Reg. ICA No. 811-8360
File No. 33-75340
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 |X|
Pre-Effective Amendment No. |_|
Post-Effective Amendment No. 6
|X|
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 |X|
Amendment No. 6
GUINNESS FLIGHT INVESTMENT FUNDS, INC.
(Exact Name of Registrant as Specified in Charter)
201 South Lake Avenue, Suite 510
Pasadena, California 91101
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number, including Area Code: (818) 795-0039
Susan Penry-Williams, Esq.
Kramer, Levin, Naftalis & Frankel
919 Third Avenue
New York, New York 10022
(Name and Address of Agent for Service)
Copy to:
Mr. James Atkinson
Guinness Flight Investment Funds
201 South Lake Avenue, Suite 510
Pasadena, California 91101
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE:
|X| IMMEDIATELY UPON FILING PURSUANT TO |_| ON ( ) PURSUANT
PARAGRAPH (B) TO PARAGRAPH (B)
|_| 60 DAYS AFTER FILING PURSUANT TO |_| ON ( ) PURSUANT TO
PARAGRAPH (A)(1) PARAGRAPH (A)(1)
|_| 75 DAYS AFTER FILING PURSUANT TO |_| ON ( ) PURSUANT TO
PARAGRAPH (A)(2) PARAGRAPH (A)(2), OF
RULE 485.
IF APPROPRIATE, CHECK THE FOLLOWING BOX:
|_| THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR A
PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES UNDER THE SECURITIES
ACT OF 1933 PURSUANT TO RULE 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940 AND
ITS RULE 24F-2 NOTICE FOR ITS DECEMBER 31, 1995 FISCAL YEAR END WAS FILED ON
FEBRUARY 29, 1996.
<PAGE>
CROSS-REFERENCE SHEET
(Pursuant to Rule 404 showing location in each form of
Prospectus of the responses to the Items in Part A and location in each form of
Prospectus and the Statement of Additional Information of the responses to the
Items in Part B of Form N-1A).
GUINNESS FLIGHT CHINA & HONG KONG FUND
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
GUINNESS FLIGHT ASIA BLUE CHIP FUND
GUINNESS FLIGHT ASIA SMALL CAP FUND
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
1 Front Cover Page *
2(a) Summary of Fund Expenses *
(b) Summary *
3(a) Financial Highlights *
(b) Not Applicable *
(c) Performance *
(d) Financial Highlights *
4(a) About the Funds; Investment *
Objectives, Programs and
Limitations
(c) Investment Strategies, Policies *
and Risks; Other Risk
Considerations
5(a) The Funds' Management *
(b) The Funds' Management - *
Investment Adviser; Fees and
Expenses
(c) The Funds' Management - *
Investment Adviser
(d) The Funds' Management - The *
Administrator, Distributor
(e) How to Purchase Shares; How *
to Redeem Shares; Dividends,
Distributions and Tax Matters
(f) The Funds' Management - Fees *
and Expenses, Administrator
(g) Not Applicable *
6(a) About the Funds *
(b) Not Applicable *
-1-
<PAGE>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
(c) Not Applicable *
(d) Not Applicable *
(e) Cover Page; General *
Information
(f) Dividends, Distributions and *
Tax Matters - Dividends and
Distributions
(g) Dividends, Distributions and
Tax Matters - Dividends
Tax Matterand Distributions
7(a) How to Purchase Shares *
(b) How to Purchase Shares; *
Determination of Net Asset
Value
(c) Not Applicable *
(d) How to Purchase Shares - *
Opening an Account,
Additional Investments
(e) Not Applicable *
(f) The Funds' Management -
Distribution Plan
8(a) How to Redeem Shares *
(b) How to Redeem Shares *
(c) How to Redeem Shares - *
Redemption of Small Accounts
(d) Not Applicable *
9 Not Applicable *
-2-
<PAGE>
GUINNESS FLIGHT CHINA & HONG KONG FUND
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
GUINNESS FLIGHT ASIA BLUE CHIP FUND
GUINNESS FLIGHT ASIA SMALL CAP FUND
<TABLE>
<CAPTION>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
10 * Front Cover Page
11 * Front Cover Page
12 * Not Applicable
13 Investment Objective, Programs Investment Objective and Policies;
and Limitations Investment Strategies and Risks;
Investment Restrictions and Policies
14 * Management of the Funds
15(a) * Not Applicable
(b) * Shareholder Reports
(c) * Management of the Funds
16(a) The Funds' Management - The Investment Adviser and
Investment Adviser Advisory Agreements
(b) The Funds' Management The Investment Adviser and
Advisory Agreements
(c) * Distribution Agreement and
Distribution and Service Plans
(d) The Funds' Management - Distribution Agreement and
Administrator Distribution and Service Plans
(e) * Not Applicable
(f) The Funds' Management - Distribution Agreement and
Distribution Plan Distribution and Service Plans
(g) * Not Applicable
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
Item Number
Form N-1A, Statement of Additional
Part A Prospectus Caption Information Caption
------ ------------------ -------------------
<S> <C> <C>
(h) General Information - Transfer *
Agent, Custodian, Independent
Accountants
(i) * Not Applicable
17 Investment Objectives, Programs Portfolio Transactions
and Limitations
18 Description of the Funds
19(a) How to Purchase Shares; *
How to Redeem Shares
(b) Determination of Net Asset Value Computation of Net Asset Value
(c) * Not Applicable
20 Dividends, Distributions and Tax Matters
Tax Matters
21(a) * Distribution Agreement and
Distribution and Service Plan
(b) * Distribution Agreement and
Distribution and Service Plan
(c) * Not Applicable
22 * Performance Information
23 * Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
-4-
<PAGE>
GUINNESS FLIGHT ASIA BLUE CHIP FUND
GUINNESS FLIGHT ASIA SMALL CAP FUND
GUINNESS FLIGHT CHINA & HONG KONG FUND
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
PROSPECTUS OCTOBER 3, 1996
Please read this prospectus before investing. It is designed to provide you with
information and to help you decide if the goals of the Guinness Flight Asia Blue
Chip Fund, Guinness Flight Asia Small Cap Fund, Guinness Flight China & Hong
Kong Fund, or the Guinness Flight Global Government Bond Fund match your own. It
should be retained for future reference. A Statement of Additional Information,
dated October 3, 1996 has been filed with the Securities and Exchange Commission
and is incorporated herein by reference. The Statement of Additional Information
is available without charge upon request by calling the Funds at 1-800-915-6565.
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.
PROSPECTUS PAGE 1
<PAGE>
GUINNESS FLIGHT ASIA BLUE CHIP FUND
(The "Asia Blue Chip Fund's") investment objective is long-term capital
appreciation through investments in equity securities of well established and
sizable companies located in the Asian continent. In pursuit of its investment
objective, the Asia Blue Chip Fund intends to invest 65% to 100% of its total
assets in a portfolio of "blue chip" companies traded primarily on the markets
of the Asian continent. For the purposes of this Fund, the Investment Adviser
has defined a "blue chip" company to be a company that has a market
capitalization of at least $1 billion and a reputation for quality and wide
acceptance of its products or services, as well as a strong history of
profitability. Generally, the Asian continent includes the relatively more
developed markets of Hong Kong, Singapore, Malaysia, and Thailand, as well as
the relatively less developed and emerging markets of Korea and Taiwan in North
Asia; of China; of Indonesia, the Philippines, and Vietnam in the ASEAN region;
and of India, Pakistan, Sri Lanka, and Bangladesh in East Asia. Under normal
market conditions, the Asia Blue Chip Fund will invest in a minimum of four
countries. An investment in this Fund may be more volatile than an investment in
a fund which invests only in U.S. "blue chip" companies. (See "Investment
Objectives, Programs and Limitations," for a more detailed discussion.)
GUINNESS FLIGHT ASIA SMALL CAP FUND
(The "Asia Small Cap Fund's") investment objective is long-term capital
appreciation through investments in equity securities of smaller capitalization
issuers located in the Asian continent. In pursuit of its investment objective,
the Asia Small Cap Fund intends to invest 65% to 100% of its total assets in a
portfolio of equity securities of companies traded primarily on the markets of
the Asian continent that have a market capitalization of no more than $1
billion. Generally, the Asian continent includes the relatively more developed
markets of Hong Kong, Singapore, Malaysia, and Thailand, as well as the
relatively less developed and emerging markets of Korea and Taiwan in North
Asia; of China; of Indonesia, the Philippines, and Vietnam in the ASEAN region;
and of India, Pakistan, Sri Lanka and Bangladesh in East Asia.
Summary................................................................ 3
Summary of The Funds' Expenses......................................... 4
Financial Highlights................................................... 6
Investment Objectives, Programs and Limitations........................ 10
Investment Strategies, Policies and Risks.............................. 14
Other Risk Considerations.............................................. 16
Performance............................................................ 20
The Funds' Management.................................................. 20
How to Purchase Shares................................................. 24
How to Redeem Shares................................................... 26
Shareholder Services................................................... 28
Determination of Net Asset Value....................................... 29
Dividends, Distributions and Tax Matters............................... 30
About The Funds........................................................ 33
General Information.................................................... 34
PROSPECTUS PAGE 2
<PAGE>
Under normal market conditions, the Asia Small Cap Fund will invest in a minimum
of four countries. (See "Investment Objectives, Programs and Limitations," for a
more detailed discussion.)
GUINNESS FLIGHT CHINA & HONG KONG FUND
(The "China Fund") seeks to provide investors with long term capital growth
through investments in the securities of China and Hong Kong. Under normal
conditions, 85% to 100% of the China Fund's total assets will be invested in
equity securities primarily traded in the markets of China and Hong Kong or in
equity securities of companies that derive a substantial portion of their
revenues from business activities with or in China and/or Hong Kong, but which
are listed on major exchanges elsewhere (e.g., London, New York, Singapore, and
Australia). To date, a majority of the securities held by the China Fund are
listed in Hong Kong. (See "Investment Objectives, Programs and Limitations," for
a more detailed discussion.)
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
(The "Global Government Fund") intends to provide investors with both current
income and capital appreciation. The Global Government Fund will invest in the
debt instruments of governments throughout the world. (See "Investment
Objectives, Programs and Limitations," for a more detailed discussion.)
SUMMARY
THE FUNDS. Guinness Flight Investment Funds, Inc. (the "Guinness Funds") is a
Maryland corporation organized as an open-end, series, management investment
company. Currently, the Guinness Funds offer four separate series portfolios:
Guinness Flight Asia Blue Chip Fund ("Asia Blue Chip Fund"), Guinness Flight
Asia Small Cap Fund ("Asia Small Cap Fund"), Guinness Flight China & Hong Kong
Fund (the "China Fund"), and Guinness Flight Global Government Bond Fund (the
"Global Government Fund")(collectively, the "Funds"), each of which pursues
unique investment strategies.
RISK CONSIDERATIONS. An investor should be aware that there are risks associated
with certain investment techniques and strategies employed by the Funds,
including those relating to investments in foreign securities. Such risks
include among others currency fluctuations, expropriation, confiscation,
diplomatic developments, and social instability. Each Fund's net asset value per
share can be expected to fluctuate. Accordingly, investors should consider an
investment in a Fund as a supplement to an overall investment program and should
invest only if they are willing to undertake the risks involved. See "Investment
Strategies, Policies and Risks" and "Other Risk Considerations."
THE INVESTMENT ADVISER. Guinness Flight Investment Management Limited ("Guinness
Flight") serves as the Funds' investment adviser pursuant to Investment Advisory
Agreements (the "Advisory Agreements"). Under the terms of the Advisory
Agreements, Guinness Flight supervises all aspects of the Funds' operations and
provides investment advisory services to the Funds. As compensation for these
services, Guinness Flight receives a fee based on the Funds' average daily net
assets. See "Management of the Funds."
PROSPECTUS PAGE 3
<PAGE>
PURCHASING SHARES. Shares of the Funds are offered by this Prospectus at net
asset value. The minimum investment in the Funds is $5,000 or $2,000 for
investments through tax-qualified retirement plans. Additional investments must
be at least $250. The Funds may reduce or waive the minimum investment under
certain conditions. See "How to Purchase Shares."
EXCHANGE PRIVILEGE. Shares of a Fund may be exchanged for shares of any other
Fund, or for shares of the Seven Seas Series Money Market Fund, in the manner
and subject to the policies set forth herein. See "Shareholder Services --
Exchange Privilege."
REDEEMING SHARES. Shareholders may redeem all or a portion of their shares at
net asset value at any time. Under certain circumstances, a redemption fee of
1.00% will be charged to any shareholder of the Asia Blue Chip Fund, Asia Small
Cap Fund or China Fund who redeems shares purchased less than 30 days prior to
redemption. See "How to Redeem Shares" and "Redemption Fee."
DISTRIBUTIONS. The Asia Blue Chip Fund, Asia Small Cap Fund and China Fund
declare and pay dividends from net investment income, if any, on a semi-annual
basis. The Global Government Fund declares and pays dividends monthly. In
addition, the Funds make distributions of realized capital gains, if any, on a
semi-annual basis. Dividends and distributions of the Funds may be paid directly
to you by check, or reinvested in additional shares of the Funds, including,
subject to certain conditions, in shares of a Fund other than the Fund making
the distribution. See "Dividends, Distributions and Tax Matters."
SUMMARY OF THE FUNDS' EXPENSES
A. SHAREHOLDER TRANSACTION EXPENSES
Asia Asia
Blue Small Global
Chip Cap China Govt
Sales Charge Imposed
on Purchases none none none none
Sales Charge Imposed on
Reinvested Dividends none none none none
Deferred Sales Charge Imposed
on Redemptions none none none none
Redemption Fee+ + + + none
Exchange Fee none none none none
+ Under certain circumstances, a redemption fee of 1.00% applies to
investors who redeem shares purchased less than 30 days prior to
redemption. See "How to Redeem Shares -- Redemption Fee."
B. ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets)
Asia Asia
Blue Small Global
Chip Cap China Govt
Advisory Fee 1.00% 1.00% 1.00% .75%
Rule 12b-1 Fee .00% .00% .00% .00%
Other Expenses (after expense .98% .98% .98% .98%
reimbursement) --- --- --- ---
Total Fund Operating Expenses
(after expense reimbursement) 1.98% 1.98% 1.98% 1.73%
PROSPECTUS PAGE 4
<PAGE>
C. EXAMPLE: YOU WOULD PAY THE FOLLOWING EXPENSES ON A $1,000 INVESTMENT IN A
FUND, ASSUMING (1) A 5% ANNUAL RETURN AND (2) FULL REDEMPTION AT THE END OF EACH
TIME PERIOD:
One Year $20 $20 $20 $18
Three Year $62 $62 $62 $54
Five Year $107 $107 $107 $94
Ten Year $231 $231 $231 $204
EXPLANATION OF TABLE: The purpose of the table is to assist you in understanding
the various costs and expenses that an investor in a Fund would bear directly or
indirectly.
A. SHAREHOLDER TRANSACTION EXPENSES represent charges paid when you purchase,
redeem or exchange shares of a Fund. See "How to Purchase Shares," "How to
Redeem Shares" and "Redemption Fee."
B. ANNUAL FUND OPERATING EXPENSES are based on a Fund's operating expenses for
the current fiscal year. The Funds incur "other expenses" for maintaining
shareholder records, furnishing shareholder statements and reports, and other
services. For the Asia Blue Chip Fund and Asia Small Cap Fund, "other expenses"
is based on estimated amounts for the current fiscal year. Guinness Flight or
the Administrator may, from time to time, voluntarily agree to defer or waive
fees or absorb some or all of the expenses of the Funds. To the extent that they
should do so, either may seek repayment of such deferred fees or absorbed
expenses after this practice is discontinued. However, no repayment will be made
if the expense ratio of the Asia Blue Chip Fund, Asia Small Cap Fund, China Fund
or the Global Government Fund would exceed 1.98%, 1.98%, 1.98% and 1.73%,
respectively. For the prior fiscal year, Guinness Flight absorbed some of the
expenses of the China Fund and Global Government Fund. If Guinness Flight had
not absorbed such expenses, "other expenses" for the China Fund and Global
Government Fund would have been 2.02% and 20.77%, respectively and "total fund
operating expenses" would have been 3.02% and 21.52%, respectively. Guinness
Flight anticipates absorbing some of the expenses of the Asia Blue Chip Fund and
Asia Small Cap Fund. Absent such expense reimbursements, "total fund operating
expenses" for the Asia Blue Chip and Asia Small Cap Fund are estimated
approximately to equal 3.00% and 3.00% respectively. See "The Funds'
Management."
C. EXAMPLE OF EXPENSES. The hypothetical example illustrates the expenses
associated with a $1,000 investment in a Fund over periods of one and three
years, based on the estimated expenses in the above table and an assumed annual
rate of return of 5%. THE 5% RETURN AND EXPENSES SHOULD NOT BE CONSIDERED
INDICATIONS OF ACTUAL OR EXPECTED FUND PERFORMANCE OR EXPENSES, BOTH OF WHICH
MAY VARY.
PROSPECTUS PAGE 5
<PAGE>
FINANCIAL HIGHLIGHTS
The following information concerning the China Fund and Global Government Fund
has been audited by Coopers & Lybrand L.L.P. for the fiscal period from June 30,
1994 (commencement of operations) to December 31, 1994, and Ernst & Young LLP,
independent accountants to the Funds, whose unqualified report covering the
fiscal period ending December 31, 1995 is incorporated by reference in the
Statement of Additional Information. The unaudited financial statements for all
the Funds for the period ended June 30, 1996 also is incorporated by reference
in the Statement of Additional Information. A copy of the audited and unaudited
financial statements for the period ended December 31, 1995 and June 30, 1996
may be obtained by calling the telephone number on the Prospectus cover page.
GUINNESS FLIGHT CHINA & HONG KONG FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
For the Six Months For the Year June 30, 1994*
ended Ended through
June 30, 1996 December 31, 1995 December 31, 1994
(Unaudited)
<S> <C> <C> <C>
Net asset value, beginning of period .......................... $13.64 $11.47 12.50
Income from investment operations:
Net investment income ................................ .14 .14 .04
Net realized and unrealized gain (loss) on investments 1.26 2.20 (.96)
------ ------ ------
Total from investment operations .............................. 1.40 2.34 (.92)
------ ------ ------
Less distributions:
Dividends from net investment income ................. (0.14) (.14) (.04)
Distributions from net capital gains ................. (0.20) (.03) (.07)
------ ------ ------
Total distributions ........................................... (0.34) (.17) (.11)
------ ------ ------
Net asset value, end of period ................................ $14.70 $13.64 $11.47
====== ====== ======
Total return .................................................. 10.27% 20.45% (7.74)%
Ratios/supplemental data:
Net assets, end of period (thousands) ................ $165,601 $55,740 $2,287
Ratio of expenses to average net assets:+
Before expense reimbursement ......................... 1.70% 3.02%++ 19.92%+
After expense reimbursement .......................... 1.98% 1.98% 2.00%+
Ratio of net investment income to average net assets:+
Before expense reimbursement ......................... 2.44% 0.49% (17.15)%+
After expense reimbursement .......................... 2.17% 1.52% 0.78%+
Portfolio turnover rate ....................................... 17.90% 10.89% 27.25%
Average Commission Rate Paid+++ ............................... $0.0080 --
BANKLOANS
Amount outstanding at end of period $(000) .................... -- --
Average amount of loans outstanding during
the period(monthly average) (000) ........................... $1,413 --
Average number of shares outstanding during the
period (monthly average) (000) .............................. 10,128 --
Average amount of debt per share during the period ............ $0.14 --
</TABLE>
* Commencement of operations.
+ Annualized.
++ Includes indirectly paid expenses. Excluding indirectly paid expenses
for the year ended December 31, 1995, the "ratio of expenses to average
net assets before expense reimbursement" would have been 3.04%.
+++ For the fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commission rate per share for security
trades on which commissions are charged. This amount may vary from
period to period and fund to fund depending on the mix of trades
executed in various markets where trading practices and commission
rates structures may differ.
See accompanying notes to financial statements.
PROSPECTUS PAGE 6
<PAGE>
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
For the six months For the Year June 30, 1994*
Ended Ended through
June 30, 1996 December 31, 1995 December 31, 1994
(Unaudited)
<S> <C> <C> <C>
Net asset value, beginning of period .......................... $12.77 $ 12.00 $ 12.50
Income from investment operations:
Net investment income ................................ 0.31 .69 .29
Net realized and unrealized gain (loss) on investments 0.01 1 .01 (.58)
------ ------- -------
Total from investment operations .............................. 0.32 1.70 (.29)
------ ------- -------
Less distributions:
Dividends from net investment income ................. (0.05) (.65) (.21)
Distributions from net capital gains ................. (0.10) (.28) -0-
------ ------- -------
Total distributions ........................................... (0.15) (.93) (.21)
------ ------- -------
Net asset value, end of period ................................ $12.95 $ 12.77 $ 12.00
====== ======= =======
Total return .................................................. 0.13% 14.49% (2.33)%
Ratios/supplemental data:
Net assets, end of period (thousands) ....................... $ 1,565 $ 1,153 $ 751
Ratio of expenses to average net assets:+
Before expense reimbursement ......................... 14.75% 21.52%++ 40.78%+
After expense reimbursement .......................... 1.73% 1.73% 1.75%+
Ratio of net investment income to average net assets:+
Before expense reimbursement ......................... (8.09)% (14.26)% (34.18)
After expense reimbursement .......................... 5.04% 5.53% 4.86%+
Portfolio turnover rate ....................................... 127.15% 202.54% 46.15%
</TABLE>
* Commencement of operations.
+ Annualized.
++ Includes indirectly paid expenses. Excluding indirectly paid expenses for
the year ended December 31, 1995, the "ratio of expenses to average net
assets before expense reimbursement" would have been 21.68%.
See accompanying notes to financial statements.
PROSPECTUS PAGE 7
<PAGE>
GUINNESS FLIGHT ASIA BLUE CHIP FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD (UNAUDITED)
April 29, 1996*
through
June 30, 1996
Net asset value, beginning of period.............................. $ 12.50
--------
Income from investment operations:
Net investment income........................................... (0.01)
Net realized and unrealized gain (loss) on investments.......... (0.11)
------
Total from investment operations.................................. (0.12)
------
Net asset value, end of period.................................... $ 12.38
========
Total return...................................................... (0.96)%
Ratios/supplemental data:
Net assets, end of period (thousands)............................. $ 1,018
Ratio of expense to average net asset:+
Before expense reimbursement.................................... 24.55%
After expense reimbursement..................................... 1.98%
Ratio of net investment income to average net assets:+
Before expense reimbursement.................................... (23.07)%
After expense reimbursement..................................... (0.50)%
Portfolio turnover rate........................................... 0.00%
Average Commission Rate Paid ++................................... $ 0.0190
* Commencement of operations.
+ Annualized.
++ A fund is required to disclosed its average commission rate per share
for security trades on which commissions are charged. This amount may
vary from period to period and fund to fund depending on the mix of
trades executed in various markets where trading practices and
commission rate structures may differ.
See accompanying notes to financial statements.
PROSPECTUS PAGE 8
<PAGE>
GUINNESS FLIGHT ASIA BLUE CHIP FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD (UNAUDITED)
April 29, 1996*
through
June 30, 1996
Net asset value, beginning of period............................. $ 12.50
--------
Income from investment operations:
Net investment income.......................................... 0.03
Net realized and unrealized gain (loss) on investments......... 0.55
----
Total from investment operations................................. 0.58
----
Less distributions from net investment income.................... (0.02)
------
Net asset value, end of period................................... $ 13.06
Total return..................................................... 4.61%
Ratios/supplemental data:
Net assets, end of period (thousands)............................ $ 1,790
Ratio of expense to average net asset:+
Before expense reimbursement.................................. 17.60%
After expense reimbursement................................... 1.98%
Ratio of net investment income to average net assets:+
Before expense reimbursement.................................. (13.56)%
After expense reimbursement................................... 2.06%
Portfolio turnover rate.......................................... 2.91%
Average Commission Rate Paid ++.................................. $ 0.0029
* Commencement of operations.
