Rule 497(c)
Registration No.: 33-75340
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 APRIL 29, 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 April 29,1996 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.
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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...................... 8
Investment Strategies, Policies and Risks............................ 12
Other Risk Considerations............................................ 14
Performance.......................................................... 18
The Funds' Management................................................ 18
How to Purchase Shares............................................... 22
How to Redeem Shares................................................. 24
Shareholder Services................................................. 26
Determination of Net Asset Value..................................... 27
Dividends, Distributions and Tax Matters............................. 28
About the Funds...................................................... 31
General Information.................................................. 32
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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."
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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."
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."
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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 reimbursement) .98% .98% .98% .98%
--- --- --- ---
Total Fund Operating Expenses
(after expense reimbursement) 1.98% 1.98% 1.98% 1.73%
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
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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.
FINANCIAL HIGHLIGHTS
The following information has been audited by Coopers & Lybrand 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 included in the
Statement of Additional Information which 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
For the Year June 30, 1994*
Ended through
December 31, 1995 December 31, 1994
Net asset value, beginning of period $11.47 $12.50
Income from investment operations:
Net investment income .14 .04
Net realized and unrealized gain
(loss) on investments 2.20 (.96)
------ -------
Total from investment operations 2.34 (.92)
------ -------
Less distributions:
Dividends from net investment income (.14) (.04)
Distributions from net capital gains (.03) (.07)
------- -------
Total distributions (.17) (.11)
------- -------
Net asset value, end of period $13.64 $11.47
====== ======
Total return 20.45% (7.74)%
Ratios/supplemental data:
Net assets, end of period (thousands) $55,740 $2,287
Ratio of expenses to average net assets:
Before expense reimbursement 3.02%++ 19.92%+
After expense reimbursement 1.98% 2.00%+
Ratio of net investment income to average
net assets:
Before expense reimbursement 0.49% (17.15)%+
After expense reimbursement 1.52% 0.78%+
Portfolio turnover rate 10.89% 27.25%
* 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%.
See accompanying notes to financial statements.
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FINANCIAL HIGHLIGHTS
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
For the Year June 30, 1994*
Ended through
December 31, 1995 December 31, 1994
Net asset value, beginning of period $12.00 $12.50
Income from investment operations:
Net investment income .69 .29
Net realized and unrealized gain
loss) on investments 1.01 (.58)
------ -------
Total from investment operations 1.70 (.29)
------ -------
Less distributions:
Dividends from net investment income (.65) (.21)
Distributions from net capital gains (.28) -0-
Total distributions (.93) (.21)
------- -------
Net asset value, end of period $12.77 $12.00
====== ======
Total return 14.49% (2.33)%
Ratios/supplemental data:
Net assets, end of period (thousands) $1,153 $751
Ratio of expenses to average net assets:
Before expense reimbursement 21.52%++ 40.78%+
After expense reimbursement 1.73% 1.75%+
Ratio of net investment income to average
net assets:
Before expense reimbursement (14.26)% (34.18)%+
After expense reimbursement 5.53% 4.86%+
Portfolio turnover rate 202.54% 46.15%
* 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.
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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
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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
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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
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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
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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.
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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.
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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 GlassSteagall 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
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.
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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.
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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 September 1, 1996, 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
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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.
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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
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"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.
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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 24.
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
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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
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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 exdividend 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 exdividend 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,
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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
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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.
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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.
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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, Nessen, Kamin & 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.
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Rule 497(e)
Registration No.: 33-75340
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 April 29, 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......................................... 14
PORTFOLIO TRANSACTIONS....................................................... 15
COMPUTATION OF NET ASSET VALUE............................................... 16
PERFORMANCE INFORMATION...................................................... 17
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................... 19
TAX MATTERS.................................................................. 19
MANAGEMENT OF THE FUNDS...................................................... 24
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS............................... 25
DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN................................. 27
DESCRIPTION OF THE FUNDS..................................................... 27
SHAREHOLDER REPORTS.......................................................... 28
FINANCIAL STATEMENTS......................................................... 28
APPENDIX A.................................................................. A-1
Dated: April 29, 1996
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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.
An Equity Fund may invest indirectly in issuers through
sponsored or unsponsored American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs"),
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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.
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
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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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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
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges).
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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
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
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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-theCounter 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
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
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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 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.
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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 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,
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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.
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.
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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 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.
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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:
(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;
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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.
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").
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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 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:
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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, 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
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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.
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.
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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.
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
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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 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%.
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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.
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 ShortShort 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
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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 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
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<PAGE>
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
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).
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<PAGE>
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.
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.
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<PAGE>
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 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
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<PAGE>
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.
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.
-------- * Not an "interested person," as that
term is defined by the 1940 Act.
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<PAGE>
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.
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
Compensation Retirement Benefits Estimated Annual from Guinness
Name of Person, from Guinness Accrued as Part of Benefits Upon Funds Paid to
Position Funds Fund Expenses Retirement 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
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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
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.
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<PAGE>
The Agreements were approved by the Board of Directors on May 6,
1994. The Agreements will remain in effect until May 6, 1996 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 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 on May 6, 1994 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.
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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.
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 February 9, 1996, Charles Schwab & Co.
Inc. (101 Montgomery St., San Francisco 94104-4122) owned 42.80% of the
outstanding shares of the China Fund for the exclusive benefit of its accounts.
As of February 9, 1996, Guinness Flight Fund Managers (PO Box 250 St. Peter,
Port Guernsy, Channel Islands GY1-3QH) owned 20.81% and Charles Schwab & Co.
Inc. for the exclusive benefit of its accounts owned 47.54%, of the outstanding
shares of the Global Government Fund.
FINANCIAL STATEMENTS
The Financial Statements for the China Fund and Global
Government Fund for the year ended December 31, 1995 are incorporated by
reference from the Annual Reports to Shareholders dated January 24, 1996.
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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.
- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
A-1
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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
