<PAGE>
UNITED STATES FILE NO. 33-78960
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 FILE NO. 811-8510
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. [ ]
--------
Post Effective Amendment No. 4 [X]
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ ]
Amendment No. 7 [X]
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MATTHEWS INTERNATIONAL FUNDS
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(Exact name of Registrant as Specified in Charter)
655 Montgomery Street
Suite 1438
San Francisco, CA 94111
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code 415-788-7553
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G. Paul Matthews, President
Matthews International Capital Management
655 Montgomery Street, Suite 1438
San Francisco, California 94111
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(Name and Address of Agent for Service)
COPIES TO:
Robert D. Evans, Esq. Joseph M. O'Donnell, Esq.
Shartsis, Friese & Ginsburg Fund/Plan Services, Inc.
One Maritime Plaza, 18th Floor 2 West Elm Street
San Francisco, CA 94111 Conshohocken, Pennsylvania 19428
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE: DECEMBER 29, 1995
[X] immediately upon filing pursuant to Paragraph (b) of Rule 485.
[ ] on (date) , pursuant to Paragraph (b).
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[ ] 60 days after filing pursuant to paragraph (a).
[ ] on (date) pursuant to paragraph (a) of Rule 485.
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[ ] 75 days after filing pursuant to paragraph (a)(ii).
[ ] on (date) pursuant to paragraph (a)(ii) of rule 485.
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If appropriate, check the following box:
[ ] this post-effective amendment designates a new effective date for
previously files post-effective amendment.
================================================================================
Registrant has elected to register an indefinite number of shares of its
securities under this Registration Statement pursuant to Rule 24f-2 of the
Investment Company Act of 1940, as amended. Registrant filed its Notice pursuant
to Rule 24f-2 on October 26, 1995.
As filed with the U.S. Securities and Exchange TOTAL PAGES: ______
Commission on December 29, 1995. INDEX TO EXHIBITS, PAGE: ______
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MATTHEWS INTERNATIONAL FUNDS
Cross Reference Sheet Pursuant to Rule 481a
PART A -- INFORMATION REQUIRED IN A PROSPECTUS
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<CAPTION>
FORM N-1A ITEM CAPTION IN PROSPECTUS
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<S> <C>
1. Cover Page Cover Page
2. Synopsis Synopsis; Transactions and operating
Expenses Table
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Investment Objectives; Investment
Policies and Risks; Risk Factors;
Investment Strategies and Risks
5. Management of the Funds Who Manages the Funds
5A. Management's Discussion of Fund Contained in the Annual Report of
Performance Registrant
6. Capital Stock and Other Securities General Information; Dividends and
Taxes; Net Asset Value
7. Purchase of Securities Being Offered How to Purchase Shares; Shareholder
Services
8. Redemption or Repurchase How to Redeem Shares
9. Pending Legal Proceedings *
</TABLE>
Page 2
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PART B -- INFORMATION REQUIRED IN A STATEMENT OF
ADDITIONAL INFORMATION:
<TABLE>
<CAPTION>
FORM N-1A ITEM CAPTION IN SAI
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<S> <C>
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History Covered in Part A
13. Investment Objectives and Investment Policies and Techniques;
Policies Investment Restrictions
14. Management of the Fund Trustees and Officers
15. Control Persons and Principal Control Persons and Principal
Holders of Securities Holders of Securities
16. Investment Advisory and Other Investment Advisory and Other
Services Services
17. Brokerage Allocation Portfolio Transactions and Brokerage
18. Capital Stock and Other Other Information
Securities
19. Purchase, Redemption and Pricing Covered in Part A; Determination of
of Securities Being Offered Net Asset Value
20. Tax Status Taxes
21. Underwriters The Underwriter
22. Calculations of Performance Data Performance Information
23. Financial Statements Portfolio Highlights; Schedule of
Investments; Statements of Assets
and Liabilities; Statements of
Operations; Statements of Changes in
Net Assets; Notes to Financial
Statements
</TABLE>
PART C -- OTHER INFORMATION
Information required to be included in Part C is set forth under the appropriate
Item, so numbered, in Part C to this Registration Statement.
* Item inapplicable at this time or answer negative.
