Rule 497(c)
Registration No. 33-75340
GUINNESS FLIGHT
PROSPECTUS April 28, 1998
ASIA BLUE CHIP FUND
ASIA SMALL CAP FUND
CHINA & HONG KONG FUND
MAINLAND CHINA FUND
GLOBAL GOVERNMENT BOND 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 Asia Blue
Chip Fund, Guinness Flight Asia Small Cap Fund, Guinness Flight China & Hong
Kong Fund, Guinness Flight Mainland China Fund, or the Guinness Flight Global
Government Bond Fund match your own. It should be retained for future reference.
A Statement of Additional Information, dated April 29, 1998 has been filed with
the Securities and Exchange Commission and is incorporated herein by reference.
The Statement of Additional Information is available without charge upon request
by calling the Funds at 1-800-915-6565.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, 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.
Summary............................................... 4
Summary of The Funds' Expenses....................... 6
Financial Highlights...................................8
Investment Objectives, Programs and Limitations......14
Investment Strategies, Policies and Risks............19
Risk Considerations.................................. 21
Performance.......................................... 26
The Funds' Management................................ 26
How to Purchase Shares............................... 30
How to Redeem Shares................................. 33
Shareholder Services................................. 36
Determination of Net Asset Value.................... 38
Dividends, Distributions and Tax Matters............ 38
About the Funds...................................... 41
General Information.................................. 41
GUINNESS FLIGHT ASIA BLUE CHIP FUND
The "Asia Blue Chip Fund's" investment objective is long-term capital
appreciation through investments in equity securities of well established and
sizable companies located in the Asian continent. In pursuit of its investment
objective, the Asia Blue Chip Fund intends to invest 65% to 100% of its total
assets in a portfolio of "blue chip" companies traded primarily on the markets
of the Asian continent. For the purposes of this Fund, the Investment Adviser
has defined a "blue chip" company to be a company that has a market
capitalization of at least $1 billion and a reputation for quality and wide
acceptance of its products or services, as well as a strong history of
profitability.
Generally, the Asian continent includes the relatively more developed markets of
Hong Kong, Singapore, Malaysia, and Thailand, as well as the relatively less
developed and emerging markets of Korea and Taiwan in North Asia; of China; of
Indonesia, the Philippines, and Vietnam in the ASEAN region; and of India,
Pakistan, Sri Lanka, and Bangladesh in East Asia. Under normal market
conditions, the Asia Blue Chip Fund will invest in a minimum of four countries.
An investment in this Fund may be more volatile than an investment in a fund
which invests only in U.S. "blue chip" companies. See "Investment Objectives,
Programs and Limitations," for a more detailed discussion.
GUINNESS FLIGHT ASIA SMALL CAP FUND
The "Asia Small Cap Fund's" investment objective is long-term capital
appreciation through investments in equity securities of smaller capitalization
issuers located in the Asian continent. In pursuit of its investment objective,
the Asia Small Cap Fund intends to invest 65% to 100% of its total assets in a
portfolio of equity securities of companies traded primarily on the markets of
the Asian continent that have a market capitalization of no more than $1
billion.
Generally, the Asian continent includes the relatively more developed markets of
Hong Kong, Singapore, Malaysia, and Thailand, as well as the relatively less
developed and emerging markets of Korea and Taiwan in North Asia; of China; of
2
<PAGE>
Indonesia, the Philippines, and Vietnam in the ASEAN region; and of India,
Pakistan, Sri Lanka and Bangladesh in East Asia. Under normal market conditions,
the Asia Small Cap Fund will invest in a minimum of four countries. See
"Investment Objectives, Programs and Limitations," for a more detailed
discussion.
GUINNESS FLIGHT CHINA & HONG KONG FUND
The "China & Hong Kong Fund" seeks to provide investors with long- term capital
growth through investments in securities of China and Hong Kong. Under normal
conditions, 85% to 100% of the China & Hong Kong Fund's total assets will be
invested in equity securities primarily traded in the markets of China and Hong
Kong or in equity securities of companies that derive a substantial portion of
their revenues from business activities with or in China and/or Hong Kong, but
which are listed on major exchanges elsewhere (e.g., London, New York,
Singapore, and Australia). To date, a majority of the securities held by the
China & Hong Kong Fund have been listed in Hong Kong. See "Investment
Objectives, Programs and Limitations," for a more detailed discussion.
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 listed in Hong
Kong, shares listed in Hong Kong and 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.
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
The "Global Government Bond Fund" intends to provide investors with both current
income and capital appreciation. The Global Government Bond Fund will invest in
the debt instruments of governments throughout the world. See "Investment
Objectives, Programs and Limitations," for a more detailed discussion.
3
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SUMMARY
THE FUNDS. Guinness Flight Investment Funds (the "Guinness Flight Funds") is a
Delaware business trust organized as an open-end, series, management investment
company. Currently, the Guinness Flight Funds offer five separate series
portfolios:
Guinness Flight Asia Blue Chip Fund (the "Asia Blue Chip Fund"), Guinness Flight
Asia Small Cap Fund (the "Asia Small Cap Fund"), Guinness Flight China & Hong
Kong Fund (the "China & Hong Kong Fund"), Guinness Flight Mainland China Fund
(the "Mainland China Fund"), and Guinness Flight Global Government Bond Fund
(the "Global Government Bond Fund")(collectively, the "Funds"), each of which
pursues unique investment strategies.
RISK CONSIDERATIONS. An investor should be aware that there are risks associated
with certain investment techniques and strategies employed by the Funds,
including those relating to investments in foreign securities. Such risks
include, among others, currency fluctuations, expropriation, confiscation,
diplomatic developments, and social instability. Each Fund's net asset value per
share can be expected to fluctuate. Accordingly, investors should consider an
investment in a Fund as a supplement to an overall investment program and should
invest only if they are willing to undertake the risks involved. See "Investment
Strategies, Policies and Risks" and "Other Risk Considerations."
THE INVESTMENT ADVISER. Guinness Flight Investment Management Limited ("Guinness
Flight") serves as the Funds' investment adviser pursuant to an investment
advisory agreement (the "Advisory Agreement"). Under the terms of the Advisory
Agreement, Guinness Flight supervises all aspects of the Funds' operations and
provides investment advisory services to the Funds. As compensation for these
services, Guinness Flight receives a fee based on the Funds' average daily net
assets. See "The Funds' Management ."
PURCHASING SHARES. Shares of the Funds are offered by this Prospectus at net
asset value. The Mainland China Fund will cease offering its shares 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 time. The minimum investment in the Funds is as follows:
Minimum
Type of Account Investment
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
The Funds may reduce or waive the minimum investment under certain conditions.
See "How to Purchase Shares."
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EXCHANGE PRIVILEGE. Shares of a Fund may be exchanged for shares of any other
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."
REDEEMING SHARES. Shareholders may redeem all or a portion of their shares at
net asset value . A redemption fee of 1.00% will be charged to any shareholder
of the Asia Blue Chip Fund, Asia Small Cap Fund or China & Hong Kong Fund who
redeems shares purchased less than 30 days prior to redemption, and a redemption
fee of 2.00% will be charged to any shareholder of the Mainland China Fund who
redeems shares purchased less than 60 days prior to redemption. Exchanges
between the Funds or into the SSgA Money Market Fund are considered redemptions
for purposes of the redemption fee. See "How to Redeem Shares" and "Redemption
Fee."
DISTRIBUTIONS. The Asia Blue Chip Fund, Asia Small Cap Fund , China & Hong Kong
Fund and Mainland China Fund declare and pay dividends from net investment
income, if any, on a semi-annual basis. The Global Government Bond Fund declares
and pays dividends monthly. In addition, the Funds make distributions of
realized capital gains, if any, on a semi-annual basis. Dividends and
distributions of the Funds may be paid directly to you by check, or reinvested
in additional shares of the Funds, including, subject to certain conditions, in
shares of a Fund other than the Fund making the distribution. See "Dividends,
Distributions and Tax Matters."
5
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SUMMARY OF THE FUNDS' EXPENSES
A. SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
Asia Asia Global
Blue Small China & Mainland Gov't
Chip Cap Hong Kong China Bond
---- --- --------- ----- ----
<S> <C> <C> <C> <C> <C>
Sales Charge Imposed on Purchases none none none none none
Sales Charge Imposed on Reinvested Dividends none none none none none
Deferred Sales Charge Imposed on Redemptions none none none none none
Redemption Fee 1.00%+ 1.00%+ 1.00%+ 2.00%+ none
Exchange Fee none none none none none
</TABLE>
+ See "How to Redeem Shares - Redemption Fee."
B. ANNUAL FUND OPERATING EXPENSES (as a percentage of average daily net assets)
<TABLE>
<CAPTION>
Asia Asia Global
Blue Small China & Mainland Gov't
Chip Cap Hong Kong China Bond
---- --- --------- ----- ----
<S> <C> <C> <C> <C> <C>
Advisory Fee 1.00% 1.00% 1.00% 1.00% .75%
Rule 12b-1 Fee .00% .00% .00% .00% .00%
Other Expenses (after expense reimbursement) .98% .76% .70% .98% .00%
---- ---- ----- ---- ----
Total Fund Operating Expenses
(after expense reimbursement) 1.98% 1.76% 1.70% 1.98% .75%++
</TABLE>
++ Guinness Flight has undertaken to cap Total Fund Operating Expenses at
.75% for the Global Government Bond Fund by reimbursing the Fund for all
"Other Expenses." The Global Government Bond 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>
Asia Asia Global
Blue Small China & Mainland Gov't
Chip Cap Hong Kong China Bond
---- --- --------- ----- ----
<S> <C> <C> <C> <C> <C>
One Year $20 $18 $17 $20 $8
Three Year $62 $55 $54 $62 $24
Five Year $107 $95 $92 $107 $42
Ten Year $231 $207 $201 $231 $93
</TABLE>
6
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EXPLANATION OF TABLE: The purpose of the table is to assist you in understanding
the various costs and expenses that an investor in a Fund would bear directly or
indirectly.
A. SHAREHOLDER TRANSACTION EXPENSES represent charges paid when you purchase,
redeem or exchange shares of a Fund. See "How to Purchase Shares," "How to
Redeem Shares" and "Redemption Fee."
B. ANNUAL FUND OPERATING EXPENSES are based on a Fund's operating expenses for
the current fiscal year. The Funds incur "other expenses" for maintaining
shareholder records, furnishing shareholder statements and reports, and other
services. Guinness Flight or the Administrator may, from time to time,
voluntarily agree to defer or waive fees or absorb some or all of the expenses
of the Funds. To the extent that they should do so, either may seek repayment of
such deferred fees or absorbed expenses after this practice is discontinued.
However, no repayment will be made if the expense ratio of the Asia Blue Chip
Fund, Asia Small Cap Fund, China & Hong Kong Fund, Mainland China Fund or the
Global Government Bond Fund would exceed 1.98%, 1.98%, 1.98%, 1.98% and 0.75%,
respectively. For the current year, the Asia Small Cap Fund repaid Guinness
Flight for amounts it had absorbed during prior fiscal periods. Including such
repayment, "other expenses" were .80% and "total fund operating expenses" were
1.80%. For the prior fiscal year, Guinness Flight absorbed some of the expenses
of each of the funds except the China & Hong Kong Fund and Asia Small Cap Fund.
If Guinness Flight had not absorbed such expenses, "other expenses" for the Asia
Blue Chip, Mainland China Fund and Global Government Bond Fund would have been
3.41%, 1.69% and 2.40%, respectively and "total fund operating expenses" would
have been 4.41%, 2.69% and 3.15%, respectively. See "The Funds' Management."
C. EXAMPLE OF EXPENSES. The hypothetical example illustrates the expenses
associated with a $1,000 investment in a Fund over periods of one, 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.
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FINANCIAL HIGHLIGHTS
The following tables set forth certain financial information with respect to a
share outstanding for each of the Funds for the periods indicated. The following
information has been audited by the Guinness Flight Fund's auditors. The
unqualified report of Ernst & Young LLP, covering the fiscal year ended December
31, 1997 is incorporated by reference into the Statement of Additional
Information, which may be obtained by calling 800-915-6565. The financial
highlights should be read in conjunction with each Fund's audited financial
statements for the periods indicated.
8
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GUINNESS FLIGHT ASIA BLUE CHIP FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
For the Year Ended April 29, 1996* through
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 12.98 $ 12.50
-------- -------
Income (loss) from investment operations:
Net investment income 0.02 0.00
Net realized and unrealized gain (loss) on investments (4 .91) 0.48
------------- --------
Total from investment operations (4.89) 0.48
----------- --------
Less distributions:
Dividends from net investment income (0.01) --
Distributions from taxable net capital gains (0.00) --
--------- ---------
Total distributions (0.01) --
--------- ---------
Net asset value, end of period $ 8.08 $ 12.98
======= =======
Total return (37.68)% 3.84%++
Ratios/supplemental data:
Net assets, end of period (thousands) $ 6, 917 $ 3,687
Ratio of expenses to average net assets:
Before expense reimbursement 4.41% 9.14%+
After expense reimbursement 1.98% 1.98%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement (2.16)% (7.10)%+
After expense reimbursement 0.28% 0.06%+
Portfolio turnover rate 34.69% 10.97%
Average Commission Rate Paid# $ 0 .0078 $ 0.0190
BANK LOANS
Amount outstanding at end of period (000) $ 0 --
Average amount of bank loans outstanding
during the period (monthly average) (000) $ 121 --
Average number of shares outstanding
during the period (monthly average) (000) 479 --
Average amount of debt per share during the period $ 0.25 --
</TABLE>
- ---------------------
* Commencement of operations.
+ Annualized.
++ Not Annualized.
# A fund is required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may vary from
period to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
9
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GUINNESS FLIGHT ASIA SMALL CAP FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
For the Year Ended April 29, 1996* through
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
Net asset value, beginning of period $ 14.10 $ 12.50
-------- -------
Income (loss) from investment operations:
Net investment income 0.07 0.02
Net realized and unrealized gain (loss) on investments (4 .38) 1.61
------------ --------
Total from investment operations (4.31) 1.63
----------- --------
Less distributions:
Dividends from net investment income -- (0.02)
Distributions from taxable net capital gains (0.01) (0.01)
Return of Capital (0.05) --
---------- --------
Total distributions (0.06) (0.03)
--------- -----------
Net asset value, end of period $ 9.73 $ 14.10
======= =======
Total return (30.77)% 13.08%++
Ratios/supplemental data:
Net assets, end of period (thousands) $ 108,478 $ 50,868
Ratio of expenses to average net assets:
Before expense reimbursement (recoupment) 1 .76% 3.09%+
After expense reimbursement (recoupment) 1.80% 1.98%+
Ratio of net investment income (loss) to average net assets:
Before expense reimbursement (recoupment) 0.53% (0.76)%+
After expense reimbursement (recoupment) 0.49% 0.36%+
Portfolio turnover rate 52.33% 21.91%
Average Commission Rate Paid# $ 0.0029 $ 0.0029
</TABLE>
* Commencement of operations.
+ Annualized.
++ Not Annualized.
10
<PAGE>
# A fund is required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may vary from
period to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
GUINNESS FLIGHT CHINA & HONG KONG FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
For the Year For the Year For the Year June 30, 1994*
Ended Ended Ended through
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $17.71 $13.64 $11.47 $12.50
Income (loss) from investment operations:
Net investment income 0.20 0.19 0.14 0.04
Net realized and unrealized gain (loss) (3.71) 4.43 2.20 (0.96)
on investments ------ ------ ------ ------
Total from investment operations (3.51) 4.62 2.34 (0.92)
Less distributions:
Dividends from net investment income (0.20) (0.19) (0.14) (0.04)
Distributions from taxable net capital gains (1.09) (0.36) (0.03) (0 .07)
------ ------- ------- --------
Total distributions (1.29) (0.55) (0.17) (0.11)
------ ------- ------- --------
Net asset value, end of period 12.91 $17.71 $13.64 $11.47
====== ====== ====== ======
Total return (20.34)% 34.38% 20.45% (7.74)% ++
Ratios/supplemental data:
Net assets, end of period (thousands) $241,808 $311,521 $55,740 $2,287
Ratio of expenses to average net assets:
Before expense reimbursement (recoupment) 1.70% 1.78% 3.02%** 19.92% +
After expense reimbursement (recoupment) 1.70% 1.96% 1.98% 2.00% +
Ratio of net investment income to average net
assets:
Before expense reimbursement (recoupment) 1.18% 1.57% 0.49% (17.15)% +
After expense reimbursement (recoupment) 1.18% 1.39% 1.52% 0.78% +
Portfolio turnover rate 53.62% 30.04% 10.89% 27.25%
Average Commission Rate Paid# $0.0052 $0.0070 - -
BANK LOANS
Amount outstanding at end of period (000) $0.00 $0.00 - -
Average amount of bank loans outstanding during
the period (monthly average) (000) $2,305 $1,413
Average number of shares outstanding
during the period (monthly average) (000) 16,944 11,419 - -
Average amount of debt per share
during the period $0.14 $0.12 - -
</TABLE>
* Commencement of operations.
** Includes directly paid expenses. Excluding indirectly paid expenses for the
year ended December 31, 1995, the ratio of expenses to average net assets
before "expense reimbursement" would have been 3.04%.
+ Annualized.
++ Not Annualized.
# For fiscal years beginning on or after September 1, 1995, a fund is
required to disclose its average commissions rate per share for security
trades on which commissions are charged. This amount may vary from period
to period and fund to fund depending on the mix of trades executed in
various markets where trading practices and commission rate structures may
differ.
11
<PAGE>
GUINNESS FLIGHT MAINLAND CHINA
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
November 3, 1997*
through
December 31, 1997
-----------------
<S> <C>
Net asset value, beginning of period $12.50
Income (loss) from investment operations:
Net investment income 0.02
Net realized and unrealized gain (loss) on investments (0.71)
------
Total from investment operations (0.69)
Less distributions:
Dividends from net investment income (0.02)
Total distributions (0.02)
Net asset value, end of period $11.79
======
Total return (5.50)%**
Ratios/supplemental data:
Net assets, end of period (thousands) $16,402
Ratio of expenses to average net assets:
Before expense reimbursement 2.69%+
After expense reimbursement 1.98%+
Ratio of net investment income to average net assets:
Before expense reimbursement 1.17%+
After expense reimbursement 1.88%+
Portfolio turnover rate 0.00%
Average Commission Rate Paid# $0.0021
</TABLE>
* Commencement of operations.
** Not Annualized.
+ Annualized.
# A fund is required to disclose its average commission rate per share for
security trades on which commissions are charged. This amount may vary from
period to period and fund to fund depending on the mix of trades executed
in various markets where trading practices and commission rate structures
may differ.