+ Annualized.
++ A fund is required to disclosed its average commission rate per share
for security trades on which commissions are charged. This amount may
vary from period to period and fund to fund depending on the mix of
trades executed in various markets where trading practices and
commission rate structures may differ.
See accompanying notes to financial statements.
PROSPECTUS PAGE 9
<PAGE>
INVESTMENT OBJECTIVES, PROGRAMS AND LIMITATIONS
THE ASIA BLUE CHIP FUND. The Asia Blue Chip Fund's investment objective is
long-term capital appreciation through investments in equity securities of well
established and sizable companies located in the Asian continent. In pursuit of
its investment objective, the Asia Blue Chip Fund intends to invest 65% to 100%
of its total assets in a portfolio of "blue chip" companies traded primarily on
the markets of the Asian continent. For purposes of this Fund, the Investment
Adviser has defined a "blue chip" company to be a company that has a market
capitalization of at least $1 billion and a reputation for quality and wide
acceptance of its products or services, as well as a strong history of
profitability. An investment in this Fund, however, may be more volatile than an
investment in a fund which invests only in U.S "blue chip"companies.
Generally, the Asian continent includes the relatively more developed markets of
Hong Kong, Singapore, Malaysia, and Thailand, as well as the relatively less
developed and emerging markets of Korea and Taiwan in North Asia; of China; of
Indonesia, the Philippines, and Vietnam in the ASEAN region; and of India,
Pakistan, Sri Lanka and Bangladesh in East Asia. Under normal market conditions,
the Asia Blue Chip Fund will invest in a minimum of four countries. As a matter
of fundamental policy, the Asia Blue Chip Fund will not invest more than 25% of
its assets in the securities (other than U.S. Government securities) of issuers
in any one industry, as defined by the Current Directory of Companies Filing
Annual Reports with the Securities and Exchange Commission.
Equity securities, for purposes of the 65% policy, will be limited to common and
preferred stocks; special classes of shares available only to foreign persons in
markets that restrict the ownership of certain classes of equity to nationals or
residents of the county; convertible preferred stocks; and convertible
investment grade instruments. In addition, the Asia Blue Chip Fund may invest up
to 5% of its net assets in options on equity securities and up to 5% of its net
assets in warrants, including options and warrants traded in over-the-counter
markets.
Notwithstanding the above information, the Asia Blue Chip Fund reserves the
right to invest up to 100% of its assets in cash, cash equivalents, or high
quality short-term money market instruments for temporary defensive purposes
during periods that Guinness Flight considers to be unsuitable for the Fund's
normal investment strategy. The Asia Blue Chip Fund may also purchase and sell
stock index futures to hedge against equity markets on a temporary basis.
THE ASIA SMALL CAP FUND. The Asia Small Cap Fund's investment objective is
long-term capital appreciation through investments in equity securities of
smaller capitalization issuers located in the Asian continent. In pursuit of its
investment objective, the Asia Small Cap Fund intends to invest 65% to 100% of
its total assets in a portfolio of equity securities of companies traded
primarily on the markets of the Asian continent that have a market
capitalization of no more than $1 billion. Generally, the Asian continent
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includes the relatively more developed markets of Hong Kong, Singapore,
Malaysia, and Thailand, as well as the relatively less developed and emerging
markets of Korea and Taiwan in North Asia; of China; of Indonesia, the
Philippines, and Vietnam in the ASEAN region; and of India, Pakistan, Sri Lanka
and Bangladesh in East Asia. Under normal market conditions, the Asia Small Cap
Fund will invest in a minimum of four countries. As a matter of fundamental
policy, the Asia Small Cap Fund will not invest more than 25% of its assets in
the securities (other than U.S. Government securities) of issuers in any one
industry, as defined by the Current Directory of Companies Filing Annual Reports
with the Securities and Exchange Commission.
Equity securities, for purposes of the 65% policy, will be limited to common and
preferred stocks; special classes of shares available only to foreign persons in
markets that restrict the ownership of certain classes of equity to nationals or
residents of the county; convertible preferred stocks; and convertible
investment grade instruments. In addition, the Asia Small Cap Fund may invest up
to 5% of its net assets in options on equity securities and up to 5% of its net
assets in warrants, including options and warrants traded in over-the-counter
markets.
Notwithstanding the above information, the Asia Small Cap Fund reserves the
right to invest up to 100% of its assets in cash, cash equivalents, or high
quality short-term money market instruments for temporary defensive purposes
during periods that Guinness Flight considers to be unsuitable for the Fund's
normal investment strategy. The Asia Small Cap Fund may also purchase and sell
stock index futures to hedge against equity markets on a temporary basis.
THE CHINA FUND. The China Fund seeks to provide investors with long-term capital
growth. Under normal market conditions, 85% to 100% of the China Fund's total
assets will be invested in equity securities primarily traded in the markets of
China and Hong Kong or in equity securities of companies that derive a
substantial portion of their revenues from business activities with or in China
and/or Hong Kong, but which are listed on major exchanges elsewhere (e.g.,
London, New York, Singapore and Australia). To date, a majority of the
securities held by the China Fund are listed in Hong Kong. The principal offices
of these issuers may be located outside China and Hong Kong. The China Fund will
not invest more than 15% of its total assets in any equity securities other than
those of such issuers. As a matter of fundamental policy, the China Fund will
not invest more than 25% of its total assets in the securities (other than U.S.
Government securities) of issuers in any one industry, as defined by the Current
Directory of Companies Filing Annual Reports with the Securities and Exchange
Commission.
Equity securities, for purposes of the 85% policy, will be limited to common and
preferred stocks; special classes of shares available only to foreign persons in
markets that restrict the ownership of certain classes of equity to nationals or
residents of the country; convertible preferred stocks; and convertible
investment grade instruments. In addition, the China Fund may invest up to 5% of
its net assets in options on equity
PROSPECTUS PAGE 11
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securities and up to 5% of its net assets in warrants, including options and
warrants traded in over-the-counter markets.
Notwithstanding the above information, the China Fund reserves the right to
invest up to 100% of its assets in cash, cash equivalents, or high quality
short-term money market instruments for temporary defensive purposes during
periods that Guinness Flight considers to be unsuitable for the Fund's normal
investment strategy. The China Fund may also purchase and sell stock index
futures to hedge against equity markets on a temporary basis.
THE GLOBAL GOVERNMENT FUND. The Global Government Fund intends to provide
investors with current income while seeking opportunities for capital
appreciation.
The Global Government Fund's portfolio is managed in accordance with a global
investment strategy, which means that the Global Government Fund's investments
will be allocated among securities denominated in the United States dollar and
the currencies of a number of foreign countries. Fundamental economic strength,
credit quality and interest rate trends are the principal factors considered by
Guinness Flight in determining whether to increase or decrease the emphasis
placed upon a particular type of security in the Global Government Fund's
portfolio. Guinness Flight may further evaluate among other things, foreign
yield curves and regulatory and political factors, including the fiscal and
monetary policies of the countries in which the Global Government Fund may
invest. Although the Global Government Fund intends to invest substantially all
of its total assets directly in the debt of governments (or any of their
political subdivisions, authorities, agencies or instrumentalities), or of
supranational entities, throughout the world, the Global Government Fund may
also invest in certain futures, options, foreign currency contracts, repurchase
agreements, and other investments described below.
Under normal market conditions, the Global Government Fund will invest at least
65% of its total assets in bonds issued by the governments of at least three
different countries. For the purpose of this policy, a bond is a debt
instrument. The Global Government Fund will neither invest more than 25% of its
net assets in securities issued by a single foreign government, or in
supranational entities as a group, nor invest more than 25% of its net assets in
securities denominated in a single currency other than the U.S. Dollar, British
Pound Sterling, Canadian Dollar, French Franc, German Mark and Japanese Yen. The
Global Government Fund will invest in the entire range of maturities and may
adjust the average maturity of the investments held in the portfolio from time
to time, depending upon its assessment of relative yields of securities of
different maturities and its expectations of future changes in interest rates.
The Global Government Fund presently expects to invest in both dollar and
non-dollar denominated securities of issuers in the United States and the
industrialized Western European countries; in Canada, Japan, Australia and New
Zealand; and in Latin America. The Global Government Fund may invest up to 15%
of its assets in the fixed income securities of issuers in emerging market
countries. An emerging market is
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any country that the World Bank has determined to have a low or middle income
economy and may include every country in the world except the United States,
Australia, Canada, Japan, New Zealand and most countries located in Western
Europe such as Belgium, Denmark, France, Germany, Great Britain, Italy, the
Netherlands, Norway, Spain, Sweden and Switzerland.
Debt instruments of emerging market countries may be below investment grade,
commonly referred to as "junk bonds." "Investment grade" securities are those
rated within the four highest quality grades as determined by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("Standard &
Poor's"). Securities rated Aaa by Moody's and AAA by Standard & Poor's are
judged to be of the best quality and carry the smallest degree of risk.
Securities rated Baa by Moody's and BBB by Standard & Poor's lack high quality
investment characteristics and, in fact, have speculative characteristics as
well. Debt instruments that are deemed to be below investment grade entail
greater risks of untimely interest and principal payments, default, and price
volatility than investment grade securities, and may present problems of
liquidity and valuation. See Appendix A of the Statement of Additional
Information for additional information concerning investment grade debt ratings.
In order to protect and enhance the capital value of the Global Government Fund,
Guinness Flight employs an investment technique known as "Currency Overlay"
which allows Guinness Flight to manage the currency exposure of the underlying
bond portfolio. Using the Currency Overlay, Guinness Flight constructs a
portfolio of bonds denominated in a variety of currencies and then, using
forwards, options and futures contracts, reconstructs the currency portion of
the bond portfolio. The use of this technique allows Guinness Flight to invest
in the bond markets that it believes offers the best opportunities for total
return regardless of the prospects for the currencies involved, and then to
invest in the currencies that Guinness Flight believes offer the best
opportunities to protect and enhance capital. Guinness Flight intends to place
the Fund in the major currencies perceived to be in, or about to enter, a
strengthening phase and to avoid those in, or about to enter, a phase of
relative weakness. In making currency decisions, a wholly international stance
is pursued by Guinness Flight. Consideration is given to both fundamental
economic and financial data such as relative GNP growth, the Balance of Payments
position, inflation and interest rates, as well as short-term factors such as
political events and market sentiment. The Currency Overlay is employed on a
medium to long-term basis and not on a day to day trading approach. Not more
than 5% of the Global Government Fund's assets may be invested in initial
margins or premiums for the futures and options needed to construct the Currency
Overlay. Where Guinness Flight misperceives certain economic trends, the Global
Government Fund's net asset value may be adversely affected as a result of this
investment technique.
Notwithstanding the above, the Global Government Fund reserves the right to
invest up to 100% of its assets in cash, cash equivalents, high quality
short-term money market instruments, and in bills, notes or bonds issued by the
United States Treasury Department or by other agencies of the United States
Government for temporary
PROSPECTUS PAGE 13
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defensive purposes during periods that Guinness Flight considers to be
unsuitable for the Fund's normal investment strategy. The Global Government Fund
may also purchase and sell index futures to hedge against maturity risk on a
temporary basis.
INVESTMENT STRATEGIES, POLICIES AND RISKS
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Funds may purchase or sell
forward foreign currency exchange contracts ("forward contracts") as part of
their portfolio investment strategy. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers. A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, for example, when a Fund believes that a
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 a Fund believes that
the U.S. dollar may suffer a substantial decline against foreign currency, it
may enter into a forward purchase contract to buy that foreign currency for a
fixed dollar amount ("position hedge"). 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"). Unanticipated
changes in currency prices may result in poorer overall performance for a Fund
than if it had not entered into such contracts. Forward contracts may be
considered to be "derivative securities." See "Investment Strategies and Risks"
in the Statement of Additional Information.
FORWARD COMMITMENTS. The Funds may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Funds, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. Although the Funds will enter into such contracts with the
intention of acquiring the securities, the Funds may dispose of a commitment
prior to a settlement date if Guinness Flight deems it appropriate to do so. A
Fund may realize short-term profits or losses upon the sale of forward
commitments. Forward contracts may be considered to be "derivative securities."
See "Investment Strategies and Risks" in the Statement of Additional
Information.
COVERED CALL OPTIONS. Call options may also be used as a means of participating
in an anticipated price increase of a security on a more limited basis than
would be possible if the security itself were purchased. The Funds may write
only covered call options. Since it
PROSPECTUS PAGE 14
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can be expected that a call option will be exercised if the market value of the
underlying security increases to a level greater than the exercise price, this
strategy will generally be used when Guinness Flight believes that the call
premium received by the Fund plus anticipated appreciation in the price of the
underlying security up to the exercise price of the call, will be greater than
the appreciation in the price of the security. By writing a call option, A Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option. The Funds will not
write any put options. Covered call options may be considered to be "derivative
securities." See "Investment Strategies and Risks" in the Statement of
Additional Information.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES. The Asia Blue Chip
Fund, Asia Small Cap Fund and China Fund may purchase and sell options and
futures on stock indices. If Guinness Flight expects general stock market prices
to rise, it might purchase a call option on a stock index or a futures contract
on that index as a hedge against an increase in prices of particular equity
securities they ultimately want to buy. If in fact the stock index does rise,
the prices of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the value
of a Fund's index option or futures contract resulting from the increase in the
index. If, on the other hand, Guinness Flight expects general stock market
prices to decline, it might purchase a put option or sell a futures contract on
the index. If that index does in fact decline, the value of some or all of the
equity securities in a Fund's portfolio may also be expected to decline, but
that decrease would be offset in part by the increase in the value of the Fund's
position in such put option or futures contract. Risks in the use of options and
futures on stock indices result from the possibility that changes in the stock
indices may differ substantially from the changes anticipated by the Funds when
the hedged positions were established. Options and futures on stock indices may
be considered to be "derivative securities." See "Investment Strategies and
Risks" in the Statement of Additional Information.
ILLIQUID SECURITIES. The Funds will not invest more than 15% of their net assets
in illiquid securities, including repurchase agreements with maturities in
excess of seven days.
RESTRICTED SECURITIES. The Funds may invest in securities that are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "1933 Act"). These securities are
sometimes referred to as private placements. Although securities which may be
resold only to "qualified institutional buyers" in accordance with the
provisions of Rule 144A under the 1933 Act are technically considered
"restricted securities," the Funds may purchase Rule 144A securities without
regard to the limitation on investments in illiquid securities described above
in the "Illiquid Securities" section, provided that a determination is made that
such securities have a readily available trading market. Guinness Flight will
determine the liquidity of Rule 144A securities under the supervision of the
Guinness Funds' Board of Directors. The liquidity of Rule 144A securities will
be monitored by Guinness Flight, and if as a result of changed conditions, it is
determined that a Rule 144A security is no longer
PROSPECTUS PAGE 15
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liquid, a Fund's holdings of illiquid securities will be reviewed to determine
what, if any, action is required to assure that the Fund does not exceed its
applicable percentage limitation for investments in illiquid securities.
PORTFOLIO TURNOVER. Any particular security will be sold, and the proceeds
reinvested, whenever such action is deemed prudent from the viewpoint of a
Fund's investment objective, regardless of the holding period of that security.
A higher rate of portfolio turnover may result in higher transaction costs,
including brokerage commissions. To the extent that higher portfolio turnover
results in a higher rate of net realized capital gains to a Fund, the portion of
the Fund's distributions constituting taxable capital gains may increase. See
"Dividends, Distributions and Tax Matters." Guinness Flight anticipates that the
annual portfolio turnover rate will not exceed 100% for the Asia Blue Chip Fund,
100% for the Asia Small Cap Fund, 100% for the China Fund, and 200% for the
Global Government Fund.
For further discussion with regard to the Funds' investment strategies, policies
and risks, see "Investment Strategies and Risks" in the Funds' Statement of
Additional Information.
OTHER RISK CONSIDERATIONS
THE ASIA BLUE CHIP FUND, ASIA SMALL CAP FUND AND CHINA FUND -- RISK
CONSIDERATIONS. The Chinese economy previously operated as a Socialist economic
system, relying heavily upon government planning from 1949, the year in which
the Communists seized power, to 1978, the year Deng Xiaoping instituted his
first economic reforms.
Deng Xiaoping's economic reforms are transforming China's economy into a market
system that has stimulated significant economic growth. Deng Xiaoping's reform
began by improving the living standards of the 800 million rural workers. Farm
reform led to the doubling of China's farmers' incomes over the 1980's. The next
stage of reform gave rise to small scale entrepreneurs and stimulated light and
medium industry. In addition, a cheap and abundant supply of labor has attracted
foreign investment in China. Special Economic Zones (SEZ), five originally and
over thirty today, were set up, providing tax advantages to foreign investors.
Further, two stock exchanges have recently opened in China - the Shenzhen and
the Shanghai. Class "A" and Class "B" shares are traded on both exchanges. While
only resident Chinese can purchase Class "A" shares, foreign investors (such as
the China Fund) can purchase Class "B" shares. Over the period 1978 to 1995,
China's gross domestic product grew at approximately 10% per annum. By 1995,
China had become one of the world's major trading nations. The World Bank
forecasts that China will have the world's largest economy by 2003.
In 1984 China and Britain signed the Joint Declaration which allowed for the
termination of British rule in Hong Kong in July 1997, but which would maintain
the existing capitalist economic and social system of Hong Kong for 50 years
beyond that date.
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Article 5 of the Sino-British Declaration 26.9.84 provides:
The current social and economic systems in Hong Kong will remain unchanged and
so will the lifestyle. Rights and freedoms, including those of the person, of
speech, of the press, of assembly, of association, of travel, of movement, of
correspondence, of choice, of occupation, of academic research and of religious
belief, will be ensured by law in the Hong Kong Special Administrative Region.
Private property, ownership of enterprises, legitimate right of inheritance and
foreign investment will be protected by law.
Obviously there is a risk after 1997 when Hong Kong returns to China under the
"one country two systems" proposal. However, Hong Kong and China are
interdependent; 70% of foreign investment in China is from Hong Kong and China
has large share holdings in Hong Kong companies. Guinness Flight believes that
China is unlikely to damage the Hong Kong economy and destroy the value of their
investments. Today, Hong Kong's stock market, is one of the largest in the world
and is highly liquid and extensively regulated.
Notwithstanding the beliefs of Guinness Flight, investors should realize that
there are significant risks to investing in Hong Kong and China, both before and
after 1997, including:
(1) that the transition from Deng Xiaoping to a successor may result in an open
feud amongst China's leaders leading to political instability;
(2) that hard line Marxist Leninists might regain the political initiative,
either at the time of Deng Xiaoping's demise or at a subsequent occasion;
(3) that social tensions caused by widely differing levels of economic
prosperity within Chinese society might create unrest, as they did in the tragic
events of 1989, culminating in the Tiananmen Square incident; and
(4) that the threat of armed conflict exists over the unresolved situation
concerning Taiwan.
Nonetheless, Guinness Flight believes that the process of reform has now gone
too far to be easily reversed and that China will not deliberately damage the
Hong Kong economy in which it has become a substantial investor and on which so
much of its industry depends.
THE GLOBAL GOVERNMENT FUND -- RISK CONSIDERATIONS. The obligations of foreign
government entities, including supranational issuers, have various kinds of
government support. Although obligations of foreign governmental entities
include obligations issued or guaranteed by national provincial, state or other
government with taxing power, or by their agencies, these obligations may or may
not be supported by the full faith and credit of a foreign government.
PROSPECTUS PAGE 17
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GENERAL ECONOMIC AND POLITICAL RISKS. The economies of foreign countries may
differ unfavorably from the United States economy in such respects as growth of
domestic product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments positions. Further, such economies
generally are heavily dependent upon international trade and, accordingly, have
been and may continue to be adversely affected by economic conditions in
countries in which they trade, as well as trade barriers, managed adjustments in
relative currency values and other protectionist measures imposed or negotiated
by such countries.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulations, social instability or diplomatic developments (including
war) which could affect adversely the economies of such countries or the Funds'
investments in those countries. In addition, it may be more difficult to obtain
a judgement in a court outside of the United States.
SMALL CAPITALIZATION ISSUERS. An investor should be aware that investment in
small capitalization issuers carry more risk than issuers with market
capitalizations greater than $1 billion. Generally, small companies rely on
limited product lines, financial resources, and business activities that make
them more susceptible to setbacks or downturns. In addition, the stock of such
companies may be more thinly traded. Accordingly, the performance of small
capitalization issuers may be more volatile.
INTEREST RATE FLUCTUATIONS. Generally, the value of fixed income securities will
change as interest rates fluctuate. During periods of falling interest rates,
the values of outstanding long term debt obligations generally rise. Conversely,
during periods of rising interest rates, the value of such securities generally
decline. The magnitude of these fluctuations generally will be greater for
securities with longer maturities.
SECURITIES MARKETS. Trading volume on foreign stock exchanges is substantially
less than that on the New York Stock Exchange. Further, securities of some
foreign companies are less liquid and more volatile than securities of
comparable United States companies. Securities without a readily available
market will be treated as illiquid securities for purposes of the Funds'
limitation on such purchases. Similarly, volume and liquidity in most foreign
bond markets can be substantially less than in the United States, and
consequently, volatility of price can be greater than in the United States.
Fixed commissions on foreign markets are generally higher than negotiated
commissions on United States exchanges, although the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions and may
be able to purchase the securities in which the Funds may invest on other stock
exchanges where commissions are negotiable.
Many foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards practices and disclosure
requirements comparable to those applicable to United States companies.
Consequently, there may be less publicly available information about such
companies than about United States companies.
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Further, there is generally less governmental supervision and regulations of
foreign stock exchanges, brokers and listed companies than in the United States.
INVESTMENT AND REPATRIATION RESTRICTIONS. Some foreign countries have laws and
regulations which currently preclude direct foreign investment in the securities
of their companies. However, indirect foreign investment in the securities
listed and traded on the stock exchanges in these countries is permitted by
certain foreign countries through investment funds which have been specially
authorized. See "Tax Matters" in the Statement of Additional Information for an
additional discussion concerning such investment funds. The Funds may invest in
these investment funds subject to the provisions of the 1940 Act. If a Fund
invests in such investment funds, the Fund's shareholders will bear not only
their proportionate share of the expenses of the Fund, but also will bear
indirectly similar expenses of the underlying investment funds. Guinness Flight
has agreed to waive its management fees with respect to the portion of a Fund's
assets invested in shares of other open-end investment companies. A fund would
continue to pay its own management fees and other expenses with respect to its
investments in shares of closed-end investment companies.
In addition to the foregoing investment restrictions, prior governmental
approval for foreign investments may be required under certain circumstances in
some foreign countries, and the extent of foreign investment in foreign
companies may be subject to limitation. Foreign ownership limitations also may
be imposed by the charters of individual companies to prevent, among other
concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some foreign
countries. A Fund could be adversely affected by delays in or a refusal to grant
any required governmental approval for such repatriation.
FOREIGN CURRENCY CONSIDERATIONS. Although the Funds' investments generally will
be denominated in foreign currencies and most income paid by such investments
will be in foreign currencies, the Funds will compute and distribute their
income in dollars. The computation of income will be made on the date of its
receipt by a Fund at the foreign exchange rate in effect on that date.
Therefore, if the value of the foreign currencies in which a Fund receives its
income falls relative to the dollar between the receipt of the income and the
making of Fund distributions, the Fund will be required to liquidate securities
in order to make distributions if the Fund has insufficient cash in dollars to
meet distribution requirements.
The value of the assets of a Fund as measured in dollars also may be affected
favorably or unfavorably by fluctuations in currency rates and exchange control
regulations. Further, a Fund may incur costs in connection with conversions
between various currencies.
For further discussion with regard to the Funds' other risk considerations, see
"Other Risk Factors and Special Considerations" in the Funds' Statement of
Additional Information.
