIX MONTHS SIX MONTHS ENDED YEAR ENDED ENDED YEAR ENDED ENDED YEAR ENDED APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, APRIL 30, OCTOBER 31, 1995* 1994 1995* 1994 1995* 1994 ----------- ----------- ----------- ----------- ----------- ----------- NET INVESTMENT INCOME: Class A................... $ 0.182 $ 0.319 $ 0.322 $ 0.593 $ 0.362 $ 0.680 Class B................... 0.162 0.265 0.284 0.510 0.332 0.609 Class C................... 0.142 0.261 0.279 0.509 0.329 0.608 NET REALIZED GAINS: Class A................... $ 0.422 $ 1.669 $ 0.013 $ 0.213 -- $ 0.069 Class B................... 0.422 1.669 0.013 0.213 -- 0.069 Class C................... 0.422 1.669 0.013 0.213 -- 0.069 *Unaudited.
8. FINANCIAL INSTRUMENTS AND ASSOCIATED RISKS At April 30, 1995, U.S. Government had written options outstanding. Written options have elements of risk in excess of the amounts reflected in the Statement of Assets and Liabilities. The fund, as a writer of an option, has no control over whether the option is exercised. The underlying security may be sold and, as a result, the fund bears the market risk of an unfavorable change in the price of the security underlying the written option. 29 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ----------------------------------- --------------------------------------- Net Distributions Realized Dividends to and to Shareholders Net Net Asset Net Unrealized Shareholders from Net Total Asset Value, Investment Gain Total from from Net Realized Dividends Value, Beginning Income (Loss) on Investment Investment Gain on and End of Total of Period (Loss) Investments Operations Income Investments Distributions Period Return* Quest for Value Fund, Inc. Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $12.59 $ 0.06 $ 1.00 $ 1.06 $(0.08) $(0.83) $(0.91) $12.74 9.52% YEAR ENDED OCTOBER 31, 1994 12.51 0.09 0.50 0.59 (0.04) (0.47) (0.51) 12.59 5.01% 1993 11.71 0.05 1.34 1.39 (0.05) (0.54) (0.59) 12.51 12.27% 1992 10.61 0.04 1.77 1.81 (0.07) (0.64) (0.71) 11.71 18.45% 1991 7.84 0.09 2.84 2.93 (0.16) -- (0.16) 10.61 37.94% 1990 (2) 9.85 0.18 (1.38) (1.20) (0.26) (0.55) (0.81) 7.84 (13.43%) Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 12.53 0.03 0.99 1.02 (0.07) (0.83) (0.90) 12.65 9.23% YEAR ENDED OCTOBER 31, 1994 12.51 0.02 0.50 0.52 (0.03) (0.47) (0.50) 12.53 4.43% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.66(3) (0.01) (0.14) (0.15) -- -- -- 12.51 (1.19%) Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 12.52 0.03 1.00 1.03 (0.08) (0.83) (0.91) 12.64 9.31% YEAR ENDED OCTOBER 31, 1994 12.50 0.01 0.51 0.52 (0.03) (0.47) (0.50) 12.52 4.45% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.66(3) (0.01) (0.15) (0.16) -- -- -- 12.50 (1.26%) RATIOS ---------------------------------------------- Ratio of Net Net Ratio of Net Investment Assets Operating Income End of Expenses to (Loss) to Portfolio Period Average Net Average Net Turnover (000's) Assets Assets Rate Quest for Value Fund, Inc. Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $ 251,821 1.69%(1,5) 0.97%(1,5) 17% YEAR ENDED OCTOBER 31, 1994 238,085 1.71% 0.72% 49% 1993 245,320 1.75% 0.40% 27% 1992 142,939 1.75% 0.53% 41% 1991 79,914 1.83% 1.06% 48% 1990 (2) 49,740 1.82% 1.71% 51% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 23,805 2.21%(1,5) 0.45%(1,5) 17% YEAR ENDED OCTOBER 31, 1994 14,373 2.24% 0.14% 49% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 2,015 2.27%(5) (1.19%)(5) 27% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 6,375 2.24%(1,5) 0.43%(1,5) 17% YEAR ENDED OCTOBER 31, 1994 3,581 2.28% 0.09% 49% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 221 2.27%(5) (0.90%)(5) 27% (1) AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED APRIL 30, 1995, FOR CLASSES A, B, AND C WERE $234,786,678, $18,171,756, $4,638,234, RESPECTIVELY. (2) SHARE AND PER SHARE DATA HAVE BEEN RETROACTIVELY RESTATED TO REFLECT A 200% STOCK DIVIDEND AS OF JULY 1, 1991.
INCOME FROM INVESTMENT OPERATIONS ----------------------------------- DIVIDENDS AND DISTRIBUTIONS Net --------------------------------------- Realized Distributions and Dividends to Unreal- to Shareholders Net Net Asset Net In- ized Gain Shareholders from Net Asset Value, Be- vestment (Loss) on Total from from Net Realized Total Divi- Value, Total ginning of Income In- Investment Investment Gain on dends and End of Re- Period (Loss) vestments Operations Income Investments Distributions Period turn* Opportunity Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $19.69 $ 0.12 $ 2.25 $ 2.37 $(0.12) $(0.61) $(0.73) $ 21.33 12.66% YEAR ENDED OCTOBER 31, 1994 18.71 0.18 1.35 1.53 (0.33) (0.22) (0.55) 19.69 8.41% 1993 16.73 0.35 2.02 2.37 (0.07) (0.32) (0.39) 18.71 14.34% 1992 14.29 0.09 2.93 3.02 (0.03) (0.55) (0.58) 16.73 21.93% 1991 9.74 0.03 4.78 4.81 (0.23) (0.03) (0.26) 14.29 50.44% 1990 11.59 0.25 (1.64) (1.39) (0.22) (0.24) (0.46) 9.74 (12.62%) Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 19.59 0.07 2.23 2.30 (0.12) (0.61) (0.73) 21.16 12.36% YEAR ENDED OCTOBER 31, 1994 18.70 0.08 1.34 1.42 (0.31) (0.22) (0.53) 19.59 7.84% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 18.73(3) 0.02 (0.05) (0.03) -- -- -- 18.70 (0.16%) Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 19.58 0.07 2.23 2.30 (0.12) (0.61) (0.73) 21.15 12.37% YEAR ENDED OCTOBER 31, 1994 18.70 0.08 1.33 1.41 (0.31) (0.22) (0.53) 19.58 7.78% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 18.73(3) 0.02 (0.05) (0.03) -- -- -- 18.70 (0.16%) RATIOS ------------------------------------------- Ratio of Ratio of Net Net Net Investment Assets Operating Income End of Expenses to (Loss) to Portfolio Period Average Net Average Net Turnover Opportunity Fund (000's) Assets Assets Rate Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $ 231,881 1.71%(1,5) 1.25%(1,5) 10% YEAR ENDED OCTOBER 31, 1994 163,340 1.78% 0.96% 42% 1993 127,225 1.83% 2.69% 24% 1992 40,563 2.27% 0.72% 32% 1991 8,446 2.35%(2) 0.30%(2) 88% 1990 4,570 2.00%(2) 2.30%(2) 206% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 102,353 2.24%(1,5) 0.75%(1,5) 10% YEAR ENDED OCTOBER 31, 1994 43,317 2.34% 0.43% 42% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 2,115 2.52%(5) 1.32%(5) 24% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 20,091 2.26%(1,5) 0.73%(1,5) 10% YEAR ENDED OCTOBER 31, 1994 7,289 2.35% 0.43% 42% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 313 2.52%(5) 1.13%(5) 24% (1) AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED APRIL 30, 1995, FOR CLASSES A, B, AND C WERE $185,941,734, $64,723,666, $11,766,750, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED ITS FEES AND REIMBURSED THE FUND FOR A PORTION OF ITS OPERATING EXPENSES. IF SUCH WAIVERS AND REIMBURSEMENTS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 3.33% AND (0.68%), RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1991 AND 3.69% AND 0.61%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1990. - ------------------------------ (3) OFFERING PRICE. (4) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (5) ANNUALIZED. (6) UNAUDITED. * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
30 - --------------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ----------------------------------- --------------------------------------- Net Distributions Realized to and Dividends Shareholders Unrealized to from Net Net Net Asset Net Gain Shareholders Realized Total Asset Value, Investment (Loss) Total from from Net Gain Dividends Value, Beginning Income on Investment Investment on and End of Total of Period (Loss) Investments Operations Income Investments Distributions Period Return* Small Capitalization Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $16.33 $ 0.05 $ 0.22 $ 0.27 $-- $(0.42) $(0.42) $16.18 1.71% YEAR ENDED OCTOBER 31, 1994 17.68 (0.03) 0.01 (0.02) -- (1.33) (1.33) 16.33 0.04% 1993 14.60 (0.04) 4.26 4.22 -- (1.14) (1.14) 17.68 30.21% 1992 13.52 0.00 1.50 1.50 -- (0.42) (0.42) 14.60 11.60% 1991 8.80 (0.05) 4.85 4.80 (0.08) -- (0.08) 13.52 55.01% 1990 10.91 0.07 (2.04) (1.97) (0.08) (0.06) (0.14) 8.80 (18.33%) Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 16.24 (0.01) 0.22 0.21 -- (0.42) (0.42) 16.03 1.35% YEAR ENDED OCTOBER 31, 1994 17.66 (0.11) 0.02 (0.09) -- (1.33) (1.33) 16.24 (0.39%) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 17.19(3) (0.02) 0.49 0.47 -- -- -- 17.66 2.73% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 16.23 0.00 0.22 0.22 -- (0.42) (0.42) 16.03 1.41% YEAR ENDED OCTOBER 31, 1994 17.67 (0.13) 0.02 (0.11) -- (1.33) (1.33) 16.23 (0.51%) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 17.19(3) (0.02) 0.50 0.48 -- -- -- 17.67 2.79% RATIOS ---------------------------------------------- Ratio of Net Net Ratio of Net Investment Assets Operating Income End of Expenses (Loss) Portfolio Period to Average to Average Turnover (000's) Net Assets Net Assets Rate Small Capitalization Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $ 118,909 1.80%(1,5) 0.56%(1,5) 29% YEAR ENDED OCTOBER 31, 1994 120,102 1.88% (0.14%) 67% 1993 104,898 1.89% (0.36%) 74% 1992 39,693 2.11% (0.04%) 95% 1991 20,686 2.25%(2) (0.41%)(2) 103% 1990 1,880 2.00%(2) 0.71%(2) 18% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 19,564 2.37%(1,5) (0.01%)(1,5) 29% YEAR ENDED OCTOBER 31, 1994 16,144 2.48% (0.70%) 67% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 1,754 2.57%(5) (1.15%)(5) 74% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 5,670 2.35%(1,5) (0.01%)(1,5) 29% YEAR ENDED OCTOBER 31, 1994 3,344 2.59% (0.81%) 67% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 235 2.57%(5) (1.20%)(5) 74% (1) AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED APRIL 30, 1995, FOR CLASSES A, B, AND C WERE $117,288,229, $17,676,777, $4,453,700, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED ITS FEES AND REIMBURSED THE FUND FOR A PORTION OF ITS OPERATING EXPENSES. IF SUCH WAIVERS AND REIMBURSEMENTS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME (LOSS) TO AVERAGE NET ASSETS WOULD HAVE BEEN 3.27% AND (1.43%), RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1991 AND 5.82% AND (3.11%), RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1990.
