Rule 497(c)
Registration No. 33-75340
GUINNESS FLIGHT
PROSPECTUS NOVEMBER 3, 1997
MAINLAND CHINA FUND
<PAGE>
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 Mainland
China Fund match your own. It should be retained for future reference. A
Statement of Additional Information, dated November 3, 1997 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 Guinness Flight Investment Funds at 1-800-915-6565.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
PROSPECTUS PAGE 1
<PAGE>
Summary ...................................................................... 2
Summary of The Fund's Expenses ............................................... 5
Investment Objective,
Programs and Limitations ..................................................... 7
Investment Strategies,
Policies and Risks ........................................................... 8
Risk Considerations ......................................................... 10
Performance ................................................................. 14
The Fund's Management ....................................................... 14
How to Purchase Shares ...................................................... 17
How to Redeem Shares ........................................................ 20
Shareholder Services ........................................................ 23
Determination of
Net Asset Value ............................................................. 24
Dividends, Distributions
and Tax Matters ............................................................. 24
About the Fund .............................................................. 27
General Information ......................................................... 28
Guinness Flight Mainland China Fund
THE "MAINLAND CHINA FUND'S" investment objective is long-term capital
appreciation through investments in equity securities of companies which are
located in Mainland China and in companies located outside Mainland China which
have a significant part of their interests in China. In pursuit of its
investment objective, the Fund as a non-fundamental policy intends to invest 65%
to 100% of its total assets in a portfolio of equity securities of companies
which have "B" shares listed in Shanghai or Shenzhen, "H" shares and in other
companies listed in Hong Kong that are controlled by Chinese corporations
(commonly referred to as "Red Chips"), and "N" shares listed in New York
(collectively, "Mainland China Companies"). The Fund does not intend to make
equity investments in companies other than Mainland China Companies, except
where such companies are either Hong Kong registered companies or are companies
registered elsewhere that have a material exposure either directly or indirectly
to markets or economic developments in Mainland China. See "Investment
Objectives, Programs and Limitations," for a more detailed discussion.
Summary
The Fund. Guinness Flight Investment Funds (the "Guinness Flight Funds") is a
Delaware business trust organized as an open-end, series, management investment
company. Currently, Guinness Flight Funds offers five separate series
portfolios: Guinness Flight Asia Blue Chip Fund, Guinness Flight Asia Small Cap
Fund, Guinness Flight China & Hong Kong Fund, Guinness Flight Global Government
Bond Fund and Guinness Flight Mainland China Fund, each of which pursues unique
investment strategies. For purposes of this prospectus, references to the "Fund"
are to the Mainland China Fund.
Risk Considerations. An investor should be aware that there are risks associated
with certain investment techniques and strategies employed by the Fund,
including those relating to investments in foreign securities. Such
PROSPECTUS PAGE 2
<PAGE>
risks include, among others, currency fluctuations, expropriation, confiscation,
diplomatic developments, and social instability. The Fund's net asset value per
share can be expected to fluctuate. Accordingly, investors should consider an
investment in the Fund as a supplement to an overall investment program and
should invest only if they are willing to undertake the risks involved. See
"Investment Strategies, Policies and Risks" and "Other Risk Considerations."
The Investment Adviser. Guinness Flight Investment Management Limited ("Guinness
Flight") serves as the Fund's investment adviser pursuant to an investment
advisory agreement (the "Advisory Agreement"). Under the terms of the Advisory
Agreement, Guinness Flight supervises all aspects of the Fund's operations and
provides investment advisory services to the Fund. As compensation for these
services, Guinness Flight receives a fee based on the Fund's average daily net
assets. See "The Fund's Management."
Purchasing Shares. Shares of the Fund are offered by this prospectus at net
asset value. Through November 30, 1997, shares of the Fund will be offered
exclusively to (i) shareholders of the existing Guinness Flight Funds who owned
such shares as of November 3, 1997, and (ii) clients of registered investment
advisers who have invested any of their clients in the existing Guinness Flight
Funds as of November 3, 1997. Beginning December 1, 1997, the Fund will offer
its shares to the general public provided that net assets of the Fund do not
exceed $50 million. Shares of the Fund will cease being offered on or after
December 1, 1997 to new investors when the net assets of the Fund exceed $50
million. Existing Mainland China Fund investors, however, may continue to
purchase shares of the Fund on or after such date. The minimum investment in the
Fund is as follows:
<TABLE>
<CAPTION>
Minimum
Type of Account Investment
<S> <C>
Regular-new investor $2,500
Regular-shareholder purchasing another Guinness Flight Fund $1,000
Retirement $1,000
Gift $250
Pre-authorized investment plan (initial and monthly investments) $100
Additional investment $250
</TABLE>
The Fund may reduce or waive the minimum investment under certain conditions.
See "How to Purchase Shares."
Exchange Privilege. Shares of the Fund may be exchanged for shares of any other
Guinness Flight Fund, or for shares of the SSgA Money Market Fund, in the manner
and subject to the policies set forth herein. See "Shareholder Services --
Exchange Privilege."
PROSPECTUS PAGE 3
<PAGE>
Redeeming Shares. Shareholders may redeem all or a portion of their shares at
net asset value. A redemption fee of 2.00% will be charged to any shareholder of
the Fund who redeems shares purchased less than 60 days prior to redemption. See
"How to Redeem Shares" and "Redemption Fee."
Distributions. The Fund declares and pays dividends from net investment income,
if any, on a semi-annual basis. In addition, the Fund makes distributions of
realized capital gains, if any, on a semi-annual basis. Dividends and
distributions of the Fund may be paid directly to you by check, or reinvested in
additional shares of the Fund, including, subject to certain conditions, in
shares of a Guinness Flight Fund other than the Fund making the distribution.
See "Dividends, Distributions and Tax Matters."
PROSPECTUS PAGE 4
<PAGE>
Summary of The Fund's Expenses
A. Shareholder Transaction Expenses
<TABLE>
<CAPTION>
<S> <C>
Sales Charge Imposed on Purchases none
Sales Charge Imposed on Reinvested Dividends none
Deferred Sales Charge Imposed on Redemptions none
Redemption Fee on shares held 60 days or less
(as a % of redemption amount) 2.00%+
Exchange Fee none
</TABLE>
+ A 2.00% redemption fee applies to investors who redeem shares purchased less
than 60 days prior to redemption. Exchanges into other Guinness Flight Funds
or the SSgA Money Market Fund are considered redemptions for purposes of the
redemption fee. See "How to Redeem Shares -- Redemption Fee."
B. Annual Fund Operating Expenses (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
<S> <C>
Advisory Fee 1.00%
Rule 12b-1 Fee .00%
Other Expenses .85%
---------
Total Fund Operating Expenses 1.85%++
---------
---------
</TABLE>
++ Guinness Flight has voluntarily undertaken to waive and/or reimburse expenses
during the current fiscal year so that Total Fund Operating Expenses do not
exceed 1.98%. The Fund will notify its shareholders in writing at least 30
days prior to any adjustments to the cap on its Total Fund Operating
Expenses.
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:
<TABLE>
<CAPTION>
One Year Three Year Five Year Ten Year
<S> <C> <C> <C>
$19 $58 $100 $217
</TABLE>
Explanation of Table: The purpose of the table is to assist you in understanding
the various costs and expenses that an investor in the Fund would bear directly
or indirectly. See "The Fund's Management" for a more complete discussion of the
annual operating expenses of the Fund. The foregoing example is based upon
estimated expenses for the current fiscal year.
A. Shareholder Transaction Expenses represent charges paid when you purchase,
redeem or exchange shares of the Fund. See "How to Purchase Shares," "How to
Redeem Shares" and "Redemption Fee."
B. Annual Fund Operating Expenses are based on the Fund's estimated operating
expenses for the current fiscal year. The Fund incurs "other expenses" for
maintaining shareholder records, furnishing shareholder statements and reports,
and other services. Guinness
PROSPECTUS PAGE 5
<PAGE>
Flight or the Fund's administrator may, from time to time, voluntarily agree to
defer or waive fees or absorb some or all of the expenses of the Fund. 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 Fund would exceed 1.98%. See "The
Fund's Management."