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PERFORMANCE
A Fund's total return shows its overall change in value, including changes in
share price and assuming all the Fund's dividends and capital gain distributions
are reinvested. A cumulative total return reflects a Fund's performance over a
stated period of time. Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. To illustrate the components of overall performance, the Funds may
separate their cumulative and average annual returns into income results and
capital gains or losses.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information and can be expected to fluctuate from time
to time. It is not necessarily indicative of future results. Accordingly, the
yield information may not provide a basis for comparison with investments which
pay a fixed rate of interest for a stated period of time. Yield is a function of
the type and quality of a Fund's investments, maturity and operating expense
ratio. A shareholder's investment in a Fund is not insured or guaranteed.
The performance of the Funds will vary from time to time and past results are
not necessarily representative of future results. A Fund's performance is a
function of its portfolio management in selecting the type and quality of
portfolio securities, and is affected by operating expenses of the Fund as well
as by general market conditions.
THE FUNDS' MANAGEMENT
The overall management of the business and affairs of the Funds is vested in the
Guinness Funds' Board of Directors. The Board of Directors approves all
significant agreements between the Guinness Funds, on behalf of a Fund, and
persons or companies furnishing services to a Fund. The day-to-day operations of
each Fund are delegated to the officers of the Guinness Funds and to Guinness
Flight, subject always to the investment objective and policies of each Fund and
to the general supervision of the Guinness Funds' Board of Directors.
Information concerning the Board of Directors may be found in the Statement of
Additional Information.
INVESTMENT ADVISER. Guinness Flight is headquartered in London, England, at
Lighterman's Court, 5 Gainsford Street, Tower Bridge SE1 2NE, and has a U.S.
office at 201 South Lake Avenue, Suite 510, Pasadena, California 91101 and at
Upper Ground Floor, Far East Center, 16 Harcourt Road, Admiralty, Hong Kong.
Guinness Flight serves as the investment adviser to the China Fund and Global
Government Fund pursuant to Investment Advisory Agreements dated as of May 6,
1994, and to the Asia Blue Chip Fund and Asia Small Cap Fund pursuant to
Investment Advisory Agreements dated April 29, 1996 (the "Advisory Agreements").
Under the terms of the Advisory Agreements, Guinness Flight supervises all
aspects of the Funds' operations and provides investment advisory services to
the Funds. Guinness Flight was organized in 1985 and is registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940, as
amended.
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The Funds are managed by a team of portfolio managers. The following are
biographies of key personnel who are responsible for ultimate investment
decisions.
MICHAEL DALEY -- Mr. Daley joined Guinness Flight as a Director of the Fixed
Income Team in 1994. Prior to joining Guinness Flight, he was a founding member
in 1986 of Morgan Stanley Asset Management's London operation where he served as
Director, Vice President and Head of Fixed Income. In 1991, he established his
own firm, Strategic Value Management Limited. Mr. Daley serves as Co-Manager of
the Global Government Fund.
RICHARD FARRELL -- Mr. Farrell joined Guinness Mahon, a predecessor entity of
Guinness Flight, in 1978. He specializes in Far Eastern markets and currently is
the investment adviser to the Guinness Flight Global Strategy Fund's Japan Fund,
Japan & Pacific Fund, and Japan Smaller Companies Fund. These funds are
currently available only to overseas investors. As the head of Guinness Flight's
Asia Equity Desk, Mr. Farrell has strategic input on all of Guinness Flight's
Asia Equity Funds. In addition, Mr. Farrell serves as the Manager of the Asia
Blue Chip Fund.
HOWARD FLIGHT -- Mr. Flight has been involved in asset management for over 25
years throughout the world. He joined Guinness Mahon in 1979 as a director of
the investment department. In 1987, he became Joint Managing Director of
Guinness Flight. Presently, he is responsible for Guinness Flight's currency and
fixed interest operations as Investment Director. Until its dissolution, he was
a member of H.M. Treasury Tax Consultative Committee.
TIMOTHY GUINNESS -- Mr. Guinness originally joined Guinness Mahon in 1977 in the
Corporate Finance Department, and later transferred to the Investment
Department, becoming Senior Investment Director in 1982. He served as Fund
Manager of both the Guinness Flight Global Equity Fund and United Kingdom Equity
Fund. These funds are currently available only to overseas investors. In 1987,
he became Joint Managing Director and leads the Global Equity Team as Investment
Director.
LYNDA JOHNSTONE -- Ms. Johnstone joined Guinness Mahon in 1986 in the Investment
Department as a member of the Equity Team. Currently, she is responsible for
running the Guinness Flight Global Strategy Fund's, Hong Kong Fund and ASEAN
Fund. These funds are currently available only to overseas investors. Ms.
Johnstone is primarily responsible for the day-to-day management of the China
Fund.
NERISSA LEE -- Ms. Lee joined Guinness Flight in 1995 in Guinness Flight's Hong
Kong office and specializes in Far Eastern markets. She has a degree in
economics from Hong Kong University and 20 years of experience in Asian markets.
She started in the research department of the Hong Kong Stock Exchange and has
been managing funds for 8 years. Currently, Ms. Lee manages the Guinness Flight
Global Strategy Fund's Asian Smaller Companies Fund and the Guinness Flight
Select Fund's China Fund. These funds are offered only to offshore investors.
Ms. Lee serves as the Manager of the Asia Small Cap Fund.
PROSPECTUS PAGE 21
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PHILIP SAUNDERS -- Mr. Saunders joined Guinness Mahon in 1980. He gained
experience in all principal operating areas before joining the investment
department on a permanent basis as a member of the Currency and Fixed Interest
team. He assumed responsibility for the day to day management of the Guinness
Flight managed currency, international and global bond funds and portfolios in
1984 and assumed responsibility as Fixed Income Investment Director in 1987.
These funds are currently available only to overseas investors.
JOHN STOPFORD -- Mr. Stopford joined Guinness Flight in 1993. Currently, he is a
member of the Fixed Income Team, specializing in "core" European bond markets.
Prior to joining Guinness Flight, he was responsible for European fixed income
fund management at Mitsui Trust Asset Management (U.K.) Ltd. Mr. Stopford serves
as the Co-Manager of the Global Government Fund.
Guinness Flight's legal counsel believes that Guinness Flight may provide
services described in its Investment Advisory Agreements to the Funds without
violating the federal banking law commonly known as the Glass-Steagall Act. The
Act generally bars banks or investment advisers deemed to be controlled by banks
from publicly underwriting or distributing certain securities. Because of stock
ownership by a subsidiary of a foreign bank in Guinness Flight's parent,
Guinness Flight Global Asset Management Limited, such restrictions may be deemed
to apply.
The U.S. Supreme Court in its 1981 decision in Board of Governors of the Federal
Reserve System v. Investment Company Institute determined that, consistent with
the requirements of the Act, a bank may serve as an investment adviser to a
registered, closed-end investment company. Other decisions of banking regulators
have supported the position that a bank may act as investment adviser to a
registered, open-ended investment company. Based on the advice of its counsel,
Guinness Flight believes that the Court's decision, and these other decisions of
banking regulators, permit it to serve as investment adviser to a registered,
open-end investment company.
Possible future changes in federal law or administrative or judicial
interpretations of current or future law, however, could prevent Guinness Flight
from continuing to perform investment advisory services for the Funds. If that
occurred, the Board of Directors of Guinness Funds promptly would seek to obtain
the services of another qualified adviser, as necessary. The Directors would
then consider what action would be in the best interest of the Funds'
shareholders.
For a discussion of Guinness Flight's brokerage allocation policies and
practices, see "Portfolio Transactions" in the Statement of Additional
Information. In accordance with policies established by the Board of Directors,
Guinness Flight may take into account sales of shares of each Fund advised by
Guinness Flight in selecting broker-dealers to effect portfolio transactions on
behalf of the Funds.
PROSPECTUS PAGE 22
<PAGE>
FEES AND EXPENSES. Pursuant to the Advisory Agreements, Guinness Flight is paid
a monthly fee from the Asia Blue Chip Fund, Asia Small Cap Fund and China Fund
at an annual rate of 1.00% of each Fund's average daily net assets, and a
monthly fee from the Global Government Fund calculated at an annual rate of .75%
of its average daily net assets. These fees are higher than those charged by
most investment companies. However, the Board of Directors believes that such
fees are appropriate because of the complexity of managing funds that invest in
global markets. Guinness Flight or Investment Company Administration Corporation
may, from time to time, voluntarily agree to defer or waive fees or absorb some
or all of the expenses of the Funds. To the extent that they should do so, they
may seek repayment of such deferred fees and absorbed expenses after this
practice is discontinued. However, no repayment will be made if it would result
in the Asia Blue Chip Fund's, Asia Small Cap Fund's and China Fund's expense
ratio exceeding 1.98%, or if it would result in the Global Government Fund's
expense ratio exceeding 1.73%.
ADMINISTRATOR. Pursuant to an Administration Agreement, Investment Company
Administration Corporation ("ICAC") serves as administrator of the Funds. As the
administrator, ICAC provides certain administrative services, including, among
other responsibilities, coordinating relationships with independent contractors
and agents, preparing for signature by officers and filing of certain documents
required for compliance with applicable laws and regulations, preparing
financial statements, and arranging for the maintenance of books and records.
ICAC receives a monthly fee equal to, on an annual basis, the greater of $40,000
or .25% of average daily net assets on the China Fund and $20,000 or 0.25% of
average daily net assets on each of the Asia Blue Chip Fund, Asia Small Cap Fund
and the Global Government Fund.
DISTRIBUTOR. The Guinness Funds have entered into a Distribution Agreement (the
"Distribution Agreement") with First Fund Distributors, Inc. ("First Fund"), a
registered broker-dealer, to act as the principal distributor of the shares of
the Funds. The Distribution Agreement provides First Fund with the right to
distribute shares of the Funds through affiliated broker-dealers and through
other broker-dealers or financial institutions with whom First Fund has entered
into selected dealer agreements.
DISTRIBUTION PLAN. The Funds have adopted a Distribution Plan (the "Plan") under
Rule 12b-1 under the 1940 Act. No separate payments are authorized to be made by
a Fund under the Plan. Rather, the Plan recognizes that Guinness Flight or ICAC
may use fee revenues, or other resources to pay expenses associated with
shareholder servicing and recordkeeping functions. The Plan also provides that
Guinness Flight or ICAC may make payments from these sources to third parties,
including affiliates, such as banks or broker-dealers, that provide such
services. See "The Funds' Management -- Fees and Expenses."
For additional information concerning the operation of the Plan, see
"Distribution Agreements and Distribution Plans" in the Statement of Additional
Information.
PROSPECTUS PAGE 23
<PAGE>
SHAREHOLDER SERVICING. The Funds may enter into Shareholder Servicing Agreements
whereby the Adviser or Administrator pays a shareholder servicing agent for
shareholder services and account maintenance, including responding to
shareholder inquiries, direct shareholder communications, account balance,
maintenance and dividend posting.
HOW TO PURCHASE SHARES
GENERAL INFORMATION. Investors may purchase shares of a Fund from the Fund's
transfer agent or from other selected securities brokers or dealers. A buyer
whose purchase order is received by the transfer agent before the close of
trading on the New York Stock Exchange, currently 4:00 p.m. Eastern time, will
acquire shares at the net asset value set as of that day. A buyer whose purchase
order is received by the transfer agent after the close of trading on the New
York Stock Exchange will acquire shares at the net asset value set as of the
next trading day on the New York Stock Exchange. A broker may charge a
transaction fee for the purchase. The Distributor may, from time to time,
provide promotional incentives to certain brokers or dealers whose
representatives have sold or are expected to sell significant amounts of the
Funds' shares. The Funds reserve the right to reject any purchase order.
Share of the Funds are available for purchase by any retirement plan, including
401(K) plans, profit sharing plans, 403(b) plans and individual retirement
accounts.
OPENING AN ACCOUNT -- INVESTMENT MINIMUMS. The minimum initial investment in
each Fund is $5,000 or $2,000 for investments through tax-qualified retirement
plans. However, through January 1, 1997, the minimum initial investment for all
investors in the Asia Blue Chip Fund and Asia Small Cap Fund is $2,000. The
Funds may further reduce or waive the minimum for certain retirement and other
employee benefit plans; for the Adviser's employees, clients and their
affiliates; for advisers or financial institutions offering investors a program
of services; or any other person or organization deemed appropriate by the
Funds.
ADDITIONAL INVESTMENTS -- MINIMUM SUBSEQUENT INVESTMENT. The minimum
"subsequent" investment is $250 for regular accounts as well as tax-qualified
retirement plans. The amount of the minimum subsequent investment, like the
minimum "initial" investment, may be reduced or waived by the Funds. See waiver
discussion under "Opening an Account-Investment Minimums." Cash investments may
be made either by check or by wire.
PURCHASING BY MAIL. State Street Bank and Trust Company (the "Transfer Agent")
acts as transfer and shareholder service agent for the Funds. An investor may
purchase shares by sending a check payable to Guinness Flight Investment Funds,
together with an Application Form, to the Transfer Agent at the following
address:
Guinness Flight Investment Funds, Inc.
P.O. Box 9288
Boston, MA 02205-8559
PROSPECTUS PAGE 24
<PAGE>
Overnight courier deliveries should be sent to:
Boston Financial Data Services
ATTN: Guinness Flight Investment Funds, Inc.
Two Heritage Drive
3rd Floor
North Quincy, MA 02171
If the purchase is a subsequent investment, the shareholder should either
include the stub from a confirmation form previously sent by the Transfer Agent
or include a letter giving the shareholder's name and account number.
All purchases made by check should be in U.S. dollars and made payable to
"Guinness Flight Investment Funds, Inc.," or in the case of a retirement
account, the custodian or trustee. Third party checks will not be accepted. When
purchases are made by check or periodic account investment, redemptions will not
be allowed until the investment being redeemed has been in the account for 15
calendar days.
PURCHASING BY WIRE. For an initial purchase of shares of a Fund by wire,
shareholders should first telephone the Transfer Agent at (800) 915-6566 between
the hours of 8:00 a.m. and 4:00 p.m. (Eastern time) on a day when the New York
Stock Exchange is open for normal trading to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank. In
addition, a buyer will be required to provide the Transfer Agent a signature
application within 10 business days of an initial purchase. You should then give
instructions to your bank to transfer funds by wire to the Transfer Agent at the
following address:
State Street Bank and Trust Company
ABA # 0011 000 028
Shareholder and Custody Services
DDA # 99050171
ATTN: (Fund Name)
(Fund Account Number)
In making a subsequent purchase order by wire, you should wire funds to the
Transfer Agent in the manner described above, making sure that the wire
specifies the name of the Fund, your name and the account number. However, it is
not necessary to call the Transfer Agent to make subsequent purchase orders
using federal funds.
If you arrange for receipt by the Transfer Agent of federal funds prior to the
close of trading (currently 4:00 p.m., Eastern time) of the New York Stock
Exchange on a day the Exchange is open for normal trading, you may purchase
shares of a Fund as of that day. Your bank may charge a fee for wiring money on
your behalf.
PROSPECTUS PAGE 25
<PAGE>
HOW TO REDEEM SHARES
GENERAL INFORMATION. Investors may redeem shares of a Fund through the Transfer
Agent or from other selected securities brokers or dealers. A shareholder whose
redemption order is received by the Transfer Agent before the close of trading
on the New York Stock Exchange, currently 4:00 p.m. Eastern time, will redeem
shares at the net asset value set as of that day. A shareholder whose redemption
order is received by the Transfer Agent after the close of trading on the New
York Stock Exchange will redeem shares at the net asset value set as of the next
trading day on the New York Stock Exchange. A broker may charge a transaction
fee for the redemption. Under certain circumstances, the Funds may temporarily
borrow cash pursuant to a credit agreement with Deutsche Bank AG to satisfy
redemption requests.
REDEMPTIONS BY MAIL. Shareholders may redeem shares of any Fund by writing to
the Transfer Agent at the following address:
Guinness Flight Investment Funds, Inc
P.O. Box 9288
Boston, MA 02205-8559
Overnight courier deliveries should be sent to:
Boston Financial Data Services
ATTN: Guinness Flight Investment Funds, Inc.
Two Heritage Drive
3rd Floor
North Quincy, MA 02171
Please specify the name of the Fund, the number of shares or dollar amount to be
redeemed, and your name and account number. You should also enclose any
certificated shares that you wish to redeem.
The signature on a redemption request must be exactly as the names appear on a
Fund's account records, and the request must be signed by the minimum number of
persons designated on the account application that are required to effect a
redemption. Requests by participants of qualified retirement plans must include
all other signatures required by the plan and applicable federal law.
SIGNATURE GUARANTEE. If a redemption is requested by a corporation, partnership,
trust or fiduciary, written evidence of authority acceptable to the Transfer
Agent must be submitted before such request will be accepted. If the proceeds of
the redemption exceed $50,000, or are to be paid to a person other than the
record owner, or are to be sent to an address other than the address on the
Transfer Agent's records, or are to be paid to a corporation, partnership, trust
or fiduciary, the signature(s) on the redemption request and on the
certificates, if any, or stock powers must be guaranteed by an
PROSPECTUS PAGE 26
<PAGE>
"eligible guarantor," which includes certain banks, brokers, dealers, credit
unions, securities exchanges, clearing agencies and savings associations. A
signature guarantee is not the same as notarization and an acknowledgment by a
notary public is not acceptable as a substitute for a signature guarantee.
REDEMPTIONS BY TELEPHONE. Shareholders may establish telephone redemption
privileges if so elected on the account application. Shares of a Fund may then
be redeemed by telephoning the Transfer Agent at (800) 915-6566, between the
hours of 8:00 a.m. and 4:00 p.m. (Eastern time) on a day when the New York Stock
Exchange is open for normal trading.
SPECIAL FACTORS REGARDING TELEPHONE REDEMPTIONS. In order to protect itself and
shareholders from liability for unauthorized or fraudulent telephone
transactions, the Guinness Funds will use reasonable procedures in an attempt to
verify the identity of a person making a telephone redemption request. The
Guinness Funds reserve the right to refuse a telephone redemption request if it
believes that the person making the request is not the record owner of the
shares being redeemed, or is not authorized by the shareholder to request the
redemption. Shareholders will be promptly notified of any refused request for a
telephone redemption. As long as these reasonable procedures are followed,
neither the Guinness Funds nor its agents will be liable for any loss, liability
or cost which results from acting upon instructions of a person believed to be a
shareholder with respect to the telephone redemption privilege. However, if the
Guinness Funds or its agents fail to follow such reasonable procedures, then the
Guinness Funds or its agents may be liable for any losses due to unauthorized or
fraudulent instructions.
REDEMPTIONS BY WIRE. Redemption proceeds are generally paid to shareholders by
check. However, redemptions proceeds of $500 or more may be wired by the
Transfer Agent to a shareholder's bank account. Requests for redemption by wire
should include the name, location and ABA or bank routing number (if known) of
the designated bank and account number. Payment will be made within three days
after receipt by the Transfer Agent of the written or telephone redemption
request and any share certificates, except as indicated below. Such payment may
be postponed, or the right of redemption suspended at times when (a) the New
York Stock Exchange is closed for other than customary weekends and holidays;
(b) trading on such exchange is restricted; (c) an emergency exists, the result
of which disposal of Fund securities or determination of the value of a Fund's
net assets are not reasonably practicable; or (d) during any other period when
the Securities and Exchange Commission, by order, so permits. The Transfer Agent
will deduct a fee equal to $10.00 from the amount wired.
REDEMPTION OF SMALL ACCOUNTS. In order to reduce expenses, the Funds may redeem
shares in any account, other than retirement plan or Uniform Gift to Minors Act
accounts, if at any time, due to redemptions, the total value of a shareholder's
account does not equal at least $500. Shareholders will be given 30 days prior
written notice in which to purchase sufficient additional shares to avoid such a
redemption.
PROSPECTUS PAGE 27
<PAGE>
REDEMPTION FEE. On redemptions of shares purchased less than 30 days prior to
redemption, a redemption fee, equal to 1% of the value of the shares being
redeemed, shall be charged to any shareholder who redeems his interest in the
China Fund, Asia Blue Chip Fund, or Asia Small Cap Fund, such proceeds to be
payable to the Fund. Such redemption fee will not be charged on shares purchased
30 or more days prior to redemption or acquired through the reinvestment of
distributions of investment income and capital gains. Redemptions will be
assumed to have been made through the liquidation of shares in a shareholder's
account on a first-in, first-out basis.
Any redemption fee payable to the Asia Blue Chip Fund, Asia Small Cap Fund, or
China Fund, will be waived if such fee is equal to or less than .10% of the
total value of the shares, including shares purchased more than 30 days prior to
redemption and shares acquired through the reinvestment of distributions of
investment income and capital gains, being redeemed.
ADDITIONAL REDEMPTION INFORMATION. Payment for redemption of recently purchased
shares will be delayed until the Transfer Agent has been advised that the
purchase check has been honored, up to 12 calendar days from the time of receipt
of the purchase check by the Transfer Agent. If the purchase check does not
clear, the investor, and not the Funds, will be responsible for any resulting
loss. Such delay may be avoided by purchasing shares by wire or by certified or
official bank checks.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE. You may exchange shares of a Fund for shares of the other
Funds by mailing or delivering written instructions to the Transfer Agent at the
following address:
Guinness Flight Investment Funds, Inc.
P.O. Box 9288
Boston, MA 02205-8559
Please specify the name of the applicable Fund, the number of shares or dollar
amount to be exchanged and your name and account number. You may also exchange
shares by telephoning the Transfer Agent at (800) 915-6566 between the hours of
8:00 a.m. and 4:00 p.m. (Eastern time) on a day when the New York Stock Exchange
is open for normal trading.
In periods of severe market or economic conditions, telephone exchanges may be
difficult to implement, in which case you should mail or send by overnight
delivery a written exchange request to the Transfer Agent. Overnight deliveries
should be sent to the Transfer Agent at the address on page 26.
All exchanges will be made on the basis of the relative net asset values of the
Funds next determined after a completed request is received. Requests for
telephone
PROSPECTUS PAGE 28
<PAGE>
exchanges received before 4:00 p.m. (Eastern time) on a day when the New York
Stock Exchange is open for normal trading will be processed that day. Otherwise,
processing will occur on the next business day.
You may also exchange shares of either Fund for shares of the Seven Seas Series
Money Market Fund, a money market mutual fund advised by State Street Bank &
Trust Co., 225 Franklin Street, Boston, MA 02110 and not affiliated with the
Guinness Funds or Guinness Flight, if such shares are offered in your state of
residence. Prior to making such an exchange, you should obtain and carefully
read the prospectus for the Seven Seas Series Money Market Fund. The exchange
privilege does not constitute an offering or recommendation on the part of the
Funds or Guinness Flight of an investment in the Seven Seas Series Money Market
Fund.
EXCHANGE PRIVILEGE ANNUAL LIMITS. The Funds reserve the right to limit the
number of exchanges a shareholder may make in any year to four (4) to avoid
excessive Fund expenses.
PRE-AUTHORIZED INVESTMENT PLAN. You may establish a pre-authorized investment
plan whereby your personal bank account is automatically debited and your Fund
account is automatically credited with additional full and fractional shares.
Through the pre-authorized investment plan, the minimum initial investment is
$100 and the subsequent minimum monthly investments is $100 per an investment.
SYSTEMATIC WITHDRAWAL PLAN. You may elect to have regular monthly or quarterly
payments in any fixed amount in excess of $100 made to you, your personal bank
account, or a properly designated third party, as long as your Fund account has
a value at the current price of at least $1,000. During the withdrawal period,
you may purchase additional shares for deposit to your account if the additional
purchases are equal to at least one year's scheduled withdrawals. The number of
full and fractional shares equal in value to the amount of the payment made will
be redeemed at net asset value as determined on the day of withdrawal. As shares
of a Fund are redeemed, you may recognize a capital gain or loss to be reported
for income tax purposes.