Growth and Income Fund
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ----------------------------------- --------------------------------------- Net Distributions Realized to and Dividends Shareholders Unrealized to from Net Net Net Asset Net Gain Shareholders Realized Total Asset Value, Investment (Loss) Total from from Net Gain Dividends Value, Beginning Income on Investment Investment on and End of Total of Period (Loss) Investments Operations Income Investments Distributions Period Return* Growth and Income Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $10.09 $ 0.18 $ 0.67 $ 0.85 $(0.18) $(0.42) $(0.60) $10.34 9.11% YEAR ENDED OCTOBER 31, 1994 11.24 0.32 0.55 0.87 (0.32) (1.70) (2.02) 10.09 8.64% 1993 10.80 0.30 0.73 1.03 (0.26) (0.33) (0.59) 11.24 9.93% NOVEMBER 4, 1991 (7) TO OCTOBER 31, 1992 10.00(3) 0.28 0.80 1.08 (0.28) -- (0.28) 10.80 10.84% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 10.07 0.16 0.66 0.82 (0.16) (0.42) (0.58) 10.31 8.79% YEAR ENDED OCTOBER 31, 1994 11.23 0.25 0.56 0.81 (0.27) (1.70) (1.97) 10.07 7.96% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 11.21(3) 0.04 0.05 0.09 (0.07) -- (0.07) 11.23 0.81% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 10.07 0.14 0.67 0.81 (0.14) (0.42) (0.56) 10.32 8.67% YEAR ENDED OCTOBER 31, 1994 11.23 0.24 0.56 0.80 (0.26) (1.70) (1.96) 10.07 7.91% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 11.21(3) 0.04 0.05 0.09 (0.07) -- (0.07) 11.23 0.81% RATIOS ---------------------------------------------- Ratio of Net Net Ratio of Net Investment Assets Operating Income End of Expenses (Loss) Portfolio Period to Average to Average Turnover (000's) Net Assets Net Assets Rate Growth and Income Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $ 32,969 1.92%(1,2,5) 3.78%(1,2,5) 63% YEAR ENDED OCTOBER 31, 1994 30,576 1.86%(2) 3.16%(2) 113% 1993 28,466 1.90%(2) 2.66%(2) 192% NOVEMBER 4, 1991 (7) TO OCTOBER 31, 1992 8,057 2.23%(2,5) 2.73%(2,5) 77% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 4,231 2.49%(1,2,5) 3.25%(1,2,5) 63% YEAR ENDED OCTOBER 31, 1994 2,928 2.47%(2) 2.53%(2) 113% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 319 2.49%(2,5) 1.83%(2,5) 192% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 897 2.77%(1,2,5) 3.00%(1,2,5) 63% YEAR ENDED OCTOBER 31, 1994 455 2.62%(2) 2.39%(2) 113% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 102 2.49%(2,5) 2.18%(2,5) 192% (1) AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED APRIL 30, 1995, FOR CLASSES A, B, AND C WERE $30,191,320, $3,343,785, $609,761, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED A PORTION OF ITS FEES. IF SUCH WAIVER HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 2.17% AND 3.53%, ANNUALIZED, RESPECTIVELY, FOR THE SIX MONTHS ENDED APRIL 30, 1995, 2.32% AND 2.70%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1994 AND 2.18% AND 2.38%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1993 AND 2.98% AND 1.98%, ANNUALIZED, RESPECTIVELY, FOR THE PERIOD NOVEMBER 4, 1991 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1992. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 2.73% AND 3.01%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 3.00% AND 2.77%, ANNUALIZED, RESPECTIVELY, FOR CLASS C, FOR THE SIX MONTHS ENDED APRIL 30, 1995, 2.93% AND 2.07%, RESPECTIVELY, FOR CLASS B AND 3.10% AND 1.91%, RESPECTIVELY, FOR CLASS C, FOR THE YEAR ENDED OCTOBER 31, 1994 AND 2.88% AND 1.44%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 2.87% AND 1.80%, ANNUALIZED, RESPECTIVELY, FOR CLASS C, FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO OCTOBER 31, 1993. - ------------------------------ (3) OFFERING PRICE. (4) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (5) ANNUALIZED. (6) UNAUDITED. (7) COMMENCEMENT OF OPERATIONS. * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
31 - -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS (FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ----------------------------------- --------------------------------------- Net Distributions Realized Dividends to and to Shareholders Net Net Asset Net Unrealized Shareholders from Net Total Asset Value, Investment Gain Total from from Net Realized Dividends Value, Beginning Income (Loss) on Investment Investment Gain on and End of Total of Period (Loss) Investments Operations Income Investments Distributions Period Return* U.S. Government Income F und Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $10.79 $ 0.32 $ 0.26 $ 0.58 $(0.32) $(0.01) $(0.33) $11.04 5.50% YEAR ENDED OCTOBER 31, 1994 12.08 0.59 (1.08) (0.49) (0.59) (0.21) (0.80) 10.79 (4.15%) 1993 11.92 0.65 0.35 1.00 (0.68) (0.16) (0.84) 12.08 8.55% 1992 11.80 0.74 0.18 0.92 (0.74) (0.06) (0.80) 11.92 7.98% 1991 11.35 0.85 0.61 1.46 (0.86) (0.15) (1.01) 11.80 13.40% 1990 11.50 0.93 (0.06) 0.87 (0.93) (0.09) (1.02) 11.35 7.98% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 10.79 0.28 0.26 0.54 (0.28) (0.01) (0.29) 11.04 5.14% YEAR ENDED OCTOBER 31, 1994 12.08 0.51 (1.08) (0.57) (0.51) (0.21) (0.72) 10.79 (4.84%) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.13(3) 0.08 (0.04) 0.04 (0.08) (0.01) (0.09) 12.08 0.29% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 10.79 0.28 0.26 0.54 (0.28) (0.01) (0.29) 11.04 5.09% YEAR ENDED OCTOBER 31, 1994 12.08 0.51 (1.08) (0.57) (0.51) (0.21) (0.72) 10.79 (4.84%) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 12.13(3) 0.08 (0.04) 0.04 (0.08) (0.01) (0.09) 12.08 0.34% RATIOS ---------------------------------------------- Ratio of Net Net Ratio of Net Investment Assets Operating Income End of Expenses (Loss) Portfolio Period to Average to Average Turnover (000's) Net Assets Net Assets Rate U.S. Government Income Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $ 115,898 1.27%(1,5) 5.99%(1,5) 205% YEAR ENDED OCTOBER 31, 1994 123,257 1.20%(2) 5.19%(2) 126% 1993 189,091 1.15%(2) 5.33%(2) 315% 1992 151,197 1.15%(2) 6.26%(2) 207% 1991 82,400 1.15%(2) 7.24%(2) 309% 1990 52,742 1.15%(2) 8.21%(2) 101% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 10,280 1.93%(1) 5.18%(1) 205% YEAR ENDED OCTOBER 31, 1994 6,813 1.92%(2) 4.53%(2) 126% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 1,286 1.85%(2,5) 3.07%(2,5) 315% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 1,872 2.05%(1) 5.14%(1) 205% YEAR ENDED OCTOBER 31, 1994 1,224 1.94%(2) 4.57%(2) 126% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 141 1.85%(2,5) 3.89%(2,5) 315% (1) AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED APRIL 30, 1995, FOR CLASSES A, B, AND C WERE $116,762,622, $8,585,009, $1,432,342, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED A PORTION OF ITS FEES. IF SUCH WAIVERS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 1.23% AND 5.16%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1994, 1.20% AND 5.28%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1993, 1.17% AND 6.24%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1992, 1.46% AND 6.93%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1991 AND 1.44% AND 7.92%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1990. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.93% AND 4.52%, RESPECTIVELY, FOR CLASS B AND 1.95% AND 4.56%, RESPECTIVELY, FOR CLASS C, FOR THE YEAR ENDED OCTOBER 31, 1994 AND 1.96% AND 2.96%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 1.96% AND 3.78%, ANNUALIZED, RESPECTIVELY, FOR CLASS C, FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO OCTOBER 31, 1993.