12
<PAGE>
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
FINANCIAL HIGHLIGHTS
FOR A CAPITAL SHARE OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
For the Year For the Year For the Year June 30, 1994*
Ended Ended Ended through
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $12.72 $12.77 $12.00 $12.50
------ ------ ------ ------
Income (loss) from investment operations:
Net investment income 0.63 0.63 0.69 0.29
Net realized and unrealized gain (loss) on
investments (0.29) 0 .13 1.01 (0.58)
------ ------- ------ ------
Total from investment operations 0.34 0.76 1.70 (0.29)
------ ------- ------ ------
Less distributions:
Dividends from net investment income (0.49) (0.69) (0.65) (0.21)
Distributions from taxable net capital gains (0.11) (0.12) (0.28) -
Return of capital (0.09) - - -
------ ------ ------ ------
Total distributions (0.69) (0.81) (0.93) (0.21)
------ ------ ------ ------
Net asset value, end of period $12.37 $12.72 $12.77 $12.00
====== ====== ====== ======
Total return 2.87% 6.21% 14.49% (2.33)%+
Ratios/supplemental data:
Net assets, end of period (thousands) $10,016 $6,564 $1,153 $751
Ratio of expenses to average net assets:
Before expense reimbursement 3.15% 8.21% 21.52%** 40.78%+
After expense reimbursement 0.75% 1.31% 1.73% 1.75%+
Ratio of net investment income to average
net assets:
Before expense reimbursement 2.67% (1.76)% (14.26)% (34.18)%+
After expense reimbursement 5.07% 5.14% 5.53% 4.86%+
Portfolio turnover rate 185.55 296.51% 202.54% 46.15%
</TABLE>
+ Annualized.
++ Not Annualized.
* Commencement of operations.
** Includes indirectly paid expenses. Excluding indirectly paid expenses for
the year ended December 31, 1995, the ratio of expenses to average net
assets before expense reimbursement would have been 21.68%.
13
<PAGE>
INVESTMENT OBJECTIVES, PROGRAMS AND LIMITATIONS
THE ASIA BLUE CHIP FUND. The Asia Blue Chip Fund's investment objective is
long-term capital appreciation through investments in equity securities of well
established and sizable companies located in the Asian continent. In pursuit of
its investment objective, the Asia Blue Chip Fund intends to invest 65% to 100%
of its total assets in a portfolio of "blue chip" companies traded primarily on
the markets of the Asian continent. For purposes of this Fund, the Investment
Adviser has defined a "blue chip" company to be a company that has a market
capitalization of at least $1 billion and a reputation for quality and wide
acceptance of its products or services, as well as a strong history of
profitability. An investment in this Fund, however, may be more volatile than an
investment in a fund which invests only in U.S "blue chip" companies.
Generally, the Asian continent includes the relatively more developed markets of
Hong Kong, Singapore, Malaysia, and Thailand, as well as the relatively less
developed and emerging markets of Korea and Taiwan in North Asia; of China; of
Indonesia, the Philippines, and Vietnam in the ASEAN region; and of India,
Pakistan, Sri Lanka and Bangladesh in East Asia. Under normal market conditions,
the Asia Blue Chip Fund will invest in a minimum of four countries. As a matter
of fundamental policy, the Asia Blue Chip Fund will not invest more than 25% of
its assets in the securities (other than U.S. Government securities) of issuers
in any one industry, as defined by the Current Directory of Companies Filing
Annual Reports with the Securities and Exchange Commission.
Equity securities, for purposes of the 65% policy, will be limited to common and
preferred stocks; special classes of shares available only to foreign persons in
markets that restrict the ownership of certain classes of equity to nationals or
residents of the country; convertible preferred stocks; and convertible
investment grade instruments. In addition, the Asia Blue Chip Fund may invest up
to 5% of its net assets in options on equity securities and up to 5% of its net
assets in warrants, including options and warrants traded in over-the-counter
markets.
Notwithstanding the above information, the Asia Blue Chip Fund reserves the
right to invest up to 100% of its assets in cash, cash equivalents, or high
quality short-term money market instruments for temporary defensive purposes
during periods that Guinness Flight considers to be unsuitable for the Fund's
normal investment strategy. The Asia Blue Chip Fund may also purchase and sell
stock index futures to hedge against equity markets on a temporary basis.
THE ASIA SMALL CAP FUND. The Asia Small Cap Fund's investment objective is
long-term capital appreciation through investments in equity securities of
smaller capitalization issuers located in the Asian continent. In pursuit of its
investment objective, the Asia Small Cap Fund intends to invest 65% to 100% of
its total assets in a portfolio of equity securities of companies traded
primarily on the markets of the Asian continent that have a market
14
<PAGE>
capitalization of no more than $1 billion. Generally, the Asian continent
includes the relatively more developed markets of Hong Kong, Singapore,
Malaysia, and Thailand, as well as the relatively less developed and emerging
markets of Korea and Taiwan in North Asia; of China; of Indonesia, the
Philippines, and Vietnam in the ASEAN region; and of India, Pakistan, Sri Lanka
and Bangladesh in East Asia. Under normal market conditions, the Asia Small Cap
Fund will invest in a minimum of four countries. As a matter of fundamental
policy, the Asia Small Cap Fund will not invest more than 25% of its assets in
the securities (other than U.S. Government securities) of issuers in any one
industry, as defined by the Current Directory of Companies Filing Annual Reports
with the Securities and Exchange Commission.
Equity securities, for purposes of the 65% policy, will be limited to common and
preferred stocks; special classes of shares available only to foreign persons in
markets that restrict the ownership of certain classes of equity to nationals or
residents of the country; convertible preferred stocks; and convertible
investment grade instruments. In addition, the Asia Small Cap Fund may invest up
to 5% of its net assets in options on equity securities and up to 5% of its net
assets in warrants, including options and warrants traded in over-the-counter
markets.
Notwithstanding the above information, the Asia Small Cap Fund reserves the
right to invest up to 100% of its assets in cash, cash equivalents, or high
quality short-term money market instruments for temporary defensive purposes
during periods that Guinness Flight considers to be unsuitable for the Fund's
normal investment strategy. The Asia Small Cap Fund may also purchase and sell
stock index futures to hedge against equity markets on a temporary basis.
THE CHINA & HONG KONG FUND. The China & Hong Kong Fund seeks to provide
investors with long-term capital growth. Under normal market conditions, 85% to
100% of the China & Hong Kong Fund's total assets will be invested in equity
securities primarily traded in the markets of China and Hong Kong or in equity
securities of companies that derive a substantial portion of their revenues from
business activities with or in China and/or Hong Kong, but which are listed on
major exchanges elsewhere (e.g., London, New York, Singapore and Australia). The
principal offices of these issuers may be located outside China and Hong Kong.
The China & Hong Kong Fund will not invest more than 15% of its total assets in
any equity securities other than those of such issuers. As a matter of
fundamental policy, the China & Hong Kong Fund will not invest more than 25% of
its total assets in the securities (other than U.S. Government securities) of
issuers in any one industry, as defined by the Current Directory of Companies
Filing Annual Reports with the Securities and Exchange Commission.
Equity securities, for purposes of the 85% policy, will be limited to common and
preferred stocks; special classes of shares available only to foreign persons in
markets that restrict the ownership of certain classes of equity to nationals or
residents of the country; convertible preferred stocks; and convertible
investment grade instruments. In addition, the China &
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Hong Kong 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 China & Hong Kong 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. The China & Hong Kong Fund may also purchase and sell stock index
futures to hedge against equity markets on a temporary basis.
THE 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 Mainland China 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 or "Red Chips" listed in Hong Kong, and
"N"shares listed in New York (collectively, "Mainland China Companies"). The
Mainland China 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 are 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; special classes of shares available only to foreign persons in
markets that restrict the ownership of certain classes of equity to nationals or
residents of the country; convertible preferred stocks; and convertible
investment grade instruments. In addition, the Mainland China Fund
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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 Mainland China Fund reserves the
right to invest up to 100% of its assets in cash, cash equivalents, or high
quality short-term money market instruments for temporary defensive purposes
during periods that Guinness Flight considers to be unsuitable for the Mainland
China Fund's normal investment strategy. The Mainland China Fund may also
purchase and sell stock index futures to hedge against equity markets on a
temporary basis.
THE GLOBAL GOVERNMENT BOND FUND. The Global Government Bond Fund intends to
provide investors with current income while seeking opportunities for capital
appreciation.
The Global Government Bond Fund's portfolio is managed in accordance with a
global investment strategy, which means that the Global Government Bond Fund's
investments will be allocated among securities denominated in the United States
dollar and the currencies of a number of foreign countries. Fundamental economic
strength, credit quality and interest rate trends are the principal factors
considered by Guinness Flight in determining whether to increase or decrease the
emphasis placed upon a particular type of security in the Global Government Bond
Fund's portfolio. Guinness Flight may further evaluate foreign yield curves ,
regulatory and political factors, including the fiscal and monetary policies of
the countries in which the Global Government Bond Fund may invest. Although the
Global Government Bond Fund intends to invest substantially all of its assets
directly in the debt of governments (or any of their political subdivisions,
authorities, agencies or instrumentalities), or of supranational entities,
throughout the world, the Global Government Bond Fund may also invest in certain
futures, options, foreign currency contracts, repurchase agreements, and other
investments described below.
Under normal market conditions, the Global Government Bond Fund will invest at
least 65% of its total assets in bonds issued by the governments of at least
three different countries. For the purpose of this policy, a bond is a debt
instrument. The Global Government Bond Fund will neither invest more than 25% of
its net assets in securities issued by a single foreign government, or in
supranational entities as a group, nor invest more than 25% of its net assets in
securities denominated in a single currency other than the U.S. Dollar, British
Pound Sterling, Canadian Dollar, French Franc, German Mark and Japanese Yen. The
Global Government Bond Fund will invest in the entire range of maturities and
may adjust the average maturity of the investments held in the portfolio from
time to time, depending upon its assessment of relative yields of securities of
different maturities and its expectations of future changes in interest rates.
The Global Government Bond Fund presently expects to invest in both dollar and
non-dollar denominated securities of issuers in the United States and the
industrialized Western European countries; in Canada, Japan, Australia and New
Zealand; and in Latin America. The
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Global Government Bond Fund may invest up to 15% of its assets in the fixed
income securities of issuers in emerging market countries. An emerging market is
any country that the World Bank has determined to have a low or middle income
economy and may include every country in the world except the United States,
Australia, Canada, Japan, New Zealand and most countries located in Western
Europe such as Belgium, Denmark, France, Germany, Great Britain, Italy, the
Netherlands, Norway, Spain, Sweden and Switzerland.
Debt instruments of emerging market countries may be below investment grade,
commonly referred to as "junk bonds." "Investment grade" securities are those
rated within the four highest quality grades as determined by Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Corporation ("Standard &
Poor's"). Securities rated Aaa by Moody's and AAA by Standard & Poor's are
judged to be of the best quality and carry the smallest degree of risk.
Securities rated Baa by Moody's and BBB by Standard & Poor's lack high quality
investment characteristics and, in fact, have speculative characteristics as
well. Debt instruments that are deemed to be below investment grade entail
greater risks of untimely interest and principal payments, default, and price
volatility than investment grade securities, and may present problems of
liquidity and valuation. See Appendix A of the Statement of Additional
Information for a further description of investment grade debt ratings.
In order to protect and enhance the capital value of the Global Government Bond
Fund, Guinness Flight employs an investment technique known as "Currency
Overlay" which allows Guinness Flight to manage the currency exposure of the
underlying bond portfolio. Using Currency Overlay, Guinness Flight constructs a
portfolio of bonds denominated in a variety of currencies and then, using
forwards, options and futures contracts, reconstructs the currency portion of
the bond portfolio. The use of this technique allows Guinness Flight to invest
in the bond markets that it believes offer the best opportunities for total
return regardless of the prospects for the currencies involved, and then to
invest in the currencies that believes offer the best opportunities to protect
and enhance capital.
Guinness Flight intends to place the Fund in the major currencies perceived to
be in, or about to enter, a strengthening phase and to avoid those in, or about
to enter, a phase of relative weakness. In making currency decisions, a wholly
international stance is pursued by Guinness Flight. Consideration is given to
both fundamental economic and financial data such as relative GNP growth, the
Balance of Payments position, inflation and interest rates, as well as
short-term factors such as political events and market sentiment. The Currency
Overlay is employed on a medium to long-term basis and not on a day-to -day
trading approach.
Not more than 5% of the Global Government Bond Fund's assets may be invested in
initial margins or premiums for the futures and options needed to construct the
Currency Overlay. Where Guinness Flight misperceives certain economic trends,
the Global Government Bond Fund's net asset value may be adversely affected as a
result of this investment technique.
Notwithstanding the above, the Global Government Bond Fund reserves the right to
invest up to 100% of its assets in cash, cash equivalents, high quality
short-term money market
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instruments, and in bills, notes or bonds issued by the United States Treasury
Department or by other agencies of the United States Government for temporary
defensive purposes . The Global Government Bond Fund may also purchase and sell
index futures to hedge against maturity risk on a temporary basis.
INVESTMENT STRATEGIES, POLICIES AND RISKS
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. The Funds may purchase or sell
forward foreign currency exchange contracts ("forward contracts") as part of
their portfolio investment strategy. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers. A Fund may enter into a forward contract, for example, 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 a Fund believes that a foreign currency may suffer a
substantial decline against the U.S. dollar, it may enter into a forward sale
contract 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 a 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 Funds may make contracts to purchase securities for a
fixed price at a future date beyond customary settlement time ("forward
commitments") because new issues of securities are typically offered to
investors, such as the Funds, on that basis. Forward commitments involve a risk
of loss if the value of the security to be purchased declines prior to the
settlement date. Although the Funds will enter into such contracts with the
intention of acquiring the securities, the Funds may dispose of a commitment
prior to a settlement date if Guinness Flight deems it appropriate to do so. A
Fund may realize short-term profits or losses upon the sale of forward
commitments. Forward contracts may be considered to be "derivative securities,"
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.
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The Funds 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.
By writing a call option, a Fund limits its opportunity to profit from any
increase in the market value of the underlying security above the exercise price
of the option. The Funds will not write any put options. Covered call options
may be considered to be "derivative securities" 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 Asia Blue Chip
Fund, Asia Small Cap Fund , China & Hong Kong Fund and Mainland China Fund may
purchase and sell options and futures on stock indices. If Guinness Flight
expects general stock market prices to rise, it might purchase a call option on
a stock index or a futures contract on that index as a hedge against an increase
in prices of particular equity securities they ultimately want to buy. If in
fact the stock index does rise, the prices of the particular equity securities
intended to be purchased may also increase, but that increase would be offset in
part by the increase in the value of a Fund's index option or futures contract
resulting from the increase in the index.
If, on the other hand, Guinness Flight expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does in fact decline, the value of some or all of the equity
securities in a Fund's portfolio may also be expected to decline, but that
decrease would be offset in part by the increase in the value of the Fund's
position in such put option or futures contract. Risks in the use of options and
futures on stock indices result from the possibility that changes in the stock
indices may differ substantially from the changes anticipated by the Funds when
the hedged positions were established. Options and futures on stock indices may
be considered to be "derivative securities" which are described further in the
"Investment Strategies and Risks" section of the Statement of Additional
Information.
ILLIQUID SECURITIES. The Funds will not invest more than 15% of their net assets
in illiquid securities, including repurchase agreements with maturities in
excess of seven days.
RESTRICTED SECURITIES. The Funds may invest in securities that are subject to
restrictions on resale because they have not been registered under the
Securities Act of 1933, as amended (the "1933 Act"). These securities are
sometimes referred to as private placements. Although securities which may be
resold only to "qualified institutional buyers" in accordance with the
provisions of Rule 144A under the 1933 Act are technically considered
"restricted securities," the Funds may purchase Rule 144A securities without
regard to the limitation on
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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, a Fund's holdings of illiquid
securities will be reviewed to determine what, if any, action is required to
assure that the Fund does not exceed its applicable percentage limitation for
investments in illiquid securities.
PORTFOLIO TURNOVER. Any particular security will be sold, and the proceeds
reinvested, whenever such action is deemed prudent from the viewpoint of a
Fund's investment objective, regardless of the holding period of that security.
A higher rate of portfolio turnover may result in higher transaction costs,
including brokerage commissions. To the extent that higher portfolio turnover
results in a higher rate of net realized capital gains to a Fund, the portion of
the Fund's distributions constituting taxable capital gains may increase. See
"Dividends, Distributions and Tax Matters." Guinness Flight anticipates that the
annual portfolio turnover rate will not exceed 100% for the Asia Blue Chip Fund,
the Asia Small Cap Fund and the China & Hong Kong Fund, and 200% for the
Mainland China Fund and Global Government Bond Fund.
For further discussion with regard to the Funds' investment strategies, policies
and risks, see "Investment Strategies and Risks" in the Funds' Statement of
Additional Information.
RISK CONSIDERATIONS
The following risk considerations may be applicable to any or all of the Funds,
depending upon the level of investment in securities giving rise to such risks.
ECONOMIC AND POLITICAL RISKS. The economies of foreign countries may differ
unfavorably from the United States economy in such respects as, but not limited
to, growth of domestic product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments positions. Further, economies
of foreign countries generally are heavily dependent upon international trade
and, accordingly, have been and may continue to be adversely affected by the
economic conditions of the countries in which they trade, as well as trade
barriers, managed adjustments in relative currency values and other
protectionist measures imposed or negotiated by such countries.
With respect to any foreign country, there is the possibility of
nationalization, expropriation or confiscatory taxation, political changes,
government regulations, social instability or diplomatic developments (including
war) which could adversely affect the economies of such countries or the Funds'
investments in those countries. In addition, it may be more difficult to obtain
a judgment in a court outside of the United States.
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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 Funds) 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. 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
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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 Funds 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 Funds.
Guinness Flight, however, believes that the process of reform has now gone too
far to be easily reversed .
INVESTMENT IN CHINA AT PRESENT INVOLVES ABOVE AVERAGE RISK DUE TO A NUMBER OF
SPECIAL FACTORS DESCRIBED HEREIN. INVESTMENT IN THE FUNDS SHOULD BE REGARDED AS
LONG TERM IN NATURE. THE FUNDS ARE 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 FUNDS MAY EXPERIENCE SIGNIFICANT
FLUCTUATIONS.
FOREIGN CURRENCY CONSIDERATIONS. Although the Funds' investments generally will
be denominated in foreign currencies and most income paid by such investments
will be in foreign currencies, the Funds will compute and distribute their
income in dollars. The computation of income will be made on the date of its
receipt by a Fund at the foreign exchange rate in effect on that date.
Therefore, if the value of the foreign currencies in which a Fund receives its
income falls relative to the dollar between the receipt of the income and the
making of Fund distributions, the Fund will be required to liquidate securities
in order to make distributions if the Fund has insufficient cash in dollars to
meet distribution requirements.
The value of the assets of a Fund as measured in dollars also may be affected
favorably or unfavorably by fluctuations in currency rates and exchange control
regulations. Further, a Fund may incur costs in connection with conversions
between various currencies.
SECURITIES MARKET RISKS. 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 Funds'
limitation on such purchases. Similarly, volume and liquidity in most foreign
bond markets can be substantially less than in the United States, and
consequently, volatility of price can be greater than in the United States.
Fixed commissions on foreign markets are generally higher than negotiated
commissions on United States exchanges; however, the Funds will endeavor to
achieve the most favorable net results on their portfolio transactions and may
be able to purchase the securities in which the Funds may invest on other stock
exchanges where commissions are negotiable.
With regard to China, 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
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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 Funds 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.