DETERMINATION OF NET ASSET VALUE
The net asset value per share (or share price) of the Funds is determined as of
4:15 p.m. Eastern Time on each business day. The net asset value per share is
calculated by subtracting a Fund's liabilities from its assets and dividing the
result by the total number of Fund shares outstanding. The determination of a
Fund's net asset value per share is made in accordance with generally accepted
accounting principles. Among other items, a Fund's liabilities include accrued
expenses and dividends payable, and its total assets include portfolio
securities valued at their market value, as well as income accrued but not yet
received. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the supervision of
the Fund's officers and in accordance with methods which are specifically
authorized by its
PROSPECTUS PAGE 29
<PAGE>
governing Board of Directors. Short-term obligations with maturities of 60 days
or less are valued at amortized cost as reflecting fair value.
DIVIDENDS, DISTRIBUTIONS AND TAX MATTERS
DIVIDENDS AND DISTRIBUTIONS. Income dividends of the Asia Blue Chip Fund, Asia
Small Cap Fund and China Fund are declared and paid semiannually, normally in
June and December. The Global Government Fund declares and pays dividends
monthly. The Funds distribute all or substantially all of their net investment
income and net capital gains (if any) to shareholders each year. Any net capital
gains earned by a Fund normally are distributed in June and December to the
extent necessary to avoid federal income and excise taxes.
In determining the amount of capital gains, if any, available for distribution,
net capital gains are offset against available net capital losses, if any,
carried forward from previous fiscal periods.
All dividends and distributions of a Fund are automatically reinvested on the
ex-dividend date in full and fractional shares of such Fund, unless the
shareholder has made an alternate election as to the method of payment.
Dividends and distributions will be reinvested at the net asset value per share
determined on the ex-dividend date. Shareholders may elect, by written notice to
the Transfer Agent, to receive such distributions, or the dividend portion
thereof, in cash, or to invest such dividends and distributions in additional
shares, including, subject to certain conditions, in shares of a Fund other than
the Fund making the distribution. Investors who have not previously selected
such a reinvestment option on the account application form may contact the
Transfer Agent at any time to obtain a form to authorize such reinvestments in a
Fund other than the Fund making the distribution. Such reinvestments into a Fund
are automatically credited to the account of the shareholder.
Changes in the form of dividend and distribution payments may be made by the
shareholder at any time by notice to the Transfer Agent and are effective as to
any subsequent payment if such notice is received by the Transfer Agent prior to
the record date of such payment. Any dividend and distribution election remains
in effect until the Transfer Agent receives a revised written election by the
shareholder.
Any dividend or distribution paid by a Fund has the effect of reducing the net
asset value per share on the ex-dividend date by the amount of the dividend or
distribution. Therefore, a dividend or distribution declared shortly after a
purchase of shares by an investor would represent, in substance, a return of
capital to the shareholder with respect to such shares even though it would be
subject to income taxes, as discussed below.
TAX MATTERS. Each Fund intends to qualify as a regulated investment company by
satisfying the requirements under Subchapter M of the Internal Revenue Code of
1986,
PROSPECTUS PAGE 30
<PAGE>
as amended (the "Code"), including the requirements with respect to
diversification of assets, distribution of income and sources of income. It is
the Funds' policy to distribute to shareholders all of its investment income
(net of expenses) and any capital gains (net of capital losses) in accordance
with the timing requirements imposed by the Code, so that each Fund will satisfy
the distribution requirement of Subchapter M and not be subject to Federal
income taxes or the 4% excise tax.
If a Fund fails to satisfy any of the Code requirements for qualification as a
regulated investment company, it will be taxed at regular corporate tax rates on
all its taxable income (including capital gains) without any deduction for
distributions to shareholders, and distributions to shareholders will be taxable
as ordinary dividends (even if derived from the Fund's net long-term capital
gains) to the extent of the Fund's current and accumulated earnings and profits.
Distributions by a Fund of its net investment income (including foreign currency
gains and losses) and the excess, if any, of its net short-term capital gain
over its net long-term capital loss are taxable to shareholders as ordinary
income. Distributions by a Fund of the excess, if any, of its net long-term
capital gain over its net short-term capital loss are designated as capital gain
dividends and are taxable to shareholders as long-term capital gains, regardless
of the length of time shareholders have held their shares.
Distributions by a Fund which are taxable to shareholders as ordinary income are
treated as dividends for Federal income tax purposes, but in any year only a
portion thereof (which cannot exceed the aggregate amount of qualifying
dividends from domestic corporations received by the Fund during the year) may
qualify for the 70% dividends-received deduction for corporate shareholders.
Because the investment income of the Asia Blue Chip Fund, Asia Small Cap Fund
and China Fund will consist primarily of dividends from foreign corporations and
the Fund may have interest income and short-term capital gains, it is not
expected that a significant portion of the ordinary income dividends paid by the
China Fund may qualify for the dividends-received deduction. Because the Global
Government Bond Fund's investment income will consist of interest from debt,
ordinary income dividends paid by the Fund will not qualify for the
dividends-received deduction. Portions of each Fund's investment income may be
subject to foreign income taxes withheld at the source. If a Fund meets certain
requirements, it may elect to "pass-through" to shareholders any such foreign
taxes, which may enable shareholders to claim a foreign tax credit or a
deduction with respect to their share thereof.
Distributions to shareholders will be treated in the same manner for Federal
income tax purposes whether shareholders elect to receive them in cash or
reinvest them in additional shares. In general, shareholders take distributions
into account in the year in which they are made. However, shareholders are
required to treat certain distributions made during January as having been paid
by the Fund and received by shareholders on December 31 of the preceding year. A
statement setting forth the Federal income tax
PROSPECTUS PAGE 31
<PAGE>
status of all distributions made (or deemed made) during the year, and any
foreign taxes "passed- through" to shareholders, will be sent to shareholders
promptly after the end of each year.
Investors should be careful to consider the tax implications of purchasing
shares just prior to the record date of any ordinary income dividend or capital
gain dividend. Those investors purchasing shares just prior to an ordinary
income or capital gain dividend will be taxed on the entire amount of the
dividend received, even though the net asset value per share on the date of such
purchase reflected the amount of such dividend.
A shareholder will recognize gain or loss upon the sale or redemption of shares
of the Funds in an amount equal to the difference between the proceeds of the
sale or redemption and the shareholder's adjusted tax basis in the shares. Any
loss realized upon a taxable disposition of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the extent
of any capital gain dividends received on such shares. All or a portion of any
loss realized upon a taxable disposition of shares of the Funds may be
disallowed if other shares of the "redeemed" Fund are purchased within 30 days
before or after such disposition.
If a shareholder is a non-resident alien or foreign entity shareholder, ordinary
income dividends paid to such shareholder generally will be subject to United
States withholding tax at a rate of 30% (or lower rate under an applicable
treaty). We urge non-United States shareholders to consult their own tax adviser
concerning the applicability of the United States withholding tax.
Under the back-up withholding rules of the Code, shareholders may be subject to
31% withholding of Federal income tax on ordinary income dividends, capital gain
dividends and redemption payments made by the Funds. In order to avoid this
back-up withholding, shareholders must provide the Fund with a correct taxpayer
identification number (which for an individual is usually his Social Security
number) and certify that the shareholder is a corporation or otherwise exempt
from or not subject to back-up withholding.
The foregoing discussion of Federal income tax consequences is based on tax laws
and regulations in effect on the date of this Prospectus, and is subject to
change by legislative or administrative action. As the foregoing discussion is
for general information only, shareholders should also review the more detailed
discussion of Federal income tax considerations relevant to the Fund that is
contained in the Statement of Additional Information. In addition, shareholders
should consult with their own tax adviser as to the tax consequences of
investments in a Fund, including the application of state and local taxes which
may differ from the Federal income tax consequences described above.
PROSPECTUS PAGE 32
<PAGE>
ABOUT THE FUNDS
Each Fund is a separate series of shares of the Guinness Funds, a Maryland
Corporation incorporated on January 7, 1994 and registered under the 1940 Act,
as an open-end management investment company. Each Fund has its own investment
objective and policies designed to meet specific investment goals, operates as
an open-end management investment company and expects to be treated as a
regulated investment company for Federal income tax purposes. The Asia Blue Chip
Fund, Asia Small Cap Fund, China Fund and Global Government Fund are
non-diversified. The investment objective of the Asia Blue Chip Fund and Asia
Small Cap Fund is fundamental.
Each Fund invests in securities of different issuers and industry
classifications in an attempt to spread and reduce the risks inherent in all
investing. The Funds continuously offer new shares for sale to the public, and
stand ready to redeem their outstanding shares for cash at their net asset
value. Guinness Flight, the investment adviser for the Funds, continuously
reviews and, from time to time, changes the portfolio holdings of the Funds in
pursuit of each Fund's investment objective.
Shares of each Fund entitle the holders to one vote per share. The shares have
no preemptive or conversion rights. When issued, shares are fully paid and
nonassessable. The shareholders have certain rights, as set forth in the
By-laws, to call a meeting for any purpose. See "Description of the Funds --
Voting Rights" in the Statement of Additional Information.
PROSPECTUS PAGE 33
<PAGE>
GENERAL INFORMATION
INVESTMENT ADVISER. Guinness Flight Investment Management Limited, 201 South
Lake Avenue, Suite 510, Pasadena, California 91101, serves as Investment Adviser
for the Funds.
ADMINISTRATOR. Investment Company Administration Corporation, 4455 East
Camelback Road, Suite 261E, Phoenix, Arizona 85018, serves as Administrator of
the Funds.
CUSTODIAN. Investors Bank and Trust Company, 89 South Street, P.O. Box 1537,
Boston, Massachusetts 02205, serves as the custodian of the Funds. Generally,
the Custodian holds the securities, cash and other assets of the Funds.
TRANSFER AGENT. State Street Bank and Trust Company, P.O. Box 1912, Boston,
Massachusetts 02105, serves as Transfer Agent of the Funds. Generally the
Transfer Agent provides recordkeeping services for the Funds and their
shareholders.
LEGAL COUNSEL. Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York,
New York 10022 serves as counsel to the Guinness Funds.
INDEPENDENT ACCOUNTANTS. Ernst & Young LLP, 515 South Flower Street, Los
Angeles, CA 90071. Generally, the Independent Accountants will audit the
financial statement and the financial highlights of the Funds, as well as
provide reports to the Directors.
DISTRIBUTOR. First Fund Distributors, Inc., 4455 East Camelback Road, Suite
261E, Phoenix, Arizona 85018, serves as Distributor for the Funds.
OTHER INFORMATION. This prospectus sets forth basic information that investors
should know about the Funds prior to investing. A Statement of Additional
Information has been filed with the Securities and Exchange Commission and is
available upon request and without charge, by writing or calling the Funds at
1-800-915-6565. This prospectus omits certain information contained in the
registration statement filed with the Securities and Exchange Commission. Copies
of the registration statement, including items omitted from this prospectus, may
be obtained from the Securities and Exchange Commission by paying the charges
prescribed under its rules and regulations.
PROSPECTUS PAGE 34
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
GUINNESS FLIGHT INVESTMENT FUNDS, INC.
201 South Lake Avenue, Suite 510
Pasadena, California 91101
GUINNESS FLIGHT CHINA & HONG KONG FUND
GUINNESS FLIGHT ASIA BLUE CHIP FUND
GUINNESS FLIGHT ASIA SMALL CAP FUND
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated October 3, 1996 (the "Prospectus"), pursuant to which
the Guinness Flight China & Hong Kong Fund (the "China Fund"), Guinness Flight
Asia Blue Chip Fund ("Asia Blue Chip Fund"), Guinness Flight Asia Small Cap Fund
("Asia Small Cap Fund"), and Guinness Flight Global Government Bond Fund (the
"Global Government Fund") (collectively, the "Funds") are offered. Please retain
this document for future reference.
For a free copy of the Prospectus, please call the Funds at 1-800-915-6565
GENERAL INFORMATION AND HISTORY............................................. 2
INVESTMENT OBJECTIVE AND POLICIES........................................... 2
INVESTMENT STRATEGIES AND RISKS............................................. 5
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS............................... 14
INVESTMENT RESTRICTIONS AND POLICIES........................................ 15
PORTFOLIO TRANSACTIONS...................................................... 16
COMPUTATION OF NET ASSET VALUE.............................................. 17
PERFORMANCE INFORMATION..................................................... 18
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.............................. 19
TAX MATTERS................................................................. 19
MANAGEMENT OF THE FUNDS..................................................... 25
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS.............................. 26
DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN................................ 28
DESCRIPTION OF THE FUNDS.................................................... 28
SHAREHOLDER REPORTS......................................................... 29
FINANCIAL STATEMENTS........................................................ 29
APPENDIX A..................................................................A-1
Dated: October 3, 1996
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the Funds' Prospectus, Guinness Flight Investment
Funds, Inc. ("Guinness Funds") is a Maryland corporation organized as an
open-end, series, management investment company. Currently, Guinness Funds
offers four separate series portfolios: the China Fund, the Asia Blue Chip Fund,
the Asia Small Cap Fund, and the Global Government Fund, each of which has
unique investment objectives and strategies.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL INFORMATION ABOUT THE FUNDS.
The China Fund seeks to provide investors with long term capital growth
by generally investing in equity securities, that should benefit from the growth
in the Chinese economy, traded in the markets of China and Hong Kong. The Asia
Blue Chip Fund's investment objective is long-term capital appreciation through
investments in equity securities of well established and sizable companies
located in the Asian continent. The Asia Small Cap Fund's investment objective
is long-term capital appreciation through investments in equity securities of
smaller capitalization issuers located in the Asian continent. The Global
Government Fund intends to provide investors with both current income and
capital appreciation from a debt portfolio of government securities issued
throughout the world. The objective of each Fund is a fundamental policy and may
not be changed except by a majority vote of shareholders.
The Fund's do not intend to employ leveraging techniques. Accordingly,
a Fund will not purchase new securities if amounts borrowed exceed 5% of its
total assets at the time the loan is made.
When the Funds determine that adverse market conditions exist, the
Funds may adopt a temporary defensive posture and invest their entire portfolio
in Money Market Instruments. In addition, the Funds may invest in Money Market
Instruments in anticipation of investing cash positions. "Money Market
Instruments" means short-term (less than twelve months to maturity) investments
in (a) obligations of the United States or foreign governments, their respective
agencies or instrumentalities; (b) bank deposits and bank obligations (including
certificates of deposit, time deposits and bankers' acceptances) of United
States or foreign banks denominated in any currency; (c) floating rate
securities and other instruments denominated in any currency issued by
international development agencies; (d) finance company and corporate commercial
paper and other short-term corporate debt obligations of United States and
foreign corporations meeting the credit quality standards set by Guinness Funds'
Board of Directors; and (e) repurchase agreements with banks and broker-dealers
with respect to such securities. While the Funds do not intend to limit the
amount of their assets invested in Money Market Instruments, except to the
extent believed necessary to achieve their investment objective, the Funds do
not expect under normal market conditions to have a substantial portion of their
assets invested in Money Market Instruments. To the extent the Funds are
invested in Money Market Instruments for defensive purposes or in anticipation
of investing cash positions, the Funds' investment objective may not be
achieved.
The following information concerning the Funds augments the disclosure
provided in the prospectus under the heading "Investment Objectives, Programs
and Limitations":
THE CHINA FUND, ASIA BLUE CHIP FUND, AND ASIA SMALL CAP FUND (THE "EQUITY
FUNDS").
Guinness Flight does not intend to invest in any security in a country
where the currency is not freely convertible to United States dollars, unless it
has obtained the necessary governmental licensing to convert such currency or
other appropriately licensed or sanctioned contractual guarantee to protect such
investment against loss of that currency's external value, or Guinness Flight
has a reasonable expectation at the time the investment is made that such
governmental licensing or other appropriately licensed or sanctioned guarantee
would be obtained or that the currency in which the security is quoted would be
freely convertible at the time of any proposed sale of the security by an Equity
Fund.
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An Equity Fund may invest indirectly in issuers through sponsored or
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs"), Global Depository Shares ("GDSs")
and other types of Depository Receipts (which, together with ADRs, EDRs, GDRs,
and GDSs, are hereinafter referred to as "Depository Receipts"). Depository
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the stock of unsponsored Depository Receipts 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 the Depository
Receipts. ADRs are Depository Receipts typically issued by a United States bank
or trust company which evidence ownership of underlying securities issued by a
foreign corporation. GDRs and other types of Depository Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
either a foreign or a United States corporation. Generally, Depository Receipts
in registered form are designed for use in the United States securities markets
and Depository Receipts in bearer form are designed for use in securities
markets outside the United States. For purposes of the Equity Funds' investment
policies, investments in ADRs, GDRs and other types of Depository Receipts will
be deemed to be investments in the underlying securities. Depository Receipts
other than those denominated in United States dollars will be subject to foreign
currency exchange rate risk. Certain Depository Receipts may not be listed on an
exchange and therefore may be illiquid securities.
Securities in which an Equity Fund may invest include those that are
neither listed on a stock exchange nor traded over-the-counter. As a result of
the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Equity Fund or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which may be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Equity Fund may be required to bear the expenses of registration. To
the extent that such securities are illiquid by virtue of the absence of a
readily available market, or legal or contractual restrictions on resale, they
will be subject to such Equity Fund's investment restriction on illiquid
securities, discussed below.
An Equity Fund, together with any of its "affiliated persons," as
defined in the Investment Company Act of 1940 (the "1940 Act"), may only
purchase up to 3% of the total outstanding securities of any underlying
investment company. Accordingly, when the Equity Fund or such "affiliated
persons" hold shares of any of the underlying investment companies, such Fund's
ability to invest fully in shares of those investment companies is restricted,
and Guinness Flight must then, in some instances, select alternative investments
that would not have been its first preference.
There can be no assurance that appropriate investment companies will be
available for investment. The Equity Funds do not intend to invest in such
investment companies unless, in the judgment of Guinness Flight, the potential
benefits of such investment justify the payment of any applicable premium or
sales charge.
GLOBAL GOVERNMENT FUND
Global Government Fund assets invested in foreign government securities
will be invested in debt obligations and other fixed income securities, in each
case denominated in U.S. currencies, non-U.S. currencies or composite currencies
including:
(1) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities;
(2) debt obligations of supranational entities (described below);
and
(3) debt obligations of the United States Government issued in
non-dollar securities.
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In making international fixed income securities investments, Guinness
Flight may consider, among other things, the relative growth and inflation rates
of different countries. Guinness Flight may also consider expected changes in
foreign currency exchange rates, including the prospects for central bank
intervention, in determining the anticipated returns of securities denominated
in foreign currencies. Guinness Flight may further evaluate, among other things,
foreign yield curves and regulatory and political factors, including the fiscal
and monetary policies of such countries.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support. Obligations of
foreign governmental entities include obligations issued or guaranteed by
national, provincial, state or other governments with taxing power or by their
agencies. These obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations designated
or supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Steel and Coal Community, the Asian
Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income.
The Global Government Fund may invest in United States Government
Securities and in options, futures contracts and repurchase transactions with
respect to such securities. The term "United States Government Securities"
refers to debt securities denominated in United States dollars, issued or
guaranteed by the United States Government, by various of its agencies, or by
various instrumentalities established or sponsored by the United States
Government. Certain of these obligations, including: (1) United States Treasury
bills, notes, and bonds; (2) mortgage participation certificates guaranteed by
the Government National Mortgage Association ("GNMA"); and (3) Federal Housing
Administration debentures, are supported by the full faith and credit of the
United States. Other United States Government Securities issued or guaranteed by
Federal agencies or government sponsored enterprises are not supported by the
full faith and credit of the United States. These securities include obligations
supported by the right of the issuer to borrow from the United States Treasury,
such as obligations of Federal Home Loan Banks, and obligations supported only
by the credit of the instrumentality, such as Federal National Mortgage
Association Bonds.
When purchasing United States Government Securities, Guinness Flight
may take full advantage of the entire range of maturities of such securities and
may adjust the average maturity of the investments held in the portfolio from
time to time, depending upon its assessment of relative yields of securities of
different maturities and its expectations of future changes in interest rates.
To the extent that the Global Government Fund invests in the mortgage market,
Guinness Flight usually will evaluate, among other things, relevant economic
data, environmental and security specific variables such as housing starts,
coupon and age trends. To determine relative value among markets, Guinness
Flight may use tools such as yield/duration curves, break-even prepayment rate
analysis and holding-period-return scenario testing.
The Global Government Fund may seek to increase its current income by
writing covered call options with respect to some or all of the United States
Government Securities held in its portfolio. In addition, the Global Government
Fund may at times, through the purchase of options on United States Government
Securities, and the purchase and sale of futures contracts and related options
with respect to United States Government Securities, seek to reduce fluctuations
in net asset value by hedging against a decline in the value of the United
States Government Securities owned by the Global Government Fund or an increase
in the price of such securities which the Global Government Fund plans to
purchase, although it is not the general practice to do so. Significant option
writing opportunities generally exist only with respect to longer term United
States Government Securities. Options on United States Government Securities and
futures and related options are not considered United States Government
Securities; accordingly, they have a different set of risks and features.
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<PAGE>
INVESTMENT STRATEGIES AND RISKS
OPTIONS AND FUTURES STRATEGIES
Through the writing of call options and the purchase of options and the
purchase and sale of stock index futures contracts, interest rate futures
contracts, foreign currency futures contracts and related options on such
futures contracts, Guinness Flight may at times seek to hedge against a decline
in the value of securities included in a Fund's portfolio or an increase in the
price of securities which it plans to purchase for a Fund or to reduce risk or
volatility while seeking to enhance investment performance. Expenses and losses
incurred as a result of such hedging strategies will reduce a Fund's current
return.
The ability of a Fund to engage in the options and futures strategies
described below will depend on the availability of liquid markets in such
instruments. Although the Funds will not enter into an option or futures
position unless a liquid secondary market for such option or futures contract is
believed by Guinness Flight to exist, there is no assurance that a Fund will be
able to effect closing transactions at any particular time or at an acceptable
price. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume; or (vi) one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market thereon would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
Low initial margin deposits made upon the opening of a futures position
and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent a Fund purchases
or sells futures contracts and options on futures contracts and purchases and
writes options on securities and securities indexes for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities held by the Fund or decreases in the prices of securities the Fund
intends to acquire. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
the Funds will only engage in options and futures transactions for limited
purposes, it will involve certain risks. The Funds will not engage in options
and futures transactions for leveraging purposes.
Upon purchasing futures contracts of the type described above, the
Funds will maintain in a segregated account with their Custodian cash or liquid
high grade debt obligations with a value, marked-to- market daily, at least
equal to the dollar amount of the Funds' purchase obligation, reduced by any
amount maintained as margin. Similarly, upon writing a call option, the Funds
will maintain in a segregated account with their Custodian, liquid or high grade
debt instruments with a value, marked-to-market daily, at least equal to the
market value of the underlying contract (but not less than the strike price of
the call option) reduced by any amounts maintained as margin.
WRITING COVERED CALL OPTIONS ON SECURITIES
A Fund may write covered call options on optionable securities (stocks,
bonds, foreign exchange related futures, options and options on futures) of the
types in which it is permitted to invest in seeking to attain its objective.
Call options written by a Fund give the holder the right to buy the underlying
securities from the Fund at a stated exercise price. As the writer of the call
option, the Fund is obligated to own the underlying
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securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges).
The Funds will receive a premium from writing a call option, which
increases the writer's return in the event the option expires unexercised or is
closed out at a profit. The amount of the premium will reflect, among other
things, the relationship of the market price of the underlying security to the
exercise price of the option, the term of the option and the volatility of the
market price of the underlying security. By writing a call option, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The Funds will realize a
profit or loss from such transaction if the cost of such transaction is less or
more, respectively, than the premium received from the writing of the option.
Because increases in the market price of a call option will generally reflect
increases in the market price of the underlying security, any loss resulting
from the repurchase of a call option is likely to be offset in whole or in part
by unrealized appreciation of the underlying security owned by a Fund.