INCOME FROM INVESTMENT OPERATIONS DIVIDENDS AND DISTRIBUTIONS ----------------------------------- --------------------------------------- Net Distributions Realized Dividends to and to Shareholders Net Net Asset Net Unrealized Shareholders from Net Total Asset Value, Investment Gain Total from from Net Realized Dividends Value, Beginning Income (Loss) on Investment Investment Gain on and End of Total of Period (Loss) Investments Operations Income Investments Distributions Period Return* Investment Quality Income Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $ 9.67 $ 0.36 $ 0.52 $ 0.88 $(0.36) $-- $(0.36) $10.19 9.28% YEAR ENDED OCTOBER 31, 1994 11.49 0.68 (1.75) (1.07) (0.68) (0.07) (0.75) 9.67 (9.61%) 1993 10.36 0.68 1.19 1.87 (0.68) (0.06) (0.74) 11.49 18.64% 1992 10.06 0.80 0.30 1.10 (0.80) -- (0.80) 10.36 11.21% DECEMBER 18, 1990 (7) TO OCTOBER 31, 1991 10.00(3) 0.71 0.06 0.77 (0.71) -- (0.71) 10.06 8.11% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 9.67 0.33 0.52 0.85 (0.33) -- (0.33) 10.19 8.96% YEAR ENDED OCTOBER 31, 1994 11.49 0.61 (1.75) (1.14) (0.61) (0.07) (0.68) 9.67 (10.22%) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 11.52(3) 0.08 (0.03) 0.05 (0.08) -- (0.08) 11.49 0.45% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 9.67 0.33 0.52 0.85 (0.33) -- (0.33) 10.19 8.92% YEAR ENDED OCTOBER 31, 1994 11.49 0.61 (1.75) (1.14) (0.61) (0.07) (0.68) 9.67 (10.23%) SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 11.52(3) 0.09 (0.03) 0.06 (0.09) -- (0.09) 11.49 0.55% RATIOS ---------------------------------------------- Ratio of Net Net Ratio of Net Investment Assets Operating Income End of Expenses (Loss) Portfolio Period to Average to Average Turnover (000's) Net Assets Net Assets Rate Investment Quality Income Fund Class A, SIX MONTHS ENDED APRIL 30, 1995 (6) $ 45,860 1.41%(1,2,5) 7.41%(1,2,5) 4% YEAR ENDED OCTOBER 31, 1994 46,922 1.29%(2) 6.47%(2) 33% 1993 61,288 1.20%(2) 6.07%(2) 12% 1992 29,701 0.95%(2) 7.62%(2) 18% DECEMBER 18, 1990 (7) TO OCTOBER 31, 1991 17,235 0.82%(2,5) 8.25%(2,5) 19% Class B, SIX MONTHS ENDED APRIL 30, 1995 (6) 9,293 2.01%(1,2,5) 6.71%(1,2,5) 4% YEAR ENDED OCTOBER 31, 1994 6,605 1.92%(2) 5.85%(2) 33% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 1,468 1.84%(2,5) 3.68%(2,5) 12% Class C, SIX MONTHS ENDED APRIL 30, 1995 (6) 3,306 2.07%(1,2,5) 6.70%(1,2,5) 4% YEAR ENDED OCTOBER 31, 1994 2,583 1.90%(2) 6.01%(2) 33% SEPTEMBER 2, 1993 (4) TO OCTOBER 31, 1993 101 1.84%(2,5) 4.83%(2,5) 12% (1) AVERAGE NET ASSETS FOR THE SIX MONTHS ENDED APRIL 30, 1995, FOR CLASSES A, B, AND C WERE $44,895,780, $7,602,107, $2,880,817, RESPECTIVELY. (2) DURING THE PERIODS PRESENTED ABOVE, THE ADVISER VOLUNTARILY WAIVED ALL OR A PORTION OF ITS FEES AND REIMBURSED THE FUND FOR A PORTION OF ITS OPERATING EXPENSES. IF SUCH WAIVERS AND REIMBURSEMENTS HAD NOT BEEN IN EFFECT, THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS FOR CLASS A WOULD HAVE BEEN 1.26% AND 7.56%, ANNUALIZED, RESPECTIVELY, FOR THE SIX MONTHS ENDED APRIL 30, 1995, 1.59% AND 6.17%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1994, 1.50% AND 5.77%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1993, 1.72% AND 6.85%, RESPECTIVELY, FOR THE YEAR ENDED OCTOBER 31, 1992, AND 2.11% AND 6.96%, ANNUALIZED, RESPECTIVELY, FOR THE PERIOD DECEMBER 18, 1990 (COMMENCEMENT OF OPERATIONS) TO OCTOBER 31, 1991. THE RATIOS OF NET OPERATING EXPENSES TO AVERAGE NET ASSETS AND THE RATIOS OF NET INVESTMENT INCOME TO AVERAGE NET ASSETS WOULD HAVE BEEN 1.86% AND 6.86%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 1.92% AND 6.85%, ANNUALIZED, RESPECTIVELY FOR CLASS C, FOR THE SIX MONTHS ENDED APRIL 30, 1995, 2.23% AND 5.54%, RESPECTIVELY, FOR CLASS B AND 2.21% AND 5.70%, RESPECTIVELY, FOR CLASS C, FOR THE YEAR ENDED OCTOBER 31, 1994 AND 2.07% AND 3.45%, ANNUALIZED, RESPECTIVELY, FOR CLASS B AND 2.06% AND 4.61%, ANNUALIZED, RESPECTIVELY, FOR CLASS C FOR THE PERIOD SEPTEMBER 2, 1993 (INITIAL OFFERING) TO OCTOBER 31, 1993. - ------------------------------ (3) OFFERING PRICE. (4) INITIAL OFFERING OF CLASS B AND CLASS C SHARES. (5) ANNUALIZED. (6) UNAUDITED. (7) COMMENCEMENT OF OPERATIONS. * ASSUMES REINVESTMENT OF ALL DIVIDENDS AND DISTRIBUTIONS, BUT DOES NOT REFLECT DEDUCTIONS FOR SALES CHARGES. AGGREGATE (NOT ANNUALIZED) TOTAL RETURN IS SHOWN FOR ANY PERIOD SHORTER THAN ONE YEAR.
32 (This page has been left blank intentionally.) THE QUEST FOR VALUE FAMILY OF FUNDS - -------------------------------------------------------------------------------- EQUITY FUNDS QUEST FOR VALUE FUND invests primarily in common stocks with an objective of capital appreciation. QUEST FOR VALUE OPPORTUNITY FUND seeks capital appreciation by investing through a mix of stocks, fixed income and money market securities. QUEST FOR VALUE SMALL CAPITALIZATION FUND seeks capital appreciation by investing primarily in undervalued stocks of companies with market capitalizations under $1 billion. QUEST FOR VALUE GLOBAL EQUITY FUND seeks long term growth through a global investment strategy primarily involving equity securities. QUEST FOR VALUE GROWTH AND INCOME FUND seeks total return by investing in a combination of stocks, U.S. government securities and investment grade bonds. FIXED-INCOME FUNDS QUEST FOR VALUE INVESTMENT QUALITY INCOME FUND seeks high monthly income consistent with conservation of principal through a portfolio of corporate and U.S. government bonds, 80% of which are rated A or better. QUEST FOR VALUE GLOBAL INCOME FUND invests in fixed income securities of domestic and foreign governments and corporations with an objective of high monthly income. QUEST FOR VALUE U.S. GOVERNMENT INCOME FUND seeks high current income together with protection of principal by investing in U.S. government securities. QUEST FOR VALUE TAX EXEMPT FUNDS are three portfolios investing in investment grade municipal obligations with the objective of high current income exempt from federal taxes and, in some cases, state and local income taxes. The three portfolios are: the National Tax Exempt Fund, the New York Tax Exempt Fund and the California Tax Exempt Fund. - -------------------------------------------------------------------------------- QUEST FOR VALUE QUEST FOR VALUE DIRECTORS (TRUSTEES) AND OFFICERS JOSEPH M. LA MOTTA DIRECTOR (TRUSTEE), PRESIDENT PAUL Y. CLINTON DIRECTOR (TRUSTEE) THOMAS W. COURTNEY DIRECTOR (TRUSTEE) LACY B. HERRMANN DIRECTOR (TRUSTEE) GEORGE LOFT DIRECTOR (TRUSTEE) BERNARD H. GARIL VICE PRESIDENT ROBERT J. BLUESTONE VICE PRESIDENT RICHARD J. GLASEBROOK, II VICE PRESIDENT COLIN GLINSMAN VICE PRESIDENT LOUIS GOLDSTEIN VICE PRESIDENT VIKKI HANGES VICE PRESIDENT JENNY BETH JONES VICE PRESIDENT EILEEN P. ROMINGER VICE PRESIDENT GEORGE TILGHMAN VICE PRESIDENT SHELDON SIEGEL TREASURER DEBORAH KABACK SECRETARY LESLIE KLEIN ASSISTANT TREASURER THOMAS E. DUGGAN ASSISTANT SECRETARY MARIA CAMACHO ASSISTANT SECRETARY INVESTMENT ADVISER QUEST FOR VALUE ADVISORS ONE WORLD FINANCIAL CENTER NEW YORK, NY 10281 DISTRIBUTOR QUEST FOR VALUE DISTRIBUTORS TWO WORLD FINANCIAL CENTER NEW YORK, NY 10080 TRANSFER AND SHAREHOLDER SERVICING AGENT STATE STREET BANK AND TRUST COMPANY P.O. BOX 8505 BOSTON, MA 02266 CUSTODIAN STATE STREET BANK AND TRUST COMPANY P.O. BOX 351 BOSTON, MA 02101 TABLE OF CONTENTS PRESIDENT'S LETTER........................... 1 INVESTMENT REVIEW............................ 3 SCHEDULES OF INVESTMENTS..................... 10 STATEMENTS OF ASSETS AND LIABILITIES......... 20 STATEMENTS OF OPERATIONS..................... 21 STATEMENTS OF CHANGES IN NET ASSETS.......... 22 NOTES TO FINANCIAL STATEMENTS................ 24 FINANCIAL HIGHLIGHTS......................... 30 QUEST FOR VALUE FUND, INC. OPPORTUNITY FUND SMALL CAPITALIZATION FUND GROWTH AND INCOME FUND U.S. GOVERNMENT INCOME FUND INVESTMENT QUALITY INCOME FUND SEMI-ANNUAL REPORT APRIL 30, 1995 MANAGED BY QUEST FOR VALUE ADVISORS THIS REPORT IS AUTHORIZED FOR DISTRIBUTION ONLY TO SHAREHOLDERS AND TO OTHERS WHO HAVE RECEIVED A COPY OF THE PROSPECTUS. PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES June 30, 1995 (Unaudited) Oppenheimer Bond Fund and Quest for Value Investment Quality Income Fund
Quest for Value Investment Combined Oppenheimer Quality Oppenheimer Bond Fund Income Fund Bond Fund Assets Investments, at value* $134,074,884 $60,481,685 $194,556,569 Receivables: Interest and principal paydowns1,593,375 1,296,987 2,890,362 Shares of beneficial interest sold251,712 16,180 267,892 Investments sold 10,861,821 -- 10,861,821 Other 26,066 27,961 54,027 Total assets 146,807,858 61,822,813 208,630,671 Liabilities Bank overdraft 75,439 (28,456) 46,983 Payables and other liabilities: Investments purchased 19,267,031 -- 19,267,031 Dividends 499,146 92,901 592,047 Shares of beneficial interest redeemed294,005 1,579 295,584 Distribution and service plan fees72,871 7,581 80,452 Transfer and shareholder servicing agent fees 9,378 -- 9,378 Other 24,964 69,794 94,758 Total liabilities 20,242,834 143,399 20,386,233 Net Assets $126,565,024 $61,679,414 $188,244,438 Net Asset Value and Redemption Price Per Share Class A Shares: Net asset value and redemption price per share (based on net assets of $118,864,206, $47,384,068, and $166,248,274 and 10,995,949, 4,417,757, and 15,379,305 shares of beneficial interest outstanding for Oppenheimer Bond Fund, Quest for Value Investment Quality Income Fund and Combined Oppenheimer Bond Fund, respectively). $10.81 $10.73 $10.81 Maximum offering price per share (net asset value plus sales charge 4.75% of offering price)$11.35 $11.27 $11.35
PRO FORMA COMBINING STATEMENT OF ASSETS AND LIABILITIES June 30, 1995 (Unaudited) Oppenheimer Bond Fund and Quest for Value Investment Quality Income Fund
Quest for Value Investment Combined Oppenheimer Quality Oppenheimer Bond Fund Income Fund Bond Fund Class B Shares: Net asset value and redemption price per share (based on net assets of $7,700,818 and $10,751,740 and $18,452,558 and 712,334, 1,002,425, and 1,706,945 shares of beneficial interest outstanding for Oppenheimer Bond Fund, Quest for Value Investment Quality Income Fund, and Combined Oppenheimer Bond Fund, respectively). $10.81 $10.73 $10.81 Class C Shares: Net asset value and redemption price per share (based on net assets of $3,543,606 and $3,543,606 and 330,312 and 327,809 shares of beneficial interest outstanding for Oppenheimer Bond Fund, Quest for Value Investment Quality Income Fund, and Combined Oppenheimer Bond Fund, respectively).$ --$10.73 $10.81 *Cost $131,622,464 $57,935,158 $189,557,622
PRO FORMA COMBINING STATEMENT OF OPERATIONS For The Six Months Ended June 30, 1995 (Unaudited) Oppenheimer Bond Fund and Quest for Value Investment Quality Income Fund
Quest for Value Investment Combined OppenheimerQuality Pro FormaOppenheimer Bond Fund Income FundAdjustmentsBond Fund Investment Income: Interest $ 4,185,138$2,437,470 $6,622,608 Expenses: Management fees 421,551 171,225 68,800 (1) 661,576 Distribution and service plan fees: Class A 131,136 90,453(33,451)(2) 188,138 Class B 27,526 43,519 71,045 Class C 15,723 15,723 Transfer agency 106,447 -- 106,447 Class A 22,518 22,518 Class B 4,607 (2,869)(3) 1,738 Class C 1,981 1,981 Shareholder reports 40,946 11,206 52,152 Legal and audit 10,458 11,775 22,233 Trustees' fees -- 8,529 8,529 Custodian fees 12,853 9,990 22,843 Registration and filing fees 16,022 (7,522)(3) 8,500 Class A 559 -- 559 Class B 810 -- 810 Class C Other 8,053 61,871(52,897)(3) 17,027 Total expenses 760,339 469,419(27,939) 1,201,819 Less: Investment advisory fees waived -- (23,063) 23,063 Net expenses 760,339 446,356 (4,876)1,201,819 Net Investment Income 3,424,799 1,991,114 4,876 5,420,789
Realized and Unrealized Gain on Investments: Net realized gain on investments213,04911,446 224,495 Net change in unrealized appreciation or depreciation on investments8,295,9695,677,759 13,973,728
PRO FORMA COMBINING STATEMENT OF OPERATIONS For The Six Months Ending June 30, 1995 (Unaudited) Oppenheimer Bond Fund and Quest for Value Investment Quality Income Fund
Quest for Value Investment Combined OppenheimerQuality Pro FormaOppenheimer Bond Fund Income FundAdjustmentsBond Fund Net realized and unrealized gain on investments 8,509,018 5,689,205 14,198,223 Net Increase in Net Assets Resulting from Operations $11,933,817$7,680,319 $4,876$19,619,012