Page 3
<PAGE>
MATTHEWS INTERNATIONAL FUNDS
655 MONTGOMERY STREET, SUITE 1438
SAN FRANCISCO, CA 94111
MATTHEWS PACIFIC TIGER FUND
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
MATTHEWS KOREA FUND
PROSPECTUS DECEMBER 29, 1995
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Matthews International Funds (the "Company") is a no load, open-end investment
management company which currently consists of three separate investment se-
ries (each a "Fund" and collectively, the "Funds") designed to offer investors
a variety of investment opportunities. Each series has distinct investment ob-
jectives and policies. Information concerning the Funds has been combined into
this one Prospectus to aid investors in understanding the similarities and
differences among the Funds.
The Company is organized as a Delaware business trust. Matthews International
Capital Management (the "Advisor") serves as the investment advisor to the
Funds and manages the investments of the Funds according to the investment ob-
jectives of each Fund. Daewoo Capital Management Co., Ltd. (the "Korean Advi-
sor"), an investment advisory subsidiary of Daewoo Securities Co., Ltd., acts
as the Korean advisor to MATTHEWS KOREA FUND.
MATTHEWS PACIFIC TIGER FUND seeks maximum capital appreciation by investing,
under normal circumstances, at least 65% of its total assets in equity securi-
ties of Pacific Tiger economies. The Pacific Tiger economies include: Hong
Kong, Singapore, South Korea, Taiwan, Indonesia, Malaysia, the Philippines,
Thailand and China. Equity securities in which the Fund may invest include:
common stocks, preferred stocks, warrants, and securities convertible into
common stocks such as convertible bonds and debentures.
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND seeks to provide capital apprecia-
tion and current income by investing at least 65% of its total assets in con-
vertible securities of the Asian markets. The countries included in this mar-
ket are: Hong Kong, Japan, Singapore, South Korea, Taiwan, Indonesia, Malay-
sia, the Philippines, Thailand, China and India. Convertible securities in-
clude corporate bonds and preferred stocks which are convertible into common
stocks, as well as debt instruments with warrants or common stock attached.
MATTHEWS KOREA FUND seeks long-term capital appreciation through investment
primarily in equity securities of South Korean companies. Under normal circum-
stances, the Fund will invest at least 65% of its total assets in equity secu-
rities of South Korean companies. Equity securities include common stocks,
preferred stocks, warrants and securities convertible into common or preferred
stock.
MANY CONVERTIBLE SECURITIES ARE NOT CONSIDERED INVESTMENT GRADE AND THE FUNDS
MAY INVEST IN VARYING DEGREES IN SUCH SECURITIES. SECURITIES OF THIS TYPE
(COMMONLY REFERRED TO AS "JUNK BONDS") ARE SUBJECT TO A GREATER RISK OF LOSS
OF PRINCIPAL AND INTEREST. INVESTORS SHOULD CAREFULLY ASSESS THESE RISKS BE-
FORE INVESTING IN THE FUNDS. SEE "RISK FACTORS" AND FOR FURTHER INFORMATION
SEE "RISKS RELATED TO LOWER GRADE DEBT SECURITIES" IN THE STATEMENT OF ADDI-
TIONAL INFORMATION.
Shares of each Fund may be purchased directly from the Funds without any sales
charge although the Advisor and other institutions may charge their customers
a fee for services provided in connection with their investments.
A REDEMPTION FEE OF 1% WILL BE IMPOSED ON REDEMPTIONS MADE WITHIN NINETY DAYS
OF PURCHASE, THE PROCEEDS OF WHICH WILL BE RETAINED BY THE FUNDS.
The minimum initial investment for each Fund is $1,000. Subsequent investments
will be accepted in minimum amounts of $250. The minimum initial investment
for IRAs, 401(k), 403(b)(7) plans and other retirement plans is $250. Subse-
quent investments for any retirement plan is $50.