Options written by the Funds will normally have expiration dates not
more than one year from the date written. The exercise price of the options may
be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities at
the times the options are written. A Fund may engage in buy-and-write
transactions in which the Fund simultaneously purchases a security and writes a
call option thereon. Where a call option is written against a security
subsequent to the purchase of that security, the resulting combined position is
also referred to as buy-and-write. Buy-and-write transactions using in-the-money
call options may be utilized when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. In such a transaction, a Fund's maximum gain will be the premium
received from writing the option reduced by any excess of the price paid by the
Fund for the underlying security over the exercise price. Buy-and-write
transactions using at-the-money call options may be utilized when it is expected
that the price of the underlying security will remain flat or advance moderately
during the option period. In such a transaction, a Fund's gain will be limited
to the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
foregoing situations, if the market price of the underlying security declines,
the amount of such decline will be offset wholly or in part by the premium
received and a Fund may or may not realize a loss.
To the extent that a secondary market is available on the Exchanges,
the covered call option writer may liquidate his position prior to the
assignment of an exercise notice by entering a closing purchase transaction for
an option of the same series as the option previously written. The cost of such
a closing purchase, plus transaction costs, may be greater than the premium
received upon writing the original option, in which event the writer will have
incurred a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES
A Fund may purchase put options to protect its portfolio holdings in an
underlying security against a decline in market value. Such hedge protection is
provided during the life of the put option since the Fund, as holder of the put
option, is able to sell the underlying security at the put exercise price
regardless of any decline in the underlying security's market price. In order
for a put option to be profitable, the market price of the underlying security
must decline sufficiently below the exercise price to cover the premium and
transaction costs. By using put options in this manner, the Funds will reduce
any profit they might otherwise have realized in the underlying security by the
premium paid for the put option and by transaction costs.
A Fund may also purchase call options to hedge against an increase in
prices of securities that it wants ultimately to buy. Such hedge protection is
provided during the life of the call option since the Fund, as
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holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. By using call options in this manner, the Funds
will reduce any profit they might have realized had they bought the underlying
security at the time they purchased the call option by the premium paid for the
call option and by transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES
The Equity Funds may purchase and sell options on stock indices and
stock index futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific securities
except that, rather than the right to take or make delivery of the specific
security at a specific price, an option on a stock index gives the holder the
right to receive, upon exercise of the option, an amount of cash if the closing
level of that stock index is greater than, in the case of a call, or less than,
in the case of a put, the exercise price of the option. This amount of cash is
equal to such difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified multiple. The
writer of the option is obligated, in return for the premium received, to make
delivery of this amount. Unlike options on specific securities, all settlements
of options on stock indices are in cash and gain or loss depends on general
movements in the stocks included in the index rather than on price movements in
particular stocks. Currently, index options traded include the S&P 100 Index,
the S&P 500 Index, the NYSE Composite Index, the AMEX Market Value Index, the
National Over-the-Counter Index and other standard broadly based stock market
indices.
A stock index futures contract is an agreement in which one party
agrees to deliver to the other an amount of cash equal to a specific dollar
amount multiplied by the difference between the value of a specific stock index
at the close of the last trading day of the contract and the price at which the
agreement is made. For example, the China Fund may invest in Hang-Seng Index
Futures. No physical delivery of securities is made.
If Guinness Flight expects general stock market prices to rise, it
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
they want ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Equity
Fund's index option or futures contract resulting from the increase in the
index. If, on the other hand, Guinness Flight expects general stock market
prices to decline, it might purchase a put option or sell a futures contract on
the index. If that index does in fact decline, the value of some or all of the
equity securities in the Equity Fund's portfolio may also be expected to
decline, but that decrease would be offset in part by the increase in the value
of the China Fund's position in such put option or futures contract.
PURCHASE AND SALE OF INTEREST RATE FUTURES
A Fund may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar interest
rate futures contracts on foreign bonds for the purpose of hedging fixed income
and interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
A Fund may purchase futures contracts in anticipation of a decline in
interest rates when it is not fully invested in a particular market in which it
intends to make investments to gain market exposure that may in part or entirely
offset an increase in the cost of securities it intends to purchase. The Funds
do not consider purchases of futures contracts to be a speculative practice
under these circumstances. In a substantial majority of these transactions, the
Funds will purchase securities upon termination of the futures contract.
A Fund may sell U.S. dollar and non-U.S. dollar interest rate futures
contracts in anticipation of an increase in the general level of interest rates.
Generally, as interest rates rise, the market value of the fixed
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income securities held by the Funds will fall, thus reducing the net asset value
of the holder. This interest rate risk can be reduced without employing futures
as a hedge by selling long-term fixed income securities and either reinvesting
the proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs to the Funds in the
form of dealer spreads and brokerage commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate futures
contracts provides an alternative means of hedging against rising interest
rates. As rates increase, the value of a Fund's short position in the futures
contracts will also tend to increase, thus offsetting all or a portion of the
depreciation in the market value of the Fund's investments which are being
hedged. While the Funds will incur commission expenses in entering and closing
out futures positions (which is done by taking an opposite position from the one
originally entered into, which operates to terminate the position in the futures
contract), commissions on futures transactions are lower than transaction costs
incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES CONTRACTS
A Fund may write call options and purchase call and put options on
stock index and interest rate futures contracts. The Funds may use such options
on futures contracts in connection with their hedging strategies in lieu of
purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options on stock index or interest rate futures,
rather than purchasing such futures, to hedge against possible increases in the
price of equity securities or debt securities, respectively, which the Fund
intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS
In order to hedge its portfolio and to protect it against possible
variations in foreign exchange rates pending the settlement of securities
transactions, a Fund may buy or sell foreign currencies or may deal in forward
currency contracts. A Fund may also invest in currency futures contracts and
related options. If a fall in exchange rates for a particular currency is
anticipated, a Fund may sell a currency futures contract or a call option
thereon or purchase a put option on such futures contract as a hedge. If it is
anticipated that exchange rates will rise, a Fund may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the Fund intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the Funds
will be covered.
A currency futures contract sale creates an obligation by a Fund, as
seller, to deliver the amount of currency called for in the contract at a
specified future time for a specified price. A currency futures contract
purchase creates an obligation by a Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The Funds will write (sell) only covered call options on currency
futures. This means that the Funds will provide for their obligations upon
exercise of the option by segregating sufficient cash or short-term obligations
or by holding an offsetting position in the option or underlying currency
future, or a combination of the foregoing. The Funds will, so long as they are
obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the Funds in cash,
Treasury bills, or other high-grade short-term obligations in a segregated
account with its custodian. If at the close of business
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on any day the market value of the call purchased by a Fund falls below 100% of
the market value of the call written by the Fund, the Fund will so segregate an
amount of cash, Treasury bills or other high-grade short-term obligations equal
in value to the difference. Alternatively, a Fund may cover the call option
through segregating with the custodian an amount of the particular foreign
currency equal to the amount of foreign currency per futures contract option
times the number of options written by the Fund.
If other methods of providing appropriate cover are developed, the
Funds reserve the right to employ them to the extent consistent with applicable
regulatory and exchange requirements.
In connection with transactions in stock index options, stock index
futures, interest rate futures, foreign currency futures and related options on
such futures, the Funds will be required to deposit as "initial margin" an
amount of cash and short-term U.S. Government securities generally equal to from
5% to 10% of the contract amount. Thereafter, subsequent payments (referred to
as "variation margin") are made to and from the broker to reflect changes in the
value of the futures contract.
OPTIONS ON FOREIGN CURRENCIES
A Fund may write call options and purchase call and put options on
foreign currencies to enhance investment performance and for hedging purposes in
a manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized as described above. For example, a decline
in the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, a Fund may purchase put
options on the foreign currency. If the value of the currency does decline, the
Funds will have the right to sell such currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may purchase call options thereon. The purchase
of such options could offset, at least partially, the effects of the adverse
movements in exchange rates. As in the case of other types of options, however,
the benefit to a Fund deriving from purchases of foreign currency options will
be reduced by the amount of the premium and related transaction costs. In
addition, where currency exchange rates do not move in the direction or to the
extent anticipated, a Fund could sustain losses on transactions in foreign
currency options which would require it to forego a portion or all of the
benefits of advantageous changes in such rates.
Also, where a Fund anticipates a decline in the dollar value of foreign
currency denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the expected decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to sell the underlying currency at a loss which may not be
offset by the amount of the premium. Through the writing of options on foreign
currencies, a Fund also may be required to forego all or a portion of the
benefits which might otherwise have been obtained from favorable movements in
exchange rates.
The Funds intend to write covered only call options on foreign
currencies. A call option written on a foreign currency by a 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, which acts as the Fund's custodian, or by a designated
sub-custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
foreign currency 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
or the call written or (b) is greater than the exercise price of the call
written if the difference
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is maintained by the Fund in cash, U.S. Government Securities and other
high-grade liquid debt securities in a segregated account with its custodian or
with a designated sub-custodian.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Fund may purchase or sell forward foreign currency exchange contracts
("forward contracts") to attempt to minimize the risk to the Fund from
variations in foreign exchange rates. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers. A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, for example, when a Fund believes that a
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 securities
denominated in such foreign currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against foreign currency, it may enter
into a forward purchase contract to buy that foreign currency for a fixed dollar
amount ("position hedge"). 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 it 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 sector are denominated ("cross-hedge"). If a Fund enters into a position
hedging transaction, cash not available for investment or U.S. Government
Securities or other high quality debt securities will be placed in a segregated
account in an amount sufficient to cover the Fund's net liability under such
hedging transactions. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the Fund's commitment
with respect to its position hedging transactions. As an alternative to
maintaining all or part of the separate account, a Fund may purchase a call
option permitting it 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
a Fund may purchase a put option permitting it 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 would
result in lower overall performance for a Fund than if it had not entered into
such contracts.
Generally, the Funds will not enter into a forward foreign currency
exchange contract with a term of greater than one year. At the maturity of the
contract, a Fund may either sell the portfolio security and make delivery of the
foreign currency, or may retain the security and terminate the obligation to
deliver the foreign currency by purchasing an "offsetting" forward contract with
the same currency trader obligating the Fund to purchase, on the same maturity
date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market value
of portfolio securities at the expiration of the contract. Accordingly, it may
be necessary for a Fund to purchase additional foreign currency on the spot
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.
If a Fund retains the portfolio security and engages in an offsetting
transaction, the Funds will incur a gain or a loss (as described below) to the
extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for the sale of a
foreign currency and the date the Fund enters into an offsetting contract for
the purchase of the foreign currency, the Fund will realize a gain to the extent
the price of the currency the Fund has agreed to sell exceeds the price of the
currency it has agreed to purchase. Should forward prices increase, the Fund
will suffer a loss to the extent the price of the currency the Fund has agreed
to purchase exceeds the price of the currency the Fund has agreed to sell.
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The Funds' dealing in forward foreign currency exchange contracts will
be limited to the transactions described above. Of course, a Fund is not
required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
Guinness Flight. It also should be realized that this method of protecting the
value of a Fund's portfolio securities against the decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain which might result should
the value of such currency increase.
ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS, FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The market prices of futures contracts may be affected by certain
factors. First, all participants in the futures market are subject to margin
deposit and maintenance requirements. Rather than meeting additional margin
deposit requirements, investors may close futures contracts through offsetting
transactions which could distort the normal relationship between the securities
and futures markets. Second, 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 also cause temporary price distortions.
In addition, futures contracts in which a Fund may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits." During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent a
Fund from promptly liquidating unfavorable positions and adversely affect
operations and profitability.
Options on foreign currencies and forward foreign currency exchange
contracts ("forward contracts") are not traded on contract markets regulated by
the Commodity Futures Trading Commission ("CFTC") and are not regulated by the
SEC. Rather, forward currency contracts are traded through financial
institutions acting as market-makers. Foreign currency options are traded on
certain national securities exchanges, such as the Philadelphia Stock Exchange
and the Chicago Board Options Exchange, subject to SEC regulation. In the
forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges
are within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may exist, potentially permitting a Fund to
liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options,
however, are subject to the risks of the availability of a liquid secondary
market described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exercise and settlement of such
options must be made exclusively through the OCC, which has established banking
relationships in applicable foreign countries for this purpose. As a result, the
OCC may, if it determines that foreign governmental restrictions or taxes would
prevent the orderly settlement of foreign
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<PAGE>
currency option exercises, or would result in undue burdens on the OCC or its
clearing member, impose special procedures on exercise and settlement, such as
technical changes in the mechanics of delivery of currency, the fixing of dollar
settlement prices or prohibitions on exercise.
In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in a Fund's ability to act upon economic events occurring
in foreign markets during nonbusiness hours in the United States and the United
Kingdom, (d) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (e) lesser
trading volume.
REGULATORY MATTERS
In connection with its proposed futures and options transactions, each
Fund will file with the CFTC a notice of eligibility for exemption from the
definition of (and therefore from CFTC regulation as) a "commodity pool
operator" under the Commodity Exchange Act.
The Staff of the SEC has taken the position that the purchase and sale
of futures contracts and the writing of related options may involve senior
securities for the purposes of the restrictions contained in Section 18 of the
1940 Act on investment companies issuing senior securities. However, the Staff
has issued letters declaring that it will not recommend enforcement action under
Section 18 if an investment company:
(i) sells futures contracts on an index of securities that
correlate with its portfolio securities to offset expected
declines in the value of its portfolio securities;
(ii) writes call options on futures contracts, stock indexes or
other securities, provided that such options are covered by
the investment company's holding of a corresponding long
futures position, by its ownership of portfolio securities
which correlate with the underlying stock index, or otherwise;
(iii) purchases futures contracts, provided the investment company
establishes a segregated account ("cash segregated account")
consisting of cash or cash equivalents in an amount equal to
the total market value of such futures contracts less the
initial margin deposited therefor; and
(iv) writes put options on futures contracts, stock indices or
other securities, provided that such options are covered by
the investment company's holding of a corresponding short
futures position, by establishing a cash segregated account in
an amount equal to the value of its obligation under the
option, or otherwise.
In addition, the Funds are eligible for, and are claiming, exclusion
from the definition of the term Commodity Pool Operator in connection with the
operations of the Funds, in accordance with subparagraph (1) of paragraph (a) of
CFTC Rule 4.5, because the Funds operate in a manner such that:
(i) the Funds use commodity futures or commodity options
contracts solely for bona fide hedging purposes within the meaning and
intent of CFTC Rule 1.3(z)(1); provided, however, that in the
alternative, with respect to each long position in a commodity future
or commodity option contract which is used as part of a portfolio
management strategy and which is incidental to a Fund's activities in
the underlying cash market but would not come within the meaning and
intent of Rule 1.3(z)(1), as a substitute for compliance with this
paragraph (i), the underlying commodity value of such contract at all
times does not exceed the sum of:
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(A) Cash set aside in an identifiable manner, or short-term
United States debt obligations or other United States
dollar-denominated high quality short-term money market instruments so
set aside, plus any funds deposited as margin on such contract;
(B) Cash proceeds from existing investments due in 30 days;
and
(C) Accrued profits on such contract held at the futures
commission merchant.
(ii) the Funds do not enter into commodity futures and
commodity options contracts for which the aggregate initial margin and
premiums exceed five (5) percent of the fair market value of a Fund's
assets, after taking into account unrealized profits and unrealized
losses on any such contracts it has entered into; provided, however,
that in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount as defined in CFTC Rule 190.01(x) may
be excluded in computing such five (5) percent;
The Funds will conduct their purchases and sales of futures contracts
and writing of related options transactions in accordance with the foregoing.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements. Under a repurchase
agreement, a Fund acquires a debt instrument for a relatively short period
(usually not more than one week) subject to the obligation of the seller to
repurchase and the Fund to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the Fund's money is invested. A Fund's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When a Fund enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the 1940 Act, collateralized by the underlying securities.
The return on the collateral may be more or less than that from the repurchase
agreement. The securities underlying a repurchase agreement will be marked to
market every business day so that the value of the collateral is at least equal
to the value of the loan, including the accrued interest earned. In evaluating
whether to enter into a repurchase agreement, Guinness Flight will carefully
consider the creditworthiness of the seller. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the Fund may
incur a loss.
ILLIQUID AND RESTRICTED SECURITIES
The Funds have adopted the following investment policy, which may be
changed by the vote of the Board of Directors. The Funds will not invest in
illiquid securities if immediately after such investment more than 15% of a
Fund's net assets (taken at market value) would be invested in such securities.
For this purpose, illiquid securities include (a) securities that are illiquid
by virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by a
Fund over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days.
Historically, illiquid securities have included securities subject to
contractual or legal restrictions on resale because they have not been
registered for sale to the public, securities that are otherwise not readily
marketable and repurchase agreements having a maturity of longer than seven
days. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the marketability of portfolio securities and a mutual fund might be
unable to dispose of restricted or other illiquid securities promptly or at
reasonable prices and might thereby experience difficulty satisfying redemptions
within seven days. A mutual fund might also have to register such restricted
securities in order to dispose of them resulting in additional expense and
delay. Adverse market conditions could impede such a public offering of
securities.
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<PAGE>
In recent years, however, a large institutional market has developed
for certain securities that are not registered under the Securities Act
including repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
The Commission has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. Guinness Flight anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the development
of automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
Guinness Flight will monitor the liquidity of restricted securities in
the Funds' portfolios under the supervision of the Funds' Board of Directors. In
reaching liquidity decision, Guinness Flight will consider, among other things,
the following factors: (1) the frequency of trades and quotes for the security;
(2) the number of dealers wishing to purchase or sell security and the number of
other potential purchasers; (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of the marketplace
trades (e.g., the time needed to dispose of the security, the method of
soliciting offers and the mechanics of the transfer).
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS
Investors should recognize that investing in securities of companies in
emerging countries, involves certain special considerations and risk factors
which are not typically associated with investing in securities of U.S.
companies. The following disclosure augments the information provided in the
prospectus under the heading "Other Risk Considerations."
ADDITIONAL FOREIGN CURRENCY CONSIDERATIONS
The Funds' assets will be invested principally in securities of
entities in foreign markets and substantially all of the income received by the
Funds will be in foreign currencies. If the value of the foreign currencies in
which a Fund receives its income falls relative to the U.S. dollar between the
earning of the income and the time at which the Fund converts the foreign
currencies to U.S. dollars, the Fund will be required to liquidate securities in
order to make distributions if the Fund has insufficient cash in U.S. dollars to
meet distribution requirements. The liquidation of investments, if required, may
have an adverse impact on a Fund's performance.
Changes in foreign currency exchange rates also will affect the value
of securities in the Funds' portfolios and the unrealized appreciation or
depreciation of investments. Further, a Fund may incur costs in connection with
conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
the Fund desire immediately to resell that currency to the dealer. The Funds
will conduct their foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forward, futures or options contracts to
purchase or sell foreign currencies.
A Fund may enter into forward currency exchange contracts and currency
futures contracts and options on such futures contracts, as well as purchase put
or call options on currencies, in U.S. or foreign markets to protect the value
of some portion or all of its portfolio holdings against currency risks by
engaging in hedging transactions. There can be no guarantee that instruments
suitable for hedging currency or market shifts
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will be available at the time when a Fund wishes to use them. Moreover,
investors should be aware that in most emerging countries, such as China, the
markets for certain of these hedging instruments are not highly developed and
that in many emerging countries no such markets currently exist.
INVESTMENT RESTRICTIONS AND POLICIES
Investment restrictions are fundamental policies and cannot be changed
without approval of the holders of a majority (as defined in the 1940 Act) of
the outstanding shares of a Fund. As used in the Prospectus and the Statement of
Additional Information, the term "majority of the outstanding shares" of a Fund
means, respectively, the vote of the lesser of (i) 67% or more of the shares of
the Fund present at a meeting, if the holders of more than 50% of the
outstanding shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the outstanding shares of the Fund. The following are the Funds'
investment restrictions set forth in their entirety. Investment policies are not
fundamental and may be changed by the Board of Directors without shareholder
approval.
INVESTMENT RESTRICTIONS
Each Fund may not:
1. Issue senior securities, except that a Fund may borrow up to 33 1/3%
of the value of its total assets from a bank (i) to increase its holdings of
portfolio securities, (ii) to meet redemption requests, or (iii) for such
short-term credits as may be necessary for the clearance or settlement of the
transactions. A Fund may pledge its assets to secure such borrowings.
2. Invest 25% or more of the total value of its assets in a particular
industry, except that this restriction shall not apply to U.S. Government
Securities.
3. Buy or sell commodities or commodity contracts or real estate or
interests in real estate (including real estate limited partnerships), except
that it may purchase and sell futures contracts on stock indices, interest rate
instruments and foreign currencies, securities which are secured by real estate
or commodities, and securities of companies which invest or deal in real estate
or commodities.
4. Make loans, except through repurchase agreements to the extent
permitted under applicable law.
5. Act as an underwriter except to the extent that, in connection with
the disposition of portfolio securities, it may be deemed to be an underwriter
under applicable securities laws.
INVESTMENT POLICIES
Each Fund may not:
1. Purchase securities on margin, except such short-term credits as may
be necessary for clearance of transactions and the maintenance of margin with
respect to futures contracts.
2. Make short sales of securities or maintain a short position (except
that the Fund may maintain short positions in foreign currency contracts,
options and futures contracts).
3. Purchase or otherwise acquire the securities of any open-end
investment company (except in connection with a merger, consolidation,
acquisition of substantially all of the assets or reorganization of another
investment company) if, as a result, the Fund and all of its affiliates would
own more than 3% of the total outstanding stock of that company.
4. Purchase or retain securities of any issuer (other than the shares
of the Fund) if to the Fund's knowledge, those officers and Directors of the
Fund and the officers and directors of Guinness Flight,
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<PAGE>
who individually own beneficially more than 1/2 of 1% of the outstanding
securities of such issuer, together own beneficially more than 5% of such
outstanding securities.
5. Invest directly in oil, gas or other mineral exploration or
development programs or leases; provided, however, that if consistent with the
objective of the Fund, the Fund may purchase securities of issuers whose
principal business activities fall within such areas.
In order to permit the sale of shares of a Fund in certain states, a
Fund may make commitments more restrictive than the restrictions described
above. Should a Fund determine that any such commitment is no longer in the best
interests of the Fund and its shareholders it will revoke the commitment by
terminating sales of its shares in the state(s) involved.
Percentage restrictions apply at the time of acquisition and any
subsequent change in percentages due to changes in market value of portfolio
securities or other changes in total assets will not be considered a violation
of such restrictions.
PORTFOLIO TRANSACTIONS
All orders for the purchase or sale of portfolio securities are placed
on behalf of the Funds by Guinness Flight subject to the supervision of the
Guinness Funds and the Board of Directors and pursuant to authority contained in
the Management Agreements between the Funds and Guinness Flight. In selecting
such brokers or dealers, Guinness Flight will consider various relevant factors,
including, but not limited to the best net price available, the size and type of
the transaction, the nature and character of the markets for the security to be
purchased or sold, the execution efficiency, settlement capability, financial
condition of the broker-dealer firm, the broker-dealer's execution services
rendered on a continuing basis and the reasonableness of any commissions.
In addition to meeting the primary requirements of execution and price,
brokers or dealers may be selected who provide research services, or statistical
material or other services to a Fund or to Guinness Flight for the Fund's use,
which in the opinion of the Board of Directors, are reasonable and necessary to
the Fund's normal operations. Those services may include economic studies,
industry studies, security analysis or reports, sales literature and statistical
services furnished either directly to a Fund or to Guinness Flight. Such
allocation shall be in such amounts as Guinness Funds shall determine and
Guinness Flight shall report regularly to Guinness Funds who will in turn report
to the Board of Directors on the allocation of brokerage for such services.
The receipt of research from broker-dealers may be useful to Guinness
Flight in rendering investment management services to its other clients, and
conversely, such information provided by brokers or dealers who have executed
orders on behalf of Guinness Flight's other clients may be useful to Guinness
Flight in carrying out its obligations to the Funds. The receipt of such
research may not reduce Guinness Flight's normal independent research
activities.
Guinness Flight is authorized, subject to best price and execution, to
place portfolio transactions with brokerage firms that have provided assistance
in the distribution of shares of the Funds and is authorized to use the
Distributor on an agency basis, to effect a substantial amount of the portfolio
transactions which are executed on the New York or American Stock Exchanges,
Regional Exchanges and Foreign Exchanges where relevant, or which are traded in
the Over-the-Counter market.