(1) Calculated in accordance with the proposed investment advisory agreement of Oppenheimer Bond Fund (.75% on the first $200 million of net assets with a reduction of .03% on each $200 million thereafter to $800 million, .60% on the next $200 million and .50% on net assets in excess of $1 billion). This assumes that the management fee structure had been in place for the entire period. (2) Calculated in accordance with existing Distribution and Service Plan Agreement for Oppenheimer Bond Fund. (3) Estimated fee for similar size Funds. Adjustments reflect expected savings when the two Funds combine. ========================================================== Pro Forma Combining Statement of Investments June 30, 1995(Unaudited) Oppenheimer Bond Fund and Quest for Value Investment Quality Income Fund
Face Amount Market Value ------------------------------------- ----------------------------------- Quest Quest Investment Investment Oppenheimer Quality Oppenheimer Quality Bond Income Pro Forma Bond Income Pro Forma Fund Fund Combined Fund Fund Combined ========================================================== Short-Term Notes - 18.2% - ------------------------------------------------------------------------------------------------------------------------------------ Baxter International, Inc., 6.05%, 7/7/95 $ 2,260,000 $ -- $ 2,260,000 $ 2,257,721 $ -- $ 2,257,721 ---------------------------------------------------------------------------------------------------------------------------- Beneficial Corp., 6.00%, 7/14/95 -- 540,000 540,000 -- 538,830 538,830 ---------------------------------------------------------------------------------------------------------------------------- Boston Edison Co., 6.07%, 7/6/95 2,500,000 -- 2,500,000 2,497,892 -- 2,497,892 ---------------------------------------------------------------------------------------------------------------------------- Burlington Northern Railroad Co., 6.10%, 7/27/95 2,500,000 -- 2,500,000 2,488,986 -- 2,488,986 ---------------------------------------------------------------------------------------------------------------------------- ConAgra, Inc., 6.05%, 7/5/95 2,175,000 -- 2,175,000 2,173,538 -- 2,173,538 ---------------------------------------------------------------------------------------------------------------------------- Deere (John) Capital Corp., 5.93%, 7/13/95 -- 580,000 580,000 -- 578,853 578,853 ---------------------------------------------------------------------------------------------------------------------------- Eastman Chemical Co., 6.10%, 7/20/95 2,400,000 -- 2,400,000 2,392,273 -- 2,392,273 ---------------------------------------------------------------------------------------------------------------------------- GTE Corp., 6.03%, 7/12/95 1,070,000 -- 1,070,000 1,068,029 -- 1,068,029 ---------------------------------------------------------------------------------------------------------------------------- Household Finance Corp., 5.95%, 7/11/95 -- 684,000 684,000 -- 682,869 682,869 ---------------------------------------------------------------------------------------------------------------------------- Illinois Power Co., 6.07%, 7/18/95 1,590,000 -- 1,590,000 1,585,442 -- 1,585,442 ---------------------------------------------------------------------------------------------------------------------------- Indiana & Michigan Power Co., 6.05%-6.22%, 7/11/95 760,000 -- 760,000 758,723 -- 758,723 ---------------------------------------------------------------------------------------------------------------------------- Orix Credit Alliance, Inc., 6.11%, 7/14/95 2,500,000 -- 2,500,000 2,494,484 -- 2,494,484 ---------------------------------------------------------------------------------------------------------------------------- Pacific Telecom, Inc., 6.125%-6.15%, 7/31/95 1,345,000 -- 1,345,000 1,338,135 -- 1,338,135 ---------------------------------------------------------------------------------------------------------------------------- Rite Aid Corp., 6.05%, 7/19/95 1,730,000 -- 1,730,000 1,724,767 -- 1,724,767 ---------------------------------------------------------------------------------------------------------------------------- Ryder System, Inc., 6.15%, 7/28/95 2,500,000 -- 2,500,000 2,488,469 -- 2,488,469 ---------------------------------------------------------------------------------------------------------------------------- Sonat, Inc., 6.08%, 7/13/95 1,960,000 -- 1,960,000 1,956,028 -- 1,956,028 ---------------------------------------------------------------------------------------------------------------------------- SuperValu Stores, Inc., 6.10%, 8/1/95 1,985,000 -- 1,985,000 1,974,573 -- 1,974,573 ---------------------------------------------------------------------------------------------------------------------------- Texaco, Inc., 5.96%, 7/06/95 -- 1,200,000 1,200,000 -- 1,199,007 1,199,007 ---------------------------------------------------------------------------------------------------------------------------- Textron Financial Corp., 6.07%, 7/10/95 2,500,000 -- 2,500,000 2,496,206 -- 2,496,206 ---------------------------------------------------------------------------------------------------------------------------- Tyson Foods, Inc., 6.05%, 7/21/95 1,490,000 -- 1,490,000 1,484,992 -- 1,484,992 ----------------------------------- Total Short-Term Notes (Cost $31,180,258, $2,999,559, Combined $34,179,817) 31,180,258 2,999,559 34,179,817 ========================================================== Asset-Backed Securities - 3.1% - ------------------------------------------------------------------------------------------------------------------------------------ Auto Loan - 3.1% ---------------------------------------------------------------------------------------------------------------------------- Daimler-Benz Vehicle Trust, Series 1994-A, Cl. A, 5.95%, 12/15/00 614,013 -- 614,013 613,934 -- 613,934 ---------------------------------------------------------------------------------------------------------------------------- Ford Credit Grantor Trust, Series 1994-B, Cl. A, 7.30%, 10/15/99 1,209,370 -- 1,209,370 1,230,027 -- 1,230,027 ---------------------------------------------------------------------------------------------------------------------------- General Motors Acceptance Corp., Grantor Trust, Series 1992-E, Cl. A, 4.75%, 8/15/97 311,342 -- 311,342 309,704 -- 309,704 ---------------------------------------------------------------------------------------------------------------------------- Nissan Auto Receivables Grantor Trust, Series 1994-A, Cl. A, 6.45%, 9/15/99 1,742,150 -- 1,742,150 1,752,551 -- 1,752,551 ---------------------------------------------------------------------------------------------------------------------------- World Omni Automobile Lease Securitization Trust, Series 1994-A, Cl. A, 6.45%, 9/25/00 2,000,000 -- 2,000,000 2,011,600 -- 2,011,600 ----------------------------------- Total Asset-Backed Securities (Cost $5,867,852) 5,917,816 -- 5,917,816
Mortgage-Backed Obligations - 9.2% - ------------------------------------------------------------------------------------------------------------------------------------ Government Agency - 8.1% - ------------------------------------------------------------------------------------------------------------------------------------ FHLMC/FNMA/Sponsored - 5.0% ---------------------------------------------------------------------------------------------------------------------------- Federal Home Loan Mortgage Corp.: Certificates of Participation, 9%, 3/1/17 734,171 -- 734,171 766,178 -- 766,178 Certificates of Participation, Series 17-039, 13.50%, 11/1/10 89,109 -- 89,109 102,045 -- 102,045 Certificates of Participation, Series 17-094, 12.50%, 4/1/14 48,706 -- 48,706 55,287 -- 55,287 Collateralized Mtg. Obligation Gtd. Multiclass Certificates of Participation, Series 1322, Cl. G, 7.50%, 2/15/07 2,000,000 -- 2,000,000 2,074,660 -- 2,074,660 Multiclass Gtd. Mtg. Participation Certificates, Series 1460, Cl. H, 7%, 5/15/07 1,500,000 -- 1,500,000 1,521,300 -- 1,521,300 ---------------------------------------------------------------------------------------------------------------------------- Federal National Mortgage Assn.: Gtd. Mtg. Pass-Through Certificates, 8%, 8/1/17 993,349 -- 993,349 1,019,639 -- 1,019,639 Collateralized Mtg. Obligation Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Series 1993-175, Cl. PL, 5%, 10/25/02 2,000,000 -- 2,000,000 1,958,640 -- 1,958,640 Collateralized Mtg. Obligation Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Series 1993-191, Cl. PD, 5.40%, 3/25/04 1,500,000 -- 1,500,000 1,459,950 -- 1,459,950 Interest-Only Collateralized Mtg. Obligations, Gtd. Real Estate Mtg. Investment Conduit Pass-Through Certificates, Trust 1992 G-57, Cl. SA, 35.85%, 10/25/22 (1) 529,602 -- 529,602 397,202 -- 397,202 -------------------------------------- 9,354,901 -- 9,354,901 - ------------------------------------------------------------------------------------------------------------------------------------ GNMA/Guaranteed - 3.1% ---------------------------------------------------------------------------------------------------------------------------- Government National Mortgage Assn.: 10%, 11/15/09 467,695 -- 467,695 507,265 -- 507,265 12%, 1/15/99-5/15/14 76,028 -- 76,028 81,435 -- 81,435 12.75%, 6/15/15 43,874 -- 43,874 50,737 -- 50,737 6%, 10/20/24 (2) 2,000,000 -- 2,000,000 2,005,625 -- 2,005,625 8%, 6/15/05-10/15/06 2,547,389 -- 2,547,389 2,631,481 -- 2,631,481 9%, 2/15/09-6/15/09 606,003 -- 606,003 638,044 -- 638,044 ----------------------------------- 5,914,587 -- 5,914,587 - ------------------------------------------------------------------------------------------------------------------------------------ Other - 1.1% - ------------------------------------------------------------------------------------------------------------------------------------ JHM Mtg. Acceptance Corp., 8.96% Collateralized Mtg. Obligation Bonds, Series E, Cl. 5, 4/1/19 1,928,395 -- 1,928,395 2,044,292 -- 2,044,292 ----------------------------------- Total Mortgage-Backed Obligations (Cost $17,391,169) 17,313,780 -- 17,313,780 ========================================================== U.S. Government Obligations - 22.0% - ------------------------------------------------------------------------------------------------------------------------------------ Agency - 2.1% - ------------------------------------------------------------------------------------------------------------------------------------ Government Agency/Full Faith - 2.1% ---------------------------------------------------------------------------------------------------------------------------- Allentown, Pennsylvania, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 65,000 -- 65,000 71,876 -- 71,876 ---------------------------------------------------------------------------------------------------------------------------- Babylon, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 115,000 -- 115,000 112,592 -- 112,592 ---------------------------------------------------------------------------------------------------------------------------- Bakersfield, California, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 255,000 -- 255,000 249,661 -- 249,661 ---------------------------------------------------------------------------------------------------------------------------- Boston, Massachusetts, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 795,000 -- 795,000 778,355 -- 778,355