The Funds' principal Underwriter is Fund/Plan Broker Services, Inc. #2 West
Elm Street, P.O. Box 874, Conshohocken, Pennsylvania 19428.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in any of the above Funds. Investors should read
and retain this Prospectus for future reference. Additional Information about
the Funds is contained in the Statement of Additional Information dated Decem-
ber 29, 1995, which has been filed with the Securities and Exchange Commission
and is available upon request without charge by contacting Fund/Plan Broker
Services, Inc., at the address above or by calling (800) 892-0382. The State-
ment of Additional Information is incorporated by reference into this Prospec-
tus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY......................................................... 3
EXPENSE INFORMATION........................................................ 4
FINANCIAL HIGHLIGHTS....................................................... 6
INVESTMENT OBJECTIVES
Matthews Pacific Tiger Fund.............................................. 7
Matthews Asian Convertible Securities Fund............................... 7
Matthews Korea Fund...................................................... 7
INVESTMENT POLICIES AND RISKS
Common to all Funds...................................................... 8
Specific to Matthews Pacific Tiger Fund.................................. 9
Specific to Matthews Asian Convertible Securities Fund................... 10
Specific to Matthews Korea Fund.......................................... 11
INVESTMENT STRATEGIES AND RISKS
Common to all Funds...................................................... 12
Specific to Matthews Asian Convertible Securities Fund................... 16
Specific to Matthews Korea Fund.......................................... 16
RISK FACTORS
Common to all Funds...................................................... 17
Specific to Matthews Asian Convertible Securities Fund................... 18
Specific to Matthews Korea Fund.......................................... 19
MANAGEMENT OF THE FUNDS.................................................... 21
ADMINISTRATION OF THE FUNDS................................................ 23
PURCHASE OF SHARES......................................................... 24
EXCHANGE OF SHARES......................................................... 26
REDEMPTION OF SHARES and REDEMPTION FEE.................................... 26
SHAREHOLDER SERVICES....................................................... 28
NET ASSET VALUE............................................................ 28
DIVIDENDS AND TAXES........................................................ 29
PERFORMANCE INFORMATION.................................................... 30
GENERAL INFORMATION........................................................ 31
APPENDIX
DEBT RATINGS............................................................... A-1
</TABLE>
This Prospectus is not an offering of the securities herein described in any
jurisdiction or to any person to whom it is unlawful for the Funds to make
such an offer or solicitation. No sales representative, dealer, or other per-
son is authorized to give any information or make any representation other
than those contained in this Prospectus.
2
<PAGE>
PROSPECTUS SUMMARY
THE COMPANY
Matthews International Funds (the "Company") is an open-end investment manage-
ment company organized as a business trust under the laws of the state of Del-
aware. The Company is organized to offer separate series of shares and is cur-
rently comprised of three separate series of shares--MATTHEWS PACIFIC TIGER
FUND, MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND and MATTHEWS KOREA FUND. Ad-
ditional series of the Company may be established from time to time at the
discretion of the Board of Trustees of the Company.
INVESTMENT OBJECTIVES
MATTHEWS PACIFIC TIGER FUND seeks to maximize capital appreciation by invest-
ing, under normal circumstances, at least 65% of its total assets in equity
securities of Pacific Tiger economies. The Pacific Tiger economies include
Hong Kong, Singapore, South Korea, Taiwan, Indonesia, Malaysia, the Philip-
pines, Thailand and China. See "INVESTMENT OBJECTIVES," "INVESTMENT POLICIES
AND RISKS" and "RISK FACTORS."
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND seeks capital appreciation and cur-
rent income by investing, under normal circumstances, at least 65% of its to-
tal assets in convertible securities of the Asian markets. The countries in-
cluded in this market are: Hong Kong, Japan, Singapore, South Korea, Taiwan,
Indonesia, Malaysia, the Philippines, Thailand, China and India. See "INVEST-
MENT OBJECTIVES," "INVESTMENT POLICIES AND RISKS" and "RISK FACTORS."
MATTHEWS KOREA FUND seeks long-term capital appreciation through investment
primarily in equity securities of South Korean companies. The Fund will, under
normal circumstances, invest at least 65% of its total assets in equity secu-
rities of South Korean companies. The Fund is designed primarily for long-term
investment, and investors should not consider it a short-term trading vehicle.
See "INVESTMENT OBJECTIVES," "INVESTMENT POLICIES AND RISKS" and "RISK FAC-
TORS."
RISK FACTORS
There is no assurance that the Funds will achieve their investment objectives.