SMALL CAPITALIZATION ISSUERS. An investor should be aware that investments in
small capitalization issuers carry more risk than in issuers with market
capitalizations greater than $1 billion. Generally, small companies rely on
limited product lines, financial resources, and business activities that make
them more susceptible to setbacks or downturns. In addition, the stock of such
companies may be more thinly traded. Accordingly, the performance of small
capitalization issuers may be more volatile.
INTEREST RATE FLUCTUATIONS. Generally, the value of fixed income securities will
change as interest rates fluctuate. During periods of falling interest rates,
the values of outstanding long-term debt obligations generally rise. Conversely,
during periods of rising interest rates, the value of such securities generally
decline. The magnitude of these fluctuations generally will be greater for
securities with longer maturities.
GOVERNMENTAL CREDIT RISK. The obligations of foreign government entities,
including supranational issuers, have various kinds of government support.
Although obligations of foreign governmental entities include obligations issued
or guaranteed by national, provincial, state or other government with taxing
power, or by their agencies, these obligations may or may not be supported by
the full faith and credit of a foreign government.
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.
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.
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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 these countries is permitted by
certain foreign countries through investment funds which have been specially
authorized. See "Tax Matters" in the Statement of Additional Information for an
additional discussion concerning such investment funds. The Funds may invest in
these investment funds ; however, if the acquired investment fund is registered
pursuant to the 1940 Act, then the acquiring 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 a Fund invests in such investment funds, the Fund's
shareholders will bear not only their proportionate share of the expenses of the
Fund, but also will bear indirectly similar expenses of the underlying
investment funds. Guinness Flight has agreed to waive its management fees with
respect to the portion of a Fund's assets invested in shares of other open-end
investment companies. A Fund would continue to pay its own management fees and
other expenses with respect to its investments in shares of closed-end
investment companies.
In addition to the foregoing investment restrictions, prior governmental
approval for foreign investments may be required under certain circumstances in
some foreign countries, and the extent of foreign investment in foreign
companies may be subject to limitation. Foreign ownership limitations also may
be imposed by the charters of individual companies to prevent, among other
concerns, violation of foreign investment limitations.
Repatriation of investment income, capital and the proceeds of sales by foreign
investors may require governmental registration and/or approval in some foreign
countries. A Fund could be adversely affected by delays in or a refusal to grant
any required governmental approval for such repatriation.
YEAR 2000 PROBLEM. Like other mutual funds, financial and business organizations
and individuals around the world, the Funds could be adversely affected if the
computer systems
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used by the advisor/administrator and other service providers
do not properly process and calculate date-related information and data from and
after January 1, 2000. This is commonly known as the "Year 2000 Problem." The
advisor/administrator is taking steps that it believes are reasonably designed
to address the Year 2000 Problem with respect to computer systems that it uses
and to obtain reasonable assurances that comparable steps are being taken by the
Funds' major service providers .
For further discussion with regard to the Funds' other risk considerations, see
"Other Risk Factors and Special Considerations" in the Funds' Statement of
Additional Information.
PERFORMANCE
A Fund's total return shows its overall change in value, including changes in
share price and assuming all the Fund's dividends and capital gain distributions
are reinvested. A cumulative total return reflects a Fund's performance over a
stated period of time. Average annual total return figures are annualized and,
therefore, represent the average annual percentage change over the period in
question. To illustrate the components of overall performance, the Funds may
separate their cumulative and average annual returns into income results and
capital gains or losses.
Yield is computed in accordance with a standardized formula described in the
Statement of Additional Information and can be expected to fluctuate from time
to time. It is not necessarily indicative of future results. Accordingly, the
yield information may not provide a basis for comparison with investments which
pay a fixed rate of interest for a stated period of time. Yield is a function of
the type and quality of a Fund's investments, maturity and operating expense
ratio. A shareholder's investment in a Fund is not insured or guaranteed.
The performance of the Funds will vary from time to time and past results are
not necessarily representative of future results. A Fund's performance is a
function of its portfolio management in selecting the type and quality of
portfolio securities, and is affected by operating expenses of the Fund as well
as by general market conditions.
THE FUNDS' MANAGEMENT
The overall management of the business and affairs of the Funds is vested in the
Guinness Flight Funds' Board of Trustees. The Board of Trustees approves all
significant agreements between the Guinness Flight Funds, on behalf of a Fund,
and persons or companies furnishing services to a Fund. The day-to-day
operations of each Fund are delegated to the officers of the Guinness Flight
Funds and to Guinness Flight, subject always to the investment objective and
policies of each 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.
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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 House, One Connaught Place, Central, Hong Kong. Guinness
Flight serves as the investment adviser to each of the Funds, except the
Mainland China Fund, pursuant to an Investment Advisory Agreement dated as of
April 28, 1997. Guinness Flight serves as the investment adviser to the Mainland
China 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 Funds' operations and provides investment advisory services to
the Funds. Guinness Flight was organized in 1985 and is registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940, as
amended. Guinness Flight is a wholly owned subsidiary of Guinness Flight Hambro
Asset Management Limited.
The Funds are managed by a team of portfolio managers. The following are
biographies of key personnel who are responsible for ultimate investment
decisions.
AGNES CHOW - Ms. Chow joined Hambro Pacific Fund Management, now Guinness
Flight Hambro, in 1995 as a Fund Manager. Prior to joining Guinness Flight
Hambro, she worked as an Assistant Fund Manager at Dao Heng Fund Management
from November 1994 to August 1995. Ms. Chow began her career in 1991 as a
Credit Analyst with Sun Hung Kai Securities. In 1993, she was promoted to
Investment Analyst and then in 1994 to Assistant Fund Manager responsible
for managing just over $100 million in Asia ex-Japan equities. Ms. Chow
serves as the Co-Manager of the Asia Small Cap Fund.
LISA CHOW - Ms. Chow joined Guinness Flight in 1996 as an Investment
Manager. She has assisted with the management of the Asia Small Cap and
Mainland China Funds since their inception. Prior to joining Guinness
Flight, Ms. Chow was an investment analyst specializing in Hong Kong
smaller capitalization stocks at HG Asia from December 1993 to May 1995.
From May 1995 to August 1996 she worked at Sassoon Securities, where she
provided in-depth research on the telecom and energy sectors and was
instrumental in initiating Sassoon's research effort in the Philippines and
Thai stock market. Ms. Chow received her Bachelor's of Science in 1993 from
the Massachusetts Institute of Technology in Cambridge, Massachusetts, with
a major in Management Science and a minor in Economics. Ms. Chow serves as
the Co-Manager of the Mainland China Fund.
ROBERT CONLON - Mr. Conlon joined Guinness Flight Hambro's Hong Kong
investment team in 1998 as a Fund Manager. Prior to joining Guinness Flight
Hambro, Mr. Conlon gained over 10 years of investment management experience
with Ivory & Sime, including the last four years as Senior Investment
Manager in their Hong Kong office. In this capacity, Mr. Conlon was a
senior member of a team that managed a number of portfolios, including a
sizable investment trust in the Pacific region. Prior to becoming Senior
Investment Manager, Mr. Conlon managed portfolios that invested in smaller
U.S. companies. Mr. Conlon graduated from Edinburgh University with First
Class Honours
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in Mathematical Physics. In addition to serving as Co-Manager of the Asia
Small Cap Fund, Mr. Conlon will serve as chief investment officer for
Guinness Flight Hambro Asia.
MICHAEL DALEY - Mr. Daley joined Guinness Flight as a Director of the Fixed
Income Team in 1994. Prior to joining Guinness Flight, he was a founding
member in 1986 of Morgan Stanley Asset Management's London operation where
he served as Director, Vice President and Head of Fixed Income. In 1991, he
established his own firm, Strategic Value Management Limited. Mr. Daley
serves as Manager of the Global Government Bond Fund.
RICHARD FARRELL - Mr. Farrell joined Guinness Mahon, a predecessor entity
of Guinness Flight, in 1978. He specializes in Far Eastern markets and
currently is the investment adviser to the Guinness Flight Global Strategy
Fund's Japan Fund, Japan & Pacific Fund, and Japan Smaller Companies Fund.
These funds are currently available only to overseas investors. As the head
of Guinness Flight's Asia Equity Desk, Mr. Farrell has strategic input on
all of Guinness Flight's Asia Equity Funds. Mr. Farrell is the Manager of
the Asia Blue Chip Fund and co-manager of the China & Hong Kong Fund.
ADRIAN FU - Mr. Fu joined Hambro Pacific Fund Management, now Guinness
Flight Hambro, in 1996 as a member of the Hong Kong investment team. Prior
to joining Guinness Flight Hambro , he was an Associate at Indo-Suez Asia
Shipping Finance Services, Ltd. from December 1994 to October 1996. Mr. Fu
received his MBA from Imperial College, London University in 1994. He
received a Master of Engineering (Merit) from the University of
Southampton, England, which he attended from 1989-1993. Mr. Fu serves as
the Co-Manager of the Mainland China Fund.
EDMUND HARRISS - Mr. Harriss joined Guinness Flight's London headquarters
in July 1993 as a Marketing Executive and transferred to the Far East Desk
in 1994. He has assisted Richard Farrell and Lynda Johnstone with the
management of the China & Hong Kong Fund since November, 1994. From 1991 to
1993, he was the Assistant to the Managing Director at a computer software
company, PP Systems Ltd. of Salisbury, England. During the same time
period, Mr. Harriss was also an independent salesman. Mr. Harriss received
a Master's of Philosophy in Management Studies from Oxford University in
1991. In 1989, he received a Bachelor's of Arts with Honors in History from
the University of York in York, England. Mr. Harriss is an Associate Member
of the Institute of Management & Research. Mr. Harriss serves as 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 is Co-Manager of the China & Hong Kong
Fund.
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Guinness Flight's legal counsel believes that Guinness Flight may provide
services described in its Investment Advisory Agreement to the Funds without
violating the federal banking law commonly known as the Glass- Steagall Act. The
Act generally bars banks or investment advisers deemed to be controlled by banks
from publicly underwriting or distributing certain securities. Because of stock
ownership by a subsidiary of a foreign bank in Guinness Flight's parent,
Guinness Flight Hambro Asset Management Limited, such restrictions may be deemed
to apply.
The U.S. Supreme Court in its 1981 decision in Board of Governors of the Federal
Reserve System v. Investment Company Institute determined that, consistent with
the requirements of the Act, a bank may serve as an investment adviser to a
registered, closed-end investment company. Other decisions of banking regulators
have supported the position that a bank may act as investment adviser to a
registered, open- 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 Funds. 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 Funds'
shareholders.
For a discussion of Guinness Flight's brokerage allocation policies and
practices, see "Portfolio Transactions" in the Statement of Additional
Information. In accordance with policies established by the Board of 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 Funds.
FEES AND EXPENSES. Pursuant to the Advisory Agreement, Guinness Flight is paid a
monthly fee from the Asia Blue Chip Fund, Asia Small Cap Fund , China & Hong
Kong Fund, and Mainland China Fund at an annual rate of 1.00% of each Fund's
average daily net assets, and a monthly fee from the Global Government Bond Fund
calculated at an annual rate of .75% of its average daily net assets. These fees
are higher than those charged by most investment companies. However, the Board
of Trustees believes that such fees are appropriate because of the complexity of
managing funds that invest in global markets. Guinness Flight or Investment
Company Administration Corporation, the Administrator, may, from time to time,
voluntarily agree to defer or waive fees or absorb some or all of the expenses
of the Funds. To the extent that they should do so, they may seek repayment of
such deferred fees and absorbed expenses after this practice is discontinued.
However, no repayment will be made if the expense ratio of the Asia Blue Chip
Fund, Asia Small Cap Fund, China & Hong Kong Fund, Mainland China Fund or the
Global Government Bond Fund would exceed 1.98%, 1.98%, 1.98%, 1.98% and 0.75%,
respectively.
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ADMINISTRATOR. Pursuant to an Administration Agreement, Investment Company
Administration Corporation ("ICAC") serves as administrator of the Funds. As the
administrator, ICAC provides certain administrative services, including, among
other responsibilities, coordinating relationships with independent contractors
and agents, preparing for signature by officers and filing of certain documents
required for compliance with applicable laws and regulations, preparing
financial statements, and arranging for the maintenance of books and records.
ICAC receives a monthly fee equal to, on an annual basis, the greater of $40,000
or .25% of the average daily net assets of the China & Hong Kong Fund and
$80,000 or .25% of the aggregate average daily net assets of the Asia Blue Chip
Fund, Asia Small Cap Fund, Mainland China Fund and the Global Government Bond
Fund.
DISTRIBUTOR. The Guinness Flight Funds have entered into a Distribution
Agreement (the "Distribution Agreement") with First Fund Distributors, Inc.
("First Fund"), a registered broker-dealer, to act as the principal distributor
of the shares of the Funds. The Distribution Agreement provides First Fund with
the right to distribute shares of the Funds through affiliated broker-dealers
and through other broker-dealers or financial institutions with whom First Fund
has entered into selected dealer agreements. The Distributor is an affiliate of
the Administrator.
DISTRIBUTION PLAN. The Funds have adopted a Distribution Plan (the "Plan") under
Rule 12b-1 under the 1940 Act. No separate payments are authorized to be made by
a Fund under the Plan. Rather, the Plan recognizes that Guinness Flight or ICAC
may use fee revenues, or other resources to pay expenses associated with
shareholder servicing and recordkeeping functions. The Plan also provides that
Guinness Flight or ICAC may make payments from these sources to third parties,
including affiliates, such as banks or broker-dealers, that provide such
services. See "The Funds' Management - Fees and Expenses."
For additional information concerning the operation of the Plan, see
"Distribution Agreements and Distribution Plans" in the Statement of Additional
Information.
SHAREHOLDER SERVICING. The Funds may enter into Shareholder Servicing Agreements
whereby the Adviser or Administrator pays a shareholder servicing agent for
shareholder services and account maintenance, including responding to
shareholder inquiries, direct shareholder communications, account balance,
maintenance and dividend posting.
HOW TO PURCHASE SHARES
GENERAL INFORMATION. Investors may purchase shares of a Fund from the Fund's
transfer agent or from other selected securities brokers or dealers. A buyer
whose purchase order is received by the transfer agent before the close of
trading on the New York Stock Exchange, currently 4:00 p.m. Eastern time, will
acquire shares at the net asset value as of that day; however, the Funds may, in
their sole discretion, cease taking purchase orders prior to the
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close of trading on the New York Stock Exchange on any day when Guinness Flight
determines that such action is in the best interests of the existing
shareholders. A buyer whose purchase order is received by the transfer agent
after the close of trading on the New York Stock Exchange or after the Fund
ceases taking orders 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 Funds reserve the right to reject any purchase order.
The Distributor may, from time to time, provide promotional incentives to
certain brokers or dealers whose representatives have sold or are expected to
sell significant amounts of the Funds' shares.
The Mainland China Fund will cease offering its shares 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
time.
Investors may also purchase shares of the SSgA Money Market Fund which is
advised by State Street Bank & 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. An investor should carefully read
the prospectus and complete the application for the SSgA Money Market Fund. For
additional information, please call shareholder services at 800-915-6566.
Share of the Funds are available for purchase by any retirement plan, including
401(k) plans, profit sharing plans, 403(b) plans and individual retirement
accounts.
OPENING AN ACCOUNT - INVESTMENT MINIMUMS. The minimum initial investments are as
follows:
Minimum
Type of Account Investment
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
The Funds may further reduce or waive the minimum for certain retirement and
other employee benefit plans; for the Adviser's employees, clients and their
affiliates; for advisers or financial institutions offering investors a program
of services; or any other person or organization deemed appropriate by the
Funds.
ADDITIONAL INVESTMENTS - MINIMUM SUBSEQUENT INVESTMENT. The minimum "subsequent"
investment is $250 for regular accounts as well as tax-qualified retirement
plans. The
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amount of the minimum subsequent investment, like the minimum "initial"
investment, may be reduced or waived by the Funds. See waiver discussion under
"Opening an Account-Investment Minimums." Investments may be made either by
check or by wire.
PRE-AUTHORIZED INVESTMENT PLAN AND AUTO-BUY OPTION. You may establish a
pre-authorized investment plan or auto-buy option. Under the pre-authorized
investment plan, your personal bank account is automatically debited and your
Fund account is automatically credited with additional full and fractional
shares on the fifth or twentieth day of each month or calendar quarter. Under
the auto-buy option, your personal bank account is automatically debited and
your Fund account is automatically credited with additional full and fractional
shares on any day that you choose by calling the Transfer Agent before 4:00 p.m.
Eastern time. Purchases orders received by the Transfer Agent under the Auto-Buy
Option after 4:00 p.m. Eastern time will be acquired at the net asset value as
of the next trading day on the New York Stock Exchange. Through the
pre-authorized investment plan, the minimum initial investment is $100 and the
subsequent minimum investments is $100 per an investment. Through the auto-buy
option, the subsequent minimum investment is $250 per an investment.
PURCHASING BY MAIL. State Street Bank and Trust Company (the "Transfer Agent")
acts as transfer and shareholder service agent for the Funds. An investor may
purchase shares by sending a check payable to Guinness Flight Investment Funds,
together with an Account Application form, to the Transfer Agent at the
following address:
If by business reply envelope: If by stamped envelope:
Guinness Flight Investment Funds Guinness Flight Investment Funds
P.O. Box 9288 P.O. Box 8500
Boston, MA 02205-8559 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
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party checks will not be accepted. When purchases are made by check or periodic
account investment, redemptions will not be allowed until the investment being
redeemed has been in the account for 15 calendar days.
PURCHASING BY WIRE. For an initial purchase of shares of a Fund by wire,
shareholders should first telephone the Transfer Agent at (800) 915-6566 between
the hours of 8:00 a.m. and 4:00 p.m. (Eastern time) on a day when the New York
Stock Exchange is open for normal trading to receive an account number. The
following information will be requested: your name, address, tax identification
number, dividend distribution election, amount being wired and wiring bank. In
addition, a buyer will be required to provide the Transfer Agent a signature
application within 10 business days of an initial purchase. You should then give
instructions to your bank to transfer funds by wire to the Transfer Agent at the
following address:
State Street Bank and Trust Company
ABA # 0110 00028
Shareholder and Custody Services
DDA # 99050171
(Your Name)
ATTN: (Fund Name)
(Fund/Account Number)
In making a subsequent purchase order by wire, you should wire funds to the
Transfer Agent in the manner described above, making sure that the wire
specifies the name of the Fund, your name and the account number. However, it is
not necessary to call the Transfer Agent to make subsequent purchase orders
using federal funds.
If you arrange for receipt by the Transfer Agent of federal funds prior to the
close of trading (currently 4:00 p.m., Eastern time) of the New York Stock
Exchange on a day the Exchange is open for normal trading, you may purchase
shares of a Fund as of that day. Your bank may charge a fee for wiring money on
your behalf.
HOW TO REDEEM SHARES
GENERAL INFORMATION. Investors may redeem shares of a Fund through the Transfer
Agent or from other selected securities brokers or dealers. A shareholder whose
redemption order is received by the Transfer Agent before the close of trading
on the New York Stock Exchange, currently 4:00 p.m. Eastern time, will redeem
shares at the net asset value set as of that day. A shareholder whose redemption
order is received by the Transfer Agent after the close of trading on the New
York Stock Exchange will redeem shares at the net asset value set as of the next
trading day on the New York Stock Exchange. A broker may charge a transaction
fee for the redemption. Under certain circumstances, the Funds may temporarily
borrow cash pursuant to a credit agreement with Deutsche Bank AG to satisfy
redemption requests.