---------------------------------------------------------------------------------------------------------------------------- Buena Vista Township, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 270,000 -- 270,000 264,347 -- 264,347 ---------------------------------------------------------------------------------------------------------------------------- Buffalo, New York, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 400,000 -- 400,000 391,625 -- 391,625 ---------------------------------------------------------------------------------------------------------------------------- Detroit, Michigan, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 405,000 -- 405,000 396,521 -- 396,521 ---------------------------------------------------------------------------------------------------------------------------- Fajardo, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 300,000 -- 300,000 331,735 -- 331,735 ---------------------------------------------------------------------------------------------------------------------------- New Haven, Connecticut, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 400,000 -- 400,000 442,299 -- 442,299 ---------------------------------------------------------------------------------------------------------------------------- Roanoke, Virginia, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 220,000 -- 220,000 215,394 -- 215,394 ---------------------------------------------------------------------------------------------------------------------------- Sacramento County, California Redevelopment Agency, U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 240,000 -- 240,000 234,975 -- 234,975 ---------------------------------------------------------------------------------------------------------------------------- Tacoma, Washington, U.S. Government Gtd. Nts., Series 94A, 5.93%, 8/1/99 165,000 -- 165,000 161,545 -- 161,545 ---------------------------------------------------------------------------------------------------------------------------- Trenton, New Jersey, U.S. Government Gtd. Nts., Series A, 5.93%, 8/1/99 135,000 -- 135,000 132,174 -- 132,174 ---------------------------------------------------------------------------------------------------------------------------- Tujillo Alto, Puerto Rico, U.S. Government Gtd. Nts., Series A, 8.74%, 8/1/01 235,000 -- 235,000 259,851 -- 259,851 ----------------------------------- 4,042,950 -- 4,042,950 - ------------------------------------------------------------------------------------------------------------------------------------ Treasury - 19.9% - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Treasury Bonds: 11.125%, 8/15/03 1,000,000 -- 1,000,000 1,309,062 -- 1,309,062 7.125%, 2/15/23 3,600,000 -- 3,600,000 3,801,373 -- 3,801,373 7.25%, 8/15/22 3,650,000 -- 3,650,000 3,899,795 -- 3,899,795 7.875%, 2/15/21 900,000 -- 900,000 1,025,156 -- 1,025,156 8%, 11/15/21 2,000,000 -- 2,000,000 2,311,874 -- 2,311,874 8.875%, 8/15/17 4,500,000 -- 4,500,000 5,622,188 -- 5,622,188 STRIPS, Zero Coupon, 2/15/15 13,500,000 -- 13,500,000 3,526,994 -- 3,526,994 ---------------------------------------------------------------------------------------------------------------------------- U.S. Treasury Nts.: 5.75%, 8/15/03 1,150,000 -- 1,150,000 1,116,219 -- 1,116,219 6.375%, 8/15/02 750,000 -- 750,000 758,438 -- 758,438 7.25%, 8/15/04 1,000,000 -- 1,000,000 1,068,125 -- 1,068,125 7.50%, 11/15/01 5,500,000 -- 5,500,000 5,902,188 -- 5,902,188 7.50%, 2/15/05 6,500,000 -- 6,500,000 7,082,965 -- 7,082,965 ----------------------------------- 37,424,377 -- 37,424,377 ----------------------------------- Total U.S. Government Obligations (Cost 41,467,327 -- 41,467,327 $40,475,081) ========================================================== Corporate Bonds and Notes - 50.8% - ------------------------------------------------------------------------------------------------------------------------------------ Basic Industry - 3.3% - ------------------------------------------------------------------------------------------------------------------------------------ Chemicals - 0.3% ---------------------------------------------------------------------------------------------------------------------------- Rohm & Haas Co., 9.50%, 4/01/21 -- 500,000 500,000 -- 592,480 592,480 - ------------------------------------------------------------------------------------------------------------------------------------ Metals/Mining - 2.0% ---------------------------------------------------------------------------------------------------------------------------- AMAX, Inc., 9.875% Nts., 6/13/01 1,000,000 -- 1,000,000 1,126,492 -- 1,126,492 ---------------------------------------------------------------------------------------------------------------------------- Newmont Mining Corp., 8.625% Nts., 4/1/02 1,000,000 -- 1,000,000 1,077,506 -- 1,077,506 ---------------------------------------------------------------------------------------------------------------------------- Teck Corp., 8.70% Debs., 5/1/02 1,500,000 -- 1,500,000 1,617,678 -- 1,617,678 ----------------------------------- 3,821,676 -- 3,821,676
- ------------------------------------------------------------------------------------------------------------------------------------ Paper - 1.0% ---------------------------------------------------------------------------------------------------------------------------- Georgia-Pacific Corp., 9.95% Debs., 6/15/02 1,500,000 -- 1,500,000 1,744,662 -- 1,744,662 ---------------------------------------------------------------------------------------------------------------------------- Union Camp Corp., 10.00%, 5/01/19 -- 100,000 100,000 -- 113,533 113,533 ----------------------------------- 1,744,662 113,533 1,858,195 - ------------------------------------------------------------------------------------------------------------------------------------ Consumer Related - 5.3% - ------------------------------------------------------------------------------------------------------------------------------------ Consumer Products - 0.6% ---------------------------------------------------------------------------------------------------------------------------- Toro Co. (The), 11% Debs., 8/1/17 1,000,000 -- 1,000,000 1,074,560 -- 1,074,560 - ------------------------------------------------------------------------------------------------------------------------------------ Food/Beverages/Tobacco - 1.1% ---------------------------------------------------------------------------------------------------------------------------- American Brands, Inc., 7.875%, 1/15/23 -- 2,000,000 2,000,000 -- 2,047,520 2,047,520 - ------------------------------------------------------------------------------------------------------------------------------------ Healthcare - 1.9% ---------------------------------------------------------------------------------------------------------------------------- Grace (W.R.) & Co., 7.25% Medium-Term Nts., 7/15/97 2,000,000 -- 2,000,000 2,024,448 -- 2,024,448 ---------------------------------------------------------------------------------------------------------------------------- Imcera Group, Inc., 6% Nts., 10/15/03 500,000 -- 500,000 474,124 -- 474,124 Service Corp. International, 7% Sr. Nts., 6/1/15 1,000,000 -- 1,000,000 1,019,000 -- 1,019,000 ----------------------------------- 3,517,572 -- 3,517,572 - ------------------------------------------------------------------------------------------------------------------------------------ Leisure - 1.7% ---------------------------------------------------------------------------------------------------------------------------- Time Warner, Inc., 9.15%, 2/01/23 -- 3,000,000 3,000,000 -- 3,111,510 3,111,510 - ------------------------------------------------------------------------------------------------------------------------------------ Energy - 3.7% - ------------------------------------------------------------------------------------------------------------------------------------ Enron Corp., 8.10% Nts., 12/15/96 1,500,000 -- 1,500,000 1,538,329 -- 1,538,329 ---------------------------------------------------------------------------------------------------------------------------- Occidental Petroleum Corp., 11.125%, 6/01/19 -- 3,000,000 3,000,000 -- 3,598,830 3,598,830 ---------------------------------------------------------------------------------------------------------------------------- TransCanada Pipelines Ltd., 9.875%, 1/01/21 -- 1,500,000 1,500,000 -- 1,885,125 1,885,125 ----------------------------------- 1,538,329 5,483,955 7,022,284 - ------------------------------------------------------------------------------------------------------------------------------------ Financial Services - 16.4% - ------------------------------------------------------------------------------------------------------------------------------------ Banks & Thrifts - 2.1% ---------------------------------------------------------------------------------------------------------------------------- NatWest Bancorp, Inc., 9.375%, 11/15/03 -- 70,000 70,000 -- 80,398 80,398 ---------------------------------------------------------------------------------------------------------------------------- NCNB Corp., 10.20%, 7/15/15 -- 1,300,000 1,300,000 -- 1,623,752 1,623,752 ---------------------------------------------------------------------------------------------------------------------------- RBSG Capital Corp., 10.125%, 3/01/04 -- 500,000 500,000 -- 597,695 597,695 ---------------------------------------------------------------------------------------------------------------------------- Westpac Banking Corp., 9.125%, 8/15/01 -- 1,500,000 1,500,000 -- 1,677,585 1,677,585 ----------------------------------- -- 3,979,430 3,979,430 - ------------------------------------------------------------------------------------------------------------------------------------ Diversified Financial - 9.8% ---------------------------------------------------------------------------------------------------------------------------- Beneficial Corp., 12.875%, 8/01/13 -- 20,000 20,000 -- 24,265 24,265 ---------------------------------------------------------------------------------------------------------------------------- BHP Finance USA Ltd., 8.50%, 12/01/12 -- 1,500,000 1,500,000 -- 1,664,415 1,664,415 ---------------------------------------------------------------------------------------------------------------------------- Enterprise Rent-A-Car USA Finance Co., 7.875% Nts., 3/15/98 (3) 1,500,000 -- 1,500,000 1,538,292 -- 1,538,292 ---------------------------------------------------------------------------------------------------------------------------- Ford Motor Credit Co., 9.90% Medium-Term Nts., 11/6/97 2,000,000 -- 2,000,000 2,098,914 -- 2,098,914 ---------------------------------------------------------------------------------------------------------------------------- Ford Motor Credit Co., 8.875%, 11/15/22 -- 2,000,000 2,000,000 -- 2,176,060 2,176,060 ---------------------------------------------------------------------------------------------------------------------------- Goldman Sachs Group LP, 6.20% Nts., 2/15/01 1,500,000 -- 1,500,000 1,432,031 -- 1,432,031 ---------------------------------------------------------------------------------------------------------------------------- ITT Financial Corp., 6.50%, 5/01/11 -- 1,000,000 1,000,000 -- 946,450 946,450 ---------------------------------------------------------------------------------------------------------------------------- Lehman Brothers, Inc.: 9.875%, 10/15/00 -- 865,000 865,000 -- 952,555 952,555 10.00%, 5/15/99 -- 115,000 115,000 -- 124,607 124,607 ---------------------------------------------------------------------------------------------------------------------------- Leucadia National Corp., 7.75% Sr. Nts., 8/15/13 2,000,000 -- 2,000,000 1,949,960 -- 1,949,960 ---------------------------------------------------------------------------------------------------------------------------- Midland American Capital Corp., 12.75%, 11/15/03 -- 205,000 205,000 -- 242,425 242,425 ---------------------------------------------------------------------------------------------------------------------------- Penske Truck Leasing Co. LP, 7.75% Sr. Nts., 5/15/99 1,500,000 -- 1,500,000 1,555,368 -- 1,555,368 ---------------------------------------------------------------------------------------------------------------------------- Prudential Funding Corp., 6.75%, 9/15/23 -- 3,000,000 3,000,000 -- 2,535,000 2,535,000 ---------------------------------------------------------------------------------------------------------------------------- Source One Mortgage Services Corp., 9.00%, 6/01/12 -- 1,250,000 1,250,000 -- 1,287,100 1,287,100 ----------------------------------- 8,574,565 9,952,877 18,527,442