C. Example of Expenses. The hypothetical example illustrates the expenses
associated with a $1,000 investment in the Fund over periods of one, three, five
and ten years based on the estimated expenses in the above table and an assumed
annual rate of return of 5%. The 5% return and expenses should not be considered
indications of actual or expected Fund performance or expenses, both of which
may vary.
PROSPECTUS PAGE 6
<PAGE>
Investment Objective, Programs and Limitations
The Fund's investment objective is long-term capital appreciation through
investments in equity securities of companies which are located in Mainland
China and in companies located outside Mainland China which have a significant
part of their interests in China. In pursuit of its investment objective, the
Fund as a non-fundamental policy intends to invest 65% to 100% of its total
assets in a portfolio of equity securities of companies which have "B" shares
listed in Shanghai or Shenzhen, "H" shares and "Red Chips" listed in Hong Kong,
and "N" shares listed in New York (collectively, "Mainland China Companies").
The Fund does not intend to make equity investments in companies other than
Mainland China Companies, except where such companies are either Hong Kong
registered companies or are companies registered elsewhere that have a material
exposure either directly or indirectly to markets or economic developments in
Mainland China.
"B" shares listed in Shanghai or Shenzhen are shares in Chinese companies issued
in China under Chinese laws. Shares that trade on the Shanghai Stock Exchange
are denominated in U.S. dollars, while shares that trade on the Shenzhen Stock
Exchange are denominated in H.K. dollars. "H" shares listed in Hong Kong are
shares in Chinese companies issued in China under Chinese law. They are subject
to its stringent listing and disclosure requirements. The shares are denominated
in H.K. dollars and trade like any other shares listed on the Hong Kong Stock
Exchange. "N" shares are similar to H shares, but listed on the New York Stock
Exchange, rather than the Hong Kong Stock Exchange. Red Chips are Hong Kong
listed companies that are controlled by Chinese corporations. Through a process
known as "back-door listing" a Chinese firm acquires interests in a Hong Kong
corporation and subsequently invests in it often by injecting Mainland China
assets in exchange for shares. In this way, a Chinese business can get a foreign
listing (and access to foreign capital) without going through the bureaucratic,
drawn-out official process necessary inside China. Red Chips have a varying mix
of mainland and Hong Kong assets and revenue.
Equity securities, for purposes of the 65% policy, will be limited to common and
preferred stocks; convertible preferred stocks; and convertible investment grade
instruments. In addition, the 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 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 Fund may also purchase and sell stock index futures to hedge
against equity markets on a temporary basis.
PROSPECTUS PAGE 7
<PAGE>
Investment Strategies, Policies and Risks
Forward Foreign Currency Exchange Contracts. The Fund may purchase or sell
forward foreign currency exchange contracts ("forward contracts") as part of its
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. The Fund may enter into a forward contract, for example, 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, when the Fund believes that a foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a forward sale
contract by selling an amount of that foreign currency and approximating the
value of some or all of the Fund's portfolio securities denominated in such
foreign currency. If the Fund believes that the U.S. dollar may suffer a
substantial decline against the 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 the Fund than if it had not
entered into such contracts. Forward contracts may be considered to be
"derivative securities" which are described further in the "Investment
Strategies and Risks" section of the Statement of Additional Information.
Forward Commitments. The Fund 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 Fund, 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 Fund will enter into such contracts with the
intention of acquiring the securities, the Fund may dispose of a commitment
prior to a settlement date if Guinness Flight deems it appropriate to do so. The
Fund may realize short-term profits or losses upon the sale of forward
commitments. Forward contracts may be considered to be "derivative securities,"
which are described further in the "Investment Strategies and Risks" section of
the Statement of Additional Information.
Covered Call Options. Call options may also be used to anticipate a price
increase of a security on a more limited basis than would be possible if the
security itself were purchased. The Fund may write only covered call options.
Since it 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.
PROSPECTUS PAGE 8
<PAGE>
By writing a call option, the 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 Fund will not write any put options. Covered call options may
be considered to be "derivative securities" which are described further in the
"Investment Strategies and Risks" section of the Statement of Additional
Information.
Purchase and Sale of Options and Futures on Stock Indices. The 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 the 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 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 Fund when
the hedged positions were established. Options and futures on stock indices may
be considered to be "derivative securities" which are described further in the
"Investment Strategies and Risks" section of the Statement of Additional
Information.
Illiquid Securities. The Fund will not invest more than 15% of its net assets in
illiquid securities, including repurchase agreements with maturities in excess
of seven days.
Restricted Securities. The Fund 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 Fund 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 Flight Funds' Board of Trustees. 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 liquid, the 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.
PROSPECTUS PAGE 9
<PAGE>
Portfolio Turnover. Any particular security will be sold, and the proceeds
reinvested, whenever such action is deemed prudent from the viewpoint of the
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 the 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 200% for the Fund.
For further discussion with regard to the Fund's investment strategies, policies
and risks, see "Investment Strategies and Risks" in the Fund's Statement of
Additional Information.
Risk Considerations
General Political Risks. With respect to any foreign country, there is the
possibility of nationalization, expropriation or confiscatory taxation,
political changes, governmental regulations, social instability or diplomatic
developments (including war) which could affect adversely the economies of such
countries or the Fund's investments in those countries. In addition, it may be
difficult to obtain a judgment in a court outside of the United States.
China Political Risks. 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.
Economic reforms in China are transforming its economy into a market system that
has stimulated significant economic growth. As a result of such reform, the
living standards of the 800 million rural workers have improved. 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, five originally and over
thirty today, were set up, providing tax advantages to foreign investors.
Further, the Shenzhen and Shanghai Stock Exchanges have recently opened. 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 Fund) can
purchase Class "B" shares. Over the period 1978 to 1997, China's gross domestic
product grew between 9% and 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 on June 30, 1997, but which maintains
the previously existing capitalist economic and social system of Hong Kong for
50 years beyond that date.
PROSPECTUS PAGE 10
<PAGE>
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 are risks arising from Hong Kong's return 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 shareholdings 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 China and Hong Kong. The risks
include:
(1)that political instability may arise as a result of indecisive
leadership;
(2)that hard line Marxist Leninists might regain the political initiative;
(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.
Investors should further realize that the central government of China is
communist and, while a liberal attitude towards foreign investment and
capitalism prevails at present, a return to hard line communism and a reaction
against capitalism and the introduction of restrictions on foreign investment is
a possibility. There can be no assurance that the Chinese government will
continue to pursue its economic reform policies or, if it does, that those
policies will be successful. The issue of "B" shares, "H" shares and "N" shares
by Chinese companies and ability to obtain a "back-door listing" through Red
Chips is still regarded by the Chinese authorities as an experiment in economic
reform. The reformist elements which now dominate Chinese policies remain
ideologically communist and political factors may, at any time, outweigh
economic policies and the encouragement of foreign investment. The Fund will be
highly sensitive to any significant change in political, social or economic
policy in China. Such sensitivity may, for the reasons specified above,
adversely affect the capital growth and thus the performance of the Fund.
Guinness Flight, however, believes that the process of reform has now gone too
far to be easily reversed.
PROSPECTUS PAGE 11
<PAGE>
Securities Markets. Both the Shanghai and the Shenzhen securities markets are in
their infancy and are undergoing a period of development and change. This may
lead to trading volatility, difficulty in the settlement and recording of
transactions and difficulty in interpreting and applying the relevant
regulations. In addition the choice of investments available to the Fund will be
severely limited as compared with the choice available in other markets due to
the small but increasing number of "B" share, "H" share, "N" share and Red Chip
issues currently available. There is a low level of liquidity in the Chinese
securities markets, which are relatively small in terms of both combined total
market value and the number of "B" shares, "H" shares, "N" shares and Red Chips
available for investment. Shareholders are warned that this could lead to severe
price volatility.
In general, 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 Fund's limitation on such purchases.
Fixed commissions on foreign markets are generally higher than negotiated
commissions on United States exchanges; however, the Fund will endeavor to
achieve the most favorable net results on their portfolio transactions and may
be able to purchase the securities in which the Fund may invest on other stock
exchanges where commissions are negotiable.