Investing outside of the United States involves special risks, in addition to
the risks which are inherent to all investments. Investing in securities of
South Korean companies and of the government of the Republic of Korea involves
certain considerations not typically associated with investing in securities
of United States companies or the United States government. Among these are
the risks of political, economic and social uncertainty and instability, in-
cluding the potential for increasing militarization in North Korea. Relations
between North and South Korea, while improving, remain tense and the possibil-
ity of military action still exists. In the event that military action were to
take place, the value of the Fund's Korean assets are likely to be adversely
affected. The Funds may also be affected by foreign currency fluctuations or
exchange controls, differences in accounting procedures and other risks. The
Funds are also subject to typical stock and bond market rise. In addition,
limitations of foreign ownership currently exist which may impact the price of
a Korean security paid by a Fund. See "RISK FACTORS" and "Security Valuation
Considerations."
INVESTMENT MANAGEMENT, UNDERWRITER AND SERVICING AGENTS
Matthews International Capital Management (the "Advisor"), 655 Montgomery
Street, Suite 1438, San Francisco, California 94111, a California corporation
and registered investment advisor, is the investment advisor for the Funds.
The Advisor manages the investments of each Fund according to its investment
objectives. As of December 4, 1995, the Advisor had approximately $130 million
under management or committed to management in various fiduciary or advisory
capacities, primarily from private and institutional accounts. Daewoo Capital
Management Co., Ltd., (the "Korean Advisor"), 34-3, Yoido-dong, Yungdungpo-gu,
Seoul 150-010, Korea, is registered under the U.S. Investment Advisers Act of
1940 and acts as Korean Advisor to MATTHEWS KOREA FUND. The Korean Advisor is
a subsidiary of Daewoo Securities Co., Ltd., the largest Korean securities
firm and an affiliate of Daewoo Research Institute. The Ad-
3
<PAGE>
visor is responsible for the fees of the Korean Advisor under the terms of a
separate agreement. See "MANAGEMENT OF THE FUNDS." Fund/Plan Broker Services,
Inc., 2 W. Elm Street, Conshohocken, Pennsylvania 19428 serves as the Funds'
underwriter. The Bank of New York, 90 Washington Street, New York, New York
10286 serves as the custodian of the Funds' assets. Fund/Plan Services, Inc.,
2 W. Elm Street, Conshohocken, Pennsylvania 19428 serves as the Funds' admin-
istrator, transfer agent and fund accounting agent.
PURCHASE OF SHARES
The minimum initial investment for each Fund is $1,000 for all accounts. Sub-
sequent investments will be accepted in minimum amounts of $250 for all ac-
counts. The Funds do not impose any sales load nor bear any fees pursuant to a
Rule 12b-1 Plan. The public offering price for shares of each Fund is the net
asset value per share next determined after receipt and acceptance of a pur-
chase order at the transfer agent in proper form with accompanying check or
bank wire arrangements. See "PURCHASE OF SHARES."
REDEMPTION OF SHARES
Shares of the Funds may be redeemed at the net asset value per share next de-
termined after receipt by the transfer agent of a redemption request in proper
form. IF ANY SHARES OF A FUND ARE REDEEMED WITHIN NINETY DAYS OF THE PURCHASE
OF THOSE SHARES, THE PROCEEDS OF THAT REDEMPTION WILL BE SUBJECT TO A REDEMP-
TION FEE OF 1.00%, THE PROCEEDS OF WHICH WILL BE RETAINED BY THE FUND FROM
WHICH THE SHARES ARE REDEEMED. Signature guarantees may be required for cer-
tain redemption requests. See "Redemption Fee" and "REDEMPTION OF SHARES."
DIVIDENDS
Each Fund intends to distribute substantially all of its net investment income
and net realized capital gains, if any, to shareholders. Distributions of net
capital gains, if any, will be made annually. All distributions are reinvested
at net asset value, in additional full and fractional shares of each Fund un-
less the shareholder notifies the transfer agent in writing requesting pay-
ments in cash. MATTHEWS PACIFIC TIGER FUND and MATTHEWS KOREA FUND intend to
declare and pay dividends annually. MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
intends to declare and pay dividends semi-annually. See "DIVIDENDS AND TAXES."
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND:
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering
price)................................................................. 0.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price)........................................................ 0.00%
Contingent Deferred Sales Charge (as a percentage of original purchase
price)................................................................. 0.00%
REDEMPTION FEE (as a percentage of amount redeemed)..................... 1.00%*
</TABLE>
* The Redemption Fee of 1.00% applies only to those shares redeemed within
ninety days of purchase. See "Redemption Fee" under the heading "REDEMPTION OF
SHARES."