Brokers or dealers who execute portfolio transactions on behalf of a
Fund may receive commissions which are in excess of the amount of commissions
which other brokers or dealers would have charged for effecting such
transactions; provided, Guinness Funds determines in good faith that such
commissions are reasonable in relation to the value of the brokerage and/or
research services provided by such executing brokers or dealers viewed in terms
of a particular transaction or Guinness Fund's overall responsibilities to a
Fund.
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It may happen that the same security will be held by other clients of
Guinness Flight. When the other clients are simultaneously engaged in the
purchase or sale of the same security, the prices and amounts will be allocated
in accordance with a formula considered by Guinness Flight to be equitable to
each, taking into consideration such factors as size of account, concentration
of holdings, investment objectives, tax status, cash availability, purchase
cost, holding period and other pertinent factors relative to each account. In
some cases this system could have a detrimental effect on the price or volume of
the security as far as a Fund is concerned. In other cases, however, the ability
of a Fund to participate in volume transactions will produce better executions
for the Fund.
For the period commencing June 30, 1994 to December 31, 1994 and the
period from December 31, 1994 to December 31, 1995, the China Fund paid
brokerage commissions equal to $13,875 and $258,319, respectively and the Global
Government Fund paid $0 and $0, respectively.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Funds is determined at 4:15 p.m. New York
time, on each day that the New York Exchange is open for business and on such
other days as there is sufficient trading in a Fund's securities to affect
materially the net asset value per share of the Fund. The Funds will be closed
on New Years Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day, and Christmas Day.
The Funds will invest in foreign securities, and as a result, the
calculation of the Funds' net asset value may not take place contemporaneously
with the determination of the prices of certain of the portfolio securities used
in the calculation. Occasionally, events which affect the values of such
securities and such exchange rates may occur between the times at which they are
determined and the close of the New York Stock Exchange and will therefore not
be reflected in the computation of a Fund's net asset value. If events
materially affecting the value of such securities occur during such period, 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 Board of
Directors. Portfolio securities of a Fund which are traded both on an exchange
and in the over-the-counter market, will be valued according to the broadest and
most representative market. All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. Dollar values at the mean
between the bid and offered quotations of the currencies against U.S. Dollars as
last quoted by any recognized dealer. When portfolio securities are traded, the
valuation will be the last reported sale price on the day of valuation. (For
securities traded on the New York Stock Exchange, the valuation will be the last
reported sales price as of the close of the Exchange's regular trading session,
currently 4:00 p.m. New York Time.) If there is no such reported sale or the
valuation is based on the Over-the-Counter market, the securities will be valued
at the last available bid price or at the mean between the bid and asked prices,
as determined by the Board of Directors. As of the date of this Statement of
Additional Information, such securities will be valued by the latter method.
Securities for which reliable quotations are not readily available and all other
assets will be valued at their respective fair market value as determined in
good faith by, or under procedures established by, the Board of Directors of the
Funds.
Money market instruments with less than sixty days remaining to
maturity when acquired by the Funds will be valued on an amortized cost basis by
the Funds, excluding unrealized gains or losses thereon from the valuation. This
is accomplished by valuing the security at cost and then assuming a constant
amortization to maturity of any premium or discount. If a Fund acquires a money
market instrument with more than sixty days remaining to its maturity, it will
be valued at current market value until the 60th day prior to maturity, and will
then be valued on an amortized cost basis based upon the value on such date
unless the Board of Directors determines during such 60-day period that this
amortized cost value does not represent fair market value.
All liabilities incurred or accrued are deducted from a Fund's total
assets. The resulting net assets are divided by the number of shares of the Fund
outstanding at the time of the valuation and the result (adjusted to the nearest
cent) is the net asset value per share.
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PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of a Fund to that
of other mutual funds and to stock or other relevant indices in advertisements
or in reports to Shareholders, performance will be stated both in terms of total
return and in terms of yield. The total return basis combines principal and
dividend income changes for the periods shown. Principal changes are based on
the difference between the beginning and closing net asset values for the period
and assume reinvestment of dividends and distributions paid by the Fund.
Dividends and distributions are comprised of net investment income and net
realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)^n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods or at the end of the
1, 5 or 10 year periods (or fractional
portion thereof)
In calculating the ending redeemable value, all dividends and
distributions by the Fund are assumed to have been reinvested at net asset value
as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value.
A Fund may also from time to time include in such advertising a total
return figure that is not calculated according to the formula set forth above in
order to compare more accurately the Fund's performance with other measures of
investment return. For example, in comparing a Fund's total return with data
published by Lipper Analytical Services, Inc. or similar independent services or
financial publications, the Fund calculates its aggregate total return for the
specified periods of time by assuming the reinvestment of each dividend or other
distribution at net asset value on the reinvestment date. Percentage increases
are determined by subtracting the initial net asset value of the investment from
the ending net asset value and by dividing the remainder by the beginning net
asset value. Such alternative total return information will be given no greater
prominence in such advertising than the information prescribed under the
Commission's rules.
In addition to the total return quotations discussed above, a Fund may
advertise its yield based on a 30-day (or one month) period ended on the date of
the most recent balance sheet included in the Fund's Post-Effective Amendment to
its Registration Statement, computed by dividing the net investment income per
share earned during the period by the maximum offering price per share on the
last day of the period, according to the following formula:
a-b
YIELD = 2[( ----- +1)^6-1]
cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
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.
Under this formula, interest earned on debt obligations for purposes of
"all above, is calculated by (1) computing the yield to maturity of each
obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with
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respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation for each day of the subsequent month that the obligation is in the
Fund's portfolio (assuming a month of 30 days) and (3) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under the SEC's rules. In
addition, all advertisements containing performance data of any kind will
include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The annual compounded rate of total return for the one year period
ended December 31, 1995 and the average annual compounded rate of total return
from June 30, 1994 (inception) to December 31, 1995 for the China Fund was
20.45% and 7.26%, respectively, and the Global Government Fund was 14.49% and
7.71%, respectively. For the 30 day period ended on the date of the most recent
balance sheet included in this registration statement, the Global Government
Fund's yield was 5.28%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds have elected to be governed by Rule 18f-1 of the 1940 Act,
under which a Fund is obligated to redeem the shares of any shareholder solely
in cash up to the lesser of 1% of the net asset value of the Fund or $250,000
during any 90-day period. Should any shareholder's redemption exceed this
limitation, a Fund can, at its sole option, redeem the excess in cash or in
readily marketable portfolio securities. Such securities would be selected
solely by the Fund and valued as in computing net asset value. In these
circumstances a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the value
used in computing net asset value for the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting each Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
Qualification as a Regulated Investment Company
Each Fund has elected to be taxed as a regulated investment company
under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company, a Fund is not subject to federal
income tax on the portion of its net investment income (i.e., taxable interest,
dividends and other taxable ordinary income, net of expenses) and capital gain
net income (i.e., the excess of capital gains over capital losses) that it
distributes to shareholders, provided that it distributes at least 90% of its
investment company taxable income (i.e., net investment income and the excess of
net short-term capital gain over net long-term capital loss) for the taxable
year (the "Distribution Requirement"), and satisfies certain other requirements
of the Code that are described below. Distributions by a Fund made during the
taxable year or, under specified circumstances, within twelve months after the
close of the taxable year, will be considered distributions of income and gains
of the taxable year and can therefore satisfy the Distribution Requirement.
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In addition to satisfying the Distribution Requirement, a regulated
investment company must: (1) derive at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans, gains
from the sale or other disposition of stock or securities or foreign currencies
(to the extent such currency gains are directly related to the regulated
investment company's principal business of investing in stock or securities) and
other income (including but not limited to gains from options, futures or
forward contracts) derived with respect to its business of investing in such
stock, securities or currencies (the "Income Requirement"); and (2) derive less
than 30% of its gross income (exclusive of certain gains on designated hedging
transactions that are offset by realized or unrealized losses on offsetting
positions) from the sale or other disposition of stock, securities or foreign
currencies (or options, futures or forward contracts thereon) held for less than
three months (the "Short-Short Gain Test"). However, foreign currency gains,
including those derived from options, futures and forwards, will not in any
event be characterized as Short-Short Gain if they are directly related to the
regulated investment company's investments in stock or securities (or options or
futures thereon). Because of the Short-Short Gain Test, a Fund may have to limit
the sale of appreciated securities that it has held for less than three months.
However, the Short-Short Gain Test will not prevent a Fund from disposing of
investments at a loss, since the recognition of a loss before the expiration of
the three-month holding period is disregarded for this purpose. Interest
(including original issue discount) received by a Fund at maturity or upon the
disposition of a security held for less than three months will not be treated as
gross income derived from the sale or other disposition of such security within
the meaning of the Short-Short Gain Test. However, income that is attributable
to realized market appreciation will be treated as gross income from the sale or
other disposition of securities for this purpose.
In general, gain or loss recognized by a Fund on the disposition of an
asset will be a capital gain or loss. However, gain recognized on the
disposition of a debt obligation purchased by a Fund at a market discount
(generally, at a price less than its principal amount) will be treated as
ordinary income to the extent of the portion of the market discount which
accrued during the period of time the Fund held the debt obligation. In
addition, under the rules of Code Section 988, gain or loss recognized on the
disposition of a debt obligation denominated in a foreign currency or an option
with respect thereto (but only to the extent attributable to changes in foreign
currency exchange rates), and gain or loss recognized on the disposition of a
foreign currency forward contract, futures contract, option or similar financial
instrument, or of foreign currency itself, except for regulated futures
contracts or non-equity options subject to Code Section 1256 (unless a Fund
elects otherwise), will generally be treated as ordinary income or loss.
In general, for purposes of determining whether capital gain or loss
recognized by a Fund on the disposition of an asset is long-term or short-term,
the holding period of the asset may be affected if (1) the asset is used to
close a "short sale" (which includes for certain purposes the acquisition of a
put option) or is substantially identical to another asset so used, or (2) the
asset is otherwise held by the Fund as part of a "straddle" (which term
generally excludes a situation where the asset is stock and Fund grants a
qualified covered call option (which, among other things, must not be
deep-in-the-money) with respect thereto) or (3) the asset is stock and Fund
grants an in-the-money qualified covered call option with respect thereto.
However, for purposes of the Short-Short Gain Test, the holding period of the
asset disposed of may be reduced only in the case of clause (1) above. In
addition, Fund may be required to defer the recognition of a loss on the
disposition of an asset held as part of a straddle to the extent of any
unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or loss
recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss. For
purposes of the Short-Short Gain Test, the holding period of an option written
by a Fund will commence on the date it is written and end on the date it lapses
or the date a closing transaction is entered into. Accordingly, a Fund may be
limited in its ability to write options which expire within three months and to
enter into closing transactions at a gain within three months of the writing of
options.
Transactions that may be engaged in by a Fund (such as regulated
futures contracts, certain foreign currency contracts, and options on stock
indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of
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such date. Any gain or loss recognized as a consequence of the year-end deemed
disposition of Section 1256 contracts is taken into account for the taxable year
together with any other gain or loss that was previously recognized upon the
termination of Section 1256 contracts during that taxable year. Any capital gain
or loss for the taxable year with respect to Section 1256 contracts (including
any capital gain or loss arising as a consequence of the year-end deemed sale of
such contracts) is generally treated as 60% long-term capital gain or loss and
40% short-term capital gain or loss. A Fund, however, may elect not to have this
special tax treatment apply to Section 1256 contracts that are part of a "mixed
straddle" with other investments of the Fund that are not Section 1256
contracts. The IRS has held in several private rulings (and Treasury Regulations
now provide) that gains arising from Section 1256 contracts will be treated for
purposes of the Short-Short Gain Test as being derived from securities held for
not less than three months if the gains arise as a result of a constructive sale
under Code Section 1256.
Each Fund may purchase securities of certain foreign investment funds
or trusts which constitute passive foreign investment companies ("PFICs") for
federal income tax purposes. If a Fund invests in a PFIC, it may elect to treat
the PFIC as a qualifying electing fund (a "QEF") in which event the Fund will
each year have ordinary income equal to its pro rata share of the PFIC's
ordinary earnings for the year and long-term capital gain equal to its pro rata
share of the PFIC's net capital gain for the year, regardless of whether the
Fund receives distributions of any such ordinary earning or capital gain from
the PFIC. If the Fund does not (because it is unable to, chooses not to or
otherwise) elect to treat the PFIC as a QEF, then in general (1) any gain
recognized by the Fund upon sale or other disposition of its interest in the
PFIC or any excess distribution received by the Fund from the PFIC will be
allocated ratably over the Fund's holding period of its interest in the PFIC,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate) in
effect for such prior year plus (ii) interest on the amount determined under
clause (i) for the period from the due date for filing a return for such prior
year until the date for filing a return for the year in which the gain is
recognized or the excess distribution is received at the rates and methods
applicable to underpayments of tax for such period, and (4) the distribution by
the Fund to shareholders of the portions of such gain or excess distribution so
allocated to prior years (net of the tax payable by the Fund thereon) will again
be taxable to the shareholders as an ordinary income dividend.
Under recently proposed Treasury Regulations a Fund can elect to
recognize as gain the excess, as of the last day of its taxable year, of the
fair market value of each share of PFIC stock over the Fund's adjusted tax basis
in that share ("mark to market gain"). Such mark to market gain will be included
by a Fund as ordinary income, such gain will not be subject to the Short-Short
Gain Test, and the Fund's holding period with respect to such PFIC stock
commences on the first day of the next taxable year. If a Fund makes such
election in the first taxable year it holds PFIC stock, the Fund will include
ordinary income from any mark to market gain, if any, and will not incur the tax
described in the previous paragraph.
Treasury Regulations permit a regulated investment company, in
determining its investment company taxable income and net capital gain (i.e.,
the excess of net long-term capital gain over net short-term capital loss) for
any taxable year, to elect (unless it has made a taxable year election for
excise tax purposes as discussed below) to treat all or any part of any net
capital loss, any net long-term capital loss or any net foreign currency loss
incurred after October 31 as if it had been incurred in the succeeding year.
In addition to satisfying the requirements described above, a Fund must
satisfy an asset diversification test in order to qualify as a regulated
investment company. Under this test, at the close of each quarter of a Fund's
taxable year, at least 50% of the value of the Fund's assets must consist of
cash and cash items, U.S. Government securities, securities of other regulated
investment companies, and securities of other issuers (as to which the Fund has
not invested more than 5% of the value of the Fund's total assets in securities
of such issuer and as to which the Fund does not hold more than 10% of the
outstanding voting securities of such issuer), and no more than 25% of the value
of its total assets may be invested in the securities of any one
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issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses. Generally, an
option (call or put) with respect to a security is treated as issued by the
issuer of the security not the issuer of the option.
If for any taxable year a Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated investment
company that fails to distribute in each calendar year an amount equal to 98% of
ordinary taxable income for the calendar year and 98% of capital gain net income
for the one-year period ended on October 31 of such calendar year (or, at the
election of a regulated investment company having a taxable year ending November
30 or December 31, for its taxable year (a "taxable year election")). The
balance of such income must be distributed during the next calendar year. For
the foregoing purposes, a regulated investment company is treated as having
distributed any amount on which it is subject to income tax for any taxable year
ending in such calendar year.
For purposes of the excise tax, a regulated investment company shall:
(1) reduce its capital gain net income (but not below its net capital gain) by
the amount of any net ordinary loss for the calendar year; and (2) exclude
foreign currency gains and losses incurred after October 31 of any year (or
after the end of its taxable year if it has made a taxable year election) in
determining the amount of ordinary taxable income for the current calendar year
(and, instead, include such gains and losses in determining ordinary taxable
income for the succeeding calendar year).
Each Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its investment
company taxable income for each taxable year. Such distributions will be taxable
to shareholders as ordinary income and treated as dividends for federal income
tax purposes, but they generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
A Fund may either retain or distribute to shareholders its net capital
gain for each taxable year. Each Fund currently intends to distribute any such
amounts. If net capital gain is distributed and designated as a capital gain
dividend, it will be taxable to shareholders as long-term capital gain,
regardless of the length of time the shareholder has held his shares or whether
such gain was recognized by a Fund prior to the date on which the shareholder
acquired his shares.
Conversely, if a Fund elects to retain its net capital gain, the Fund
will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each received a
distribution of his pro rata share of such gain, with the result that each
shareholder will be required to report his pro rata share of such gain on his
tax return as long-term capital gain, will receive a refundable tax credit for
his pro rata share of tax paid by the Fund on the gain, and will increase the
tax basis for his shares by an amount equal to the deemed distribution less the
tax credit.
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Investment income that may be received by a Fund from sources within
foreign countries may be subject to foreign taxes withheld at the source. The
United States has entered into tax treaties with many foreign countries which
entitle a Fund to a reduced rate of, or exemption from, taxes on such income. It
is impossible to determine the effective rate of foreign tax in advance since
the amount of each Fund's assets to be invested in various countries is not
known. If more than 50% of the value of a Fund's total assets at the close of
its taxable year consist of the stock or securities of foreign corporations, a
Fund may elect to "pass through" to the Fund's shareholders the amount of
foreign taxes paid by the Fund. If a Fund so elects, each shareholder would be
required to include in gross income, even though not actually received, his pro
rata share of the foreign taxes paid by the Fund, but would be treated as having
paid his pro rata share of such foreign taxes and would therefore be allowed to
either deduct such amount in computing taxable income or use such amount
(subject to various Code limitations) as a foreign tax credit against federal
income tax (but not both). For purposes of the foreign tax credit limitation
rules of the Code, each shareholder would treat as foreign source income his pro
rata share of such foreign taxes plus the portion of dividends received from a
Fund representing income derived from foreign sources. No deduction for foreign
taxes could be claimed by an individual shareholder who does not itemize
deductions. Each shareholder should consult his own tax adviser regarding the
potential application of foreign tax credits.
Distributions by a Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by a Fund will be treated in the manner described above
regardless of whether such distributions are paid in cash or reinvested in
additional shares of the Fund (or of another fund). Shareholders receiving a
distribution in the form of additional shares will be treated as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the reinvestment date. In addition, if the net asset value at
the time a shareholder purchases shares of a Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by a Fund
into account in the year in which the distributions are made. However, dividends
declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year if such dividends are actually paid in January of the
following year. Shareholders will be advised annually as to the U.S. federal
income tax consequences of distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of ordinary income dividends and capital gain dividends,
and the proceeds of redemption of shares, paid to any shareholder (1) who has
provided either an incorrect tax identification number or no number at all, (2)
who is subject to backup withholding by the IRS for failure to report the
receipt of interest or dividend income properly, or (3) who has failed to
certify to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or redemption of
shares of a Fund in an amount equal to the difference between the proceeds of
the sale or redemption and the shareholder's adjusted tax basis in the shares.
All or a portion of any loss so recognized may be disallowed if the shareholder
purchases other shares of a Fund within 30 days before or after the sale or
redemption. In general, any gain or loss arising from (or treated as arising
from) the sale or redemption of shares of a Fund will be considered capital gain
or loss and will be long-term capital gain or loss if the shares were held for
longer than one year. However, any capital loss arising from the sale or
redemption of shares held for six months or less will be treated as a long-term
capital loss to the extent of the amount of capital gain dividends received on
such shares. For this purpose, the special holding period rules of Code Section
246(c)(3) and (4) generally will apply in
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determining the holding period of shares. Long-term capital gains of
noncorporate taxpayers are currently taxed at a maximum rate 11.6% lower than
the maximum rate applicable to ordinary income. Capital losses in any year are
deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
a Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Fund is not effectively connected with a U.S.
trade or business carried on by a foreign shareholder, ordinary income dividends
paid to a foreign shareholder will be subject to U.S. withholding tax at the
rate of 30% (or lower treaty rate) upon the gross amount of the dividend.
Furthermore, such a foreign shareholder may be subject to U.S. withholding tax
at the rate of 30% (or lower treaty rate) on the gross income resulting from a
Fund's election to treat any foreign taxes paid by it as paid by its
shareholders, but may not be allowed a deduction against this gross income or a
credit against this U.S. withholding tax for the foreign shareholder's pro rata
share of such foreign taxes which it is treated as having paid. Such a foreign
shareholder would generally be exempt from U.S. federal income tax on gains
realized on the sale of shares of a Fund, capital gain dividends and amounts
retained by the Fund that are designated as undistributed capital gains.
If the income from a Fund is effectively connected with a U.S. trade or
business carried on by a foreign shareholder, then ordinary income dividends,
capital gain dividends, and any gains realized upon the sale of shares of the
Fund will be subject to U.S. federal income tax at the rates applicable to U.S.
citizens or domestic corporations.
In the case of foreign noncorporate shareholders, a Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or taxable at a reduced treaty
rate) unless such shareholders furnish the Fund with proper notification of its
foreign status.
The tax consequences to a foreign shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described
herein. Foreign shareholders are urged to consult their own tax advisers with
respect to the particular tax consequences to them of an investment in a Fund,
including the applicability of foreign taxes.
Effect of Future Legislation; Local Tax Considerations
The foregoing general discussion of U.S. federal income tax
consequences is based on the Code and the Treasury Regulations issued thereunder
as in effect on the date of this Statement of Additional Information. Future
legislative or administrative changes or court decisions may significantly
change the conclusions expressed herein, and any such changes or decisions may
have a retroactive effect with respect to the transactions contemplated herein.
Rules of state and local taxation of ordinary income dividends and
capital gain dividends from regulated investment companies often differ from the
rules for U.S. federal income taxation described above. Shareholders are urged
to consult their tax advisers as to the consequences of these and other state
and local tax rules affecting investment in a Fund.
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MANAGEMENT OF THE FUNDS
The Board of Directors and executive officers of the Funds and their
principal occupations for the past five years are listed below. The address of
each Director is 201 South Lake Avenue, Suite 510, Pasadena, California, 91101.
James I. Fordwood* -- Director. Mr. Fordwood is President of Balmacara
Production Inc., an investment holding and management
services company that he founded in 1987. Currently,
Balmacara generally is responsible for the general
accounts and banking functions for United States
companies specializing in oil and gas operations.
Dr. Gunter Dufey*-- Director. Dr. Dufey has been a member of the faculty
of the Graduate School of Business Administration at
the University of Michigan since 1969. His academic
interests center on International Money and Capital
Markets as well as on Financial Policy of
Multinational Corporations. Outside of academia, he
has been a member of the Board of Directors of GMAC
Auto Receivables Corporation since 1992.
Dr. Bret A. Herscher* - Director. Dr. Herscher is President of Pacific
Consultants, a technical and technology management
consulting company serving the Electronic industry
and venture capital community, which he co-founded in
1988. Additionally, Dr. Herscher has been a Director
of Strawberry Tree Incorporated, a manufacturer of
computer based Data Acquisition and Control products
for factory and laboratory use, since 1989.
J. Brooks Reece, Jr.* -- Director. Mr. Reece has been a Vice-President of
Adcole Corporation, a manufacturer of precision
measuring machines and sun angle sensors for space
satellites, since 1993. Prior to becoming a
Vice-President, he was the Manager of sales and
marketing. In addition, Mr. Reece is the
Vice-President and Director of Adcole Far East, Ltd.,
a subsidiary that manages Adcole sales and service
throughout Asia. He has held this position since
1986.
Robert H. Wadsworth -- President/Assistant Treasurer. 4455 East Camelback
Road, Suite 261E, Phoenix, Arizona 85018. President,
Robert H. Wadsworth and Associates, Inc.
(consultants) and Investment Company Administration
Corporation. President and Treasurer, First Fund
Distributors, Inc.
Eric M. Banhazl -- Treasurer. 2025 East Financial Way, Suite 101,
Glendora, California 91741. Senior Vice President,
Robert H. Wadsworth & Associates, Inc. (consultants)
and Investment Company Administration Corporation
since March 1990; Formerly Vice President, Huntington
Advisors, Inc. (investment advisor).
Steven J. Paggioli -- Secretary. 479 West 22nd Street, New York, New York
10011. Executive Vice President, Robert H. Wadsworth
& Associates, Inc. (consultant) and Investment
Company Administration Corporation. Vice President
and Secretary, First Fund Distributors, Inc.