Foreign Currency Considerations. Although the Fund's investments generally will
be denominated in foreign currencies and most income paid by such investments
will be in foreign currencies, the Fund will compute and distribute its income
in dollars. The computation of income will be made on the date of its receipt by
the Fund at the foreign exchange rate in effect on that date. Therefore, if the
value of the foreign currencies in which the 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 the Fund as measured in dollars also may be affected
favorably or unfavorably by fluctuations in currency rates and exchange control
regulations. Further, the Fund may incur costs in connection with conversions
between various currencies.
For further discussion with regard to the Fund's other risk considerations, see
"Other Risk Factors and Special Considerations" in the Fund's Statement of
Additional Information.
Accounting Standards and Legal Framework. 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. Further,
there is generally less governmental supervision and regulation of foreign stock
exchanges, brokers and listed companies than in the United States.
PROSPECTUS PAGE 12
<PAGE>
With regard to China, the national regulatory and legal framework for capital
markets and joint stock companies is not well developed, compared to those of
Western countries. Certain matters of concern to foreign shareholders are not
adequately dealt with or are only covered in a number of national and local laws
and regulations. As the efficacy of such laws and regulations is as yet
uncertain, there can be no assurance as to the extent to which rights of foreign
shareholders will be protected.
Further, Chinese companies are not required to follow international accounting
standards. There are a number of differences between international accounting
standards and accounting practice in China, including the valuation of property
and other assets (in particular inventory and investments and provisions against
debtors), accounting for depreciation, consolidation, deferred taxation and
contingencies and the treatment of exchange differences. There may, therefore,
be significant differences in the preparation of financial statements by
accountants following Chinese accounting standards and practice when compared
with those prepared in accordance with international accounting standards. All
issuers of "B" shares, "H" shares, "N" shares and Red Chips are, however,
required to produce accounts which are prepared in accordance with international
accounting standards.
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 China and Hong Kong 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 Fund may invest in
these investment funds; however, if the acquired investment fund is registered
pursuant to the 1940 Act, then the Fund will not own (i) more than three percent
of the total outstanding voting stock of the acquired investment fund, (ii)
securities issued by the acquired investment fund having an aggregate value of
more than five percent of the total assets of the Fund, or (iii) securities
issued by the acquired investment fund and all other registered investment funds
having an aggregate value of more than 10 percent of the total assets of the
Fund. If the 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 the Fund's assets invested in shares of other open-end investment
companies. The 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.
PROSPECTUS PAGE 13
<PAGE>
Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some foreign
countries. The Fund could be adversely affected by delays in or a refusal to
grant any required governmental approval for such repatriation.
INVESTMENT IN CHINA AT PRESENT INVOLVES ABOVE AVERAGE RISK DUE TO A NUMBER OF
SPECIAL FACTORS AS MENTIONED ABOVE. INVESTMENT IN THE FUND SHOULD BE REGARDED AS
LONG TERM IN NATURE. THE FUND IS SUITABLE ONLY FOR THOSE INVESTORS WHO CAN
AFFORD THE RISKS INVOLVED AND SHOULD CONSTITUTE ONLY A LIMITED PART OF AN
INVESTOR'S PORTFOLIO. THE PRICE OF THE FUND MAY EXPERIENCE SIGNIFICANT
FLUCTUATIONS.
Performance
The 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 the 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 Fund may
separate their cumulative and average annual returns into income results and
capital gains or losses.
The performance of the Fund will vary from time to time and past results are not
necessarily representative of future results. The 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 Fund's Management
The overall management of the business and affairs of the Fund is vested in the
Guinness Flight Funds' Board of Trustees. The Board of Trustees approves all
significant agreements between the Guinness Flight Funds, on behalf of the Fund,
and persons or companies furnishing services to the Fund. The day-to-day
operations of the Fund are delegated to the officers of the Guinness Flight
Funds and to Guinness Flight, subject always to the investment objective and
policies of the Fund and to the general supervision of the Guinness Flight
Funds' Board of Trustees. Information concerning the Board of Trustees 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, has a U.S. office
at 225 South Lake Avenue, Suite 777, Pasadena, California 91101, and a Hong Kong
office at 2108 Jardine
PROSPECTUS PAGE 14
<PAGE>
House, One Connaught Place, Central, Hong Kong. Guinness Flight serves as the
investment adviser to the Fund pursuant to an investment advisory agreement
dated as of September 5, 1997. Under the terms of the Advisory Agreement,
Guinness Flight supervises all aspects of the Fund's operations and provides
investment advisory services to the Fund. Guinness Flight was organized in 1985
and is registered with the Securities and Exchange Commission under the
Investment Advisers Act of 1940, as amended. Guinness Flight is a wholly owned
subsidiary of Guinness Flight Hambro Asset Management Limited.
The Fund is managed by a team of portfolio managers. The following are
biographies of key personnel who are responsible for ultimate investment
decisions.
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 manager 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 and Co-manager of the China & Hong
Kong Fund.
Lynda Johnstone -- Ms. Johnstone joined Guinness Mahon's Investment
Department in 1986 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 Co-manages the China & Hong Kong Fund.
Nerissa Lee -- Ms. Lee joined Guinness Flight's Hong Kong office in 1995 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, Chief Investment Officer of
Guinness Flight Hambro Asia Ltd., manages the Guinness Flight Global
Strategy Fund's Asian Smaller Companies Fund and the Guinness Flight Select
China Fund. These funds are offered only to offshore investors. Ms. Lee
serves as the Manager of the Asia Small Cap Fund.
Guinness Flight's legal counsel believes that Guinness Flight may provide
services described in its Investment Advisory Agreement to the Fund without
violating the federal banking law commonly known as the Glass-Steagall Act (the
"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 Hambro Asset Management Limited, such
restrictions may be deemed to apply.
PROSPECTUS PAGE 15
<PAGE>
The U.S. Supreme Court in its 1981 decision in BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM V. INVESTMENT COMPANY INSTITUTE determined that, consistent with
the requirements of the Act, a bank may serve as an investment adviser to a
registered, closed-end investment company. Other decisions of banking regulators
have supported the position that a bank may act as investment adviser to a
registered, open-end 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 Fund. If that
occurred, the Board of Trustees of Guinness Flight Funds promptly would seek to
obtain the services of another qualified adviser, as necessary. The Trustees
would then consider what action would be in the best interest of the Fund's
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 Trustees,
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 Fund.
Fees and Expenses. Pursuant to the Advisory Agreement, Guinness Flight is paid a
monthly fee from the Fund at an annual rate of 1.00% of the Fund's average daily
net assets. This fee is higher than that charged by many investment companies.
However, the Board of Trustees believes that such fee is appropriate because of
the complexity of managing a fund that invests in global markets. Guinness
Flight or Investment Company Administration Corporation, the administrator, may,
from time to time, voluntarily agree to defer or waive fees or absorb some or
all of the expenses of the Fund. 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
Fund's expense ratio exceeding 1.98%. There is no current anticipation that
Guinness Flight or Investment Company Administration Corporation will be able to
receive this repayment, and, therefore, it is not a liability that would be
reflected in the net asset value of the Fund.
Administrator. Pursuant to an Administration Agreement, Investment Company
Administration Corporation ("ICAC") serves as administrator of the Fund. 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 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 $80,000
or .25% of aggregate average daily net assets of Guinness Flight Asia Blue Chip
Fund, Guinness Flight Asia Small Cap Fund, Guinness Flight Global Government
Bond Fund, and the Fund.
PROSPECTUS PAGE 16
<PAGE>
Distributor. The Guinness Flight Funds has 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 Fund. The Distribution Agreement provides First Fund with the
right to distribute shares of the Fund through affiliated broker-dealers and
through other broker-dealers or financial institutions with whom First Fund has
entered into selected dealer agreements. The Distributor is an affiliate of the
Administrator.
Distribution Plan. The Fund has adopted a Distribution Plan (the "Plan") under
Rule 12b-1 under the 1940 Act. No separate payments are authorized to be made by
the 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.