- ------------------------------------------------------------------------------------------------------------------------------------ Insurance - 4.5% ---------------------------------------------------------------------------------------------------------------------------- Aetna Life & Casualty Co., 8.00%, 1/15/17 -- 1,000,000 1,000,000 -- 993,130 993,130 ---------------------------------------------------------------------------------------------------------------------------- Capital Holding Corp., 8.75%, 1/15/17 -- 1,200,000 1,200,000 -- 1,263,804 1,263,804 ---------------------------------------------------------------------------------------------------------------------------- CNA Financial Corp., 7.25%, 11/15/23 -- 2,000,000 2,000,000 -- 1,789,380 1,789,380 ---------------------------------------------------------------------------------------------------------------------------- Comdisco, Inc., 6.50% Nts., 6/15/00 1,500,000 -- 1,500,000 1,486,972 -- 1,486,972 ---------------------------------------------------------------------------------------------------------------------------- Torchmark, Inc., 7.875%, 5/15/23 -- 3,000,000 3,000,000 -- 2,936,250 2,936,250 ----------------------------------- 1,486,972 6,982,564 8,469,536 - ------------------------------------------------------------------------------------------------------------------------------------ Manufacturing - 6.1% - ------------------------------------------------------------------------------------------------------------------------------------ Aerospace/Electronics/Computers - 3.3% ---------------------------------------------------------------------------------------------------------------------------- Boeing Co., 7.50%, 8/15/42 -- 2,000,000 2,000,000 -- 2,001,320 2,001,320 ---------------------------------------------------------------------------------------------------------------------------- McDonnell Douglas Corp., 9.25% Nts., 4/1/02 1,500,000 -- 1,500,000 1,690,873 -- 1,690,873 ---------------------------------------------------------------------------------------------------------------------------- Rolls-Royce Capital, Inc., 7.125% Gtd. Unsec. Unsub. Nts., 7/29/03 2,500,000 -- 2,500,000 2,510,938 -- 2,510,938 ----------------------------------- 4,201,811 2,001,320 6,203,131 - ------------------------------------------------------------------------------------------------------------------------------------ Automotive - 0.6% ---------------------------------------------------------------------------------------------------------------------------- Chrysler Corp., 10.40% Nts., 8/1/99 1,000,000 -- 1,000,000 1,062,621 -- 1,062,621 - ------------------------------------------------------------------------------------------------------------------------------------ Capital Goods - 2.2% ---------------------------------------------------------------------------------------------------------------------------- Caterpillar, Inc., 9.75%, 6/01/19 -- 1,750,000 1,750,000 -- 2,008,405 2,008,405 ---------------------------------------------------------------------------------------------------------------------------- Thomas & Betts Corp., 8.25% Sr. Nts., 1/15/04 1,000,000 -- 1,000,000 1,079,045 -- 1,079,045 ---------------------------------------------------------------------------------------------------------------------------- Westinghouse Electric Corp., 8.375% Nts., 6/15/02 1,000,000 -- 1,000,000 1,054,497 -- 1,054,497 ----------------------------------- 2,133,542 2,008,405 4,141,947 - ------------------------------------------------------------------------------------------------------------------------------------ Media - 2.2% - ------------------------------------------------------------------------------------------------------------------------------------ Cable Television - 1.3% ---------------------------------------------------------------------------------------------------------------------------- Tele-Communications, Inc., 5.28% Medium-Term Nts., 8/20/96 1,000,000 -- 1,000,000 985,566 -- 985,566 ---------------------------------------------------------------------------------------------------------------------------- Tele-Communications, Inc., 8.25% Sr. Nts., 1/15/03 1,500,000 -- 1,500,000 1,546,320 -- 1,546,320 ----------------------------------- 2,531,886 -- 2,531,886 - ------------------------------------------------------------------------------------------------------------------------------------ Publishing/Printing - 0.9% ---------------------------------------------------------------------------------------------------------------------------- Valassis Communications, Inc., 9.55% Sr. Nts., 12/1/03 1,500,000 -- 1,500,000 1,684,645 -- 1,684,645 - ------------------------------------------------------------------------------------------------------------------------------------ Other - 2.0% - ------------------------------------------------------------------------------------------------------------------------------------ Conglomerates - 2.0% ---------------------------------------------------------------------------------------------------------------------------- DLJ Mortgage Acceptance Corp., 8.75%, 11/25/24 -- 1,460,942 1,460,942 -- 1,471,442 1,471,442 ---------------------------------------------------------------------------------------------------------------------------- Nova Scotia (Province of), 8.875%, 7/01/19 -- 1,500,000 1,500,000 -- 1,692,165 1,692,165 ---------------------------------------------------------------------------------------------------------------------------- Textron, Inc., 9.55% Medium-Term Nts., 3/19/01 500,000 -- 500,000 567,789 -- 567,789 ----------------------------------- 567,789 3,163,607 3,731,396 - ------------------------------------------------------------------------------------------------------------------------------------ Retail - 0.4% - ------------------------------------------------------------------------------------------------------------------------------------ Department Stores - 0.4% ---------------------------------------------------------------------------------------------------------------------------- May Department Stores Co.: 9.875%, 6/01/17 -- 250,000 250,000 -- 270,485 270,485 10.625%, 11/01/10 -- 405,000 405,000 -- 524,823 524,823 ----------------------------------- -- 795,308 795,308 - ------------------------------------------------------------------------------------------------------------------------------------ Transportation - 4.8% - ------------------------------------------------------------------------------------------------------------------------------------ Air Transportation - 3.5% ---------------------------------------------------------------------------------------------------------------------------- AMR Corp., 9% Debs., 8/1/12 1,500,000 -- 1,500,000 1,617,442 -- 1,617,442 ---------------------------------------------------------------------------------------------------------------------------- American Airlines, 9.73%, 9/29/14 -- 1,000,000 1,000,000 -- 1,123,280 1,123,280 ---------------------------------------------------------------------------------------------------------------------------- Delta Air Lines, Inc., 10.375%, 2/01/11 -- 550,000 550,000 -- 637,324 637,324 ---------------------------------------------------------------------------------------------------------------------------- Ryder Systems, Inc., 8.75%, 3/15/17 -- 1,600,000 1,600,000 -- 1,693,888 1,693,888
-------------------------------------------------------------------------------------------------------------------------------- United Air Lines, Inc., 10.11% Equipment Trust Certificates, Series 91B, 2/19/06 1,430,581 -- 1,430,581 1,550,909 -- 1,550,909 ------------------------------------- 3,168,351 3,454,492 6,622,843 - ------------------------------------------------------------------------------------------------------------------------------------ Railroad - 1.3% -------------------------------------------------------------------------------------------------------------------------------- Canadian Pacific Ltd., 9.45%, 8/01/21 -- 2,000,000 2,000,000 -- 2,451,960 2,451,960 - ------------------------------------------------------------------------------------------------------------------------------------ Utilities - 6.6% - ------------------------------------------------------------------------------------------------------------------------------------ Electric Utilities - 2.8% -------------------------------------------------------------------------------------------------------------------------------- Hydro-Quebec, 8.50%, 12/01/29 -- 2,000,000 2,000,000 -- 2,172,400 2,172,400 -------------------------------------------------------------------------------------------------------------------------------- Southern California Edison Co., 8.875%, 6/01/24 -- 2,000,000 2,000,000 -- 2,087,980 2,087,980 -------------------------------------------------------------------------------------------------------------------------------- Tenaga Nasional Berhad, 7.875% Nts., 6/15/04 (3) 1,000,000 -- 1,000,000 1,058,726 -- 1,058,726 ------------------------------------- 1,058,726 4,260,380 5,319,106 - ------------------------------------------------------------------------------------------------------------------------------------ Telecommunications - 3.8% -------------------------------------------------------------------------------------------------------------------------------- New York Telephone Co., 9.375%, 7/15/31 -- 2,500,000 2,500,000 -- 2,803,825 2,803,825 -------------------------------------------------------------------------------------------------------------------------------- Pacific Bell, 8.50%, 8/15/31 -- 2,000,000 2,000,000 -- 2,112,780 2,112,780 -------------------------------------------------------------------------------------------------------------------------------- Southern New England Telephone Co., 8.70%, 8/15/31 -- 2,000,000 2,000,000 -- 2,166,180 2,166,180 ------------------------------------- -- 7,082,785 7,082,785 ------------------------------------- Total Corporate Bonds and Notes (Cost $36,708,104, $54,935,599, 38,167,707 57,482,126 95,649,833 Combined $91,643,703) Shares ========================================================== ========================================================== ================ Common Stocks - 0.0% - ------------------------------------------------------------------------------------------------------------------------------------ Foodbrands America, Inc. (Cost $0) 2,113 -- 2,113 27,996 -- 27,996 -------------------------------------------------------------------------------------------------------------------------------- Total Investments, at Value (Cost $131,622,464, $57,935,158, Combined $189,557,622) 105.9% 98.1% 103.3% 134,074,884 60,481,685 194,556,569 -------------------------------------------------------------------------------------------------------------------------------- Liabilities in Excess of Other Assets/Other Assets Net of Liabilities (5.9) 1.9 (3.3) (7,509,860) 1,197,729 (6,312,131) ---------------------------------- ---------------------------------------- Net Assets 100.0% 100.0% 100.0% $126,565,024 $61,679,414 $188,244,438 ================================== ======================================== 1. Interest rate resets monthly, inversely related to LIBOR. Interest-Only Strips represent the right to receive the monthly interest payments on an underlying pool of mortgage loans. These securities are subject to the risk of accelerated principal paydowns as interest rates decline. The principal amount represents the notional amount on which current interest is calculated. 2. When-issued security to be delivered and settled after June 30, 1995. 3. Represents a security sold under Rule 144A, which is exempt from registration under the Securities Act of 1933, as amended. This security has been determined to be liquid under guidelines established by the Board of Trustees. These securities amount to $2,597,018 or 2.05% (Combined 1.38%) of the Fund's net assets, at June 30, 1995.