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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 or the optional shareholder
services form. Shares of a Fund may then be redeemed by telephoning the Transfer
Agent at (800) 915-6566, between the hours of 8:00 a.m. and 4:00 p.m. Eastern
time on a day when the New York Stock Exchange is open for normal trading.
SPECIAL FACTORS REGARDING TELEPHONE REDEMPTIONS. In order to protect itself and
shareholders from liability for unauthorized or fraudulent telephone
transactions, the Guinness 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 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 any Fund by writing to
the Transfer Agent at the following address:
If by business reply envelope: If by stamped envelope:
Guinness Flight Investment Funds Guinness Flight Investment Funds
P.O. Box 9288 P.O. Box 8500
Boston, MA 02205-8559 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
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<PAGE>
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 names appear on a Fund's account records, and the
request must be signed by the minimum number of persons designated on the
account application that are required to effect a redemption. Requests by
participants of qualified retirement plans must include all other signatures
required by the plan and applicable federal law.
SIGNATURE GUARANTEE. If a redemption is requested by a corporation, partnership,
trust or fiduciary, written evidence of authority acceptable to the Transfer
Agent must be submitted before such request will be accepted. If the proceeds of
the redemption exceed $50,000, or are to be paid to a person other than the
record owner, or are to be sent to an address other than the address on the
Transfer Agent's records, or are to be paid to a corporation, partnership, trust
or fiduciary, the signature(s) on the redemption request and on the
certificates, if any, or stock powers must be guaranteed by an "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 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 Funds may redeem
shares in any account, other than retirement plan or Uniform Gift to Minors Act
accounts, if at any time, due to redemptions, the total value of a shareholder's
account does not equal at least $500. Shareholders will be given 30 days' prior
written notice in which to purchase sufficient additional shares to avoid such a
redemption.
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 a Fund are redeemed, you may recognize a capital gain or loss to be reported
for income tax purposes.
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REDEMPTION FEES . On redemptions of shares purchased less than 30 days prior to
redemption, a fee, equal to 1.00% of the value of the shares being redeemed,
shall be charged to any shareholder who redeems such shares in the China & Hong
Kong Fund, Asia Blue Chip Fund, or Asia Small Cap Fund, and 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 such shares in the Mainland China Fund. The redemption fee proceeds
shall be payable to the Fund whose shares are being redeemed. Such redemption
fee will not be charged on shares purchased 30 or more days (60 or more days in
the case of the Mainland China Fund) 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 between the
Funds or into the SSgA Money Market Fund are considered redemptions for purposes
of the redemption fee.
Any redemption fee payable to the Asia Blue Chip Fund, Asia Small Cap Fund, or
China & Hong Kong Fund, will be waived if such fee is equal to or less than .10%
of the total value of the shares, including shares purchased more than 30 days
prior to redemption and shares acquired through the reinvestment of
distributions of investment income and capital gains, being redeemed.
ADDITIONAL REDEMPTION INFORMATION. Payment for redemption of recently purchased
shares will be delayed until the Transfer Agent has been advised that the
purchase check has been honored, up to 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 Funds, will be responsible for any resulting
loss. Such delay may be avoided by purchasing shares by wire or by certified or
official bank checks.
SHAREHOLDER SERVICES
CHANGES TO ACCOUNT INFORMATION. You may change the mailing address of record on
your account by telephoning the Transfer Agent at (800) 915-6566, between the
hours of 8:00 a.m. and 6:00 p.m. Eastern time on a day when the New York Stock
Exchange is open for normal trading. In order to protect itself and shareholders
from liability for unauthorized or fraudulent address changes, the Guinness
Flight Funds will use reasonable procedures in an attempt to verify the identity
of a person making an address change request. The Guinness Flight Funds reserves
the right to refuse an address change over the phone if it believes that the
person making the request is not the record owner of the account, or is not
authorized by the shareholder to request an address change. Shareholders will be
promptly notified of any refused request for an address change. 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 from acting
upon instructions of a person believed to be a shareholder with respect to the
telephone address change privilege. However, if the Guinness Flight Funds or its
agents fail to follow such reasonable procedures, then the Guinness Flight Funds
or its
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<PAGE>
agents may be liable for any losses due to unauthorized or fraudulent
instructions. An investor who changes the address of his account by telephoning
the Transfer Agent will not be permitted to redeem its shares for 30 calendar
days following the day of such address change.
EXCHANGE PRIVILEGE. You may exchange shares of a Fund for shares of the other
Funds by telephone or written instructions, depending upon your account
elections. You may mail or deliver written instructions to the Transfer Agent at
the following address:
If by business reply envelope: If by stamped envelope:
Guinness Flight Investment Funds Guinness Flight Investment Funds
P.O. Box 9288 P.O. Box 8500
Boston, MA 02205-8559 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
telephone 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.
All exchanges will be made on the basis of the relative net asset values of the
Funds next determined after a completed request is received. Requests for
telephone 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.
In periods of severe market or economic conditions, telephone exchanges may be
difficult to implement, in which case you should mail or send by overnight
delivery a written exchange request to the Transfer Agent. Overnight deliveries
should be sent to the Transfer Agent at the address on Page 26.
You may also exchange shares of a Fund for shares of the SSgA Money Market Fund,
a money market mutual fund advised by State Street Bank & Trust Co., 225
Franklin Street, Boston, MA 02110 and not affiliated with the Guinness 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 Funds 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
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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 Funds reserve the right to limit the
number of exchanges a shareholder may make in any year to four (4) to avoid
excessive Fund expenses.
DETERMINATION OF NET ASSET VALUE
The net asset value per share (or share price) of the Funds is determined as of
4: 00 p.m. Eastern time on each business day. The net asset value per share is
calculated by subtracting a Fund's liabilities from its assets and dividing the
result by the total number of Fund shares outstanding. The determination of a
Fund's net asset value per share is made in accordance with generally accepted
accounting principles. Among other items, a Fund's liabilities include accrued
expenses and dividends payable, and its total assets include portfolio
securities valued at their market value, as well as income accrued but not yet
received. Securities for which market quotations are not readily available are
valued at fair value as determined in good faith by or under the supervision of
the Fund's officers and in accordance with methods which are specifically
authorized by its 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 Asia Blue Chip Fund, Asia
Small Cap Fund , China & Hong Kong Fund and Mainland China Fund are declared and
paid semiannually, normally in June and December. The Global Government Bond
Fund declares and pays dividends monthly. The Funds distribute all or
substantially all of their net investment income and net capital gains (if any)
to shareholders each year. Any net capital gains earned by a Fund normally are
distributed in June and December to the extent necessary to avoid federal income
and excise taxes.
In determining the amount of capital gains, if any, available for distribution,
net capital gains are offset against available net capital losses, if any,
carried forward from previous fiscal periods.
All dividends and distributions of a Fund are automatically reinvested on the
ex-dividend date in full and fractional shares of such Fund, unless the
shareholder has made an alternate election as to the method of payment.
Dividends and distributions will be reinvested at the net asset value per share
determined on the ex- dividend date. Shareholders may elect, by written notice
to the Transfer Agent, to receive such distributions, or the dividend portion
thereof, in cash, or to invest such dividends and distributions in additional
shares, including, subject to certain conditions, in shares of a Fund other than
the Fund making the distribution.
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Investors who have not previously selected such a reinvestment option on the
account application form may contact the Transfer Agent at any time to obtain a
form to authorize such reinvestments in a Fund other than the Fund making the
distribution. Such reinvestments into a Fund are automatically credited to the
account of the shareholder.
Changes in the form of dividend and distribution payments may be made by the
shareholder at any time by notice to the Transfer Agent and are effective as to
any subsequent payment if such notice is received by the Transfer Agent prior to
the record date of such payment. Any dividend and distribution election remains
in effect until the Transfer Agent receives a revised written election by the
shareholder.
Any dividend or distribution paid by a Fund has the effect of reducing the net
asset value per share on the ex-dividend date by the amount of the dividend or
distribution. Therefore, a dividend or distribution declared shortly after a
purchase of shares by an investor would represent, in substance, a return of
capital to the shareholder with respect to such shares even though it would be
subject to income taxes, as discussed below.
TAX MATTERS. Each Fund intends to qualify as a regulated investment company 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 Funds' policy to distribute to shareholders all
of their investment income (net of expenses) and any capital gains (net of
capital losses) in accordance with the timing requirements imposed by the Code,
so that each Fund will satisfy the distribution requirement of Subchapter M and
not be subject to Federal income taxes or the 4% excise tax.
If a Fund fails to satisfy any of the Code requirements for qualification as a
regulated investment company, it will be taxed at regular corporate tax rates on
all its taxable income (including capital gains) without any deduction for
distributions to shareholders, and distributions to shareholders will be taxable
as ordinary dividends (even if derived from the Fund's net long-term capital
gains) to the extent of the Fund's current and accumulated earnings and profits.
Distributions by a Fund of its net investment income (including foreign currency
gains and losses) and the excess, if any, of its net short-term capital gain
over its net long-term capital loss are taxable to shareholders as ordinary
income. Distributions by a Fund of the excess, if any, of its net long-term
capital gain over its net short-term capital loss are designated as capital gain
dividends and are taxable to shareholders as long-term capital gains, regardless
of the length of time shareholders have held their shares.
Distributions by a Fund which are taxable to shareholders as ordinary income are
treated as dividends for federal income tax purposes, but in any year only a
portion thereof (which cannot exceed the aggregate amount of qualifying
dividends from domestic corporations received by the Fund during the year) may
qualify for the 70% dividends-received deduction
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for corporate shareholders. Because the investment income of the Asia Blue Chip
Fund, Asia Small Cap Fund , China & Hong Kong Fund and Mainland China Fund will
consist primarily of dividends from foreign corporations and the Funds may have
interest income and short-term capital gains, it is not expected that a
significant portion of the ordinary income dividends paid by these Funds may
qualify for the dividends-received deduction. Because the Global Government Bond
Fund's investment income will consist of interest , ordinary income dividends
paid by the Fund will not qualify for the dividends-received deduction. Portions
of each Fund's investment income may be subject to foreign income taxes withheld
at the source. If a Fund meets certain requirements, it may elect to
"pass-through" to shareholders any such foreign taxes, which may enable
shareholders to claim a foreign tax credit or a deduction with respect to their
share thereof.
Distributions to shareholders will be treated in the same manner for federal
income tax purposes whether shareholders elect to receive them in cash or
reinvest them in additional shares. In general, shareholders take distributions
into account in the year in which they are made. However, shareholders are
required to treat certain distributions made during January as having been paid
by the Fund and received by shareholders on December 31 of the preceding year. A
statement setting forth the Federal income tax 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 Funds in an amount equal to the difference between the proceeds of the
sale or redemption and the shareholder's adjusted tax basis in the shares. Any
loss realized upon a taxable disposition of shares within six months from the
date of their purchase will be treated as a long-term capital loss to the extent
of any capital gain dividends received on such shares. All or a portion of any
loss realized upon a taxable disposition of shares of a 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
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redemption payments made by the Funds. 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 Funds that is
contained in the Statement of Additional Information. In addition, shareholders
should consult with their own tax adviser as to the tax consequences of
investments in a Fund, including the application of state and local taxes which
may differ from the federal income tax consequences described above.
ABOUT THE FUNDS
Each 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. Each Fund has its
own investment objective and policies designed to meet specific investment
goals, operates as an open-end management investment company and expects to be
treated as a regulated investment company for federal income tax purposes. The
Asia Blue Chip Fund, Asia Small Cap Fund, China & Hong Kong Fund, Mainland China
Fund and Global Government Bond Fund are non-diversified. The investment
objectives of the Asia Blue Chip Fund and Asia Small Cap Fund are fundamental.
Each Fund invests in securities of different issuers and industry
classifications in an attempt to spread and reduce the risks inherent in all
investing. Subject to any applicable cap on new investors, the Funds
continuously offer new shares for sale to the public, and stand ready to redeem
their outstanding shares for cash at their net asset value. Guinness Flight, the
investment adviser for the Funds, continuously reviews and, from time to time,
changes the portfolio holdings of the Funds in pursuit of each Fund's investment
objective.
Shares of each Fund entitle the holders to one vote per share. The shares have
no preemptive or conversion rights. When issued, shares are fully paid and
nonassessable. The shareholders have certain rights, as set forth in the
By-laws, to call a meeting for any purpose. See "Description of the Funds -
Voting Rights" in the Statement of Additional Information.
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GENERAL INFORMATION
INVESTMENT ADVISER. Guinness Flight Investment Management Limited, 225 South
Lake Avenue, Suite 777, Pasadena, California 91101, serves as Investment Adviser
for the Funds.
ADMINISTRATOR. Investment Company Administration Corporation, 2020 East
Financial Way, Suite 100, Glendora, California 91741, serves as Administrator of
the Funds.
CUSTODIAN. Investors Bank and Trust Company, 89 South Street, P.O. Box 1537,
Boston, Massachusetts 02205, serves as the custodian of the Funds. Generally,
the Custodian holds the securities, cash and other assets of the Funds.
TRANSFER AGENT. State Street Bank and Trust Company, P.O. Box 1912, Boston,
Massachusetts 02105, serves as Transfer Agent of the Funds. Generally the
Transfer Agent provides recordkeeping services for the Funds and their
shareholders.
LEGAL COUNSEL. Kramer, Levin, Naftalis & Frankel, 919 Third Avenue, New York,
New York 10022 serves as counsel to the Guinness Flight Funds.
INDEPENDENT ACCOUNTANTS. Ernst & Young LLP, 515 South Flower Street, Los
Angeles, CA 90071. Generally, the Independent Accountants will audit the
financial statements and the financial highlights of the Funds, 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 Funds.
OTHER INFORMATION. This prospectus sets forth basic information that investors
should know about the Funds prior to investing. A Statement of Additional
Information has been filed with the Securities and Exchange Commission and is
available upon request and without charge, by writing or calling the Funds at
1-800-915-6565. This prospectus omits certain information contained in the
registration statement filed with the Securities and Exchange Commission. Copies
of the registration statement, including items omitted from this prospectus, may
be obtained from the Securities and Exchange Commission by paying the charges
prescribed under its rules and regulations.
<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 CHINA & HONG KONG FUND
GUINNESS FLIGHT ASIA BLUE CHIP FUND
GUINNESS FLIGHT ASIA SMALL CAP FUND
GUINNESS FLIGHT MAINLAND CHINA FUND
GUINNESS FLIGHT GLOBAL GOVERNMENT BOND FUND
This Statement is not a prospectus but should be read in conjunction with the
current prospectus dated April 28, 1998 (the "Prospectus"), pursuant to which
the Guinness Flight China & Hong Kong Fund (the "China & Hong Kong Fund"),
Guinness Flight Asia Blue Chip Fund (the "Asia Blue Chip Fund"), Guinness Flight
Asia Small Cap Fund (the "Asia Small Cap Fund"), Guinness Flight Mainland China
Fund (the "Mainland China Fund") and Guinness Flight Global Government Bond Fund
(the "Global Government Bond Fund") (collectively, the "Funds") are offered.
Please retain this document for future reference.
For a free copy of the Prospectus, please call the Funds at 1-800-915-6565
GENERAL INFORMATION AND HISTORY.............................................. 2
INVESTMENT OBJECTIVE AND POLICIES............................................ 2
INVESTMENT STRATEGIES AND RISKS.............................................. 5
OTHER RISK FACTORS AND SPECIAL CONSIDERATIONS................................ 14
INVESTMENT RESTRICTIONS AND POLICIES......................................... 15
PORTFOLIO TRANSACTIONS....................................................... 16
COMPUTATION OF NET ASSET VALUE............................................... 17
PERFORMANCE INFORMATION...................................................... 18
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION............................... 19
TAX MATTERS.................................................................. 19
MANAGEMENT OF THE FUNDS...................................................... 25
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS............................... 26
DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN................................. 29
DESCRIPTION OF THE FUNDS.................................................... 29
SHAREHOLDER REPORTS......................................................... 30
FINANCIAL STATEMENTS........................................................ 31
APPENDIX A.................................................................. A-1
Dated: April 29, 1998
<PAGE>
GENERAL INFORMATION AND HISTORY
As described in the Funds' 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: the China & Hong
Kong Fund, the Asia Blue Chip Fund, the Asia Small Cap Fund, the Mainland China
Fund and the Global Government Bond Fund, each of which has unique investment
objectives and strategies.
INVESTMENT OBJECTIVE AND POLICIES
GENERAL INFORMATION ABOUT THE FUNDS.
The China & Hong Kong Fund seeks to provide investors with long
term capital growth by generally investing in equity securities, that should
benefit from the growth in the Chinese economy, traded in the markets of China
and Hong Kong. The Asia Blue Chip Fund's investment objective is long-term
capital appreciation through investments in equity securities of well
established and sizable companies located in the Asian continent. The Asia Small
Cap Fund's investment objective is long-term capital appreciation through
investments in equity securities of smaller capitalization issuers located in
the Asian continent. The 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. The Global Government
Bond Fund intends to provide investors with both current income and capital
appreciation from a debt portfolio of government securities issued throughout
the world. The objective of each Fund is a fundamental policy and may not be
changed except by a majority vote of shareholders.
The Funds do not intend to employ leveraging techniques.
Accordingly, each Fund will not purchase new securities if amounts borrowed
exceed 5% of its total assets at the time the loan is made.
When the Funds determine that adverse market conditions exist,
the Funds may adopt a temporary defensive posture and invest their entire
portfolio in Money Market Instruments. In addition, the Funds may invest in
Money Market Instruments in anticipation of investing cash positions. "Money
Market Instruments" 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 Funds do not
intend to limit the amount of their assets invested in Money Market Instruments,
except to the extent believed necessary to achieve their investment objective,
the Funds do not expect under normal market conditions to have a substantial
portion of their assets invested in Money Market Instruments. To the extent the
Funds are invested in Money Market Instruments for defensive purposes or in
anticipation of investing cash positions, the Funds' investment objective may
not be achieved.
The following information concerning the Funds augments the
disclosure provided in the prospectus under the heading "Investment Objectives,
Programs and Limitations":
THE CHINA & HONG KONG FUND, ASIA BLUE CHIP FUND, ASIA SMALL CAP FUND AND
MAINLAND CHINA FUND (THE "EQUITY FUNDS").
Guinness Flight does not intend to invest in any security in a
country where the currency is not freely convertible to United States dollars,
unless it has obtained the necessary governmental licensing to convert such
currency or other appropriately licensed or sanctioned contractual guarantee to
protect such investment against loss of that currency's external value, or
Guinness Flight has a reasonable expectation at the time the
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investment is made that such governmental licensing or other appropriately
licensed or sanctioned guarantee would be obtained or that the currency in which
the security is quoted would be freely convertible at the time of any proposed
sale of the security by an Equity Fund.