Shareholder Servicing. The Fund 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. Through November 30, 1997, shares of the Fund will be
offered exclusively to (i) shareholders of the existing Guinness Flight Funds
who owned such shares as of November 3, 1997, and (ii) clients of registered
investment advisers who have invested any of their clients in the existing
Guinness Flight Funds as of November 3, 1997. Beginning December 1, 1997, the
Fund will offer its shares to the general public provided that the net assets of
the Fund do not exceed $50 million. Shares of the Fund will cease being offered
on or after December 1, 1997 to new investors when the net assets of the Fund
exceed $50 million. Existing Mainland China Fund investors, however, may
continue to purchase shares of the Fund on or after such date. It is possible
that assets of the Fund may exceed $50 million on December 1, 1997 and that the
Fund's shares will never be offered to the general public.
Investors may purchase shares of the 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 as of that day. A buyer whose purchase order is received by the transfer
agent after the close of trading on the New York
PROSPECTUS PAGE 17
<PAGE>
Stock Exchange will acquire shares at the net asset value 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 Fund's shares. The Fund reserves the
right to reject any purchase order.
You may also purchase shares of the SSgA Money Market Fund which is advised by
State Street Bank and Trust Co., 225 Franklin Street, Boston, MA 02110, and is
not affiliated with the Guinness Flight Funds or Guinness Flight, if such shares
are offered in your state of residence. You should carefully read the prospectus
and complete the application for the SSgA Money Market Fund. For additional
information, please call shareholder services for Guinness Flight Funds at
800-915-6566.
Shares of the Fund 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 investments are
as follows:
<TABLE>
<CAPTION>
Minimum
Type of Account Investment
<S> <C>
Regular (new investor) $2,500
Regular (shareholder purchasing another Guinness Flight Fund) $1,000
Retirement $1,000
Gift $250
Pre-authorized investment plan (initial and monthly investments) $100
</TABLE>
The Fund may further reduce or waive the minimum for certain retirement and
other employee benefit plans; for Guinness Flight'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 Fund.
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 Fund. Investments
may be made either by check or by wire.
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 or quarterly investment is $100 per
investment.
PROSPECTUS PAGE 18
<PAGE>
Purchasing by Mail. State Street Bank and Trust Company (the "Transfer Agent")
acts as transfer and shareholder service agent for the Fund. An investor may
purchase shares by sending a check payable to Guinness Flight Investment Funds,
together with an Account Application form, to the Transfer Agent at the
following address:
Guinness Flight Investment Funds
P.O. Box 9288
Boston, MA 02205-8559
Overnight courier deliveries should be sent to:
Boston Financial Data Services
ATTN: Guinness Flight Investment Funds
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" 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, proceeds will not be mailed
until the investment being redeemed has been in the account for 15 calendar
days.
Purchasing by Wire. For an initial purchase of shares of the 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 # 0110 00028
Shareholder and Custody Services
DDA # 99050171
ATTN: (Fund Name)
(Fund Account Number)
PROSPECTUS PAGE 19
<PAGE>
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 the Fund as of that day. Your bank may charge a fee for wiring money
on your behalf.
How to Redeem Shares
General Information. Investors may redeem shares of the 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 Fund may temporarily borrow cash pursuant to a credit
agreement with Deutsche Bank AG to satisfy redemption requests. Payment for
redemption 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
the Fund's net assets are not reasonably practicable; or (d) during any other
period when the Securities and Exchange Commission, by order, so permits.
Redemptions By Telephone. Shareholders may establish telephone redemption
privileges if so elected on the account application. Shares of the 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 Flight Funds will use reasonable procedures in an
attempt to verify the identity of a person making a telephone redemption
request. The Guinness Flight Funds reserves 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 Flight Funds nor its agents will
be liable for any loss, liability or cost which results
PROSPECTUS PAGE 20
<PAGE>
from acting upon instructions of a person believed to be a shareholder with
respect to the telephone redemption privilege. However, if the Guinness Flight
Funds or its agents fail to follow such reasonable procedures, then the Guinness
Flight Funds or its agents may be liable for any losses due to unauthorized or
fraudulent instructions.
Redemptions by Mail. Shareholders may redeem shares of the Fund by writing to
the Transfer Agent at the following address:
Guinness Flight Investment Funds
P.O. Box 9288
Boston, MA 02205-8559
Overnight courier deliveries should be sent to:
Boston Financial Data Services
ATTN: Guinness Flight Investment Funds
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.
The signature on a redemption request must be exactly as the name(s) appear on
the 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 "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 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
PROSPECTUS PAGE 21
<PAGE>
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. 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 Fund may redeem
shares in any account, other than preauthorized investment plan, 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.
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
accounts, 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 the Fund are redeemed, you may recognize a capital gain or loss to be
reported for income tax purposes.
Redemption Fee. On redemptions of shares purchased less than 60 days prior to
redemption, a fee, equal to 2.00% of the value of the shares being redeemed,
shall be charged to any shareholder who redeems his interest in the Fund, such
proceeds to be payable to the Fund. Such redemption fee will not be charged on
shares purchased 60 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. Exchanges into other
Guinness Flight Funds or the SSgA Money Market Fund are considered redemptions
for purposes of the redemption fee.
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 15 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 Fund, will be responsible for any resulting
loss. Such delay may be avoided by purchasing shares by wire or by certified or
official bank checks.
PROSPECTUS PAGE 22
<PAGE>
Shareholder Services
Exchange Privilege. You may exchange shares of the Fund for shares of the other
Guinness Flight Funds by mailing written instructions to the Transfer Agent at
the following address:
Guinness Flight Investment Funds
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. If you select the
exchange privilege on your account application, 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 21.
All exchanges will be made on the basis of the next determined relative net
asset values of the Fund after a completed request is received. Requests for
telephone 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 the Fund for shares of the SSgA Money Market
Fund, a money market mutual fund advised by State Street Bank and Trust Co., 225
Franklin Street, Boston, MA 02110 and not affiliated with the Guinness Flight
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 SSgA Money Market Fund. The exchange privilege does not
constitute an offering or recommendation on the part of the Fund or Guinness
Flight of an investment in the SSgA Money Market Fund.
The SSgA Money Market Fund's fundamental investment objective is to maximize
current income, to the extent consistent with the preservation of capital and
liquidity and the maintenance of a stable $1.00 per share net asset value, by
investing in dollar denominated securities with remaining maturities of one year
or less. Investments in the SSgA Funds are neither insured nor guaranteed by the
U.S. Government. There is no assurance that the SSgA Money Market Fund will
maintain a stable net asset value of $1.00 per share.
Exchange Privilege Annual Limits. The Fund reserves the right to limit the
number of exchanges a shareholder may make in any year to four (4) to avoid
excessive Fund expenses.
PROSPECTUS PAGE 23
<PAGE>
Determination of Net Asset Value
The net asset value per share (or share price) of the Fund is determined as of
4:00 p.m. Eastern Time on each business day. The net asset value per share is
calculated by subtracting the Fund's liabilities from its assets and dividing
the result by the total number of Fund shares outstanding. The determination of
the Fund's net asset value per share is made in accordance with generally
accepted accounting principles. Among other items, the 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 governing Board of Trustees. 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 Fund are declared and paid
semi-annually, normally in June and December. The Fund distributes all or
substantially all of its net investment income and net capital gains (if any) to
shareholders each year. Any net capital gains earned by the 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 the Fund are automatically reinvested on the
ex-dividend date in full and fractional shares of the Fund, unless the
shareholder has made an alternate election as to the method of payment.
Dividends and distributions will be reinvested at the net asset value per share
determined on the ex-dividend date. Shareholders may elect, by written notice to
the Transfer Agent, to receive such distributions, or the dividend portion
thereof, in cash, or to invest such dividends and distributions in additional
shares, including, subject to certain conditions, in shares of other Guinness
Flight Funds. 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 another Guinness Flight
Fund. Such reinvestments into another Guinness Flight 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.
PROSPECTUS PAGE 24
<PAGE>
Any dividend or distribution paid by the Fund has the effect of reducing the net
asset value per share on the ex-dividend date by the amount of the dividend or
distribution. Therefore, a dividend or distribution declared shortly after a
purchase of shares by an investor would represent, in substance, a return of
capital to the shareholder with respect to such shares even though it would be
subject to income taxes, as discussed below.