OPPENHEIMER INTEGRITY FUNDS FORM N-14 PART C OTHER INFORMATION Item 15. Indemnification Reference is made to Article IV of Registrant's Declaration of Trust filed as Exhibit 24(b)(1) to Registrant's Registration Statement and incorporated herein by reference. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of Registrant pursuant to the foregoing provisions or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a trustee, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue. Item 16. Exhibits (1) Amended and Restated Declaration of Trust dated June 26, 1995: Filed with Registrant's Post-Effective Amendment No. 25, 7/10/95, and incorporated herein by reference. (2) Registrant's By-Laws dated 6/25/91: Filed with Registrant's Post-Effective Amendment No. 16, 5/1/92, and refiled pursuant to Item 102 of Regulation S-T with Registrant's Post-Effective Amendment No. 23, 4/28/95, and incorporated herein by reference. (3) Not applicable. (4) Agreement and Plan of Reorganization: See Annex A to Part A of this Registration Statement. (5) (i) Specimen Class A Share Certificate for Oppenheimer Investment Grade Bond Fund: Filed with Registrant's Post-Effective Amendment No. 20, 4/29/94, and incorporated herein by reference. (ii) Specimen Class B Share Certificate for Oppenheimer Investment Grade Bond Fund: Filed with Registrant's Post-Effective Amendment No. 20, 4/29/94, and incorporated herein by reference. (iii) Specimen Class C Share Certificate for Oppenheimer Bond Fund: To be filed by amendment. (6) Investment Advisory Agreement 7/10/95 for Oppenheimer Bond Fund: Filed with Registrant's Post-Effective Amendment No. 25, 7/10/95, and incorporated herein by reference. (7) (i) General Distributor's Agreement dated 10/13/92: Filed with Registrant's Post-Effective Amendment No. 17, 2/26/93, and refiled pursuant to Item 102 of Regulation S-T with Registrant's Post-Effective Amendment No. 23, 4/28/95, and incorporated herein by reference. (ii) Form of Oppenheimer Funds Distributor, Inc. Dealer Agreement: Filed with Post-Effective Amendment No. 14 to the Registration Statement of Oppenheimer Main Street Funds, Inc. (Reg. No. 33-17850), 9/30/94, and incorporated herein by reference. (iii) Form of Oppenheimer Funds Distributor, Inc. Broker Agreement: Filed with Post-Effective Amendment No. 14 to the Registration Statement of Oppenheimer Main Street Funds, Inc. (Reg. No. 33-17850), 9/30/94, and incorporated herein by reference. (iv) Form of Oppenheimer Funds Distributor, Inc. Agency Agreement: Filed with Post-Effective Amendment No. 14 to the Registration Statement of Oppenheimer Main Street Funds, Inc. (Reg. No. 33-17850), 9/30/94, and incorporated herein by reference. (v) Broker Agreement between Oppenheimer Funds Distributor, Inc. and Newbridge Securities, Inc. dated 10/1/86: Filed with Post- Effective Amendment No. 25 to the Registration Statement of Oppenheimer Growth Fund (Reg. No. 2-45272), 11/1/86, and refiled with Post-Effective Amendment No. 45 to the Registration Statement of Oppenheimer Growth Fund (Reg. No. 2-45272), 8/22/94, pursuant to Item 102 of Regulation S-T, and incorporated herein by reference. (8) Retirement Plan for Non-Interested Trustees or Directors (adopted by Registrant - 6/7/90): Previously filed with Post-Effective Amendment No. 97 of Oppenheimer Fund (Reg. No. 2-14586), 8/30/90, refiled with Post-Effective Amendment No. 45 of Oppenheimer Growth Fund (Reg. No. 2-45272), 8/22/94, pursuant to Item 102 of Regulation S-T, and incorporated herein by reference. (9) Custody Agreement dated 11/12/92, between the Registrant and The Bank of New York: Filed with Registrant's Post-Effective Amendment No. 17, 2/26/93, and refiled with Post-Effective Amendment No. 23, 4/28/95 pursuant to Item 102 of Regulation S-T, and incorporated herein by reference. (10) (i) Service Plan and Agreement under Rule 12b-1 of the Investment Company Act of 1940 for Class A shares of Oppenheimer Investment Grade Bond Fund dated 6/22/93: Filed with Registrant's Post- Effective Amendment No. 19, 3/1/94, and incorporated herein by reference. (ii) Distribution and Service Plan and Agreement under Rule 12b-1 of the Investment Company Act of 1940 for Class B shares of Oppenheimer Investment Grade Bond Fund dated 7/10/95: Filed with Registrant's Post-Effective Amendment No. 25, 7/10/95, and incorporated herein by reference. (iii) Distribution and Service Plan and Agreement under Rule 12b-1 of the Investment Company Act of 1940 for Class C shares of Oppenheimer Investment Grade Bond Fund dated 7/10/95: Filed with Registrant's Post-Effective Amendment No. 25, 7/10/95, and incorporated herein by reference. (11) Opinion and Consent of Counsel dated 2/11/91: Incorporated herein by reference to Registrant's Rule 24f-2 Notice filed on 2/19/91. (12) Tax Opinion Relating to the Reorganization: Draft Form of Opinion filed herewith. (13) Not applicable. (14) (i) Consent of Deloitte & Touche LLP: To be filed by amendment. (ii) Consent of Price Waterhouse LLP: To be filed by amendment. (15) Not applicable. (16) Not applicable (17) Declaration of Registrant under Rule 24f-2: Filed herewith. Item 17. Undertakings (1) Not applicable. (2) Not applicable. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and/or the Investment Company Act of 1940, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver and State of Colorado on the 22nd day of August, 1995. OPPENHEIMER INTEGRITY FUNDS By: /s/ James C. Swain ---------------------------------- James C. Swain, Chairman Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities on the dates indicated: Signatures Title Date /s/ James C. Swain Chairman of the - ------------------ Board of Trustees August 22, 1995 James C. Swain /s/ Jon S. Fossel Chief Executive - ------------------ Officer and August 22, 1995 Jon S. Fossel Trustee /s/ George C. Bowen Chief Financial - ------------------- and Accounting August 22, 1995 George C. Bowen Officer /s/ Robert G. Avis Trustee August 22, 1995 - ------------------ Robert G. Avis /s/ William A. Baker Trustee August 22, 1995 - -------------------- William A. Baker /s/ Charles Conrad, Jr. Trustee August 22, 1995 - ----------------------- Charles Conrad, Jr. /s/ Raymond J. Kalinowski Trustee August 22, 1995 - ------------------------- Raymond J. Kalinowski /s/ C. Howard Kast Trustee August 22, 1995 - ------------------ C. Howard Kast /s/ Robert M. Kirchner Trustee August 22, 1995 - ---------------------- Robert M. Kirchner /s/ Ned M. Steel Trustee August 22, 1995 - ---------------- Ned M. Steel OPPENHEIMER INTEGRITY FUNDS EXHIBIT INDEX Exhibit Description - ------- ----------- 16(12) Tax Opinion in Draft Form 16(17)(i) Declaration of the Registrant Under Rule 24f-2 16(17)(ii) Financial Data Schedules EX-8 2 COUNSEL LETTER (Letterhead of Price Waterhouse LLP) The parties shall have received a favorable opinion from Price Waterhouse LLP (based on such representations as such firm shall reasonably request), addressed to Oppenheimer Fund and Quest Portfolio, which opinion may be relied upon by the shareholders of Oppenheimer Fund and Quest Portfolio, substantially to the effect that, for federal income tax purposes: (1) The transfer of substantially all of Quest Portfolio's assets in exchange for Oppenheimer Fund Shares and the assumption by Oppenheimer Fund of certain identified liabilities of Quest Portfolio followed by the distribution by Quest Portfolio of Oppenheimer Fund Shares to the Quest Portfolio Shareholders in exchange for their Quest Portfolio Shares will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code and Quest Portfolio and Oppenheimer Fund will each be a "party to the reorganization" within the meaning of Section 368(b) of the Code; (2) Pursuant to Section 1032 of the Code, no gain or loss will be recognized by Oppenheimer Fund upon the receipt of the assets of Quest Portfolio solely in exchange for Oppenheimer Fund Shares and the assumption by Oppenheimer Fund of the identified liabilities of Quest Portfolio; (3) Pursuant to Section 361(a) of the Code, no gain or loss will be recognized by Quest Portfolio upon the transfer of the assets of Quest Portfolio to Oppenheimer Fund in exchange for Oppenheimer Fund Shares and the assumption by Oppenheimer Fund of the identified liabilities of Quest Portfolio, or upon the distribution of Oppenheimer Fund Shares to the Quest Portfolio Shareholders in exchange for the Quest Portfolio shares; (4) Pursuant to Section 354(a) of the Code, no gain or loss will be recognized by the Quest Portfolio Shareholders upon the exchange of the Quest Portfolio Shares for the Oppenheimer Fund Shares; (5) Pursuant to Section 358 of the Code, the aggregate tax basis for Oppenheimer Fund Shares received by each Quest Portfolio Shareholder pursuant to the Reorganization will be the same as the aggregate tax basis of the Quest Portfolio Shares held by each such Quest Portfolio Shareholder immediately prior to the Reorganization; (6) Pursuant to Section 1223 of the Code, the holding period of Oppenheimer Fund Shares to be received by each Quest Portfolio Shareholder will include the period during which the Quest Portfolio Shares surrendered in exchange therefor were held (provided such Quest Portfolio Shares were held as capital assets on the date of the Reorganization); (7) Pursuant to Section 362(b) of the Code, the tax basis of the assets of Quest Portfolio acquired by Oppenheimer Fund will be the same as the tax basis of such assets to Quest Portfolio immediately prior to the Reorganization; (8) Pursuant to Section 1223 of the Code, the holding period of the assets of Quest Portfolio in the hands of Oppenheimer Fund will include the period during which those assets were held by Quest Portfolio; and (9) Oppenheimer Fund will succeed to and take into account the items of Quest Portfolio described in Section 381(c) of the Code, including the earnings and profits, or deficit in earnings and profits, of Quest Portfolio as of the date of the transaction. Oppenheimer Fund will take those items into account subject to the conditions and limitations specified in Sections 381, 382, 383 and 384 of the Code and applicable regulations thereunder. EX-99 3 24F-2 February 28, 1995 Securities and Exchange Commission 450 Fifth Street, NW Washington, DC 20549 Attn.: Mr. Frank Donaty, Jr. Mrs. Patricia P. Williams Re: Oppenheimer Integrity Funds/Reg. No. 2-76547, File No. 811-3420 To the Securities and Exchange Commission: Enclosed for your information and files is a copy of an electronic ("EDGAR") filing made pursuant to Rule 24f-2 of the Investment Company Act of 1940 (the "1940 Act") on February 27, 1995 on behalf of Oppenheimer Investment Grade Bond Fund and Oppenheimer Value Stock Fund, the two series of Oppenheimer Integrity Funds (the "Fund"), accompanied by an opinion of counsel for the registration of additional shares of each such series. The filing fees of $619 and $1,917, respectively, calculated at the rate of 1/29 of 1% of the value of the Fund's shares sold in excess of the shares redeemed for the fiscal year ended December 31, 1994, were wired to the SEC's account at Mellon Bank on February 21, 1995 (Fed Wire Nos. 2733 and 2735) and referenced this filing. The Fund has previously registered an indefinite number of shares pursuant to Rule 24f-2. The purpose of the Notice is to make definite the registration of shares in reliance on Rule 24f-2 as follows:
Oppenheimer Investment Grade Bond Fund Oppenheimer Value Stock Fund Class A: 1,071,379 Class A: 1,880,960 Class B: 293,817 Class B: 499,617
Very truly yours, Katherine P. Feld Vice President & Associate Counsel (212) 323-0252 KPF/gl Enclosures cc: Allan B. Adams, Esq. Lynn Coluccy Gloria LaFond SEC/285325.24F Rule 24f-2 Notice for Oppenheimer Integrity Funds for the account of Oppenheimer Investment Grade Bond Fund 3410 South Galena Street, Denver, Colorado 80231 (Registration No. 2-76547, File No. 811-3240) NOTICE IS HEREBY GIVEN that Oppenheimer Integrity Funds for the account of Oppenheimer Investment Grade Bond Fund having previously filed by post- effective amendment to its registration statement a declaration that an indefinite number of its shares of beneficial interest were being registered pursuant to Rule 24f-2 of the Investment Company Act of 1940, now elects to continue such indefinite registration. (i) This Notice is being filed for the fiscal year ended December 31, 1994. (ii) Shares registered other than pursuant to this Rule that remained unsold at the beginning of the above fiscal year were as follows: Class A: 0 Class B: 0 (iii) Shares registered other than pursuant to this Rule during the above fiscal year were as follows: Class A: 221,891 Class B: 0 (iv) The number of shares sold during the above fiscal year were as follows: (1) Class A: 1,071,379 Class B: 293,817 (v) Shares sold during the above fiscal year in reliance upon registration pursuant to this Rule were as follows: Class A: 1,071,379 Class B: 293,817 Pursuant to the requirements of the Investment Company Act of 1940, the undersigned registrant has caused this notice to be signed on its behalf this 22nd day of February, 1995. Oppenheimer Integrity Funds for the account of Oppenheimer Investment Grade Bond Fund By /s/ Robert G. Zack ----------------------------------- Robert G. Zack, Assistant Secretary __________________ (1) The calculation of the aggregate sales price is made pursuant to Rule 24f-2 of the Investment Company Act of 1940. Based upon an actual aggregate sales price and redemption price for the respective class during the previous fiscal year as shown below, the total filing fee (calculated at the rate of 1/29 of 1%) is as given below. Class A shares to be re- registered pursuant to Rule 24e-2 total 633,129.