If you want to redeem shares by wire transfer, the Funds' transfer agent
charges a fee (currently $9.00) for each wire redemption. Purchases and re-
demptions may also be made through broker-dealers and others who may charge a
commission or other transaction fee for their services.
4
<PAGE>
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ANNUAL FUND OPERATING EXPENSES*
as a Percentage of Average Net Assets:
<TABLE>
<CAPTION>
NET EXPENSE RATIO
MANAGEMENT 12B-1 OTHER AFTER
FUND(/1/) FEES EXPENSES EXPENSES REIMBURSEMENT(/2/)
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<S> <C> <C> <C> <C>
MATTHEWS PACIFIC TIGER FUND.... 1.00% None 0.90% 1.90%
MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND............... 1.00% None 0.90% 1.90%
MATTHEWS KOREA FUND............ 1.00% None 1.50% 2.50%
</TABLE>
(1) MATTHEWS PACIFIC TIGER FUND and MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
commenced operations on September 13, 1994. MATTHEWS KOREA FUND commenced
operations on January 3, 1995.
(2) The expense ratios set forth in the table reflect changes in the amounts
of Matthews International Capital Managements voluntary advisory fee
waivers and expense reimbursements. Prior to such changes, MATTHEWS
PACIFIC TIGER FUND'S advisory fee ratio was 1.00%, its other expenses was
24.95%, and its effective net expense ratio was 2.17%. Prior to such
changes, MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND'S advisory fee ratio
was 1.00%, its other expenses ratio was 23.11%, and its effective net
expense ratio was 2.26%. Prior to such changes, MATTHEWS KOREA FUND'S
advisory fee ratio was 1.00%, its other expenses ratio was 41.87%, and its
effective net expense ratio was 0.24%. Effective September 1, 1995,
MATTHEWS PACIFIC TIGER FUND and MATTHEWS ASIAN CONVERTIBLE SECURITIES
FUNDS' net expense ratio decreased to 1.90%.
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EXAMPLE
Based on the level of expenses listed above, the total expenses relating to an
investment of $1,000 would be as follows, assuming a 5% annual return, rein-
vestment of all dividends and distributions and redemption at the end of each
time period.
<TABLE>
<CAPTION>
NAME OF FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
MATTHEWS PACIFIC TIGER FUND..................... $19.15 $59.25 $101.91 $220.76
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND...... $19.15 $59.25 $101.91 $220.76
MATTHEWS KOREA FUND............................. $25.16 $77.38 $132.27 $282.04
</TABLE>
The purpose of this table is to assist the investor in understanding the vari-
ous costs and expenses that a shareholder will bear directly or indirectly.
While the example assumes a 5% annual return, each Funds' actual performance
will vary and may result in actual returns greater or less than 5%. The above
example should not be considered a representation of past or future expenses
or performance. Actual expenses of the Funds may be greater or less than those
shown.
5
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FINANCIAL HIGHLIGHTS
MATTHEWS PACIFIC TIGER FUND
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
MATTHEWS KOREA FUND
The following financial highlights are a part of the Funds' financial state-
ments which have been audited by Coopers & Lybrand L.L.P., independent accoun-
tants, for the most recent fiscal year. The following tables should be read in
conjunction with these financial statements and related notes included in the
Statement of Additional Information.