Tax Matters. The Fund intends to qualify as a regulated investment company for
federal income tax purposes by satisfying the requirements under Subchapter M of
the Internal Revenue Code of 1986, as amended (the "Code"), including the
requirements with respect to diversification of assets, distribution of income
and sources of income. It is the Fund's 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
the Fund will satisfy the distribution requirement of Subchapter M and not be
subject to Federal income taxes or the 4% excise tax.
If the 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 the 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 the 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 the 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 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 Fund may qualify for the dividends-received
deduction. Portions of the Fund's investment income may be subject to foreign
income taxes withheld at the source. If the 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.
PROSPECTUS PAGE 25
<PAGE>
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 of the Fund or another Guinness Flight Fund.
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 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 carefully 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 and such dividend economically constitutes
a return of capital to such investors.
A shareholder will recognize gain or loss upon the sale or redemption of shares
of the 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. 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 Fund may be disallowed
if other shares of the 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 backup 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 Fund. In order to avoid backup
withholding, shareholders must provide the appropriate Fund with a correct
taxpayer identification number (which for an individual is usually his Social
Security number) or certify that the shareholder is a corporation or otherwise
exempt from or not subject to backup 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
PROSPECTUS PAGE 26
<PAGE>
addition, shareholders should consult with their own tax adviser as to the tax
consequences of investments in the Fund, including the application of state and
local taxes which may differ from the federal income tax consequences described
above.
About The Fund
The Fund is a separate series of shares of the Guinness Flight Funds, which is
registered under the 1940 Act as an open-end management investment company.
Guinness Flight Funds was formed as a Maryland corporation on January 7, 1994
and converted to a Delaware business trust on April 28, 1997. The Fund has its
own investment objective and policies designed to meet specific investment
goals, operates as a non-diversified open-end management investment company and
expects to be treated as a regulated investment company for federal income tax
purposes.
The Fund invests in securities of different issuers and industry classifications
in an attempt to spread and reduce the risks inherent in all investing. Subject
to any applicable cap on new investors, the Fund continuously offers new shares
for sale to the public, and stands ready to redeem its outstanding shares for
cash at their net asset value. Guinness Flight continuously reviews and, from
time to time, changes the portfolio holdings of the Fund in pursuit of the
Fund's investment objective.
Shares of the 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 Fund --
Voting Rights" in the Statement of Additional Information.
PROSPECTUS PAGE 27
<PAGE>
General Information
Investment Adviser. Guinness Flight Investment Management Limited, 225 South
Lake Avenue, Suite 777, Pasadena, California 91101, serves as investment adviser
for the Fund.
Administrator. Investment Company Administration Corporation, 2025 East
Financial Way, Suite 101, Glendora, California 91741, serves as administrator of
the Fund.
Custodian. Investors Bank and Trust Company, 200 Clarendon Street, 16th Floor,
Mailcode ADM 27, Boston, Massachusetts 02116, serves as the custodian of the
Fund. Generally, the custodian holds the securities, cash and other assets of
the Fund.
Transfer Agent. State Street Bank and Trust Company, P.O. Box 1912, Boston,
Massachusetts 02105, serves as transfer agent of the Fund. Generally the
transfer agent provides recordkeeping services for the Fund and its
shareholders.
Legal Counsel. Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York,
New York 10022 serves as counsel to the Guinness Flight Funds.
Independent Accountants. Ernst & Young LLP, 515 South Flower Street, Los
Angeles, CA 90071 serves as the independent accountants to the Fund. Generally,
the independent accountants will audit the financial statement and the financial
highlights of the Fund, as well as provide reports to the Trustees.
Distributor. First Fund Distributors, Inc., 4455 East Camelback Road, Suite
261E, Phoenix, Arizona 85018, serves as distributor for the Fund.
Other Information. This prospectus sets forth basic information that investors
should know about the Fund 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 Fund at
1-800-915-6565. This prospectus omits certain information contained in the
registration statement filed with the Securities and Exchange Commission. Copies
of the registration statement, including items omitted from this prospectus, may
be obtained from the Securities and Exchange Commission by paying the charges
prescribed under its rules and regulations.
PROSPECTUS PAGE 28
<PAGE>
Rule 497(c)
Registration No. 33-75340
STATEMENT OF ADDITIONAL INFORMATION
GUINNESS FLIGHT INVESTMENT FUNDS
225 South Lake Avenue, Suite 777
Pasadena, California 91101
GUINNESS FLIGHT MAINLAND CHINA FUND
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated November 3, 1997 (the "Prospectus"), pursuant to which
the Guinness Flight Mainland China Fund is offered. Please retain this document
for future reference.
For a free copy of the Prospectus, please call the Fund at 1-800-915-6565
GENERAL INFORMATION AND HISTORY................................. 2
INVESTMENT OBJECTIVE AND POLICIES............................... 2
INVESTMENT STRATEGIES AND RISKS................................. 3
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS................... 13
INVESTMENT RESTRICTIONS AND POLICIES............................ 14
PORTFOLIO TRANSACTIONS.......................................... 15
COMPUTATION OF NET ASSET VALUE.................................. 16
PERFORMANCE INFORMATION......................................... 16
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................. 17
TAX MATTERS..................................................... 17
MANAGEMENT OF THE FUND.......................................... 23
THE INVESTMENT ADVISER AND ADVISORY AGREEMENT................... 24
DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN.................... 26
DESCRIPTION OF THE FUND......................................... 26
SHAREHOLDER REPORTS............................................. 27
Dated: November 3, 1997
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the Prospectus, Guinness Flight Investment
Funds ("Guinness Flight Funds") is a Delaware business trust organized as an
open-end, series, management investment company. Currently, Guinness Flight
Funds offers five separate series portfolios: Guinness Flight Asia Blue Chip
Fund, Guinness Flight Asia Small Cap Fund, Guinness Flight China & Hong Kong
Fund, Guinness Flight Global Government Bond Fund and Guinness Flight Mainland
China Fund, each of which has unique investment objectives and strategies. For
purposes of this statement of additional information ("Statement of Additional
Information"), references to the "Fund" are to the Guinness Flight Mainland
China Fund.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL INFORMATION ABOUT THE FUND
The Fund's investment objective is long-term capital
appreciation through investments in equity securities of companies which are
located in Mainland China and in companies located outside Mainland China which
have a significant part of their interests in China. In pursuit of its
investment objective, the Fund as a non-fundamental policy intends to invest 65%
to 100% of its total assets in a portfolio of equity securities of companies
which have "B" shares listed in Shanghai or Shenzhen, "H" shares and "Red Chips"
listed in Hong Kong, and "N" shares listed in New York (collectively, "Mainland
China Companies"). The Fund does not intend to make equity investments in
companies other than Mainland China Companies, except where such companies are
either Hong Kong registered companies or are companies registered elsewhere that
have a material exposure either directly or indirectly to markets or economic
developments in Mainland China. The investment objective of the Fund is a
fundamental policy and may not be changed except by a majority vote of
shareholders.
The Fund does not intend to employ leveraging techniques.
Accordingly, the Fund will not borrow if amounts borrowed exceed 5% of its total
assets at the time the loan is made.
When the Fund determines that adverse market conditions exist,
the Fund may adopt a temporary defensive posture and invest its entire portfolio
in Money Market Instruments. In addition, the Fund may invest in Money Market
Instruments in anticipation of investing cash positions. "Money Market
Instruments" are 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 Flight
Funds' Board of Trustees; and (e) repurchase agreements with banks and
broker-dealers with respect to such securities. While the Fund does not intend
to limit the amount of its assets invested in Money Market Instruments, except
to the extent believed necessary to achieve its investment objective, the Fund
does not expect under normal market conditions to have a substantial portion of
its assets invested in Money Market Instruments. To the extent the Fund is
invested in Money Market Instruments for defensive purposes or in anticipation
of investing cash positions, the Fund's investment objective may not be
achieved.
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
the Fund.