An Equity Fund may invest indirectly in issuers through
sponsored or unsponsored American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs"), Global Depository Receipts ("GDRs"), Global
Depository Shares ("GDSs") and other types of Depository Receipts (which,
together with ADRs, EDRs, GDRs, and GDSs, are hereinafter referred to as
"Depository Receipts"). Depository Receipts may not necessarily be denominated
in the same currency as the underlying securities into which they may be
converted. In addition, the issuers of the stock of unsponsored Depository
Receipts are not obligated to disclose material information in the United States
and, therefore, there may not be a correlation between such information and the
market value of the Depository Receipts. ADRs are Depository Receipts typically
issued by a United States bank or trust company which evidence ownership of
underlying securities issued by a foreign corporation. GDRs and other types of
Depository Receipts are typically issued by foreign banks or trust companies,
although they also may be issued by either a foreign or a United States
corporation. Generally, Depository Receipts in registered form are designed for
use in the United States securities markets and Depository Receipts in bearer
form are designed for use in securities markets outside the United States. For
purposes of the Equity Funds' investment policies, investments in ADRs, GDRs and
other types of Depository Receipts will be deemed to be investments in the
underlying securities. Depository Receipts other than those denominated in
United States dollars will be subject to foreign currency exchange rate risk.
Certain Depository Receipts may not be listed on an exchange and therefore may
be illiquid securities.
Securities in which an Equity Fund may invest include those that
are neither listed on a stock exchange nor traded over-the-counter. As a result
of the absence of a public trading market for these securities, they may be less
liquid than publicly traded securities. Although these securities may be resold
in privately negotiated transactions, the prices realized from these sales could
be less than those originally paid by the Equity Fund or less than what may be
considered the fair value of such securities. Further, companies whose
securities are not publicly traded may not be subject to the disclosure and
other investor protection requirements which may be applicable if their
securities were publicly traded. If such securities are required to be
registered under the securities laws of one or more jurisdictions before being
resold, the Equity Fund may be required to bear the expenses of registration. To
the extent that such securities are illiquid by virtue of the absence of a
readily available market, or legal or contractual restrictions on resale, they
will be subject to such Equity Fund's investment restriction on illiquid
securities, discussed below.
An Equity Fund, together with any of its "affiliated persons,"
as defined in the Investment Company Act of 1940 (the "1940 Act"), may only
purchase up to 3% of the total outstanding securities of any underlying
investment company. Accordingly, when the Equity Fund or such "affiliated
persons" hold shares of any of the underlying investment companies, such Fund's
ability to invest fully in shares of those investment companies is restricted,
and Guinness Flight must then, in some instances, select alternative investments
that would not have been its first preference.
There can be no assurance that appropriate investment companies
will be available for investment. The Equity Funds do not intend to invest in
such investment companies unless, in the judgment of Guinness Flight, the
potential benefits of such investment justify the payment of any applicable
premium or sales charge.
GLOBAL GOVERNMENT BOND FUND
Global Government Bond Fund assets invested in foreign
government securities will be invested in debt obligations and other fixed
income securities, in each case denominated in U.S. currencies, non-U.S.
currencies or composite currencies including:
(1) debt obligations issued or guaranteed by foreign national,
provincial, state, municipal or other governments with
taxing authority or by their agencies or instrumentalities;
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(2) debt obligations of supranational entities (described
below); and
(3) debt obligations of the United States Government issued in
non-dollar securities.
In making international fixed income securities investments,
Guinness Flight may consider, among other things, the relative growth and
inflation rates of different countries. Guinness Flight may also consider
expected changes in foreign currency exchange rates, including the prospects for
central bank intervention, in determining the anticipated returns of securities
denominated in foreign currencies. Guinness Flight may further evaluate, among
other things, foreign yield curves and regulatory and political factors,
including the fiscal and monetary policies of such countries.
The obligations of foreign governmental entities, including
supranational issuers, have various kinds of government support. Obligations of
foreign governmental entities include obligations issued or guaranteed by
national, provincial, state or other governments with taxing power or by their
agencies. These obligations may or may not be supported by the full faith and
credit of a foreign government.
Supranational entities include international organizations
designated or supported by governmental entities to promote economic
reconstruction or development and international banking institutions and related
government agencies. Examples include the International Bank for Reconstruction
and Development (the World Bank), the European Steel and Coal Community, the
Asian Development Bank and the Inter-American Development Bank. The governmental
agencies, or "stockholders," usually make initial capital contributions to the
supranational entity and in many cases are committed to make additional capital
contributions if the supranational entity is unable to repay its borrowings.
Each supranational entity's lending activities are limited to a percentage of
its total capital (including "callable capital" contributed by members at the
entity's call), reserves and net income.
The Global Government Bond Fund may invest in United States
Government Securities and in options, futures contracts and repurchase
transactions with respect to such securities. The term "United States Government
Securities" refers to debt securities denominated in United States dollars,
issued or guaranteed by the United States Government, by various of its
agencies, or by various instrumentalities established or sponsored by the United
States Government. Certain of these obligations, including: (1) United States
Treasury bills, notes, and bonds; (2) mortgage participation certificates
guaranteed by the Government National Mortgage Association ("GNMA"); and (3)
Federal Housing Administration debentures, are supported by the full faith and
credit of the United States. Other United States Government Securities issued or
guaranteed by Federal agencies or government sponsored enterprises are not
supported by the full faith and credit of the United States. These securities
include obligations supported by the right of the issuer to borrow from the
United States Treasury, such as obligations of Federal Home Loan Banks, and
obligations supported only by the credit of the instrumentality, such as Federal
National Mortgage Association Bonds.
When purchasing United States Government Securities, Guinness
Flight may take full advantage of the entire range of maturities of such
securities and may adjust the average maturity of the investments held in the
portfolio from time to time, depending upon its assessment of relative yields of
securities of different maturities and its expectations of future changes in
interest rates. To the extent that the Global Government Bond Fund invests in
the mortgage market, Guinness Flight usually will evaluate, among other things,
relevant economic data, environmental and security specific variables such as
housing starts, coupon and age trends. To determine relative value among
markets, Guinness Flight may use tools such as yield/duration curves, break-even
prepayment rate analysis and holding-period-return scenario testing.
The Global Government Bond Fund may seek to increase its current
income by writing covered call options with respect to some or all of the United
States Government Securities held in its portfolio. In addition, the Global
Government Bond Fund may at times, through the purchase of options on United
States Government Securities, and the purchase and sale of futures contracts and
related options with respect to United States Government Securities, seek to
reduce fluctuations in net asset value by hedging against a decline in the value
of the United States Government Securities owned by the Global Government Bond
Fund or an increase in the price of such securities which the Global Government
Bond Fund plans to purchase, although it is not the
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general practice to do so. Significant option writing opportunities generally
exist only with respect to longer term United States Government Securities.
Options on United States Government Securities and futures and related options
are not considered United States Government Securities; accordingly, they have a
different set of risks and features.
INVESTMENT STRATEGIES AND RISKS
OPTIONS AND FUTURES STRATEGIES
Through the writing of call options and the purchase of options
and the purchase and sale of stock index futures contracts, interest rate
futures contracts, foreign currency futures contracts and related options on
such futures contracts, Guinness Flight may at times seek to hedge against a
decline in the value of securities included in a Fund's portfolio or an increase
in the price of securities which it plans to purchase for a Fund or to reduce
risk or volatility while seeking to enhance investment performance. Expenses and
losses incurred as a result of such hedging strategies will reduce a Fund's
current return.
The ability of a Fund to engage in the options and futures
strategies described below will depend on the availability of liquid markets in
such instruments. Although the Funds will not enter into an option or futures
position unless a liquid secondary market for such option or futures contract is
believed by Guinness Flight to exist, there is no assurance that a Fund will be
able to effect closing transactions at any particular time or at an acceptable
price. Reasons for the absence of a liquid secondary market include the
following: (i) there may be insufficient trading interest in certain options;
(ii) restrictions may be imposed by an Exchange on opening transactions or
closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an Exchange; (v) the facilities of an Exchange or
the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume; or (vi) one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market thereon would cease to exist, although outstanding options
on that Exchange that had been issued by the OCC as a result of trades on that
Exchange would continue to be exercisable in accordance with their terms.
Low initial margin deposits made upon the opening of a futures
position and the writing of an option involve substantial leverage. As a result,
relatively small movements in the price of the contract can result in
substantial unrealized gains or losses. However, to the extent a Fund purchases
or sells futures contracts and options on futures contracts and purchases and
writes options on securities and securities indexes for hedging purposes, any
losses incurred in connection therewith should, if the hedging strategy is
successful, be offset, in whole or in part, by increases in the value of
securities held by the Fund or decreases in the prices of securities the Fund
intends to acquire. It is impossible to predict the amount of trading interest
that may exist in various types of options or futures. Therefore, no assurance
can be given that a Fund will be able to utilize these instruments effectively
for the purposes stated below. Furthermore, a Fund's ability to engage in
options and futures transactions may be limited by tax considerations. Although
the Funds will only engage in options and futures transactions for limited
purposes, such transactions involve certain risks. The Funds will not engage in
options and futures transactions for leveraging purposes.
Upon purchasing futures contracts of the type described above,
the Funds will maintain in a segregated account with their Custodian cash or
liquid high grade debt obligations with a value, marked-to- market daily, at
least equal to the dollar amount of the Funds' purchase obligation, reduced by
any amount maintained as margin. Similarly, upon writing a call option, the
Funds will maintain in a segregated account with their Custodian, liquid or high
grade debt instruments with a value, marked-to-market daily, at least equal to
the market value of the underlying contract (but not less than the strike price
of the call option) reduced by any amounts maintained as margin.
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WRITING COVERED CALL OPTIONS ON SECURITIES
A Fund may write covered call options on optionable securities
(stocks, bonds, foreign exchange related futures, options and options on
futures) of the types in which it is permitted to invest in seeking to attain
its objective. Call options written by a Fund give the holder the right to buy
the underlying securities from the Fund at a stated exercise price. As the
writer of the call option, the Fund is obligated to own the underlying
securities subject to the option (or comparable securities satisfying the cover
requirements of securities exchanges).
A 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, a Fund limits
its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option.
A Fund may terminate an option that it has written prior to its
expiration by entering into a closing purchase transaction in which it purchases
an option having the same terms as the option written. The 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 a Fund.
Options written by the Funds will normally have expiration dates
not more than one year from the date written. The exercise price of the options
may be below ("in-the-money"), equal to ("at-the-money") or above
("out-of-the-money") the current market price of the underlying securities at
the times the options are written. A Fund may engage in buy-and-write
transactions in which the Fund simultaneously purchases a security and writes a
call option thereon. Where a call option is written against a security
subsequent to the purchase of that security, the resulting combined position is
also referred to as buy-and-write. Buy-and-write transactions using in-the-money
call options may be utilized when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. In such a transaction, a Fund's maximum gain will be the premium
received from writing the option reduced by any excess of the price paid by the
Fund for the underlying security over the exercise price. Buy-and-write
transactions using at-the-money call options may be utilized when it is expected
that the price of the underlying security will remain flat or advance moderately
during the option period. In such a transaction, a Fund's gain will be limited
to the premiums received from writing the option. Buy-and-write transactions
using out-of-the-money call options may be utilized when it is expected that the
premiums received from writing the call option plus the appreciation in market
price of the underlying security up to the exercise price will be greater than
the appreciation in the price of the underlying security alone. In any of the
foregoing situations, if the market price of the underlying security declines,
the amount of such decline will be offset wholly or in part by the premium
received and a Fund may or may not realize a loss.
To the extent that a secondary market is available on the
Exchanges, the covered call option writer may liquidate his position prior to
the assignment of an exercise notice by entering a closing purchase transaction
for an option of the same series as the option previously written. The cost of
such a closing purchase, plus transaction costs, may be greater than the premium
received upon writing the original option, in which event the writer will have
incurred a loss in the transaction.
PURCHASING PUT AND CALL OPTIONS ON SECURITIES
A Fund may purchase put options to protect its portfolio
holdings in an underlying security against a decline in market value. Such hedge
protection is provided during the life of the put option since the Fund, as
holder of the put option, is able to sell the underlying security at the put
exercise price regardless of any decline in the underlying security's market
price. In order for a put option to be profitable, the market
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price of the underlying security must decline sufficiently below the exercise
price to cover the premium and transaction costs. By using put options in this
manner, the Funds will reduce any profit they might otherwise have realized in
the underlying security by the premium paid for the put option and by
transaction costs.
A Fund may also purchase call options to hedge against an
increase in prices of securities that it wants ultimately to buy. Such hedge
protection is provided during the life of the call option since the Fund, as
holder of the call option, is able to buy the underlying security at the
exercise price regardless of any increase in the underlying security's market
price. In order for a call option to be profitable, the market price of the
underlying security must rise sufficiently above the exercise price to cover the
premium and transaction costs. By using call options in this manner, the Funds
will reduce any profit they might have realized had they bought the underlying
security at the time they purchased the call option by the premium paid for the
call option and by transaction costs.
PURCHASE AND SALE OF OPTIONS AND FUTURES ON STOCK INDICES
The Equity Funds may purchase and sell options on stock indices
and stock index futures as a hedge against movements in the equity markets.
Options on stock indices are similar to options on specific
securities except that, rather than the right to take or make delivery of the
specific security at a specific price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of that stock index is greater than, in the case of a call, or
less than, in the case of a put, the exercise price of the option. This amount
of cash is equal to such difference between the closing price of the index and
the exercise price of the option expressed in dollars multiplied by a specified
multiple. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on specific
securities, all settlements of options on stock indices are in cash and gain or
loss depends on general movements in the stocks included in the index rather
than on price movements in particular stocks. Currently, index options traded
include the S&P 100 Index, the S&P 500 Index, the NYSE Composite Index, the AMEX
Market Value Index, the National Over-the-Counter Index and other standard
broadly based stock market indices.
A stock index futures contract is an agreement in which one
party agrees to deliver to the other an amount of cash equal to a specific
dollar amount multiplied by the difference between the value of a specific stock
index at the close of the last trading day of the contract and the price at
which the agreement is made. For example, the China & Hong Kong Fund may invest
in Hang-Seng Index Futures. No physical delivery of securities is made.
If Guinness Flight expects general stock market prices to rise,
it might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
they want ultimately to buy. If in fact the stock index does rise, the price of
the particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Equity
Fund's index option or futures contract resulting from the increase in the
index. If, on the other hand, Guinness Flight expects general stock market
prices to decline, it might purchase a put option or sell a futures contract on
the index. If that index does in fact decline, the value of some or all of the
equity securities in the Equity Fund's portfolio may also be expected to
decline, but that decrease would be offset in part by the increase in the value
of the Fund's position in such put option or futures contract.
PURCHASE AND SALE OF INTEREST RATE FUTURES
A Fund may purchase and sell U.S. dollar interest rate futures
contracts on U.S. Treasury bills, notes and bonds and non-U.S. dollar interest
rate futures contracts on foreign bonds for the purpose of hedging fixed income
and interest sensitive securities against the adverse effects of anticipated
movements in interest rates.
A Fund may purchase futures contracts in anticipation of a
decline in interest rates when it is not fully invested in a particular market
in which it intends to make investments to gain market exposure that may
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in part or entirely offset an increase in the cost of securities it intends to
purchase. The Funds do not consider purchases of futures contracts to be a
speculative practice under these circumstances. In a substantial majority of
these transactions, the Funds will purchase securities upon termination of the
futures contract.
A Fund may sell U.S. dollar and non-U.S. dollar interest rate
futures contracts in anticipation of an increase in the general level of
interest rates. Generally, as interest rates rise, the market value of the fixed
income securities held by the Funds will fall, thus reducing the net asset value
of the holder. This interest rate risk can be reduced without employing futures
as a hedge by selling long-term fixed income securities and either reinvesting
the proceeds in securities with shorter maturities or by holding assets in cash.
This strategy, however, entails increased transaction costs to the Funds in the
form of dealer spreads and brokerage commissions.
The sale of U.S. dollar and non-U.S. dollar interest rate
futures contracts provides an alternative means of hedging against rising
interest rates. As rates increase, the value of a Fund's short position in the
futures contracts will also tend to increase, thus offsetting all or a portion
of the depreciation in the market value of the Fund's investments which are
being hedged. While the Funds will incur commission expenses in entering and
closing out futures positions (which is done by taking an opposite position from
the one originally entered into, which operates to terminate the position in the
futures contract), commissions on futures transactions are lower than
transaction costs incurred in the purchase and sale of portfolio securities.
OPTIONS ON STOCK INDEX FUTURES CONTRACTS AND INTEREST RATE FUTURES CONTRACTS
A Fund may write call options and purchase call and put options
on stock index and interest rate futures contracts. The Funds may use such
options on futures contracts in connection with their hedging strategies in lieu
of purchasing and writing options directly on the underlying securities or stock
indices or purchasing and selling the underlying futures. For example, a Fund
may purchase put options or write call options on stock index futures or
interest rate futures, rather than selling futures contracts, in anticipation of
a decline in general stock market prices or rise in interest rates,
respectively, or purchase call options on stock index or interest rate futures,
rather than purchasing such futures, to hedge against possible increases in the
price of equity securities or debt securities, respectively, which the Fund
intends to purchase.
PURCHASE AND SALE OF CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS
In order to hedge its portfolio and to protect it against
possible variations in foreign exchange rates pending the settlement of
securities transactions, a Fund may buy or sell foreign currencies or may deal
in forward currency contracts. A Fund may also invest in currency futures
contracts and related options. If a fall in exchange rates for a particular
currency is anticipated, a Fund may sell a currency futures contract or a call
option thereon or purchase a put option on such futures contract as a hedge. If
it is anticipated that exchange rates will rise, a Fund may purchase a currency
futures contract or a call option thereon or sell (write) a put option to
protect against an increase in the price of securities denominated in a
particular currency the Fund intends to purchase. These futures contracts and
related options thereon will be used only as a hedge against anticipated
currency rate changes, and all options on currency futures written by the Funds
will be covered.
A currency futures contract sale creates an obligation by a
Fund, as seller, to deliver the amount of currency called for in the contract at
a specified future time for a specified price. A currency futures contract
purchase creates an obligation by a Fund, as purchaser, to take delivery of an
amount of currency at a specified future time at a specified price. Although the
terms of currency futures contracts specify actual delivery or receipt, in most
instances the contracts are closed out before the settlement date without the
making or taking of delivery of the currency. Closing out of a currency futures
contract is effected by entering into an offsetting purchase or sale
transaction. Unlike a currency futures contract, which requires the parties to
buy and sell currency on a set date, an option on a currency futures contract
entitles its holder to decide on or before a future date whether to enter into
such a contract or let the option expire.
The Funds will write (sell) only covered call options on
currency futures. This means that the Funds will provide for their obligations
upon exercise of the option by segregating sufficient cash or short-term
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obligations or by holding an offsetting position in the option or underlying
currency future, or a combination of the foregoing. The Funds will, so long as
they are obligated as the writer of a call option on currency futures, own on a
contract-for-contract basis an equal long position in currency futures with the
same delivery date or a call option on stock index futures with the difference,
if any, between the market value of the call written and the market value of the
call or long currency futures purchased maintained by the Funds in cash, 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 a Fund falls below 100% of the market value of the call written by
the Fund, the Fund will so segregate an amount of cash, cash equivalents or
other liquid securities equal in value to the difference. Alternatively, a Fund
may cover the call option through segregating with the custodian an amount of
the particular foreign currency equal to the amount of foreign currency per
futures contract option times the number of options written by the Fund.