<TABLE>
<CAPTION>
MATTHEWS MATTHEWS
PACIFIC ASIAN MATTHEWS
TIGER CONVERTIBLE KOREA
FUND* SECURITIES FUND* FUND**
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<S> <C> <C> <C>
Net Asset Value, beginning of period..... $10.00 $10.00 $10.00
------- ------- -------
Income from investment operations
Net investment income................... 0.02 0.23 0.08***
Net realized and unrealized loss on
investments and foreign currency....... (0.23) (0.14) (0.95)***
------- ------- -------
Total from investment operations....... (0.21) 0.09 (0.87)
------- ------- -------
Less Distributions:
From net investment income.............. (0.02) (0.21) 0.00
------- ------- -------
Total distributions.................... (0.02) (0.21) 0.00
------- ------- -------
Net Asset Value, end of period........... $9.77 $9.88 $9.13
======= ======= =======
Total Return............................. -2.07% 0.89% -8.70%
Ratios/Supplemental Data
Net assets, end of period (in 000's).... $1,082 $863 $504
Ratio of expenses to average net assets
before reimbursement and waiver of
expenses by Advisor and Administrator.. 25.95%+ 23.11%+ 42.87%+
Ratio of expenses to average net assets
after reimbursement and waiver of
expenses by Advisor and Administrator.. 2.17%+ 2.26%+ 0.24%+
Ratio of net investment loss to average
net assets before reimbursement and
waiver of expenses by Advisor and
Administrator.......................... -23.41%+ -18.68%+ -41.79%+
Ratio of net investment income to
average net assets after reimbursement
and waiver of expenses by Advisor and
Administrator.......................... 0.36%+ 2.17%+ 0.84%+
Portfolio turnover...................... 92.53% 121.63% 42.16%
</TABLE>
+ Annualized
* The Funds commenced operations on September 13, 1994.
** The Fund commenced operations on January 3, 1995.
*** Calculated using the average shares method.
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6
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INVESTMENT OBJECTIVES
The investment objective of each Fund is fundamental and may not be changed
without a vote of the holders of the majority of the voting securities of each
respective Fund. Unless otherwise stated in this Prospectus, the Funds' in-
vestment policies are not fundamental and may be changed without shareholder
approval. While an investment policy or restriction may be changed by the
Trustees of the Company without shareholder approval, the Funds intend to no-
tify shareholders before making any material change to an investment policy or
restriction. Fundamental objectives may not be changed without shareholder ap-
proval. Additional investment policies and restrictions are described in the
Statement of Additional Information.
MATTHEWS PACIFIC TIGER FUND
MATTHEWS PACIFIC TIGER FUND seeks maximum capital appreciation by investing,
under normal circumstances, at least 65% of its total assets in equity securi-
ties of Pacific Tiger economies. The Pacific Tiger economies include the fol-
lowing countries: Hong Kong, Singapore, South Korea, Taiwan, Indonesia, Malay-
sia, the Philippines, Thailand and China. The Fund will invest, under normal
market conditions, in issuers located in at least three different countries.
The assets of the Fund will be invested with geographic flexibility; however,
there is no limitation on the percentage of assets which may be invested in
the securities of issuers domiciled in any one country.
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND seeks capital appreciation and cur-
rent income by investing, under normal circumstances, at least 65% of its to-
tal assets in convertible securities of the Asian markets. The countries in-
cluded in this market are: Hong Kong, Japan, Singapore, South Korea, Taiwan,
Indonesia, Malaysia, the Philippines, Thailand, China and India. The Fund may
invest without limit in securities that are not considered investment grade
("junk bonds") and that accordingly have greater risk of loss of principal and
interest. The Fund will primarily invest in Euroconvertible securities that
are denominated in U.S. dollars, Swiss Francs or other currencies. The remain-
ing 35% of the Fund's assets may be invested in non-convertible corporate or
fixed-income securities, common stocks and selected money market instruments
of issuers located outside the Asian markets, including, without limitation,
the United States.
MATTHEWS KOREA FUND
MATTHEWS KOREA FUND'S investment objective and policies reflect the opinion of
the Advisor that attractive investment opportunities may result from the po-
tential growth of the South Korean economy and the evolving process of the
liberalization and reform of the securities markets in South Korea. The emer-
gence of Korea's reputation as a producer of quality goods coupled with its
position as a leading exporter in the Asia Pacific region may contribute sig-
nificantly to the potential for accelerated growth in the Korean economy. Con-
tinued liberalization of the securities markets along with an increase in the
number of Korean companies that are available for investment to foreign in-
vestors would enable the Fund to participate in and benefit from such poten-
tial economic growth.
In terms of Gross National Product, industrial standards and level of educa-
tion, South Korea is second in Asia only to Japan. It enjoys the benefits of a
diversified economy with well-developed sectors in electronics, automobiles,
textiles and shoe manufacture, steel and shipbuilding among others. The driv-
ing force behind the economy's dynamic growth has been the planned development
of an export-oriented economy in a vigorously entrepreneurial society.