-2-
<PAGE>
The Fund may invest indirectly in issuers through sponsored or
unsponsored American Depository Receipts ("ADRs"), European Depository Receipts
("EDRs"), Global Depository Receipts ("GDRs"), Global Depository Shares ("GDSs")
and other types of depository receipts (which, together with ADRs, EDRs, GDRs,
and GDSs, are hereinafter referred to as "Depository Receipts"). Depository
Receipts may not necessarily be denominated in the same currency as the
underlying securities into which they may be converted. In addition, the issuers
of the stock of unsponsored Depository Receipts are not obligated to disclose
material information in the United States and, therefore, there may not be a
correlation between such information and the market value of the Depository
Receipts. ADRs are Depository Receipts typically issued by a United States bank
or trust company which evidence ownership of underlying securities issued by a
foreign corporation. GDRs and other types of Depository Receipts are typically
issued by foreign banks or trust companies, although they also may be issued by
either a foreign or a United States corporation. Generally, Depository Receipts
in registered form are designed for use in the United States securities markets
and Depository Receipts in bearer form are designed for use in securities
markets outside the United States. For purposes of the Fund's 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 the 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 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 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 the Fund's investment restriction on illiquid securities, discussed
below.
The Fund, together with any of its "affiliated persons," as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), may
only purchase up to 3% of the total outstanding securities of any underlying
investment company. Accordingly, when the Fund or such "affiliated persons" hold
shares of an underlying investment company, the 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 Fund does 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.
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 the Fund's portfolio or an
increase in the price of securities which it plans to purchase for the 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
the Fund's current return.
-3-
<PAGE>
The ability of the Fund to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. Although the Fund 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 the 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 a securities exchange (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 a contract can result in substantial
unrealized gains or losses. However, to the extent the 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
the Fund will be able to utilize these instruments effectively for the purposes
stated below. Furthermore, the Fund's ability to engage in options and futures
transactions may be limited by tax considerations. Although the Fund will only
engage in options and futures transactions for limited purposes, such
transactions involve certain risks. The Fund will not engage in options and
futures transactions for leveraging purposes.
Upon purchasing futures contracts of the type described above,
the Fund will maintain in a segregated account with its 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 Fund will
maintain in a segregated account with its 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
The 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 the 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).
The Fund 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, the Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option.
-4-
<PAGE>
The 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 Fund 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 the
Fund.
Options written by the Fund 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. The 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 a covered call option. 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, the 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, the 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 the Fund may or may not realize a loss.
To the extent that a secondary market is available on any
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
The 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 Fund
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.
The 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 Fund
will reduce any profit they might have realized had they bought the underlying
security at the time they purchased the call option by the premium paid for the
call option and by transaction costs.
-5-
<PAGE>
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES
The Fund may purchase and sell options on stock indices and
stock index futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific
securities except that, rather than the right to take or make delivery of the
specific security at a specific price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of that stock index is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars multiplied by a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on specific
securities, all settlements of options on stock indices are in cash and gain or
loss depends on general movements in the stocks included in the index rather
than on price movements in particular stocks. Currently, index options traded
include the S&P 100 Index, the S&P 500 Index, the NYSE Composite Index, the AMEX
Market Value Index, the National Over-the-Counter Index and other standard
broadly based stock market indices.
A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
dollar amount multiplied by the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. For example, the 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 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 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.
PURCHASE AND SALE OF INTEREST RATE FUTURES
The 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.
The 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 Fund does not consider purchases of futures contracts to be a speculative
practice under these circumstances. In a substantial majority of these
transactions, the Fund will purchase securities upon termination of the futures
contract.
The 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 Fund 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 Fund in the
form of dealer spreads and brokerage commissions.
-6-
<PAGE>
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 the Fund's short position in the
futures contracts will also tend to increase, thus offsetting all or a portion
of the depreciation in the market value of the Fund's investments which are
being hedged. While the Fund 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
The Fund may write call options and purchase call and put
options on stock index and interest rate futures contracts. The Fund 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, the
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, the Fund may buy or sell foreign currencies or may deal
in forward currency contracts. The Fund may also invest in currency futures
contracts and related options. If a fall in exchange rates for a particular
currency is anticipated, the 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, the 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 Fund
will be covered.
A currency futures contract sale creates an obligation by the
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 the 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 Fund will write (sell) only covered call options on
currency futures. This means that the Fund 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 Fund 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 Fund in cash, cash
equivalents or other liquid securities in a segregated account with its
custodian. If at the close of business on any day the market value of the call
purchased by the Fund falls below 100% of the market value of the call written
by the Fund, the Fund will so segregate an amount of cash, cash equivalents or
other liquid securities equal in value to the difference. Alternatively, the
Fund may cover the call option through segregating with the custodian an
-7-
<PAGE>
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 Fund reserves the right to employ them to the extent consistent with
applicable regulatory and exchange requirements.
In connection with transactions in stock index options, stock
index futures, interest rate futures, foreign currency futures and related
options on such futures, the Fund 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
The 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, the Fund may
purchase put options on the foreign currency. If the value of the currency does
decline, the Fund 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, the 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 the 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, the 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 the 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, the 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 Fund intends to write only covered call options on foreign
currencies. A call option written on a foreign currency by the Fund is "covered"
if the Fund owns the underlying foreign currency covered by the call or has an
absolute and immediate right to acquire that foreign currency without additional
cash consideration (or for additional cash consideration held in a segregated
account by its custodian, 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.
-8-
<PAGE>
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The 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. The 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 the 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 the 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 the 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, the 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
the 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 the Fund than if it had not entered into
such contracts.
Generally, the Fund will not enter into a forward foreign
currency exchange contract with a term of greater than one year. At the maturity
of the contract, the 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 the 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 the Fund retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. If the 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.
-9-
<PAGE>
The Fund's dealing in forward foreign currency exchange
contracts will be limited to the transactions described above. Of course, the
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 the Fund's portfolio securities against the decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain which might result should
the value of such currency increase.
ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS, FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
In addition, futures contracts in which the 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 the
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 Securities and Exchange Commission ("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 the
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
-10-
<PAGE>
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 the Fund's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States and
the United Kingdom, (d) the imposition of different exercise and settlement
terms and procedures and margin requirements than in the United States, and (e)
lesser trading volume.
REGULATORY MATTERS
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
SEC 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 connection with its proposed futures and options
transactions, the 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 Fund is eligible
for, and is claiming, exclusion from the definition of the term commodity pool
operator in connection with the operations of the Fund, in accordance with
subparagraph (1) of paragraph (a) of CFTC Rule 4.5, because the Fund operates in
a manner such that:
(i) the Fund uses 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 the Fund's activities in the underlying
cash market but would not come within
-11-
<PAGE>
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 Fund does 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 the Fund's assets, after taking into
account unrealized profits and unrealized losses on any such
contracts it has entered into; provided, however, that in the
case of an option that is in-the-money at the time of
purchase, the in-the-money amount as defined in CFTC Rule
190.01(x) may be excluded in computing such five (5) percent;
The Fund will conduct their purchases and sales of futures
contracts and writing of related options transactions in accordance with the
foregoing.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. Under a
repurchase agreement, the 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. The Fund's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When the 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 Fund has adopted the following investment policy, which
may be changed by the vote of the Board of Trustees. The Fund will not invest in
illiquid securities if immediately after such investment more than 15% of the
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 the
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
-12-
<PAGE>
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 of 1933, as amended (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 SEC has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. Guinness Flight anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the development
of automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
Guinness Flight will monitor the liquidity of restricted
securities in the Fund's portfolio under the supervision of the Fund's Board of
Trustees. 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 Fund's assets will be invested principally in securities
of entities in foreign markets and substantially all of the income received by
the Fund will be in foreign currencies. If the value of the foreign currencies
in which the 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 the Fund's performance.
Changes in foreign currency exchange rates also will affect
the value of securities in the Fund's portfolio and the unrealized appreciation
or depreciation of investments. Further, the 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 the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the
-13-
<PAGE>
foreign currency exchange market, or through entering into forward, futures or
options contracts to purchase or sell foreign currencies.
The 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 the 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 the Fund. As used in the Prospectus and this
Statement of Additional Information, the term "majority of the outstanding
shares" of the Fund means 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 Fund's
investment restrictions set forth in their entirety.
INVESTMENT RESTRICTIONS
The Fund may not:
1. Issue senior securities, except that the 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. The 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, 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 are not fundamental and may be changed by
the Board of Trustees without shareholder approval. The following are the Fund's
investment policies set forth in their entirety.