If other methods of providing appropriate cover are developed,
the Funds reserve the right to employ them to the extent consistent with
applicable regulatory and exchange requirements.
In connection with transactions in stock index options, stock
index futures, interest rate futures, foreign currency futures and related
options on such futures, the Funds will be required to deposit as "initial
margin" an amount of cash and short-term U.S. Government securities generally
equal to from 5% to 10% of the contract amount. Thereafter, subsequent payments
(referred to as "variation margin") are made to and from the broker to reflect
changes in the value of the futures contract.
OPTIONS ON FOREIGN CURRENCIES
A Fund may write call options and purchase call and put options
on foreign currencies to enhance investment performance and for hedging purposes
in a manner similar to that in which futures contracts on foreign currencies, or
forward contracts, will be utilized as described above. For example, a decline
in the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, a Fund may purchase put
options on the foreign currency. If the value of the currency does decline, the
Funds will have the right to sell such currency for a fixed amount in dollars
and will thereby offset, in whole or in part, the adverse effect on its
portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in
which securities to be acquired are denominated is projected, thereby increasing
the cost of such securities, a Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to a Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated, a Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
Also, where a Fund anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the option will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received. As in the case of other types of
options, however, the writing of a foreign currency option will constitute only
a partial hedge up to the amount of the premium, and only if rates move in the
expected direction. If this does not occur, the option may be exercised and the
Fund would be required to sell the underlying currency at a loss which may not
be offset by the amount of the premium. Through the writing of options on
foreign currencies, a Fund also may be required to forego all or a portion of
the benefits which might otherwise have been obtained from favorable movements
in exchange rates.
The Funds intend to write only covered call options on foreign
currencies. A call option written on a foreign currency by a Fund is "covered"
if the Fund owns the underlying foreign currency covered by the
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call or has an absolute and immediate right to acquire that foreign currency
without additional cash consideration (or for additional cash consideration held
in a segregated account by its custodian, which acts as the Fund's custodian, or
by a designated sub-custodian) upon conversion or exchange of other foreign
currency held in its portfolio. A call option is also covered if the Fund has a
call on the same foreign currency and in the same principal amount as the call
written where the exercise price of the call held (a) is equal to or less than
the exercise price or the call written or (b) is greater than the exercise price
of the call written if the difference is maintained by the Fund in cash, U.S.
Government Securities and other high-grade liquid debt securities in a
segregated account with its custodian or with a designated sub-custodian.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
A Fund may purchase or sell forward foreign currency exchange
contracts ("forward contracts") to attempt to minimize the risk to the Fund from
variations in foreign exchange rates. A forward contract is an obligation to
purchase or sell a specific currency for an agreed price at a future date which
is individually negotiated and privately traded by currency traders and their
customers. A Fund may enter into a forward contract, for example, when it enters
into a contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of the security
("transaction hedge"). Additionally, for example, when a Fund believes that a
foreign currency may suffer a substantial decline against the U.S. dollar, it
may enter into a forward sale contract to sell an amount of that foreign
currency approximating the value of some or all of the Fund's securities
denominated in such foreign currency, or when a Fund believes that the U.S.
dollar may suffer a substantial decline against foreign currency, it may enter
into a forward purchase contract to buy that foreign currency for a fixed dollar
amount ("position hedge"). In this situation, the Fund may, in the alternative,
enter into a forward contract to sell a different foreign currency for a fixed
U.S. dollar amount where it believes that the U.S. dollar value of the currency
to be sold pursuant to the forward contract will fall whenever there is a
decline in the U.S. dollar value of the currency in which portfolio securities
of the sector are denominated ("cross-hedge"). If a Fund enters into a position
hedging transaction, cash not available for investment or U.S. Government
Securities or other high quality debt securities will be placed in a segregated
account in an amount sufficient to cover the Fund's net liability under such
hedging transactions. If the value of the securities placed in the segregated
account declines, additional cash or securities will be placed in the account so
that the value of the account will equal the amount of the Fund's commitment
with respect to its position hedging transactions. As an alternative to
maintaining all or part of the separate account, a Fund may purchase a call
option permitting it to purchase the amount of foreign currency being hedged by
a forward sale contract at a price no higher than the forward contract price or
a Fund may purchase a put option permitting it to sell the amount of foreign
currency subject to a forward purchase contract at a price as high or higher
than the forward contract price. Unanticipated changes in currency prices would
result in lower overall performance for a Fund than if it had not entered into
such contracts.
Generally, the Funds will not enter into a forward foreign
currency exchange contract with a term of greater than one year. At the maturity
of the contract, a Fund may either sell the portfolio security and make delivery
of the foreign currency, or may retain the security and terminate the obligation
to deliver the foreign currency by purchasing an "offsetting" forward contract
with the same currency trader obligating the Fund to purchase, on the same
maturity date, the same amount of foreign currency.
It is impossible to forecast with absolute precision the market
value of portfolio securities at the expiration of the contract. Accordingly, it
may be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency the Fund is obligated to
deliver and if a decision is made to sell the security and make delivery of the
foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the portfolio security if
its market value exceeds the amount of foreign currency the Fund is obligated to
deliver.
If a Fund retains the portfolio security and engages in an
offsetting transaction, it will incur a gain or a loss (as described below) to
the extent that there has been movement in forward contract prices. If a Fund
engages in an offsetting transaction, it may subsequently enter into a new
forward contract to sell the foreign currency. Should forward prices decline
during the period between entering into a forward contract for
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the sale of a foreign currency and the date the Fund enters into an offsetting
contract for the purchase of the foreign currency, the Fund will realize a gain
to the extent the price of the currency the Fund has agreed to sell exceeds the
price of the currency it has agreed to purchase. Should forward prices increase,
the Fund will suffer a loss to the extent the price of the currency the Fund has
agreed to purchase exceeds the price of the currency the Fund has agreed to
sell.
The Funds' dealing in forward foreign currency exchange
contracts will be limited to the transactions described above. Of course, a Fund
is not required to enter into such transactions with regard to its foreign
currency-denominated securities and will not do so unless deemed appropriate by
Guinness Flight. It also should be realized that this method of protecting the
value of a Fund's portfolio securities against the decline in the value of a
currency does not eliminate fluctuations in the underlying prices of the
securities. It simply establishes a rate of exchange which one can achieve at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time they tend to limit any potential gain which might result should
the value of such currency increase.
ADDITIONAL RISKS OF FUTURES CONTRACTS AND RELATED OPTIONS, FORWARD FOREIGN
CURRENCY EXCHANGE CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
The market prices of futures contracts may be affected by
certain factors. First, all participants in the futures market are subject to
margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which could distort the normal relationship between the
securities and futures markets. Second, from the point of view of speculators,
the deposit requirements in the futures market are less onerous than margin
requirements in the securities market. Therefore, increased participation by
speculators in the futures market may also cause temporary price distortions.
In addition, futures contracts in which a Fund may invest may be
subject to commodity exchange imposed limitations on fluctuations in futures
contract prices during a single day. Such regulations are referred to as "daily
price fluctuation limits" or "daily limits." During a single trading day no
trades may be executed at prices beyond the daily limit. Once the price of a
futures contract has increased or decreased by an amount equal to the daily
limit, positions in those futures cannot be taken or liquidated unless both a
buyer and seller are willing to effect trades at or within the limit. Daily
limits, or regulatory intervention in the commodity markets, could prevent a
Fund from promptly liquidating unfavorable positions and adversely affect
operations and profitability.
Options on foreign currencies and forward foreign currency
exchange contracts ("forward contracts") are not traded on contract markets
regulated by the Commodity Futures Trading Commission ("CFTC") and are not
regulated by the SEC. Rather, forward currency contracts are traded through
financial institutions acting as market-makers. Foreign currency options are
traded on certain national securities exchanges, such as the Philadelphia Stock
Exchange and the Chicago Board Options Exchange, subject to SEC regulation. In
the forward currency market, there are no daily price fluctuation limits, and
adverse market movements could therefore continue to an unlimited extent over a
period of time. Moreover, a trader of forward contracts could lose amounts
substantially in excess of its initial investments, due to the collateral
requirements associated with such positions.
Options on foreign currencies traded on national securities
exchanges are within the jurisdiction of the SEC, as are other securities traded
on such exchanges. As a result, many of the protections provided to traders on
organized exchanges will be available with respect to such transactions. In
particular, all foreign currency option positions entered into on a national
securities exchange are cleared and guaranteed by the OCC, thereby reducing the
risk of counterparty default. Further, a liquid secondary market in options
traded on a national securities exchange may exist, potentially permitting a
Fund to liquidate open positions at a profit prior to exercise or expiration, or
to limit losses in the event of adverse market movements.
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The purchase and sale of exchange-traded foreign currency
options, however, are subject to the risks of the availability of a liquid
secondary market described above, as well as the risks regarding adverse market
movements, margining of options written, the nature of the foreign currency
market, possible intervention by governmental authorities and the effects of
other political and economic events. In addition, exercise and settlement of
such options must be made exclusively through the OCC, which has established
banking relationships in applicable foreign countries for this purpose. As a
result, the OCC may, if it determines that foreign governmental restrictions or
taxes would prevent the orderly settlement of foreign currency option exercises,
or would result in undue burdens on the OCC or its clearing member, impose
special procedures on exercise and settlement, such as technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts and related options and forward
contracts and options on foreign currencies may be traded on foreign exchanges,
to the extent permitted by the CFTC. Such transactions are subject to the risk
of governmental actions affecting trading in or the prices of foreign currencies
or securities. The value of such positions also could be adversely affected by
(a) other complex foreign political and economic factors, (b) lesser
availability than in the United States of data on which to make trading
decisions, (c) delays in a Fund's ability to act upon economic events occurring
in foreign markets during nonbusiness hours in the United States and the United
Kingdom, (d) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (e) lesser
trading volume.
REGULATORY MATTERS
In connection with its proposed futures and options
transactions, each Fund will file with the CFTC a notice of eligibility for
exemption from the definition of (and therefore from CFTC regulation as) a
"commodity pool operator" under the Commodity Exchange Act.
The Staff of the SEC has taken the position that the purchase
and sale of futures contracts and the writing of related options may involve
senior securities for the purposes of the restrictions contained in Section 18
of the 1940 Act on investment companies issuing senior securities. However, the
Staff has issued letters declaring that it will not recommend enforcement action
under Section 18 if an investment company:
(i) sells futures contracts on an index of securities that
correlate with its portfolio securities to offset
expected declines in the value of its portfolio
securities;
(ii) writes call options on futures contracts, stock indexes
or other securities, provided that such options are
covered by the investment company's holding of a
corresponding long futures position, by its ownership
of portfolio securities which correlate with the
underlying stock index, or otherwise;
(iii)purchases futures contracts, provided the investment
company establishes a segregated account ("cash
segregated account") consisting of cash or cash
equivalents in an amount equal to the total market
value of such futures contracts less the initial margin
deposited therefor; and
(iv) writes put options on futures contracts, stock indices
or other securities, provided that such options are
covered by the investment company's holding of a
corresponding short futures position, by establishing a
cash segregated account in an amount equal to the value
of its obligation under the option, or otherwise.
In addition, the Funds are eligible for, and are claiming,
exclusion from the definition of the term Commodity Pool Operator in connection
with the operations of the Funds, in accordance with subparagraph (1) of
paragraph (a) of CFTC Rule 4.5, because each Fund represents that it will
operate in a manner such that:
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(i) each Fund will use commodity futures or commodity options
contracts solely for bona fide hedging purposes within the meaning and
intent of Commission Rule 1.3(z)(1); provided, however, that in
addition, with respect to positions in commodity futures or commodity
option contracts which do not come within the meaning and intent of
Rule 1.3(z)(1), each Fund will 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; and,
provided further, 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
Commission Rule 190.01(x) may be excluded in computing such five (5)
percent;
(ii) each Fund will not be, and has not been, marketing
participations to the public as or in a commodity pool or otherwise as
or in a vehicle for trading in the commodity futures or commodity
options markets;
(iii) each Fund will disclose in writing to each prospective
participant the purpose of and the limitations on the scope of the
commodity futures and commodity options trading in which the Fund
intends to engage; and
(iv) each Fund will submit to such special calls as the
Commission may make to require the Fund to demonstrate compliance with
the provisions of Commission Rule 4.5(c).
The Funds will conduct their purchases and sales of futures
contracts and writing of related options transactions in accordance with the
foregoing.
REPURCHASE AGREEMENTS
A Fund may enter into repurchase agreements. Under a
repurchase agreement, a Fund acquires a debt instrument for a relatively short
period (usually not more than one week) subject to the obligation of the seller
to repurchase and the Fund to resell such debt instrument at a fixed price. The
resale price is in excess of the purchase price in that it reflects an
agreed-upon market interest rate effective for the period of time during which
the Fund's money is invested. A Fund's risk is limited to the ability of the
seller to pay the agreed-upon sum upon the delivery date. When a Fund enters
into a repurchase agreement, it obtains collateral having a value at least equal
to the amount of the purchase price. Repurchase agreements can be considered
loans as defined by the 1940 Act, collateralized by the underlying securities.
The return on the collateral may be more or less than that from the repurchase
agreement. The securities underlying a repurchase agreement will be marked to
market every business day so that the value of the collateral is at least equal
to the value of the loan, including the accrued interest earned. In evaluating
whether to enter into a repurchase agreement, Guinness Flight will carefully
consider the creditworthiness of the seller. If the seller defaults and the
value of the collateral securing the repurchase agreement declines, the Fund may
incur a loss.
ILLIQUID AND RESTRICTED SECURITIES
The Funds have adopted the following investment policy, which
may be changed by the vote of the Board of Trustees. The Funds will not invest
in illiquid securities if immediately after such investment more than 15% of a
Fund's net assets (taken at market value) would be invested in such securities.
For this purpose, illiquid securities include (a) securities that are illiquid
by virtue of the absence of a readily available market or legal or contractual
restrictions on resale, (b) participation interests in loans that are not
subject to puts, (c) covered call options on portfolio securities written by a
Fund over-the-counter and the cover for such options and (d) repurchase
agreements not terminable within seven days.
Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered for sale to the public, securities that are otherwise not
readily marketable and repurchase agreements having a maturity of longer than
seven days. Mutual funds do not typically hold a significant amount of these
restricted or other illiquid securities because of the potential for delays on
resale and uncertainty in valuation. Limitations on resale may have an adverse
effect on the
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marketability of portfolio securities and a mutual fund might be unable to
dispose of restricted or other illiquid securities promptly or at reasonable
prices and might thereby experience difficulty satisfying redemptions within
seven days. A mutual fund might also have to register such restricted securities
in order to dispose of them resulting in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has
developed for certain securities that are not registered under the Securities
Act including repurchase agreements, commercial paper, foreign securities,
municipal securities and corporate bonds and notes. Institutional investors
depend on an efficient institutional market in which the unregistered security
can be readily resold or on an issuer's ability to honor a demand for repayment.
The fact that there are contractual or legal restrictions on resale to the
general public or to certain institutions may not be indicative of the liquidity
of such investments.
The Commission has adopted Rule 144A, which allows a broader
institutional trading market for securities otherwise subject to restriction on
resale to the general public. Rule 144A establishes a "safe harbor" from the
registration requirements of the Securities Act applicable to resales of certain
securities to qualified institutional buyers. Guinness Flight anticipates that
the market for certain restricted securities such as institutional commercial
paper will expand further as a result of this new regulation and the development
of automated systems for the trading, clearance and settlement of unregistered
securities of domestic and foreign issuers, such as the PORTAL System sponsored
by the National Association of Securities Dealers, Inc. (the "NASD").
Guinness Flight will monitor the liquidity of restricted
securities in the Funds' portfolios under the supervision of the Funds' 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 Funds' assets will be invested principally in securities
of entities in foreign markets and substantially all of the income received by
the Funds will be in foreign currencies. If the value of the foreign currencies
in which a Fund receives its income falls relative to the U.S. dollar between
the earning of the income and the time at which the Fund converts the foreign
currencies to U.S. dollars, the Fund will be required to liquidate securities in
order to make distributions if the Fund has insufficient cash in U.S. dollars to
meet distribution requirements. The liquidation of investments, if required, may
have an adverse impact on a Fund's performance.
Changes in foreign currency exchange rates also will affect
the value of securities in the Funds' portfolios and the unrealized appreciation
or depreciation of investments. Further, a Fund may incur costs in connection
with conversions between various currencies. Foreign exchange dealers realize a
profit based on the difference between the prices at which they are buying and
selling various currencies. Thus, a dealer normally will offer to sell a foreign
currency to a Fund at one rate, while offering a lesser rate of exchange should
the Fund desire immediately to resell that currency to the dealer. The Funds
will conduct their foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the
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<PAGE>
foreign currency exchange market, or through entering into forward, futures or
options contracts to purchase or sell foreign currencies.
A Fund may enter into forward currency exchange contracts and
currency futures contracts and options on such futures contracts, as well as
purchase put or call options on currencies, in U.S. or foreign markets to
protect the value of some portion or all of its portfolio holdings against
currency risks by engaging in hedging transactions. There can be no guarantee
that instruments suitable for hedging currency or market shifts will be
available at the time when a Fund wishes to use them. Moreover, investors should
be aware that in most emerging countries, such as China, the markets for certain
of these hedging instruments are not highly developed and that in many emerging
countries no such markets currently exist.
INVESTMENT RESTRICTIONS AND POLICIES
Investment restrictions are fundamental policies and cannot be
changed without approval of the holders of a majority (as defined in the 1940
Act) of the outstanding shares of a Fund. As used in the Prospectus and the
Statement of Additional Information, the term "majority of the outstanding
shares" of a Fund means, respectively, the vote of the lesser of (i) 67% or more
of the shares of the Fund present at a meeting, if the holders of more than 50%
of the outstanding shares of the Fund are present or represented by proxy, or
(ii) more than 50% of the outstanding shares of the Fund. The following are the
Funds' investment restrictions set forth in their entirety. Investment policies
are not fundamental and may be changed by the Board of Trustees without
shareholder approval.
INVESTMENT RESTRICTIONS
Each Fund may not:
1. Issue senior securities, except that a Fund may borrow up
to 33 1/3% of the value of its total assets from a bank (i) to increase its
holdings of portfolio securities, (ii) to meet redemption requests, or (iii) for
such short-term credits as may be necessary for the clearance or settlement of
the transactions. A Fund may pledge its assets to secure such borrowings.
2. Invest 25% or more of the total value of its assets in a
particular industry, except that this restriction shall not apply to U.S.
Government Securities.
3. Buy or sell commodities or commodity contracts or real
estate or interests in real estate (including real estate limited partnerships),
except that it may purchase and sell futures contracts on stock indices,
interest rate instruments and foreign currencies, securities which are secured
by real estate or commodities, and securities of companies which invest or deal
in real estate or commodities.
4. Make loans, except through repurchase agreements to the
extent permitted under applicable law.
5. Act as an underwriter except to the extent that, in
connection with the disposition of portfolio securities, it may be deemed to be
an underwriter under applicable securities laws.