Rita Dam-- Assistant Treasurer. 2025 East Financial Way, Suite
101, Glendora, California 91741. Vice President,
Investment Company Administration Corporation since
1994. Member of the Financial Services Audit Group at
Coopers & Lybrand, LLP from 1989-1994.
- --------
* Not an "interested person," as that term is defined by the 1940 Act.
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Robin Berger -- Assistant Secretary. 479 West 22nd Street, New York,
New York, 10011. Vice President, Robert H. Wadsworth
and Associates, Inc. since June 1993; Formerly
Regulatory and compliance Coordinator, Equitable
Capital Management, Inc. (1991-93), and Legal Product
Manager, Mitchell Hutchins Asset Management
(1988-91).
The table below illustrates the compensation paid to each Director for
the Guinness Funds' most recently completed fiscal year:
<TABLE>
<CAPTION>
Aggregate Pension or Total
Compensation Retirement Benefits Estimated Annual Compensation from
Name of Person, from Guinness Accrued as Part of Benefits Upon Guinness Funds
Position Funds Fund Expenses Retirement Paid to Directors
- -------- ----- ------------- ---------- -----------------
<S> <C> <C> <C> <C>
Dr. Gunter Dufey $5,000 $0 $0 $5,000
James I. Fordwood $5,000 $0 $0 $5,000
Dr. Bret Herscher $5,000 $0 $0 $5,000
J. Brooks Reece, Jr. $5,000 $0 $0 $5,000
</TABLE>
Each Director who is not an "interested person" of the Fund receives an
annual fee of $5,000 allocated equally among all the Funds, plus expenses
incurred by the Directors in connection with attendance at meetings of the Board
of Directors and their Committees. For the period ending December 31, 1996, the
Guinness Funds paid $20,000 to the Directors. As of the date of this Statement
of Additional Information, to the best of the knowledge of the Guinness Funds
the Board of Directors and officers of the Funds, as a group, owned of record
less than 1% of the Funds' outstanding shares.
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS
Guinness Flight furnishes investment advisory services to the Funds.
Under the Investment Advisory Agreements (the "Agreements"), Guinness Flight
directs the investments of the Funds in accordance with the investment
objectives, policies, and limitations provided in the Funds' Prospectus or other
governing instruments, the 1940 Act, and rules thereunder, and such other
limitations as the Funds may impose by notice in writing to Guinness Flight.
Guinness Flight also furnishes all necessary office facilities, equipment and
personnel for servicing the investments of the Funds; pays the salaries and fees
of all officers of Guinness Funds other than those whose salaries and fees are
paid by Guinness Funds' administrator or distributor; and pays the salaries and
fees of all Directors of Guinness Funds who are "interested persons" of Guinness
Funds or of Guinness Flight and of all personnel of Guinness Funds or of
Guinness Flight performing services relating to research, statistical and
investment activities. Guinness Flight is authorized, in its discretion and
without prior consultation with the Funds, to buy, sell, lend and otherwise
trade, consistent with the Fund's then current investment objective, policies
and restrictions in any bonds and other securities and investment instruments on
behalf of the Funds. The investment policies and all other actions of the Funds
are at all times subject to the control and direction of Guinness Funds' Board
of Directors.
Guinness Flight performs (or arranges for the performance of) the
following management and administrative services necessary for the operation of
Guinness Funds: (i) with respect to the Funds, supervising relations with, and
monitoring the performance of, custodians, depositories, transfer and pricing
agents, accountants, attorneys, underwriters, brokers and dealers, insurers and
other persons in any capacity deemed to be necessary or desirable; (ii)
investigating the development of and developing and implementing, if
-26-
<PAGE>
appropriate, management and shareholder services designed to enhance the value
or convenience of the Funds as an investment vehicle; and (iii) providing
administrative services other than those provided by Guinness Funds'
administrator.
Guinness Flight also furnishes such reports, evaluations, information
or analyses to Guinness Funds as Guinness Funds' Board of Directors may request
from time to time or as Guinness Flight may deem to be desirable. Guinness
Flight makes recommendations to Guinness Funds' Board of Directors with respect
to Guinness Funds' policies, and carries out such policies as are adopted by the
Directors. Guinness Flight, subject to review by the Board of Directors,
furnishes such other services as it determines to be necessary or useful to
perform its obligations under the Agreements.
All other costs and expenses not expressly assumed by the Adviser under
the Agreements or by the Administrator under the administration agreement
between it and the Funds on behalf of the Funds shall be paid by the Funds from
the assets of the Funds, including, but not limited to fees paid to the Adviser
and the Administrator, interest and taxes, brokerage commissions, insurance
premiums, compensation and expenses of the Directors other than those affiliated
with the adviser or the administrator, legal, accounting and audit expenses,
fees and expenses of any transfer agent, distributor, registrar, dividend
disbursing agent or shareholder servicing agent of the Funds, expenses,
including clerical expenses, incident to the issuance, redemption or repurchase
of shares of the Funds, including issuance on the payment of, or reinvestment
of, dividends, fees and expenses incident to the registration under Federal or
state securities laws of the Funds or its shares, expenses of preparing, setting
in type, printing and mailing prospectuses, statements of additional
information, reports and notices and proxy material to shareholders of the
Funds, all other expenses incidental to holding meetings of the Funds'
shareholders, expenses connected with the execution, recording and settlement of
portfolio securities transactions, fees and expenses of the Funds' custodian for
all services to the Funds, including safekeeping of funds and securities and
maintaining required books and accounts, expenses of calculating net asset value
of the shares of the Funds, industry membership fees allocable to the Funds, and
such extraordinary expenses as may arise, including litigation affecting the
Funds and the legal obligations which the Funds may have to indemnify the
officers and Directors with respect thereto.
Expenses which are attributable to the Funds are charged against the
income of the Funds in determining net income for dividend purposes.
Pursuant to the Agreement, Guinness Flight has agreed to reduce its fee
(but only to the extent of such fee) so that the amount of the ordinary expenses
of the Funds (excluding brokerage commissions, distribution fees, interest,
taxes and extraordinary expenses and certain other excludable expenses) paid or
incurred by the Funds do not exceed the expense limitations applicable to the
Funds imposed by the securities laws or regulations of those states or
jurisdictions in which the Funds' shares are registered or qualified for sale.
Currently, the most restrictive of such expense limitations would require
Guinness Flight to reduce its fees (to the extent of such fees) so that ordinary
expenses for a Fund (excluding interest, taxes, brokerage commissions,
distribution fees, certain other excludable expenses, and extraordinary
expenses) for any fiscal year do not exceed 2.5% of the first $30 million of the
Fund's average net assets, plus 2.0% of the next $70 million, plus 1.5% of the
Fund's average net assets in excess of $100 million. Guinness Flight also, from
time to time, may voluntarily waive all or a portion of its fees payable under
the Agreement.
The Agreements were approved by the Board of Directors with respect to
the China Fund and Global Government Fund on May 6, 1994 and with respect to the
Asia Blue Chip Fund and Asia Small Cap Fund on April 12, 1996. The Agreements
will remain in effect for two years from the date of execution and shall
continue from year to year thereafter if it is specifically approved at least
annually by the Board of Directors and the affirmative vote of a majority of the
Directors who are not parties to the Agreement or "interested persons" of any
such party by votes cast in person at a meeting called for such purpose. The
Directors or Guinness Flight may terminate the Agreement on 60 days' written
notice without penalty. The Agreement terminates automatically in the event of
its "assignment", as defined in the 1940 Act.
As compensation for all services rendered under the Agreement, Guinness
Flight will receive an annual fee, payable monthly, of 1.00% of the China
Fund's, Asia Blue Chip Fund's and Asia Small Cap Fund's average daily net assets
and .75% of the Global Government Bond Fund's average daily net assets. For the
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<PAGE>
period commencing June 30, 1994 to December 31, 1994 and the period from
December 31, 1994 to December 31, 1995, the China Fund paid Guinness Flight
$6,134 and $197,173, respectively, and the Global Government Fund paid Guinness
Flight $2,141 and $7,425, respectively.
DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN
Guinness Funds has entered into separate Administration and
Distribution Agreements with respect to the Funds with Investment Company
Administration Corporation ("Administrator") and First Fund Distributors, Inc.
("Distributor"), respectively. Under the Distribution Agreement, the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchases for the Funds' shares and pays the expenses of printing and
distributing any prospectuses, reports and other literature used by the
Distributor, advertising, and other promotional activities in connection with
the offering of shares of the Funds for sale to the public. It is understood
that the Administrator may reimburse the Distributor for these expenses from any
source available to it, including the administration fee paid to the
Administrator by the Funds.
The Funds will not make separate payments as a result of the
Distribution Plan to Guinness Flight, the Administrator, Distributor or any
other party, it being recognized that the Funds presently pay, and will continue
to pay, an investment advisory fee to the Guinness Flight and an administration
fee to the Administrator. To the extent that any payments made by the Funds to
Guinness Flight or the Administrator, including payment of fees under the
Investment Advisory Agreements or the Administration Agreement, respectively,
should be deemed to be indirect financing of any activity primarily intended to
result in the sale of shares of the Funds within the context of rule 12b-1 under
the 1940 Act, then such payments shall be deemed to be authorized by this Plan.
The Plan and related agreements were approved with respect to the China
Fund and Global Government Fund on May 6, 1994 and with respect to the Asia Blue
Chip Fund and Asia Small Cap Fund on April 12, 1996 by the Board of Directors
including all of the "Qualified Directors" (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 the Plan or any related agreement). In approving
the Plan, in accordance with the requirements of Rule 12b-1 under the 1940 Act,
the Board of Directors (including the Qualified Directors) considered various
factors and determined that there is a reasonable likelihood that the Plan will
benefit the Funds and their shareholders. The Plan may not be amended to
increase materially the amount to be spent by the Funds under the Plan without
shareholder approval, and all material amendments to the provisions of the Plan
must be approved by a vote of the Board of Directors and of the Qualified
Directors, cast in person at a meeting called for the purpose of such vote.
During the continuance of the Plan, Guinness Flight will report in writing to
the Board of Directors quarterly the amounts and purposes of such payments for
services rendered to shareholders pursuant to the Plan. Further, during the term
of the Plan, the selection and nomination of those Directors who are not
"interested" persons of the Funds must be committed to the discretion of the
Qualified Directors. The Plan will continue in effect from year to year provided
that such continuance is specifically approved annually (a) by the vote of a
majority of the Funds' outstanding voting shares or by the Funds' Directors and
(b) by the vote of a majority of the Qualified Directors.
DESCRIPTION OF THE FUNDS
Shareholder and Directors Liability. The Funds are each a series of
Guinness Funds, a Maryland Corporation. Under Maryland law, shareholders of such
a corporation are not held personally liable for the obligations of the
corporation.
The Funds' Articles of Incorporation provides that to the fullest
extent that limitations on the liability of directors and officers are permitted
by the Maryland General Corporation Law, no director or officer of the
corporation will have any liability to the corporation or its stockholders for
damages. The corporation will indemnify and advance expenses to its directors or
officers to the fullest extent that indemnification is permitted by Maryland
General Corporation Law.
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<PAGE>
The Articles of Incorporation do not waive a director's or officer's
duty to comply with the Securities Act of 1933 or the 1940 Act, or any rule,
regulation, or order thereunder. Further, the Articles of Incorporation do not
protect the officers and directors against any liability to the corporation or
its stockholders to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
Voting Rights. Shares of each Fund entitle the holders to one vote per
share. The shares have no preemptive or conversion rights. The dividend rights
and the right of redemption are described in the Prospectus. When issued, shares
are fully paid and nonassessable. The shareholders have certain rights, as set
forth in the Bylaws, to call a meeting for any purpose, including the purpose of
voting on removal of one or more Directors.
A Fund may be terminated upon the sale of its assets to another
open-end management company if approved by greater than 50% of the shareholders
of the Fund. A Fund may also be terminated upon liquidation and distribution of
its assets, if approved by greater than 50% of the shareholder vote of the Fund.
Shareholders of a Fund shall be entitled to receive distributions as a class of
the assets belonging to the Fund. The assets of a Fund received for the issue or
sale of the shares of the Fund and all income earnings and the proceeds thereof,
subject only to the rights of creditors, are specially allocated to the Fund,
and constitute the underlying assets of the Fund.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the investments
of the Funds and other information. In addition, shareholders will receive
annual financial statements audited by the Funds' independent accountants.
Principal Holders. As of September 25, 1996, Charles Schwab & Co. Inc.
(101 Montgomery St., San Francisco 94104-4122) owned 4,393,110.5600 (36.61%) of
the outstanding shares of the China Fund for the exclusive benefit of its
accounts. As of September 25, 1996, Charles Schwab & Co. Inc. (101 Montgomery
St., San Francisco 94104-4122) owned 96,958.8850 (48.88%) of the outstanding
shares of the Global Government Fund for the exclusive benefit of its accounts.
As of September 25, 1996, Charles Schwab & Co. Inc. (101 Montgomery St., San
Francisco 94104-4122) owned 95,203.0180 (26.41%) of the outstanding shares of
the Asia Small Cap Fund for the exclusive benefit of its accounts. As of
September 25, 1996, Charles Schwab & Co. Inc. (101 Montgomery St., San Francisco
94104-4122) owned 23,525.9470 (12.26%) of the outstanding shares of the Asia
Blue Chip Fund for the exclusive benefit of its accounts.
FINANCIAL STATEMENTS
The audited statement of assets and liabilities and report thereon for
the China Fund and Global Government Fund for the year ended December 31, 1995
and the unaudited financial statements for the Funds for the period ended June
30, 1996 are incorporated by reference. The opinion of Ernst & Young LLP,
independent accountants, with respect to the December 31, 1995 financial
statements, is incorporated herein in its entirety in reliance upon such report
of Ernst & Young LLP and on the authority of such firm as experts in auditing
and accounting. Shareholders will receive a copy of the audited and unaudited
financial statements at no additional charge when requesting a copy of the
Statement of Additional Information.
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<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
BOND RATINGS:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Bonds which are rated Aaa are judged to be 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 fluctuations 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: Bond 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.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic
rating classification from Aa through B in its 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.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months.
Issuers rated PRIME-1 or P-1 (or related supporting institutions) have
a superior capacity for repayment of short-term promissory obligations. Prime-1
or P-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well-established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance
on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial charges
and high internal cash generation.
A-1
<PAGE>
- Well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or related supporting institutions) 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.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
BOND RATINGS:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P to a debt
obligation. capacity to pay interest and repay principal is extremely strong.
*AA: Debt rated AA have a very strong capacity to pay interest; and
repay principal and differ from the higher rated issues only in small degree.
*A: Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in higher rated
categories.
*BBB: Debt rated BBB are 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 in higher rated categories.
PLUS (+) OR MINUS (-): 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.
NR: Bonds may lack a S&P rating because no public rating has been
requested, because there is insufficient information on which to base a rating,
or because S&P does not rate a particular type of obligation as a matter of
policy.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: 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 are denoted 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-1".
A-2
<PAGE>
PART C. OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements.
In Part A:
None
In Part B:
The audited statement of assets and liabilities and report
thereon for the China Fund and Global Government Fund for the
year ended December 31, 1995 are incorporated into Part B from
the Fund's Registration Statement, as filed on Form N-1A with
the Securities and Exchange Commission on February 14, 1996,
accession number 0000922423-96-000062.
In Part C:
Unaudited Statements of Assets and Liabilities as of June 30,
1996
(b) Exhibits
EX-99.B1 Amended Articles of Incorporation of Registrant and
Certificate of Correction were filed in Pre-Effective
Amendment No. 2 on June 20, 1994.
EX-99.B2 Amended and Restated By-laws of Registrant were filed in
Post-Effective Amendment No. 5 on February 14, 1996.
EX-99.B3 None.
EX-99.B4 Copies of each Security issued by Registrant were filed in
Post-Effective Amendment No. 1 on January 31, 1995.
EX-99.B5 (a)(i) Investment Advisory Agreement between Registrant and
Guinness Flight Investment Management Limited for
China Fund series was filed in Post-Effective
Amendment No. 2 on February 27, 1995.
(a)(ii) Investment Advisory Agreement between Registrant and
Guinness Flight Investment Management Limited for
Global Government Bond Fund series was filed in
Post-Effective Amendment No. 2 on February 27, 1995.
(a)(iii) Form of Investment Advisory Agreement between
Registrant and Guinness Flight Investment Management
Limited for Asia Blue Chip Fund series was filed in
Post-Effective Amendment No. 5 on February 14, 1996.
(a)(iv) Form of Investment Advisory Agreement between
Registrant and Guinness Flight Investment Management
Limited for Asia Small Cap Fund series was filed in
Post-Effective Amendment No. 5 on February 14, 1996.
EX-99.B6 (a)(i) Distribution Agreement between Registrant and First
Fund Distributors, Inc. for China Fund series was
filed in Post-Effective Amendment No. 1 on January
31, 1995.
(a)(ii) Distribution Agreement between Registrant and First
Fund Distributors, Inc. for Global Government Bond
Fund series was filed in Post- Effective Amendment
No. 1 on January 31, 1995.
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<PAGE>
(a)(iii) Form of Distribution Agreement between Registrant and
First Fund Distributors, Inc. for Asia Blue Chip Fund
series was filed in Post-Effective Amendment No. 5 on
February 14, 1996.
(a)(iv) Form of Distribution Agreement between Registrant and
First Fund Distributors, Inc. for Asia Small Cap Fund
series was filed in Post-Effective Amendment No. 5 on
February 14, 1996.
EX-99.B7 None.
EX-99.B8 Custodian Agreement between Registrant and Investors
Bank & Trust Company was filed in Post-Effective
Amendment No. 1 on January 31, 1995.
EX-99.B9 (a) Transfer Agency and Service Agreement between
Registrant and State Street Bank and Trust Company
was filed in Post-Effective Amendment No. 1 on
January 31, 1995.
(b) Administration Agreement between Registrant and
Investment Company Administration Corporation was
filed in Post-Effective Amendment No. 1 on January
31, 1995.
(c) Form of Letter of Arrangement between Registrant and
Coopers & Lybrand was filed in Pre-Effective
Amendment No. 2 on June 20, 1994.
EX-99.B10 Opinion and Consent of Counsel as to Legality of
Securities Being Registered was filed in
Pre-Effective Amendment No. 2 on June 20, 1994.
EX-99.B11 (a) Consent of Kramer, Levin, Naftalis & Frankel, Counsel
for the Registrant is filed herewith.
(b) Consent of Coopers & Lybrand, L.L.P., Independent
Accountants for the Registrant is filed herewith.
(c) Consent of Ernst & Young LLP, Independent Auditors
for the Registrant is filed herewith.
EX-99.B12 Unaudited financial statements for the period ended
June 30, 1996 is filed herewith.
EX-99.B13 Sole Shareholder Agreements between Registrant and
GFGAM Executive Pension Scheme was filed in
Post-Effective Amendment No. 1 on January 31, 1995.
EX-99.B14 None.
EX-99.B15 (a)(i)
Rule 12b-1 Distribution Plan for China Fund series
was filed in Post-Effective Amendment No. 1 on
January 31, 1995.
(a)(ii) Rule 12b-1 Distribution Plan for Global Government
Bond Fund series was filed in Post-Effective
Amendment No. 1 on January 31, 1995.
(a)(iii) Form of Rule 12b-1 Distribution for Asia Blue Chip
Fund series was filed in Post-Effective Amendment No.
5 on February 14, 1996.
(a)(iv) Form of Rule 12b-1 Distribution for Asia Small Cap
Fund series was filed in Post-Effective Amendment No.
5 on February 14, 1996.
C-2
<PAGE>
EX-99.B16 Schedule for Computation of each Performance
Quotation was filed in Post-Effective Amendment No. 5
on February 14, 1996.
EX-27(a) Financial Data Schedule - China Fund.
EX-27(b) Financial Data Schedule - Global Government Fund.
EX-27(c) Financial Data Schedule - Asia Blue Chip Fund.
EX-27(d) Financial Data Schedule - Asia Small Cap Fund.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
Title of Class; Shares Number of Record Holders
($0.001 par value) as of September 25, 1996
China & Hong Kong Fund 10,699
Global Government Bond Fund 167
Asia Blue Chip Fund 576
Asia Small Cap Fund 815
ITEM 27. INDEMNIFICATION
(1) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, no
director or officer of the corporation shall have any liability to the
corporation or its Stockholders for damages. This limitation on liability
applies to events occurring at the time a person serves as a director or officer
of the corporation whether or not such person is a director or officer at the
time of any proceeding in which liability is asserted.
(2) The corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The corporation shall indemnify and advance expenses to its officers to the
same extent as its directors and to such further extent as is consistent with
law. The Board of Directors may, through a by-law, resolution or agreement, make
further provisions for indemnification of directors, officers, employees and
agents to the fullest extent permitted by the Maryland General Corporation Law.
(3) No provision of this Article shall be effective (i) to require a
waiver of compliance with any provision of the Securities Act of 1933, or of the
Investment Company Act of 1940, or of any valid rule, regulation or order of the
Securities and Exchange Commission thereunder or (ii) to protect or purport to
protect any director or officer of the corporation against any liability to the
corporation or its stockholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office.
(4) References to the Maryland General Corporation Law in this Article
are to the law as from time to time amended. No amendment to the Articles of
Incorporation of the corporation shall affect any right of any person under this
Article based on any event, omission or proceeding prior to such amendment.
C-3
<PAGE>
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Guinness Flight Investment Management Limited provides management
services to the Registrant and its series. To the best of the Registrant's
knowledge, the directors and officers have not held at any time during the past
two fiscal years or been engaged for his own account or in the capacity of
director, officer, employee, partner or trustee in any other business,
profession, vocation or employment of a substantial nature.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) First Fund Distributors, Inc., the Registrant's principal
underwriter, also acts as the principal underwriter for the following investment
companies:
(1) Jurika & Voyles Fund Group;
(2) RNC Liquid Assets Fund, Inc.;
(3) PIC Investment Trust;
(4) Hotchkis & Wiley Funds;
(5) Professionally Managed Portfolios;
- Avondale Total Return Fund
- Perkins Opportunity Fund
- Osterweis Fund
- Pro Conscience Women's Equity Mutual Fund
- Academy Value Fund
- Trent Equity Fund
- Leonetti Balanced Fund
- Lighthouse Growth Fund
- U.S. Global Leaders Growth Fund
- Boston Managed Growth Fund
- Harris Baetas & Sullivan & Smith Growth
Fund
- Insightful Investor Growth Fund
- Penza Growth Fund
- Titan Investment Trust
(6) Rainier Investment Management Mutual Funds.
(b) The following information is furnished with respect to the officers
and directors of First Fund Distributors, Inc., Registrant's principal
underwriter:
Name and Principal Position and Offices with Position and Offices
Business Address Principal Underwriter with Registrant
Robert H. Wadsworth President/Treasurer President/Asst.
4455 East Camelback Road Treasurer
Suite 261E
Phoenix, AZ 85014
Steven J. Paggioli Vice President/Secretary Secretary
479 West 22nd Street
New York, NY 10011
Eric M. Banhazl Vice President Treasurer
2025 East Financial Way
Suite 101
Glendora, CA 91741
(c) not applicable
C-4
<PAGE>
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by
Section 31(a) of the 1940 Act and the rules promulgated thereunder are
maintained by Investment Company Administration Corporation, 2025 East Financial
Way, Suite 101, Glendora, CA 91741, except for those maintained by the Funds'
Custodian.
ITEM 31. MANAGEMENT SERVICES
Not applicable.
ITEM 32. UNDERTAKINGS
(1) Registrant undertakes to furnish each person to whom a prospectus
is delivered, a copy of the Fund's latest annual report to shareholders which
will include the information required by Item 5A, upon request and without
charge.
(2) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a trustee or trustees if
requested to do so by the holders of at least 10% of the Registrant's
outstanding voting securities, and to assist in communications with other
shareholders as required by Section 16(c) of the 1940 Act.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Registration Statement pursuant to
Rule 485(b) under the Securities Act of 1933 and has duly caused this
Post-Effective Amendment to its Registration Statement on Form N-1A to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, and the State of New York on this 1st day of October, 1996.