INVESTMENT POLICIES
The 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.
-14-
<PAGE>
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.
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 Fund by Guinness Flight subject to the supervision
of the Guinness Flight Funds and the Board of Trustees and pursuant to authority
contained in the investment advisory agreement (the "Advisory Agreement")
between the Fund 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 the Fund or to Guinness Flight for the
Fund's use, which in the opinion of the Board of Trustees, 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 the Fund or to Guinness
Flight. Such allocation shall be in such amounts as Guinness Flight Funds shall
determine and Guinness Flight shall report regularly to Guinness Flight Funds
who will in turn report to the Board of Trustees 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 Fund. 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 Fund and is authorized
to use First Fund Distributors, Inc. (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 the 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 Flight 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 Flight Fund's overall responsibilities
to the 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
-15-
<PAGE>
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 the Fund is concerned. In other cases, however, the ability of the Fund
to participate in volume transactions will produce better executions for the
Fund.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Fund is determined at 4:00 p.m. New
York time, on each day that the New York Stock Exchange is open for business and
on such other days as there is sufficient trading in the Fund's securities to
affect materially the net asset value per share of the Fund. The Fund will be
closed on New Years Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
The Fund will invest in foreign securities, and as a result,
the calculation of the Fund's 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 the 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 Trustees. Portfolio securities of the 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 Trustees.
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 Trustees of the Fund.
Money market instruments with less than sixty days remaining
to maturity when acquired by the Fund will be valued on an amortized cost basis
by the Fund, 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 the 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 Trustees 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 the
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 the
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
-16-
<PAGE>
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 SEC,
mutual funds which advertise 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 period or at the end of the
1, 5 or 10 year period (or fractional
portion thereof)
In calculating the ending redeemable value, all dividends and
distributions by the Fund are assumed to have been reinvested at net asset value
as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value.
The 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
the 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 SEC's rules.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Fund has elected to be governed by Rule 18f-1 of the 1940
Act, under which the 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, the 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 the 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 the 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
The Fund has elected to be taxed as a regulated investment
company for federal income tax purposes under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As a regulated investment
company, the 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
-17-
<PAGE>
(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 the 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 will 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) for
taxable years beginning on or before August 5, 1997, derive less than 30% of its
gross income (exclusive of certain gains on designated hedging transactions that
are offset by realized or unrealized losses on offsetting positions) from the
sale or other disposition of stock, securities or foreign currencies (or
options, futures or forward contracts thereon) held for less than three months
(the "Short-Short Gain Test"). However, foreign currency gains, including those
derived from options, futures and forwards, will not in any event be
characterized as Short-Short Gain if they are directly related to the regulated
investment company's investments in stock or securities (or options or futures
thereon). Because of the Short-Short Gain Test, the 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 the 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 the 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 such sale
or other disposition of securities for this purpose. The Short-Short Gain Test
will not apply to taxable years beginning after August 5, 1997.
In general, gain or loss recognized by the Fund on the
disposition of an asset will be a capital gain or loss. In addition, gain will
be recognized as a result of certain constructive sales, including short sales
"against the box." However, gain recognized on the disposition of a debt
obligation purchased by the Fund at a market discount (generally, at a price
less than its principal amount) will be treated as ordinary income to the extent
of the portion of the market discount which accrued during the period of time
the Fund held the debt obligation. In addition, under the rules of Code Section
988, gain or loss recognized on the disposition of a debt obligation denominated
in a foreign currency or an option with respect thereto (but only to the extent
attributable to changes in foreign currency exchange rates), and gain or loss
recognized on the disposition of a foreign currency forward contract, futures
contract, option or similar financial instrument, or of foreign currency itself,
except for regulated futures contracts or non-equity options subject to Code
section 1256 (unless the 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 the Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (as applicable,
depending on the type of the Fund) (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 the 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 the 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, the 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.
-18-
<PAGE>
Any gain recognized by the Fund on the lapse of, or any gain
or loss recognized by the 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 the 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, for
taxable years beginning on or before August 5, 1997, the 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.
Certain transactions that may be engaged in by the 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. The 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. Generally, deemed 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.
The Fund may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If the Fund invests in a PFIC, it may elect to
treat the PFIC as a qualified 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. In the alternative, for tax years beginning after December 31, 1997, a
Fund that invests in stock of a PFIC may make a mark-to-market election with
respect to such stock. Pursuant to such election, the Fund will include as
ordinary income any excess of the fair market value of such stock at the close
of any taxable year over the Fund's adjusted tax basis in the stock. If the
adjusted tax basis of the PFIC stock exceeds the fair market value of the stock
at the end of a taxable year, such excess will be deductible as ordinary loss in
the amount equal to the lesser of the amount of such excess or the net
mark-to-market gains on the stock that the Fund included in income in previous
years. The Fund's holding period with respect to the PFIC stock subject to the
election will commence on the first day of the next taxable year. If the Fund
makes the election in the first taxable year it holds PFIC stock, it will not
incur the tax described below. If the Fund does not elect to treat the PFIC as a
QEF and does not make a mark-to-market election, 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, the sum of (i) the amount of gain or excess distribution
allocated to such prior year multiplied by the highest tax rate (individual or
corporate) in effect for such prior year and (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.
-19-
<PAGE>
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
(including, to the extent provided in Treasury Regulations, losses recognized
pursuant to the PFIC mark-to-market election) incurred after October 31 as if it
had been incurred in the succeeding year.
In addition to satisfying the requirements described above,
the 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
the 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 each of
which the Fund has not invested more than 5% of the value of the Fund's total
assets in securities of such issuer and 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 the 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 its ordinary income for such 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 and ordinary gains or losses arising
as a result of a PFIC mark-to-market election (or upon an actual disposition of
the PFIC stock subject to such election) 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).
The 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 the Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Fund Distributions
The 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.
-20-
<PAGE>
The Fund may either retain or distribute to shareholders its
net capital gain for each taxable year. The Fund currently intends to distribute
any such amounts. Net capital gain that is distributed and designated as a
capital gain dividend 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 the Fund prior to the date on which the shareholder
acquired his shares.
Conversely, if the 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 the 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 the 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 may entitle the 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 the Fund's assets to be invested in
various countries is not known. If more than 50% of the value of the Fund's
total assets at the close of its taxable year consist of the stock or securities
of foreign corporations, the Fund may elect to "pass through" to the Fund's
shareholders the amount of foreign taxes paid by the Fund. If the 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 the 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 the 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 the Fund will be treated in the manner
described above regardless of whether they 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 the Fund reflects undistributed net
investment income or recognized capital gain net income, or unrealized
appreciation in the value of the assets of the Fund, distributions of such
amounts will be taxable to the shareholder in the manner described above,
although such distributions economically constitute a return of capital to the
shareholder.
Ordinarily, shareholders are required to take distributions by
the 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 the 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.
The 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
-21-
<PAGE>
subject to backup withholding 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 an "exempt recipient" (such
as a corporation).
Sale or Redemption of Shares
A shareholder will recognize gain or loss on the sale or
redemption of shares of the 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 the 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 the 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. Long- term capital gain
recognized by an individual shareholder will be taxed at the lowest rates
applicable to capital gains if the holder has held such shares for more than 18
months at the time of the sale. 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 at least 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
the Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from the 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 the
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 generally would be exempt from U.S. federal income tax on gains
realized on the sale of shares of the Fund, capital gain dividends and amounts
retained by the Fund that are designated as undistributed capital gains.
If the income from the 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, the 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 their foreign status.
The tax consequences to a foreign shareholder entitled to
claim the benefits of an applicable tax treaty may be different from those
described herein. Foreign shareholders are urged to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in the Fund, including the applicability of foreign taxes.
-22-
<PAGE>
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 the Fund.
MANAGEMENT OF THE FUND
The Board of Trustees and executive officers of the Fund and
their principal occupations for the past five years are listed below. The
address of each Trustee is 225 South Lake Avenue, Suite 777, Pasadena,
California, 91101.
James I. Fordwood* -- Trustee. 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* -- Trustee. 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* --Trustee. 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.* -- Trustee. 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.