INVESTMENT POLICIES
Each Fund may not:
1. Purchase securities on margin, except such short-term
credits as may be necessary for clearance of transactions and the maintenance of
margin with respect to futures contracts.
2. Make short sales of securities or maintain a short position
(except that the Fund may maintain short positions in foreign currency
contracts, options and futures contracts).
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<PAGE>
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 Funds by Guinness Flight subject to the supervision
of the Guinness Flight Funds and the Board of Trustees and pursuant to authority
contained in the Management Agreement between the Funds and Guinness Flight. In
selecting such brokers or dealers, Guinness Flight will consider various
relevant factors, including, but not limited to the best net price available,
the size and type of the transaction, the nature and character of the markets
for the security to be purchased or sold, the execution efficiency, settlement
capability, financial condition of the broker-dealer firm, the broker-dealer's
execution services rendered on a continuing basis and the reasonableness of any
commissions.
In addition to meeting the primary requirements of execution
and price, brokers or dealers may be selected who provide research services, or
statistical material or other services to a Fund or to Guinness Flight for the
Fund's use, which in the opinion of the Board of 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 a 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 Funds. The receipt of
such research may not reduce Guinness Flight's normal independent research
activities.
Guinness Flight is authorized, subject to best price and
execution, to place portfolio transactions with brokerage firms that have
provided assistance in the distribution of shares of the Funds and is authorized
to use the Distributor on an agency basis, to effect a substantial amount of the
portfolio transactions which are executed on the New York or American Stock
Exchanges, Regional Exchanges and Foreign Exchanges where relevant, or which are
traded in the Over-the-Counter market.
Brokers or dealers who execute portfolio transactions on
behalf of a Fund may receive commissions which are in excess of the amount of
commissions which other brokers or dealers would have charged for effecting such
transactions; provided, Guinness 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 Fund's overall responsibilities to a
Fund.
It may happen that the same security will be held by other
clients of Guinness Flight. When the other clients are simultaneously engaged in
the purchase or sale of the same security, the prices and amounts will be
allocated in accordance with a formula considered by Guinness Flight to be
equitable to each, taking into consideration such factors as size of account,
concentration of holdings, investment objectives, tax status, cash availability,
purchase cost, holding period and other pertinent factors relative to each
account. In some cases this system could have a detrimental effect on the price
or volume of the security as far as a Fund is concerned.
-16-
<PAGE>
In other cases, however, the ability of a Fund to participate in volume
transactions will produce better executions for the Fund.
Brokerage commissions paid by the Funds were as follows:
<TABLE>
<CAPTION>
Year Ended Asia Blue Asia Small China & Hong Mainland
December 31, Chip Fund Cap Fund Kong Fund China Fund
------------ --------- -------- --------- ----------
<S> <C> <C> <C> <C>
1997 $37,794 $1,271,036 $714,450 $18,313(1)
1996 $23,303(2) $204,067(2) $736,492 --
1995 -- -- $258,319 --
</TABLE>
The increase in Asia Small Cap Fund's brokerage commissions in 1997 is primarily
due to volatile Asian equity markets in 1997.
COMPUTATION OF NET ASSET VALUE
The net asset value of the Funds 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 a Fund's securities to
affect materially the net asset value per share of the Fund. The Funds will be
closed on New Years Day, Presidents' Day, Martin Luther King, Jr.'s Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day.
The Funds will invest in foreign securities, and as a result,
the calculation of the Funds' net asset value may not take place
contemporaneously with the determination of the prices of certain of the
portfolio securities used in the calculation. Occasionally, events which affect
the values of such securities and such exchange rates may occur between the
times at which they are determined and the close of the New York Stock Exchange
and will therefore not be reflected in the computation of a Fund's net asset
value. If events materially affecting the value of such securities occur during
such period, then these securities may 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 a Fund which are
traded both on an exchange and in the over-the-counter market, will be valued
according to the broadest and most representative market. All assets and
liabilities initially expressed in foreign currency values will be converted
into U.S. Dollar values at the mean between the bid and offered quotations of
the currencies against U.S. Dollars as last quoted by any recognized dealer.
When portfolio securities are traded, the valuation will be the last reported
sale price on the day of valuation. (For securities traded on the New York Stock
Exchange, the valuation will be the last reported sales price as of the close of
the Exchange's regular trading session, currently 4:00 p.m. New York time.) If
there is no such reported sale or the valuation is based on the Over-the-Counter
market, the securities will be valued at the last available bid price or at the
mean between the bid and asked prices, as determined by the Board of 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 Funds.
Money market instruments with less than sixty days remaining
to maturity when acquired by the Funds will be valued on an amortized cost basis
by the Funds, excluding unrealized gains or losses thereon from the valuation.
This is accomplished by valuing the security at cost and then assuming a
constant amortization to maturity of any premium or discount. If a Fund acquires
a money market instrument with more than sixty days remaining to its maturity,
it will be valued at current market value until the 60th day prior to
- --------------------
1 For the period 11/3/97 (commencement of operations) to 12/31/97.
2 For the period 4/29/96 (commencement of operations) to 12/31/96.
-17-
<PAGE>
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 a Fund's
total assets. The resulting net assets are divided by the number of shares of
the Fund outstanding at the time of the valuation and the result (adjusted to
the nearest cent) is the net asset value per share.
PERFORMANCE INFORMATION
For purposes of quoting and comparing the performance of a
Fund to that of other mutual funds and to stock or other relevant indices in
advertisements or in reports to Shareholders, performance will be stated both in
terms of total return and in terms of yield. The total return basis combines
principal and dividend income changes for the periods shown. Principal changes
are based on the difference between the beginning and closing net asset values
for the period and assume reinvestment of dividends and distributions paid by
the Fund. Dividends and distributions are comprised of net investment income and
net realized capital gains. Under the rules of the Commission, funds advertising
performance must include total return quotes calculated according to the
following formula:
P(1 + T)^n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years (1, 5 or 10)
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of the
1, 5 or 10 year periods or at the end of the
1, 5 or 10 year periods (or fractional
portion thereof)
In calculating the ending redeemable value, all dividends and
distributions by the Fund are assumed to have been reinvested at net asset value
as described in the prospectus on the reinvestment dates during the period.
Total return, or "T" in the formula above, is computed by finding the average
annual compounded rates of return over the 1, 5 and 10 year periods (or
fractional portion thereof) that would equate the initial amount invested to the
ending redeemable value.
A Fund may also from time to time include in such advertising a
total return figure that is not calculated according to the formula set forth
above in order to compare more accurately the Fund's performance with other
measures of investment return. For example, in comparing a Fund's total return
with data published by Lipper Analytical Services, Inc. or similar independent
services or financial publications, the Fund calculates its aggregate total
return for the specified periods of time by assuming the reinvestment of each
dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial net asset value
of the investment from the ending net asset value and by dividing the remainder
by the beginning net asset value. Such alternative total return information will
be given no greater prominence in such advertising than the information
prescribed under the Commission's rules.
In addition to the total return quotations discussed above, a
Fund may advertise its yield based on a 30-day (or one month) period ended on
the date of the most recent balance sheet included in the Fund's Post-Effective
Amendment to its Registration Statement, computed by dividing the net investment
income per share earned during the period by the maximum offering price per
share on the last day of the period, according to the following formula:
a-b
YIELD = 2[( ----- +1)^6-1]
cd
-18-
<PAGE>
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of
reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
Under this formula, interest earned on debt obligations for
purposes of "a" above, is calculated by (1) computing the yield to maturity of
each obligation held by the Fund based on the market value of the obligation
(including actual accrued interest) at the close of business on the last day of
each month, or, with respect to obligations purchased during the month, the
purchase price (plus actual accrued interest), (2) dividing that figure by 360
and multiplying the quotient by the market value of the obligation (including
actual accrued interest as referred to above) to determine the interest income
on the obligation for each day of the subsequent month that the obligation is in
the Fund's portfolio (assuming a month of 30 days) and (3) computing the total
of the interest earned on all debt obligations and all dividends accrued on all
equity securities during the 30-day or one month period. In computing dividends
accrued, dividend income is recognized by accruing 1/360 of the stated dividend
rate of a security each day that the security is in the Fund's portfolio. For
purposes of "b" above, Rule 12b-1 expenses are included among the expenses
accrued for the period. Undeclared earned income, computed in accordance with
generally accepted accounting principles, may be subtracted from the maximum
offering price calculation required pursuant to "d" above.
Any quotation of performance stated in terms of yield will be
given no greater prominence than the information prescribed under the SEC's
rules. In addition, all advertisements containing performance data of any kind
will include a legend disclosing that such performance data represents past
performance and that the investment return and principal value of an investment
will fluctuate so that an investor's shares, when redeemed, may be worth more or
less than their original cost.
The annual compounded rate of total return for the one year
period ended December 31, 1997 and the average annual compounded rate of total
return from June 30, 1994 (inception) to December 31, 1997 for the China & Hong
Kong Fund was -20.34% and 5.07%, respectively, and for the Global Government
Bond Fund was 2.87% and 5.88%, respectively. The annual compounded rate of total
return for the one-year period ended December 31, 1997 and the average annual
compounded rate of total return from April 29, 1996 (inception) to December 31,
1997 for the Asia Blue Chip Fund was -37.68% and -22.90%, respectively, and for
the Asia Small Cap Fund was -30.77 and - 13.60%, respectively. The total return
for the period from November 3, 1997 (inception) to December 31, 1997 for the
Mainland China Fund was -5.50%. For the 30 day period ended December 31, 1997,
the Global Government Bond Fund's yield was 4.90%.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
The Funds have elected to be governed by Rule 18f-1 of the 1940
Act, under which a Fund is obligated to redeem the shares of any shareholder
solely in cash up to the lesser of 1% of the net asset value of the Fund or
$250,000 during any 90-day period. Should any shareholder's redemption exceed
this limitation, a Fund can, at its sole option, redeem the excess in cash or in
readily marketable portfolio securities. Such securities would be selected
solely by the Fund and valued as in computing net asset value. In these
circumstances a shareholder selling such securities would probably incur a
brokerage charge and there can be no assurance that the price realized by a
shareholder upon the sale of such securities will not be less than the value
used in computing net asset value for the purpose of such redemption.
TAX MATTERS
The following is only a summary of certain additional tax
considerations generally affecting each Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of each Fund or its shareholders, and the
discussions here and in the Prospectus are not intended as substitutes for
careful tax planning.
-19-
<PAGE>
Qualification as a Regulated Investment Company
Each 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, a Fund is not subject to federal income tax on the portion of its net
investment income (i.e., taxable interest, dividends and other taxable ordinary
income, net of expenses) and capital gain net income (i.e., the excess of
capital gains over capital losses) that it distributes to shareholders, provided
that it distributes at least 90% of its investment company taxable income (i.e.,
net investment income and the excess of net short-term capital gain over net
long-term capital loss) for the taxable year (the "Distribution Requirement"),
and satisfies certain other requirements of the Code that are described below.
Distributions by a Fund made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year, will be
considered distributions of income and gains of the taxable year and will
therefore count toward satisfaction of the Distribution Requirement.
In addition to satisfying the Distribution Requirement, a
regulated investment company must 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").
In general, gain or loss recognized by a 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 a Fund at a market discount (generally, at a price less than its principal
amount) will be treated as ordinary income to the extent of the portion of the
market discount which accrued during the period of time the Fund held the debt
obligation. In addition, under the rules of Code section 988, gain or loss
recognized on the disposition of a debt obligation denominated in a foreign
currency or an option with respect thereto (but only to the extent attributable
to changes in foreign currency exchange rates), and gain or loss recognized on
the disposition of a foreign currency forward contract, futures contract, option
or similar financial instrument, or of foreign currency itself, except for
regulated futures contracts or non-equity options subject to Code Section 1256
(unless a Fund elects otherwise), will generally be treated as ordinary income
or loss.
In general, for purposes of determining whether capital gain or
loss recognized by a Fund on the disposition of an asset is long-term or
short-term, the holding period of the asset may be affected if (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. In addition, a Fund may be required to
defer the recognition of a loss on the disposition of an asset held as part of a
straddle to the extent of any unrecognized gain on the offsetting position.
Any gain recognized by a Fund on the lapse of, or any gain or
loss recognized by a Fund from a closing transaction with respect to, an option
written by the Fund will be treated as a short-term capital gain or loss.
Further, the Code also treats as ordinary income a portion of
the capital gain attributable to a transaction where substantially all of the
return realized is attributable to the time value of a Fund's net investment in
the transaction and: (1) the transaction consists of the acquisition of property
by the Fund and a contemporaneous contract to sell substantially identical
property in the future; (2) the transaction is a straddle within the meaning of
section 1092 of the Code; (3) the transaction is one that was marketed or sold
to the Fund on the basis that it would have the economic characteristics of a
loan but the interest-like return would be taxed
-20-
<PAGE>
as capital gain; or (4) the transaction is described as a conversion transaction
in the Treasury Regulations. The amount of the gain recharacterized generally
will not exceed the amount of the interest that would have accrued on the net
investment for the relevant period at a yield equal to 120% of the federal
long-term, mid-term, or short-term rate, depending upon the type of instrument
at issue, reduced by an amount equal to: (1) prior inclusions of ordinary income
items from the conversion transaction and (2) the capital interest on
acquisition indebtedness under Code section 263(g). Built-in losses will be
preserved where the Fund has a built-in loss with respect to property that
becomes a part of a conversion transaction. No authority exists that indicates
that the converted character of the income will not be passed through to the
Fund's shareholders.
Certain transactions that may be engaged in by a Fund (such as
regulated futures contracts, certain foreign currency contracts, and options on
stock indexes and futures contracts) will be subject to special tax treatment as
"Section 1256 contracts." Section 1256 contracts are treated as if they are sold
for their fair market value on the last business day of the taxable year, even
though a taxpayer's obligations (or rights) under such contracts have not
terminated (by delivery, exercise, entering into a closing transaction or
otherwise) as of such date. Any gain or loss recognized as a consequence of the
year-end deemed disposition of Section 1256 contracts is taken into account for
that taxable year together with any other gain or loss that was previously
recognized upon the termination of Section 1256 contracts during that taxable
year. Any capital gain or loss for the taxable year with respect to Section 1256
contracts (including any capital gain or loss arising as a consequence of the
year-end deemed sale of such contracts) is generally treated as 60% long-term
capital gain or loss and 40% short-term capital gain or loss. A Fund, however,
may elect not to have this special tax treatment apply to Section 1256 contracts
that are part of a "mixed straddle" with other investments of the Fund that are
not Section 1256 contracts.
A Fund may purchase securities of certain foreign investment
funds or trusts which constitute passive foreign investment companies ("PFICs")
for federal income tax purposes. If a Fund invests in a PFIC, it has three
separate options. First, it may elect to treat the PFIC as a qualifying electing
fund (a "QEF"), in which case it 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
earnings or capital gains from the PFIC. Second, for tax years beginning after
December 31, 1997, the Fund may make a mark-to-market election with respect to
its PFIC stock. Pursuant to such an 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 its adjusted tax basis in the stock. If the adjusted tax basis
of the PFIC stock exceeds the fair market value of such stock at the end of a
given 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 its PFIC stock subject to the
election will commence on the first day of the following taxable year. If the
Fund makes the mark-to-market election in the first taxable year it holds PFIC
stock, it will not incur the tax described below under the third option.
Finally, 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 a sale or other disposition of its interest in the
PFIC or any "excess distribution" (as defined) received by the Fund from the
PFIC will be allocated ratably over the Fund's holding period in the PFIC stock,
(2) the portion of such gain or excess distribution so allocated to the year in
which the gain is recognized or the excess distribution is received shall be
included in the Fund's gross income for such year as ordinary income (and the
distribution of such portion by the Fund to shareholders will be taxable as an
ordinary income dividend, but such portion will not be subject to tax at the
Fund level), (3) the Fund shall be liable for tax on the portions of such gain
or excess distribution so allocated to prior years in an amount equal to, for
each such prior year, (i) the amount of gain or excess distribution allocated to
such prior year multiplied by the highest tax rate (individual or corporate, as
the case may be) in effect for such prior year , plus (ii) interest on the
amount determined under clause (i) for the period from the due date for filing a
return for such prior year until the date for filing a return for the year in
which the gain is recognized or the excess distribution is received, at the
rates and methods applicable to underpayments of tax for such period, and (4)
the distribution by the Fund to shareholders of the portions of such gain or
excess distribution so allocated to prior years (net of the tax payable by the
Fund thereon) will again be taxable to the shareholders as an ordinary income
dividend.
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<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 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, a
Fund must satisfy an asset diversification test in order to qualify as a
regulated investment company. Under this test, at the close of each quarter of a
Fund's taxable year, at least 50% of the value of the Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to 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 a Fund does not qualify as a regulated
investment company, all of its taxable income (including its net capital gain)
will be subject to tax at regular corporate rates without any deduction for
distributions to shareholders, and such distributions will be taxable to the
shareholders as ordinary dividends to the extent of the Fund's current and
accumulated earnings and profits. Such distributions generally will be eligible
for the dividends-received deduction in the case of corporate shareholders.
Excise Tax on Regulated Investment Companies
A 4% non-deductible excise tax is imposed on a regulated
investment company that fails to distribute in each calendar year an amount
equal to 98% of ordinary taxable income for the calendar year and 98% of capital
gain net income for the one-year period ended on October 31 of such calendar
year (or, at the election of a regulated investment company having a taxable
year ending November 30 or December 31, for its taxable year (a "taxable year
election")). The balance of such income must be distributed during the next
calendar year. For the foregoing purposes, a regulated investment company is
treated as having distributed any amount on which it is subject to income tax
for any taxable year ending in such calendar year.
For purposes of the excise tax, a regulated investment company
shall: (1) reduce its capital gain net income (but not below its net capital
gain) by the amount of any net ordinary loss for the calendar year; and (2)
exclude foreign currency gains and losses 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).
Each Fund intends to make sufficient distributions or deemed
distributions of its ordinary taxable income and capital gain net income prior
to the end of each calendar year to avoid liability for the excise tax. However,
investors should note that a Fund may in certain circumstances be required to
liquidate portfolio investments to make sufficient distributions to avoid excise
tax liability.
Fund Distributions
Each Fund anticipates distributing substantially all of its
investment company taxable income for each taxable year. Such distributions will
be taxable to shareholders as ordinary income and treated as dividends for
federal income tax purposes, but they generally should not qualify for the 70%
dividends-received deduction for corporate shareholders.
-22-
<PAGE>
A Fund may either retain or distribute to shareholders its net
capital gain for each taxable year. Each Fund currently intends to distribute
any such amounts. 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 a Fund prior to the date on which the shareholder
acquired his shares.
Conversely, if a Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to the extent of any available capital loss
carryovers) at the 35% corporate tax rate. If a Fund elects to retain its net
capital gain, it is expected that the Fund also will elect to have shareholders
of record on the last day of its taxable year treated as if each such
shareholder 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.
Alternative minimum tax ("AMT") is imposed in addition to, but
only to the extent it exceeds, the regular tax and is computed at a maximum
marginal rate of 28% for noncorporate taxpayers and 20% for corporate taxpayers
on the excess of the taxpayer's alternative minimum taxable income ("AMTI") over
an exemption amount.