GUINNESS FLIGHT INVESTMENT FUNDS, INC.
By: /s/ Robert H. Wadsworth
-----------------------------
Robert H. Wadsworth
President
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to its Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Eric M. Banhazl Treasurer October 1, 1996
- ----------------------------- ----------------
Eric M. Banhazl
/s/ Dr. Gunter Dufey Director October 1, 1996
- ----------------------------- ----------------
Dr. Gunter Dufey
/s/ J. I. Fordwood Director October 1, 1996
- ----------------------------- ----------------
J. I. Fordwood
/s/ Bret A. Herscher Director October 1, 1996
- ----------------------------- ----------------
Bret A. Herscher
/s/ J. Brooks Reece, Jr. Director October 1, 1996
- ----------------------------- ----------------
J. Brooks Reece, Jr.
*By:
Attorney-in-Fact
C-6
<PAGE>
EXHIBIT INDEX
EX-99.B11(a) CONSENT OF KRAMER, LEVIN, NAFTALIS & FRANKEL, COUNSEL FOR THE
REGISTRANT
EX-99.B11(b) CONSENT OF COOPERS & LYBRAND LLP, INDEPENDENT ACCOUNTANTS FOR
THE REGISTRANT
EX-99.B11(c) CONSENT OF ERNST & YOUNG L.L.P., INDEPENDENT AUDITORS FOR THE
REGISTRANT
EX-99.B12 UNAUDITED FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30,
1996
EX-27(a) FINANCIAL DATA SCHEDULE - CHINA FUND
EX-27(b) FINANCIAL DATA SCHEDULE - GLOBAL GOVERNMENT FUND
EX-27(c) FINANCIAL DATA SCHEDULE - ASIA BLUE CHIP FUND
EX-27(d) FINANCIAL DATA SCHEDULE - ASIA SMALL CAP FUND
Kramer, Levin, Naftalis & Frankel
919 THIRD AVENUE
NEW YORK, N.Y. 10022 - 3852
(212) 715 - 9100
FAX
(212) 715-8000
---
WRITER'S DIRECT NUMBER
(212)715-9100
-------------
New York, New York
October 1, 1996
Guinness Flight Investment Funds, Inc.
201 South Lake Avenue
Suite 510
Pasadena, California 91101
Re: Guinness Flight Investment Funds, Inc.
Registration Statement on Form N-1A
(ICA No. 811-8360; File No. 33-75340)
Gentlemen:
We hereby consent to the reference of our firm as Counsel in this
Registration Statement on Form N-1A.
Very truly yours,
/s/ Kramer, Levin, Naftalis & Frankel
-------------------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Guinness Flight Investment Funds, Inc.:
We consent to the incorporation by reference in Post-Effective
Amendment #6 to the Registration Statement on Form N-1A of Guinness Flight
Investment Funds, Inc. (File No. 33-75340) of our report dated February 8, 1995
on our audit of the financial statements and financial highlights of the
Guinness Flight China & Hong Kong Fund and Guinness Flight Global Government
Bond Fund, two series of the Guinness Flight Investment Funds, Inc., which
report is included in the Annual Report to Shareholders for the year ended
December 31, 1994 which is incorporated by reference in the Registration
Statement. We also consent to the reference to our firm under the heading
"Financial Highlights" in the prospectus.
/s/COOPERS & LYBRAND L.L.P.
---------------------------
Los Angeles, California
September 30, 1996
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Financial
Highlights", "Independent Accountants", and "Financial Statements", and the use
of our report dated January 24, 1996, in Post- Effective Amendment No. 6 to the
Registration Statement and related Statement of Additional Information of
Guinness Flight China & Hong Kong Fund and Guinness Flight Global Government
Bond Fund.
/s/ERNST & YOUNG LLP
Los Angeles, California
October 1, 1996
GUINNESS FLIGHT ASIA BLUE CHIP FUND
STATEMENT OF ASSETS AND LIABILITIES at June 30, 1996
Unaudited
ASSETS
Investments in securities, at value (cost $905,390) $904,778
Cash 221,293
Receivables:
Fund Shares Sold 26,122
Dividends and interests 1,428
Prepaid expenses 26,526
Total assets 1,180,146
LIABILITIES
Payables:
Due to Affiliate (Note 3) 20,088
Securities purchased 126,757
Accrued expenses 14,953
Total liabilities 161,798
NET ASSETS $1,018,348
Net asset value and redemption price per share
($1,018,348/82,248 shares outstanding; unlimited
number of shares authorized without par value) 12.38
SOURCE OF NET ASSETS
Paid-in capital $1,019,820
Accumulated net investment loss (513)
Accumulated net realized loss on investments (347)
Net unrealized depreciation on investments (612)
Net assets $1,018,348
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT ASIA BLUE CHIP FUND
STATEMENT OF OPERATIONS at June 30, 1996
Unaudited
April 29, 1996*
through
June 30, 1996
INVESTMENT INCOME
Income
Dividends $1,711
Interest 852
Total Investment Income 2,563
Expenses
Advisory fees (Note 3) 944
Administration fee (Note 3) 3,233
Custodian 161
Accounting 4,849
Transfer agent fees 5,658
Auditing fees 2,587
Legal fees 3,233
Director's fees 1,132
Registration fees 3,394
Reports to shareholders 566
Miscellaneous 485
Total expenses 26,240
less: Expenses reimbursed (Note 3) (23,164)
Net expenses 3,076
Net investment loss (513)
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized loss from foreign currency (347)
Net unrealized depreciation on investments (612)
Net realized and unrealized loss on investments (959)
Net Decrease in Net Assets Resulting from Operations ($1,472)
*Commencement of operations.
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT ASIA BLUE CHIP FUND
STATEMENT OF CHANGES IN NET ASSETS at June 30, 1996
Unaudited
April 29, 1996*
through
June 30, 1996
INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment loss (513)
Net realized loss on foreign currency (347)
Net unrealized depreciation on investments (612)
----------
Net decrease in net assets resulting
from operations (1,472)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 739,293
Cost of shares redeemed (119,473)
Net increase from capital share transactions 619,820
Total increase in net assets 618,348
NET ASSETS
Beginning of period 400,000
End of period (including undistributed
net investment income of ($513)) $1,018,348
CHANGES IN SHARES
Shares sold 59,978
Shares redeemed (9,731)
Net increase 50,247
*Commencement of operations.
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT ASIA SMALL CAP FUND
STATEMENT OF ASSETS AND LIABILITIES at June 30, 1996
Unaudited
ASSETS
Investments in securities, at value (cost $1,524,006) $1,582,147
Cash 452,390
Receivables:
Fund Shares Sold 38,899
Dividends and interests 3,295
Prepaid expenses 26,530
Total assets 2,103,261
LIABILITIES
Payables:
Due to Affiliate (Note 3) 20,790
Dividends to shareholders 116
Securities purchased 277,894
Accrued expenses 14,577
Total liabilities 313,377
NET ASSETS $1,789,884
Net asset value and redemption price per share
($1,789,884/137,058 shares outstanding; unlimited
number of shares authorized without par value) 13.06
SOURCE OF NET ASSETS
Paid-in capital $1,731,348
Undistributed net investment income 244
Undistributed net realized gain on investments 114
Net unrealized appreciation (depreciation) on:
Investments 58,226
Foreign currency (48)
Net assets $1,789,884
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT ASIA SMALL CAP FUND
STATEMENT OF OPERATIONS at June 30, 1996
Unaudited
April 29, 1996*
through
June 30, 1996
INVESTMENT INCOME
Income
Dividends $4,753
Interest 1,841
Total Investment Income 6,594
Expenses
Advisory fees (Note 3) 1,501
Administration fee (Note 3) 3,233
Custodian 255
Accounting 4,849
Transfer agent fees 5,658
Auditing fees 2,586
Legal fees 3,234
Director's fees 1,132
Registration fees 3,394
Reports to shareholders 566
Miscellaneous 485
Total expenses 26,893
Less: Expenses reimbursed (Note 3) (22,733)
Net expenses 4,160
Net investment income 2,434
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain from investments 475
Net realized loss from foreign currency (360)
Net unrealized appreciation on investments 58,226
Net unrealized loss on foreign currency (48)
Net realized and unrealized gain on investments 58,293
Net Increase in Net Assets Resulting from Operations $60,727
*Commencement of operations.
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT ASIA SMALL CAP FUND
STATEMENT OF CHANGES IN NET ASSETS at June 30, 1996
Unaudited
April 29, 1996*
through
June 30, 1996
INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment income 3,084
Net realized gain from investments 475
Net realized loss on foreign currency (360)
Net unrealized appreciation on investments 58,226
Net unrealized loss on foreign currency (48)
----------
Net increase in net assets resulting
from operations 61,377
DISTRIBUTIONS TO SHAREHOLDERS
Dividends paid from net investment income (2,190)
Distributions from taxable realized gains 0
Total distributions to shareholders (2,190)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 1,655,631
Net asset value of shares issued on
reinvestment of distributions 2,074
Cost of shares redeemed (326,358)
Net increase from capital share transactions 1,331,347
Total increase in net assets 1,390,534
NET ASSETS
Beginning of period 400,000
End of period (including undistributed
net investment income of $244) $1,790,534
CHANGES IN SHARES
Shares sold 130,396
Shares reinvested from distributions 159
Shares redeemed (25,497)
Net increase 105,058e
*Commencement of operations
See accompanying notes to financials statements.
<PAGE>
GUINNESS FLIGHT CHINA & HONG KONG FUND
STATEMENT OF ASSETS AND LIABILITIES at June 30, 1996
Unaudited
ASSETS
Investments in securities, at value (cost $154,249,270) $160,873,308
Cash 4,232,265
Receivables:
Fund Shares Sold 385,415
Dividends and interests 486,437
Prepaid expenses 64,734
Deferred organizational costs, net 35,357
Total assets 166,077,517
LIABILITIES
Payables:
Due to Affiliate (Note 3) 125,140
Dividends to shareholders 217,246
Fund Shares repurchased 71,635
Accrued expenses 62,684
Total liabilities 476,705
NET ASSETS $165,600,812
Net asset value and redemption price per share
($165,600,812/11,267,127 shares outstanding; unlimited
number of shares authorized without par value) 14.7
SOURCE OF NET ASSETS
Paid-in capital $159,010,213
Overdistribution of net investment income (3,474)
Overdistribution of net realized gain on investments (29,734)
Net unrealized appreciation on investments 6,623,807
Net assets $165,600,812
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT CHINA & HONG KONG FUND
STATEMENT OF OPERATIONS at June 30, 1996
Unaudited
For the six months
ended
June 30, 1996
INVESTMENT INCOME
Income
Dividends $2,811,734
Interests 90,175
Total investment income 2,901,909
Expenses
Advisory fees (Note 3) 699,091
Administration fee (Note 3) 174,773
Custodian 129,752
Accounting 24,806
Transfer agent fees 78,270
Auditing fees 11,969
Legal fees 32,023
Director's fees 6,955
Registration fees 13,235
Reports to shareholders 4,886
Deferred organization costs amortization 5,820
Interest on loans 3,083
Miscellaneous 4,106
Total expenses 1,188,769
Expenses recouped (Note 3) 194,249
Net expenses 1,383,018
Net investment income 1,518,892
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain from investments 2,335,828
Net realized loss from foreign currency (28,378)
Net unrealized appreciation on investments (3,605,396)
Net realized and unrealized gain on investments (1,297,946)
Net Increase in Net Assets Resulting from Operations $220,946
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT CHINA & HONG KONG FUND
STATEMENT OF CHANGES IN NET ASSETS at June 30, 1996
For the six months
ended For the Year
June 30, 1996 ended
(Unaudited) December 31, 1995
INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment income 1,518,892 $300,352
Net realized gain from investments 2,335,828 28,920
Net realized loss on foreign currency (28,378) (6,121)
Net unrealized appreciation
on investments 3,018,411 3,847,844
Net increase in net assets resulting
from operations 6,844,753 4,170,995
DISTRIBUTIONS TO SHAREHOLDERS
Dividends paid from net investment income (1,521,637) (301,331)
Distributions from taxable realized gains (2,238,341) (123,918)
Total distributions to shareholders (3,759,978) (425,249)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 164,902,229 57,621,477
Net asset value of shares issued on
reinvestment of distributions 3,542,814 395,581
Cost of shares redeemed (61,669,246) (8,309,577)
Net increase from capital share transactions 106,775,797 49,707,481
Total increase in net assets 109,860,572 53,453,227
NET ASSETS
Beginning of period 55,740,240 2,287,013
End of period (including overdistributed
net investment income of
$(3,474) and $(729), respectively) $165,600,812 $55,740,240
CHANGES IN SHARES
Shares sold 11,135,609 4,513,348
Shares reinvested from distributions 264,424 29,558
Shares redeemed (4,169,861) (656,232)
Net increase 7,230,172 3,886,674
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
STATEMENT OF ASSETS AND LIABILITIES at June 30, 1996
Unaudited
ASSETS
Investments in securities, at value (cost $1,094,199) $1,083,307
Cash 533,092
Receivables:
Securities sold 36,855
Interests 26,695
Prepaid expenses 1,122
Deferred organizational costs, net 35,357
Total assets 1,716,428
LIABILITIES
Payables:
Securities purchased 95,949
Dividends payable to shareholders 1,398
Due to Affiliate (Note 3) 27,141
Accrued expenses 26,537
Total liabilities 151,025
NET ASSETS $1,565,403
Net asset value and redemption price per share
($1,565,403/126,751 shares outstanding; unlimited
number of shares authorized without par value) 12.35
SOURCE OF NET ASSETS
Paid-in capital $1,575,740
Undistributed net investment income (including
equalization credits of $4,640) 9,693
Overdistribution of net realized gain on investments (9,084)
Net unrealized appreciation (depreciation) on:
Investments 482
Foreign currency (11,428)
Net assets $1,565,403
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
STATEMENT OF OPERATIONS at June 30, 1996
Unaudited
For the six months
ended
June 30, 1996
INVESTMENT INCOME
Income
Interests $47,295
Expenses
Advisory fees (Note 3) 5,334
Administration fee (Note 3) 16,745
Custodian 5,392
Accounting 19,903
Transfer agent fees 17,702
Auditing fees 7,922
Legal fees 6,467
Director's fees 6,955
Registration fees 9,155
Reports to shareholders 2,030
Deferred organization costs amortization 5,820
Miscellaneous 1,316
Total expenses 104,741
Less: Expenses reimbursed (Note 3) (93,225)
Net expenses 11,516
Net investment income 35,779
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain from investments 4,364
Net realized gain from foreign currency 9,175
Net unrealized depreciation on investments (33,070)
Net unrealized loss on foreign currency (11,400)
Net realized and unrealized loss on investments (30,931)
Net Increase in Net Assets Resulting from Operations $4,848
See accompanying notes to financial statements.
<PAGE>
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
STATEMENT OF CHANGES IN NET ASSETS at June 30, 1996
For the six months
ended For the Year
June, 30, 1996 ended
(Unaudited) December 31, 1995
INCREASE IN NET ASSETS FROM:
OPERATIONS
Net investment income 35,779 $55,076
Net realized gain from investments 4,364 33,385
Net realized gain (loss) on foreign currency 9,175 (12,113)
Net unrealized appreciation (depreciation)
on investments (33,070) 52,690
Net unrealized depreciation on foreign
currency (11,400) (28)
Net increase in net assets
resulting from operations 4,848 129,010
NET EQUALIZATION CREDITS 4,640 1,667
DISTRIBUTIONS TO SHAREHOLDERS
Dividends paid from net investment income (39,514) (51,665)
Distributions from net capital gains (12,536) (25,177)
Total distributions to shareholders (52,050) (76,842)
CAPITAL SHARE TRANSACTIONS
Proceeds from shares sold 1,083,920 1,144,047
Net asset value of shares issued on
reinvestment of distributions 69,723 44,505
Cost of shares redeemed (699,028) (840,420)
Net increase from capital share transactions 454,615 348,132
Total increase in net assets 412,053 401,967
NET ASSETS
Beginning of period 1,153,350 751,383
End of period (including
undistributed net investment income of
$9.693 and $8,667, respectively) $1,565,403 $1,153,350
CHANGES IN SHARES
Shares sold 87,336 90,886
Shares issued from dividend distributions 5,585 3,547
Shares redeemed (56,509) (66,716)
Net increase 36,412 27,717
See accompanying notes to financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION
The Guinness Flight Investment Funds, Inc. (the "Guinness Funds") is a Maryland
Corporation incorporated on January 7, 1994 and registered under the Investment
Company Act of 1940 (the "1940 Act") as a non-diversified, open-end management
investment company. Currently, the Guinness Funds offer four separate series
portfolios: Guinness Flight Asia Blue Chip Fund (the "Asia Blue Chip Fund"),
Guinness Flight Asia Small Cap Fund (the "Asia Small Cap Fund") Guinness Flight
China & Hong Kong Fund (the "China Fund"), and Guinness Flight Global Government
Bond Fund (the "Global Government Fund") (collectively, the "Funds"). The China
and Global Government Funds began operations on June 30, 1994 and the Asia Blue
Chip and Asia Small Cap Funds began operations on April 29, 1996.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Funds. These policies are in conformity with generally accepted
accounting principles.
A. Security Valuation. Investments in securities traded on a primary
exchange are valued at the last reported sale price at the close of regular
trading on the last business day of the period; securities traded on an exchange
for which there has been no sale are valued at the last reported bid price.
Securities for which quotations are not readily available are valued at their
respective fair values as determined in good faith by the Board of Trustees.
Short-term investments are stated at cost, which when combined with accrued
interest, approximates market value.
U.S. Government securities with less than 60 days remaining to maturity
when acquired by the Fund are valued on an amortized cost basis. U.S. Government
securities with more than 60 days remaining to maturity are valued at the
current market value (using the mean between the bid and asked price) until the
60th day prior to maturity, and are then valued at amortized cost based upon the
value on such date unless the Board determines during such 60 day period that
this amortized cost basis does not represent fair value.
Foreign securities are recorded in the financial statements after
translation to U.S. dollars based on the applicable exchange rate at the end of
the period. The Funds do not isolate that portion of the results of operations
arising as a result of changes in the currency exchange rate from the
fluctuations arising as a result of changes in the market prices of investments
during the period.
Interest income is translated at the exchange rates which existed at
the dates the income was accrued. Exchange gains and losses related to interest
income are included in interest income on the accompanying Statements of
Operations.
B. Forward Foreign Currency Exchange Contracts. The Funds may utilize
forward foreign currency exchange contracts ("forward contracts") under which it
is obligated to exchange currencies at specific future dates and at specified
rates, and is subject to the risks of foreign exchange fluctuations. All
commitments are "marked-to-market" daily and any resulting
<PAGE>
unrealized gains or losses are included as unrealized appreciation
(depreciation) on foreign currency denominated assets and liabilities. The Funds
record realized gains or losses at the time the forward contract is settled.
Counterparties to these forward contracts are major U.S. financial institutions.
C. Security Transactions, Dividends and Distributions. As is common in
the industry, security transactions are accounted for on the trade date.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
D. Federal Income Taxes. The Funds intend to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of their taxable income to its shareholders.
Therefore, no federal income tax provision is required.
E. Equalization. The Global Government Fund follows the accounting
practice known as equalization, by which a portion of the proceeds from sales
and costs of redemptions of capital shares, equivalent on a per share basis to
the amount of undistributed net investment income on the date of the
transaction, is credited or charged to undistributed net investment income. As a
result, undistributed net investment income per share is unaffected by sales or
redemptions of the Fund's shares.
F. Deferred Organization Costs. The China Fund and the Global
Government Fund have each incurred expenses of $58,785 in connection with their
organization. These costs have been deferred and are being amortized on a
straight line basis over a period of sixty months from the date the Funds
commenced investment operations. In the event that any of the initial shares of
either Fund are redeemed by the holder during the period of amortization of the
Funds' organization costs, the redemption proceeds will be reduced by any such
unamortized organization costs in the same proportion as the number of initial
shares being redeemed bears to the number of those shares outstanding at the
time of redemption.
G. Concentration of Risk. The Asia Blue Chip Fund and Asia Small Cap
Fund invests substantially all of its assets in Asian continent. The China Fund
invests substantially all of its assets in securities that are traded in China
or Hong Kong or that are issued by companies that do a substantial part of their
business in China. The Global Government Fund invests substantially in bonds
issued by various European governments. The consequences of political, social or
economic changes in the countries in which the securities are offered or the
issuers conduct their operations may affect the market prices of the Funds'
investments and any income generated, as well as the Funds' ability to
repatriate such amounts.
H. Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
I. Other. Under terms of the Custodial Agreement, the Funds may earn
credits, based on custody cash balances, to applied to custodian fees. For the
six months ended June 30, 1996,
<PAGE>
there were no such credits.
NOTE 3 - INVESTMENT MANAGEMENT FEE AND OTHER TRANSACTIONS WITH
AFFILIATES
Guinness Funds, on behalf of the Funds, entered into an Investment Advisory
Agreement with Guinness Flight Investment Management Limited (the "Advisor"), to
provide the Funds with investment management services. The Advisor furnished all
investment advice, office space and certain administrative services, and
provides certain personnel needed by the Funds. As compensation for its
services, the Advisor was entitled to a monthly fee equal to the following
annual percentages of daily average net assets:
Asia Blue Chip Fund 1.00%
Asia Small Cap Fund 1.00%
China Fund 1.00%
Global Government Fund 0.75%
The Funds are responsible for their own operating expenses. The Advisor and
Administrator have agreed to reimburse each Fund to the extent necessary so that
its ratio of operating expenses to average daily net assets will not exceed the
following levels. Expenses reimbursed from the Adviser for the six months ended
June 30, 1996 are stated in the Funds' Statement of Operations:
Asia Blue Chip Fund 1.98%
Asia Small Cap Fund 1.98%
China Fund 1.98%
Global Government Fund 1.73%
In addition, the Advisor and Administrator have agreed to limit the Funds'
aggregate annual operating expenses to the most stringent limits prescribed by
any state in which the Funds' shares are offered for sale. Currently, the most
stringent limits prescribed are 2.50% of the first $30 million of net assets and
reduced amounts thereafter.
Investment Company Administration Corporation (the "Administrator") acts as the
Funds' Administrator under an Administration Agreement. The Administrator
prepares various federal and state regulatory filings, prepares reports and
materials to be supplied to the Directors; monitors the activities of the Funds'
custodian, transfer agent and accountants; coordinates the preparation and
payment of Fund expenses and reviews the Funds' expense accruals. For its
services, the Administrator receives an annual fee equal to the greater of 0.25
of 1% of the Funds' average daily net assets, subject to a $40,000 annual
minimum for the China Fund and $60,000 allocated based on average daily net
assets of the Asia Blue Chip Fund, Asia Small Cap Fund and Global Government
Fund.
First Fund Distributors, Inc. (the "Distributor") acts as the Funds' principal
underwriter in a continuous public offering of the Funds' shares. The
Distributor is an affiliate of the Administrator.
<PAGE>
Certain officers of the Guinness Funds are also officers and/or Directors of the
Administrator and Distributor.
NOTE 4 - PURCHASES AND SALES OF SECURITIES
The cost of purchases and the proceeds from sales of securities, excluding U.S.
Government obligations and short-term investments, for the six months ended June
30, 1996 were:
Fund Purchases Sales
Asia Blue Chip Fund $406,675 $0
Asia Small Cap Fund $1,557,149 $33,617
China Fund $125,032,904 $24,164,389
Global Government Fund $1,080,735 $1,041,393
Purchases and sales of U.S. Government obligations by the Global Government Fund
were $224,917 and $211,840, respectively.
NOTE 5 - LINE OF CREDIT
The Funds have a $13 million unsecured line of credit with a bank that expires
on October 11, 1996. The interest rate on the line of credit is the bank's base
rate, as revised from time to time.
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