-23-
<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
Trustee for the Guinness Flight Fund's most recently completed fiscal year:
<TABLE>
<CAPTION>
Total Compen-
Aggregate Pension or sation from
Compensation Retirement Benefits Estimated Annual Guinness Flight
Name of Person, from Guinness Accrued as Part of Benefits Upon Funds Paid to
Position Flight Funds Fund Expenses Retirement Trustees
- -------- ------------ ------------- ---------- --------
<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>
Effective January 1, 1997, each Trustee who is not an
"interested person" of the Guinness Flight Funds receives an annual fee of
$7,500 (with the exception of the Chairman, who receives $8,500) allocated
equally among all the Guinness Flight Funds, plus expenses incurred by the
Trustees in connection with attendance at meetings of the Board of Trustees and
their Committees. As of the date of this Statement of Additional Information, to
the best of the knowledge of the Guinness Flight Funds, the Board of Trustees
and officers of the Guinness Flight Funds, as a group, owned of record less than
1% of the Fund's outstanding shares.
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS
Guinness Flight furnishes investment advisory services to the
Fund. Under the Advisory Agreement, Guinness Flight directs the investments of
the Fund in accordance with the investment objective, policies, and limitations
provided in the Fund's Prospectus or other governing instruments, the 1940 Act,
and
-24-
<PAGE>
rules thereunder, and such other limitations as the Fund 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 Fund;
pays the salaries and fees of all officers of the Guinness Flight Funds other
than those whose salaries and fees are paid by Guinness Flight Fund's
administrator or distributor; and pays the salaries and fees of all Trustees of
Guinness Flight Funds who are "interested persons" of Guinness Flight Funds or
of Guinness Flight and of all personnel of Guinness Flight 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 Fund, 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 Fund.
The investment policies and all other actions of the Fund are at all times
subject to the control and direction of Guinness Flight Fund's Board of
Trustees.
Guinness Flight performs (or arranges for the performance of)
the following management and administrative services necessary for the operation
of Guinness Flight Funds: (i) with respect to the Guinness Flight 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 Guinness Flight Funds as an investment
vehicle; and (iii) providing administrative services other than those provided
by Guinness Flight Fund's administrator.
Guinness Flight also furnishes such reports, evaluations,
information or analyses to Guinness Flight Funds as Guinness Flight Fund's Board
of Trustees may request from time to time or as Guinness Flight may deem to be
desirable. Guinness Flight makes recommendations to Guinness Flight Fund's Board
of Trustees with respect to Guinness Flight Fund's policies, and carries out
such policies as are adopted by the Trustees. Guinness Flight, subject to review
by the Board of Trustees, furnishes such other services as it determines to be
necessary or useful to perform its obligations under the Advisory Agreement.
All other costs and expenses not expressly assumed by Guinness
Flight under the Advisory Agreement or by the Fund's administrator under the
administration agreement between it and the Guinness Flight Funds on behalf of
the Fund shall be paid by the Fund from the assets of the Fund, including, but
not limited to fees paid to Guinness Flight and the Fund's administrator,
interest and taxes, brokerage commissions, insurance premiums, compensation and
expenses of the Trustees other than those affiliated with Guinness Flight 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 Fund, expenses, including clerical expenses, incident to
the issuance, redemption or repurchase of shares of the Fund, 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 Fund or their
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 Fund, all other expenses incidental to
holding meetings of the Fund's shareholders, expenses connected with the
execution, recording and settlement of portfolio securities transactions, fees
and expenses of the Fund's custodian for all services to the Fund, including
safekeeping of funds and securities and maintaining required books and accounts,
expenses of calculating net asset value of the shares of the Fund, industry
membership fees allocable to the Fund, and such extraordinary expenses as may
arise, including litigation affecting the Fund and the legal obligations which
the Fund may have to indemnify the officers and Trustees with respect thereto.
Expenses which are attributable to the Fund are charged
against the income of the Fund in determining net income for dividend purposes.
Guinness Flight, from time to time, may voluntarily waive all or a portion of
its fees payable under the Agreement.
The Advisory Agreement was approved by the Board of Trustees
on September 5, 1997. The Advisory Agreement will remain in effect for two years
from the date of execution and shall continue from year to year thereafter if it
is specifically approved at least annually by the Board of Trustees and the
affirmative vote of a majority of the Trustees who are not parties to the
Advisory Agreement or "interested persons" of any such
-25-
<PAGE>
party by votes cast in person at a meeting called for such purpose. The Trustees
or Guinness Flight may terminate the Advisory Agreement on 60 days written
notice without penalty. The Advisory 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
Fund's average daily net assets.
DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN
Guinness Flight Funds has entered into separate administration
and distribution agreements (the "Administration Agreement" and "Distribution
Agreement") with respect to the Fund with Investment Company Administration
Corporation ("Administrator") and First Fund Distributors, Inc., the
Distributor, respectively. Under the Distribution Agreement, the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchases for the Fund's 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 Fund 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 Fund.
The Fund 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 Fund presently pays, and will continue
to pay, an investment advisory fee to Guinness Flight and an administration fee
to the Administrator. To the extent that any payments made by the Fund to
Guinness Flight or the Administrator, including payment of fees under the
Advisory Agreement 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 Fund within the context of Rule 12b-1 under the 1940
Act, then such payments shall be deemed to be authorized by this Plan.
The Distribution Plan and related agreements were approved by
the Board of Trustees including all of the "Qualified Trustees" (Trustees who
are not "interested" persons of the Fund, as defined in the 1940 Act, and who
have no direct or indirect financial interest in the Distribution Plan or any
related agreement). In approving the Distribution Plan, in accordance with the
requirements of Rule 12b-1 under the 1940 Act, the Board of Trustees (including
the Qualified Trustees) considered various factors and determined that there is
a reasonable likelihood that the Distribution Plan will benefit the Fund and its
shareholders. The Distribution Plan may not be amended to increase materially
the amount to be spent by the Fund under the Distribution Plan without
shareholder approval, and all material amendments to the provisions of the
Distribution Plan must be approved by a vote of the Board of Trustees and of the
Qualified Trustees, cast in person at a meeting called for the purpose of such
vote. During the continuance of the Distribution Plan, Guinness Flight will
report in writing to the Board of Trustees quarterly the amounts and purposes of
such payments for services rendered to shareholders pursuant to the Distribution
Plan. Further, during the term of the Distribution Plan, the selection and
nomination of those Trustees who are not "interested" persons of the Fund must
be committed to the discretion of the Qualified Trustees. The Distribution 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 Fund's
outstanding voting shares or by the Fund's Trustees and (b) by the vote of a
majority of the Qualified Trustees.
DESCRIPTION OF THE FUND
Shareholder and Trustees Liability. The Fund is a series of
Guinness Flight Funds, a Delaware business trust.
The Delaware Trust Instrument provides that the Trustees shall
not be liable for any act or omission as Trustee, but nothing protects a Trustee
against liability to Guinness Flight Funds or to its shareholders to which he or
she would otherwise be subject by reason of willful misfeasance, bad faith,
gross
-26-
<PAGE>
negligence, or reckless disregard of the duties involved in the conduct of his
or her office. Furthermore, a Trustee is entitled to indemnification against
liability and to all reasonable expenses, under certain conditions, to be paid
from the assets of Guinness Flight Funds; provided that no indemnification shall
be provided to any Trustee who has been adjudicated by a court to be liable to
Guinness Flight Funds or the shareholders by reason of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office or not to have acted in good faith in the reasonable
belief that his action was in the best interest of Guinness Flight Funds.
Guinness Flight Funds may advance money for expenses, provided that the Trustee
undertakes to repay Guinness Flight Funds if his or her conduct is later
determined to preclude indemnification, and one of the following conditions are
met: (i) the Trustee provides security for the undertaking; (ii) Guinness Flight
Funds is insured against losses stemming from any such advance; or (iii) there
is a determination by a majority of the Guinness Flight Fund's independent
non-party Trustees, or by independent legal counsel, that there is reason to
believe that the Trustee ultimately will be entitled to indemnification.
Voting Rights. Shares of the 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 Trustees.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the
investments of the Fund and other information. In addition, shareholders will
receive annual financial statements audited by the Fund's independent
accountants.
-27-