There can be no assurance that such liberalization or economic growth will
continue to occur or that the Fund will be able to participate in and benefit
from any future liberalization or economic growth.
MATTHEWS KOREA FUND seeks long-term capital appreciation through investment
primarily in equity securities of South Korean companies. Under normal circum-
stances, the Fund will invest at least 65% of its total assets in equity secu-
rities of South Korean companies. These include securities of companies which
(I) are organized under the laws of South Korea, (ii) regardless of where or-
ganized, derive at least 50% of their revenues or prof-
7
<PAGE>
its from goods produced or sold, investments made, or services performed or
have at least 50% of their assets located in South Korea, (iii) have the pri-
mary trading market for their securities in South Korea or (iv) are the gov-
ernment, or its agencies or instrumentalities or other political subdivisions,
of South Korea. Securities will be primarily common stocks.
The remaining 35% of the Fund's total assets may be invested in equity and
other securities of issuers located outside of South Korea, including, without
limitation, the United States, and in non-convertible bonds and other debt se-
curities issued by foreign issuers and foreign government entities.
INVESTMENT POLICIES AND RISKS COMMON TO ALL FUNDS
The Advisor uses a multi-factor research approach when selecting investments
for the Funds. These factors include evaluation of each country's political
stability, prospects for economic growth (inflation, interest direction, trade
balance and currency strength), identification of long term trends that might
create investment opportunities, the status of the purchasing power of the
people and population and composition of the work force. In reviewing poten-
tial companies in which to invest, the Advisor considers the company's quality
of management, plans for long-term growth, competitive position in the indus-
try, future expansion plans and growth prospects, valuations compared with in-
dustry average, earnings track record and a debt/equity ratio less than the
market average. In addition, the Advisor will visit countries and companies in
person to derive firsthand information for further evaluation. After evalua-
tion of all factors, the Advisor attempts to identify those companies in such
countries and industries that are best positioned and managed to take advan-
tage of the varying economic and political factors.
Many of the debt and convertible securities in which the Funds will invest are
unrated by any rating agency and, therefore, there is no objective standard
against which the Advisor may evaluate such securities. The Advisor seeks to
minimize the risks of investing in lower-rated securities through investment
analysis and attention to current developments in interest rates and economic
conditions. In selecting debt and convertible securities for the Funds, the
Advisor will assess the following factors: 1) potential for capital apprecia-
tion; 2) price of security relative to price of underlying stock, if a con-
vertible security; 3) yield of security relative to yield of other fixed-in-
come securities; 4) interest or dividend income; 5) call and/or put features;
6) creditworthiness; 7) price of security relative to price of other compara-
ble securities; 8) size of issue; 9) currency of issue; and 10) impact of se-
curity on diversification of the portfolios.
The Funds may also invest in securities of foreign issuers in the form of
American Depositary Receipts ("ADRs") and European Depositary Receipts
("EDRs"). Generally, ADRs in registered form are dollar denominated securities
designed for use in the U.S. securities markets, which represent and may be
converted into an underlying foreign security. EDRs, in bearer form, are de-
signed for use in the European securities markets. See "INVESTMENT STRATEGIES
AND RISKS."
The Funds may purchase securities on a "when-issued" basis and may purchase or
sell securities on a "forward commitment" basis in order to hedge against an-
ticipated changes in interest rates and prices. See "INVESTMENT STRATEGIES AND
RISKS".
With respect to certain countries, which currently include South Korea and
Taiwan, investments by the Fund may only be made through investment in other
investment companies that in turn are authorized to invest in the securities
of such countries. The investment in securities of other investment companies
by the Funds will be subject to limitations under the Investment Company Act
of 1940 (the "1940 Act"). The Funds may invest up to 10% of its assets in
other investment companies. See "INVESTMENT STRATEGIES AND RISKS."