Investment income that may be received by a Fund from sources
within foreign countries may be subject to foreign taxes withheld at the source.
The United States has entered into tax treaties with many foreign countries
which may entitle a Fund to a reduced rate of, or exemption from, taxes on such
income. It is impossible to determine the effective rate of foreign tax in
advance since the amount of each Fund's assets to be invested in various
countries is not known. If more than 50% of the value of a Fund's total assets
at the close of its taxable year consist of the stock or securities of foreign
corporations, a Fund may elect to "pass through" to the Fund's shareholders the
amount of foreign taxes paid by the Fund. If a Fund so elects, each shareholder
would be required to include in gross income, even though not actually received,
his pro rata share of the foreign taxes paid by the Fund, but would be treated
as having paid his pro rata share of such foreign taxes and would therefore be
allowed to either deduct such amount in computing taxable income or use such
amount (subject to various Code limitations) as a foreign tax credit against
federal income tax (but not both). For purposes of the foreign tax credit
limitation rules of the Code, each shareholder would treat as foreign source
income his pro rata share of such foreign taxes plus the portion of dividends
received from a Fund representing income derived from foreign sources. No
deduction for foreign taxes could be claimed by an individual shareholder who
does not itemize deductions. Each shareholder should consult his own tax adviser
regarding the potential application of foreign tax credits.
Distributions by a Fund that do not constitute ordinary income
dividends or capital gain dividends will be treated as a return of capital to
the extent of (and in reduction of) the shareholder's tax basis in his shares;
any excess will be treated as gain from the sale of his shares, as discussed
below.
Distributions by a Fund will be treated in the manner described
above regardless of whether 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 a Fund reflects realized but undistributed
income or gain, or unrealized appreciation in the value of the assets held by
the Fund, distributions of such amounts to the shareholder will be taxable in
the manner described above, although such distributions economically constitute
a return of capital to the shareholder.
Ordinarily, shareholders are required to take distributions by a
Fund into account in the year in which the distributions are made. However,
dividends declared in October, November or December of any year and payable to
shareholders of record on a specified date in such a month will be deemed to
have been received by the shareholders (and made by a Fund) on December 31 of
such calendar year provided such
-23-
<PAGE>
dividends are actually paid in January of the following year. Shareholders will
be advised annually as to the U.S. federal income tax consequences of
distributions made (or deemed made) during the year.
Each Fund will be required in certain cases to withhold and
remit to the U.S. Treasury 31% of distributions, and the proceeds of redemption
of shares, paid to any shareholder (1) who has failed to
provide a correct taxpayer identification number , (2) who is subject to backup
withholding for failure properly to report the receipt of interest or dividend
income , 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 a Fund in an amount equal to the difference between the
proceeds of the sale or redemption and the shareholder's adjusted tax basis in
the shares. All or a portion of any loss so recognized may be disallowed if the
shareholder purchases other shares of a Fund within 30 days before or after the
sale or redemption. In general, any gain or loss arising from (or treated as
arising from) the sale or redemption of shares of a Fund will be considered
capital gain or loss and will be long-term capital gain or loss if the shares
were held for longer than one year. 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. Capital
losses in any year are deductible only to the extent of capital gains plus, in
the case of a noncorporate taxpayer, $3,000 of ordinary income.
Foreign Shareholders
Taxation of a shareholder who, as to the United States, is a
nonresident alien individual, foreign trust or estate, foreign corporation, or
foreign partnership ("foreign shareholder"), depends on whether the income from
a Fund is "effectively connected" with a U.S. trade or business carried on by
such shareholder.
If the income from a Fund is not effectively connected with a
U.S. trade or business carried on by a foreign shareholder, ordinary income
dividends paid to a foreign shareholder will be subject to U.S. withholding tax
at the rate of 30% (or lower applicable 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 applicable treaty rate) on the
gross income resulting from a Fund's election to treat any foreign taxes paid by
it as paid by its shareholders, but may not be allowed a deduction against this
gross income or a credit against this U.S. withholding tax for the foreign
shareholder's pro rata share of such foreign taxes which it is treated as having
paid. Such a foreign shareholder would generally be exempt from U.S. federal
income tax on gains realized on the sale of shares of a Fund, capital gain
dividends and amounts retained by the Fund that are designated as undistributed
capital gains.
If the income from a Fund is effectively connected with a U.S.
trade or business carried on by a foreign shareholder, then ordinary income and
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.
taxpayers.
In the case of foreign noncorporate shareholders, a Fund may be
required to withhold U.S. federal income tax at a rate of 31% on distributions
that are otherwise exempt from withholding tax (or subject to withholding tax 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 a Fund,
including the applicability of foreign taxes.
-24-
<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 .
Rules of state and local taxation of ordinary income and capital
gain dividends from regulated investment companies may differ from the rules for
U.S. federal income taxation described above. Shareholders are urged to consult
their tax advisers as to the consequences of these and other state and local tax
rules affecting investment in a Fund.
MANAGEMENT OF THE FUNDS
The Board of Trustees and executive officers of the Funds 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.
-25-
<PAGE>
Eric M. Banhazl - Treasurer. 2020 East Financial Way, Suite 100,
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. 2020 East Financial Way, Suite
100, 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 Funds' 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 $7,500 $0 $0 $7,500
James I. Fordwood $7,500 $0 $0 $7,500
Dr. Bret Herscher $7,500 $0 $0 $7,500
J. Brooks Reece, Jr. $8,500 $0 $0 $8,500
</TABLE>
Effective January 1, 1998, each Trustee who is not an
"interested person" of the Funds receives an annual fee of $10,000 (with the
exception of the Chairman, who receives $11,000) allocated equally among all the
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 Funds, as a
group, owned of record less than 1% of the Funds' outstanding shares.
THE INVESTMENT ADVISER AND ADVISORY AGREEMENTS
Guinness Flight furnishes investment advisory services to the
Funds. Under the Investment Advisory Agreement (the "Agreement"), Guinness
Flight directs the investments of the Funds in accordance with the investment
objectives, policies, and limitations provided in the Funds' Prospectus or other
governing instruments, the 1940 Act, and rules thereunder, and such other
limitations as the Funds may impose by notice in writing to Guinness Flight.
Guinness Flight also furnishes all necessary office facilities, equipment and
personnel for servicing the investments of the Funds; pays the salaries and fees
of all officers of Guinness Flight Funds other than those whose salaries and
fees are paid by Guinness Flight Funds' administrator or distributor;
26
<PAGE>
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 Funds, to
buy, sell, lend and otherwise trade, consistent with the Fund's then current
investment objective, policies and restrictions in any bonds and other
securities and investment instruments on behalf of the Funds. The investment
policies and all other actions of the Funds are at all times subject to the
control and direction of Guinness Flight Funds' 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 Funds, supervising relations
with, and monitoring the performance of, custodians, depositories, transfer and
pricing agents, accountants, attorneys, underwriters, brokers and dealers,
insurers and other persons in any capacity deemed to be necessary or desirable;
(ii) investigating the development of and developing and implementing, if
appropriate, management and shareholder services designed to enhance the value
or convenience of the Funds as an investment vehicle; and (iii) providing
administrative services other than those provided by Guinness Flight Funds'
administrator.
Guinness Flight also furnishes such reports, evaluations,
information or analyses to Guinness Flight Funds as Guinness Flight Funds' 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 Funds' Board
of Trustees with respect to Guinness Flight Funds' 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 Agreements.
All other costs and expenses not expressly assumed by the
Adviser under the Agreements or by the Administrator under the administration
agreement between it and the Funds on behalf of the Funds shall be paid by the
Funds from the assets of the Funds, including, but not limited to fees paid to
the Adviser and the Administrator, interest and taxes, brokerage commissions,
insurance premiums, compensation and expenses of the Trustees other than those
affiliated with the adviser or the administrator, legal, accounting and audit
expenses, fees and expenses of any transfer agent, distributor, registrar,
dividend disbursing agent or shareholder servicing agent of the Funds, expenses,
including clerical expenses, incident to the issuance, redemption or repurchase
of shares of the Funds, including issuance on the payment of, or reinvestment
of, dividends, fees and expenses incident to the registration under Federal or
state securities laws of the Funds or 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
Funds, all other expenses incidental to holding meetings of the Funds'
shareholders, expenses connected with the execution, recording and settlement of
portfolio securities transactions, fees and expenses of the Funds' custodian for
all services to the Funds, including safekeeping of funds and securities and
maintaining required books and accounts, expenses of calculating net asset value
of the shares of the Funds, industry membership fees allocable to the Funds, and
such extraordinary expenses as may arise, including litigation affecting the
Funds and the legal obligations which the Funds may have to indemnify the
officers and Trustees with respect thereto.
Expenses which are attributable to the Funds are charged against
the income of the Funds in determining net income for dividend purposes.
Guinness Flight, from time to time, may voluntarily waive all or a portion of
its fees payable under the Agreement.
The Agreement was approved by the Board of Trustees on March
9, 1997 and by the shareholders of the Funds on April 25, 1997 at a shareholder
meeting called for that purpose. The 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
Agreement or "interested persons" of any such party by votes cast in person at a
meeting called for such purpose. The Trustees or Guinness Flight may terminate
the Agreement on 60 days' written notice without penalty. The Agreement
terminates automatically in the event of its "assignment", as defined in the
1940 Act.
-27-
<PAGE>
As compensation for all services rendered under the Agreement,
Guinness Flight will receive an annual fee, payable monthly, of 1.00% of the
Asia Blue Chip Fund's, Asia Small Cap Fund's, China & Hong Kong Fund's and
Mainland China Fund's average daily net assets and .75% of the Global Government
Bond Fund's average daily net assets.
Advisory fees and expense reimbursements/(recoupments) were as follows:
<TABLE>
<CAPTION>
Gross Expenses
Advisory (Reimbursed)/
Fee Recouped
-------------------------------------------------------
<S> <C> <C>
FISCAL YEAR ENDED DECEMBER 31, 1997:
Asia Blue Chip Fund $53,636 ($130,732)
Asia Small Cap Fund 1,692,574 71,583
China & Hong Kong Fund 2,958,500 0
Mainland China Fund(1) 15,705 (11,487)
Global Government Bond Fund 58,063 (185,733)
FISCAL YEAR ENDED DECEMBER 31, 1996:
Asia Blue Chip Fund(2) $12,860 ($92,856)
Asia Small Cap Fund(2) 62,680 (71,583)
China & Hong Kong Fund 1,772,174 315,433
Global Government Bond Fund 19,110 (176,407)
FISCAL YEAR ENDED DECEMBER 31, 1995:
China & Hong Kong Fund $197,173 ($204,298)
Global Government Bond Fund 7,425 (197,114)
</TABLE>
(1) For the period 11/3/97 (commencement of operations) to 12/31/97.
(2) For the period 4/29/96 (commencement of operations) to 12/31/96.
THE ADMINISTRATOR
Investment Company Administrator Corporation (the "Administrator") acts as the
Funds' Administrator under an Administration Agreement. For its services, the
Administrator receives a monthly fee equal to, on an annual basis, 0.25% of the
Funds' average daily net assets, subject to a $40,000 annual minimum for the
China Fund and $80,000 allocated based on average daily net assets of the Asia
Blue Chip Fund, Asia Small Cap Fund, Mainland China Fund and Global Government
Bond Fund.
Administration fees paid by the Funds were as follows:
<TABLE>
<CAPTION>
Global
Year Ended Asia Blue Asia Small China & Hong Mainland Government
December 31 Chip Fund Cap Fund Kong Fund China Fund Bond Fund
----------- --------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1997 $13,425 $424,336 $739,625 $3,926(1) $19,733
1996 13,424(2) 13,424(2) 443,043 -- 27,122
1995 -- -- 49,293 -- 40,000
</TABLE>
-28-
<PAGE>
DISTRIBUTION AGREEMENT AND DISTRIBUTION PLAN
Guinness Flight Funds has entered into separate Administration
and Distribution Agreements with respect to the Funds with Investment Company
Administration Corporation ("Administrator") and First Fund Distributors, Inc.
("Distributor"), respectively. Under the Distribution Agreement, the Distributor
uses all reasonable efforts, consistent with its other business, to secure
purchases for the Funds' shares and pays the expenses of printing and
distributing any prospectuses, reports and other literature used by the
Distributor, advertising, and other promotional activities in connection with
the offering of shares of the Funds for sale to the public. It is understood
that the Administrator may reimburse the Distributor for these expenses from any
source available to it, including the administration fee paid to the
Administrator by the Funds.
The Funds will not make separate payments as a result of the
Distribution Plan to Guinness Flight, the Administrator, Distributor or any
other party, it being recognized that the Funds presently pay, and will continue
to pay, an investment advisory fee to Guinness Flight and an administration fee
to the Administrator. To the extent that any payments made by the Funds to
Guinness Flight or the Administrator, including payment of fees under the
Investment Advisory 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 Funds within the context of rule 12b-1 under
the 1940 Act, then such payments shall be deemed to be authorized by this Plan.
The Plan and related agreements were approved by the Board of
Trustees including all of the "Qualified Trustees" (Trustees who are not
"interested" persons of the Funds, as defined in the 1940 Act, and who have no
direct or indirect financial interest in the Plan or any related agreement). In
approving the Plan, in accordance with the requirements of Rule 12b-1 under the
1940 Act, the Board of Trustees (including the Qualified Trustees) considered
various factors and determined that there is a reasonable likelihood that the
Plan will benefit the Funds and their shareholders. The Plan may not be amended
to increase materially the amount to be spent by the Funds under the Plan
without shareholder approval, and all material amendments to the provisions of
the Plan must be approved by a vote of the Board of Trustees and of the
Qualified Trustees, cast in person at a meeting called for the purpose of such
vote. During the continuance of the Plan, Guinness Flight will report in writing
to the Board of Trustees quarterly the amounts and purposes of such payments for
services rendered to shareholders pursuant to the Plan. Further, during the term
of the Plan, the selection and nomination of those Trustees who are not
"interested" persons of the Funds must be committed to the discretion of the
Qualified Trustees. The Plan will continue in effect from year to year provided
that such continuance is specifically approved annually (a) by the vote of a
majority of the Funds' outstanding voting shares or by the Funds' Trustees and
(b) by the vote of a majority of the Qualified Trustees.
DESCRIPTION OF THE FUNDS
Shareholder and Trustees Liability. The Funds are each 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 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
-29-
<PAGE>
Flight Funds is insured against losses stemming from any such advance; or (iii)
there is a determination by a majority of the Guinness Flight Funds' 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 each Fund entitle the holders to one
vote per share. The shares have no preemptive or conversion rights. The dividend
rights and the right of redemption are described in the Prospectus. When issued,
shares are fully paid and nonassessable. The shareholders have certain rights,
as set forth in the Bylaws, to call a meeting for any purpose, including the
purpose of voting on removal of one or more Trustees.
SHAREHOLDER REPORTS
Shareholders will receive reports semi-annually showing the
investments of the Funds and other information. In addition, shareholders will
receive annual financial statements audited by the Funds' independent
accountants.
Principal Holders. As of March 31, 1998, principal holders owning 5% or more of
the outstanding shares of the Fund as of record date are set forth below:
<TABLE>
<CAPTION>
==============================================================================================
Shareholder % held as of
Fund Name & Address March 31, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
China & Hong Kong Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 27.83%
- ----------------------------------------------------------------------------------------------
Capital Ventures International
c/o Susquehanna Advisors Group
401 City Avenue, Suite 220
Bala Cynwyd, PA 19004-1117 7.98%
- ----------------------------------------------------------------------------------------------
Asia Blue Chip Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 23.33%
- ----------------------------------------------------------------------------------------------
Menlo F Smith Ttee
Menlo F Smith Trust
UA DTD 04/08/1988
510 Maryville Collage Dr. Suite 210
St. Louis, MO 63141-5801 12.55%
- ----------------------------------------------------------------------------------------------
Asia Small Cap Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 35.51%
- ----------------------------------------------------------------------------------------------
Mainland China Fund Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 20.92%
-30-
<PAGE>
- ----------------------------------------------------------------------------------------------
Global Government Bond Fund Pigeon & Co.
c/o Frost National Bank
P.O. Box 2479
San Antonio, TX 78298-2479 39.97%
- ----------------------------------------------------------------------------------------------
Bank of America Customer
FBO Oregon Graduate Institute
P.O. Box 513577
Los Angeles, CA 90051-1577 27.59%
- ----------------------------------------------------------------------------------------------
Charles Schwab & Co. Inc.
Special Custody Account
The Exclusive Benefit of Customers
101 Montgomery St.
San Francisco, CA 94104-4122 13.77%
==============================================================================================
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FINANCIAL STATEMENTS
The audited statement of assets and liabilities and report thereon for
the Funds for the year ended December 31, 1997 are incorporated by reference.
The opinion of Ernst & Young LLP, independent accountants, with respect to the
audited financial statements, is incorporated herein in its entirety in reliance
upon such report of Ernst & Young LLP and on the authority of such firm as
experts in auditing and accounting. Shareholders will receive a copy of the
audited and unaudited financial statements at no additional charge when
requesting a copy of the Statement of Additional Information.
-31-
<PAGE>
APPENDIX A
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
BOND RATINGS:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Bonds which are rated Aaa are judged to be the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt-edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
*AA: Bonds which are rated Aa are judged to be of high quality
by all standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or fluctuations
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than in
Aaa securities.
*A: Bond which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
*BAA: Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present, but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each
generic rating classification from Aa through B in its bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category, the modifier 2 indicates a mid-range ranking, and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
Moody's commercial paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an original
maturity in excess of nine months.
Issuers rated PRIME-1 or P-1 (or related supporting
institutions) have a superior capacity for repayment of short-term promissory
obligations. Prime-1 or P-1 repayment capacity will normally be evidenced by the
following characteristics:
- Leading market positions in well-established
industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate
reliance on debt and ample asset protection.
- Broad margins in earnings coverage of fixed financial
charges and high internal cash generation.
A-1
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- Well-established access to a range of financial markets
and assured sources of alternate liquidity.
Issuers rated PRIME-2 or P-2 (or related supporting
institutions) have a strong capacity for repayment of short-term promissory
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S
BOND RATINGS:
Investment grade debt securities are those rating categories indicated by an
asterisk (*).
*AAA: Debt rated AAA have the highest rating assigned by S&P to
a debt obligation. capacity to pay interest and repay principal is extremely
strong.
*AA: Debt rated AA have a very strong capacity to pay interest;
and repay principal and differ from the higher rated issues only in small
degree.
*A: Debt rated A have a strong capacity to pay interest and
repay principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories.
*BBB: Debt rated BBB are regarded as having an adequate capacity
to pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
PLUS (+) OR MINUS (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
NR: Bonds may lack a S&P rating because no public rating has
been requested, because there is insufficient information on which to base a
rating, or because S&P does not rate a particular type of obligation as a matter
of policy.
DESCRIPTION OF S&P'S COMMERCIAL PAPER RATINGS:
S&P's commercial paper ratings are current assessments of the
likelihood of timely payment of debts having an original maturity of no more
than 365 days.
A: Issues assigned this highest rating are regarded as having
the greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1: This designation indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted with a
plus (+) sign designation.
A-2: Capacity for timely payment on issues with this designation
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1".
A-2