Difference Value of Between Value Value of Shares Sold & Value Filing Shares Sold Redeemed Redeemed Fee Class A $11,399,405 ($17,865,173) ($6,465,768) $-0- Class B $ 3,089,618 ($ 1,294,834) $1,794,784 $619 Total $619
SEC/285325.24F Rule 24f-2 Notice for Oppenheimer Integrity Funds for the account of Oppenheimer Value Stock Fund 3410 South Galena Street, Denver, Colorado 80231 (Registration No. 2-76547, File No. 811-3420) NOTICE IS HEREBY GIVEN that Oppenheimer Integrity Funds for the account of Oppenheimer Value Stock Fund having previously filed by post-effective amendment to its registration statement a declaration that an indefinite number of its shares of beneficial interest were being registered pursuant to Rule 24f-2 of the Investment Company Act of 1940, now elects to continue such indefinite registration. (i) This Notice is being filed for the fiscal year ended December 31, 1994. (ii) Shares registered other than pursuant to this Rule that remained unsold at the beginning of the above fiscal year were as follows: Class A: 0 Class B: 0 (iii) Shares registered other than pursuant to this Rule during the above fiscal year were as follows: Class A: 0 Class B: 0 (iv) The number of shares sold during the above fiscal year were as follows: (1) Class A: 1,880,960 Class B: 499,617 (v) Shares sold during the above fiscal year in reliance upon registration pursuant to this Rule were as follows: Class A: 1,880,960 Class B: 499,617 Pursuant to the requirements of the Investment Company Act of 1940, the undersigned registrant has caused this notice to be signed on its behalf this 22nd day of February, 1995. Oppenheimer Integrity Funds for the account of Oppenheimer Value Stock Fund By /s/ Robert G. Zack ----------------------------------- Robert G. Zack, Assistant Secretary __________________ (1) The calculation of the aggregate sales price is made pursuant to Rule 24f-2 of the Investment Company Act of 1940. Based upon an actual aggregate sales price and redemption price for the respective class during the previous fiscal year as shown below, the total filing fee (calculated at the rate of 1/29 of 1%) is as given below. Class A shares redeemed in excess of shares sold to be re-registered total 43,398.
Difference Value of Between Value Value of Shares Sold & Value Filing Shares Sold Redeemed Redeemed Fee Class A $27,564,846 ($27,939,743) ($ 374,897) $ -0- Class B $ 7,201,783 ($ 1,642,398) $ 5,559,385 $ 1,917 Total $ 1,917
SEC/285325.24F MYER, SWANSON, ADAMS & WOLF, P.C. Attorneys At Law The Colorado State Bank Building 1600 Broadway - Suite 1850 Denver, Colorado 80202-4918 Telephone (303) 866-9800 Facsimile (303) 866-9818 February 22, 1995 Oppenheimer Integrity Funds 3410 South Galena Street Denver, Colorado 80231 Gentlemen: In connection with the public offering of the no par value Class A and Class B shares of the Oppenheimer Investment Grade Bond Fund series of Oppenheimer Integrity Funds, a business trust organized under the laws of the Commonwealth of Massachusetts (the "Trust"), as counsel for the Trust, we have examined such records and documents and have made such further investigation and examination as we deem necessary for the purpose of this opinion. As of the end of its fiscal year, the Trust was composed of two separate series, the Oppenheimer Value Stock Fund and the Oppenheimer Investment Grade Bond Fund. This opinion is rendered in connection with only the Class A and Class B shares of the Oppenheimer Investment Grade Bond Fund series. We are advised that during the period ending December 31, 1994, the following shares of Class A and Class B shares of beneficial interest in the Oppenheimer Investment Grade Bond Fund series of the Trust were sold in reliance on the registration of an indefinite number of shares pursuant to Rule 24f-2 of the Investment Company Act of 1940: Oppenheimer Investment Grade Bond Fund Class A shares: 1,071,379 Class B shares: 293,817 It is our opinion that the said shares of beneficial interest in said series sold by the Trust in reliance on Rule 24f-2 of the Investment Company Act of 1940 are legally issued and, subject to the matters mentioned in the next paragraph, fully paid and nonassessable by the Trust. Under Massachusetts law, shareholders of the Trust may, under certain circumstances, be held personally liable as partners for the obligations of the Trust. The Declaration of Trust does, however, contain an express disclaimer of shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees. The Declaration of Trust provides for indemnification out of the trust property of any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon. Sincerely, /s/ Allan B. Adams Allan B. Adams of MYER, SWANSON, ADAMS & WOLF, P.C. MYER, SWANSON, ADAMS & WOLF, P.C. Attorneys At Law The Colorado State Bank Building 1600 Broadway - Suite 1850 Denver, Colorado 80202-4918 Telephone (303) 866-9800 Facsimile (303) 866-9818 February 22, 1995 Oppenheimer Integrity Funds 3410 South Galena Street Denver, Colorado 80231 Gentlemen: In connection with the public offering of the no par value Class A and Class B shares of the Oppenheimer Value Stock Fund series of Oppenheimer Integrity Funds, a business trust organized under the laws of the Commonwealth of Massachusetts (the "Trust"), as counsel for the Trust, we have examined such records and documents and have made such further investigation and examination as we deem necessary for the purpose of this opinion. As of the end of its fiscal year, the Trust was composed of two separate series, the Oppenheimer Value Stock Fund and the Oppenheimer Investment Grade Bond Fund. This opinion is rendered in connection with only the Class A and Class B shares of the Oppenheimer Value Stock Fund series. We are advised that during the period ending December 31, 1994, the following shares of Class A and Class B shares of beneficial interest in the Oppenheimer Value Stock Fund series of the Trust were sold in reliance on the registration of an indefinite number of shares pursuant to Rule 24f-2 of the Investment Company Act of 1940: Oppenheimer Value Stock Fund Class A shares: 1,880,960 Class B shares: 499,617 It is our opinion that the said shares of beneficial interest in said series sold by the Trust in reliance on Rule 24f-2 of the Investment Company Act of 1940 are legally issued and, subject to the matters mentioned in the next paragraph, fully paid and nonassessable by the Trust. Under Massachusetts law, shareholders of the Trust may, under certain circumstances, be held personally liable as partners for the obligations of the Trust. The Declaration of Trust does, however, contain an express disclaimer of shareholder liability for acts or obligations of the Trust and requires that notice of such disclaimer be given in each agreement, obligation, or instrument entered into or executed by the Trust or the Trustees. The Declaration of Trust provides for indemnification out of the trust property of any shareholder held personally liable for the obligations of the Trust. The Declaration of Trust also provides that the Trust shall, upon request, assume the defense of any claim made against any shareholder for any act or obligation of the Trust and satisfy any judgment thereon. Sincerely, /s/ Allan B. Adams Allan B. Adams of MYER, SWANSON, ADAMS & WOLF, P.C. SEC\285325.24F EX-27 4 FDS WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
6 0000701265 OPPENHEIMER INVESTMENT GRADE BOND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 114904658 109061109 1896596 55797 0 111013502 0 0 10922754 10922754 0 110009506 9653273 9963302 0 204894 (3870315) 0 (5843549) 96639607 0 7667379 0 1129771 6537608 (2274518) (8559673) (4296583) 0 6381575 0 298880 1071379 1704508 323100 (12477637) 0 (1468233) 56074 0 522205 0 1129771 102168000 11.12 .65 (1.08) .65 .03 0 10.01 1.06 0 0
EX-27 5 FDS
6 0000701265 OPPENHEIMER INVESTMENT GRADE BOND 12-MOS DEC-31-1994 JAN-01-1994 DEC-31-1994 0 0 0 0 0 0 0 0 0 0 0 0 344660 162838 0 0 0 0 0 3451141 0 0 0 0 0 0 0 0 0 156032 0 7308 293817 123969 11974 0 0 0 0 0 0 0 0 2747000 11.11 .58 (1.08) .57 .03 0 10.01 1.78 0 0
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