The Advisor intends to be fully invested in the economies appropriate to each
Funds' investment objectives as is practicable, in light of economic and mar-
ket conditions and the Funds' cash needs. When, in the opinion of the Advisor,
a temporary defensive position is warranted, the Funds are permitted to invest
temporarily and without limitation in money market instruments of U.S. or for-
eign issuers or maintain a cash position. Such instruments include but are not
limited to the following:
8
<PAGE>
obligations issued or guaranteed by the U.S. or foreign governments, their
agencies or instrumentalities; obligations of international organizations de-
signed or supported by multiple foreign governmental entities to promote eco-
nomic reconstruction or development; bank obligations, including bankers' ac-
ceptances, certificates of deposit, time deposits, and demand deposits. The
Funds' investment objective may not be achieved at such times when a temporary
defensive position is taken. Foreign investments which are not U.S. dollar de-
nominated may require the Funds to convert assets into foreign currencies or
to convert assets and income from foreign currencies to U.S. dollars. Normal-
ly, exchange transactions will be conducted on a spot or cash basis at the
prevailing rate in the foreign exchange market.
The Funds may write covered call options and purchase put and call options on
securities to reduce overall risk. The Funds may also purchase put and call
options on foreign currencies to hedge against movements in currency exchange
rates. For the same purpose, the Funds may also purchase and sell foreign cur-
rency futures contracts and write covered call options on such contracts. Col-
lectively, these securities may be referred to as "derivatives." Foreign in-
vestments which are not U.S. dollar denominated may require the Funds to con-
vert assets into foreign currencies or to convert assets and income from for-
eign currencies to U.S. dollars. Normally, exchange transactions will be con-
ducted on a spot or cash basis at the prevailing rate in the foreign exchange
market. See "INVESTMENT STRATEGIES AND RISKS".
INVESTMENT POLICIES AND
RISKS SPECIFIC TO MATTHEWS PACIFIC TIGER FUND
Equity securities in which the Fund may invest include common stocks, pre-
ferred stocks, warrants, and securities convertible into common stocks, such
as convertible bonds and debentures.
The Fund may invest up to 35% of its total assets in equity and other securi-
ties of issuers located outside of the Pacific Tiger economies, including,
without limitation, the United States, and in non-convertible bonds and other
debt securities issued by foreign issuers and foreign government entities.
The Fund may invest up to 10% of its total assets in securities rated below
investment grade (securities rated Baa or higher by Moody's Investors Service,
Inc. or BBB or higher by Standard & Poor's Corporation or, if unrated, are
comparable in quality). Debt securities rated below investment grade, commonly
referred to as junk bonds, have speculative characteristics that result in a
greater risk of loss of principal and interest. See "Risks Associated with
Lower Rated Securities" under the heading "RISK FACTORS."
The Fund may invest up to 25% of its total assets in the convertible securi-
ties of companies of the Pacific Tiger economies. Convertible securities are
fixed-income securities such as corporate bonds, notes and preferred stocks
that can be exchanged for stock and other securities (such as warrants) that
also offer equity participation. Convertible securities are hybrid securities,
combining the investment characteristics of both bonds and common stocks. Like
a bond, a convertible security pays a pre-determined interest rate, but may be
converted into common stock at a specific price or conversion rate. The in-
vestor has the right to initiate conversion into a specified quantity of the
underlying stock at a stated price, within a stipulated period of time. Con-
vertible securities are generally senior to common stock and junior to non-
convertible debt. In addition to the convertible securities denominated in the
currency of the issuer, the Fund may also invest in convertible securities
which are denominated in another currency (i.e., U.S. dollars).
The Advisor may invest where the Advisor believes the potential for capital
growth exists and in companies which have demonstrated the ability to antici-
pate and adapt to changing markets. The Fund may invest in the securities of
all types of issuers, large or small, whose earnings are believed by the Advi-
sor to be in a relatively strong growth trend or whose assets are substan-
tially undervalued. Smaller companies often have limited product lines, mar-
kets or financial resources, and they may be dependent upon one or a few key
people for management. The securities of such companies generally are subject
to more abrupt or erratic market movements and may be less liquid than securi-
ties of larger, more established companies or the market averages in general.
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<PAGE>
Under normal circumstances, the Advisor expects that the portfolio of the Fund
will be comprised of forty to eighty individual stocks in various countries in
the Pacific Tiger economies. When purchasing portfolio securities for the
Fund, the Advisor's philosophy is a buy and hold strategy versus buying for
short-term trading.
INVESTMENT POLICIES AND RISKS SPECIFIC TO MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND
Convertible securities are fixed-income securities such as corporate bonds,
notes and preferred stocks that can be exchanged for stock and other securi-
ties (such as warrants) that also offer equity participation. Before conver-
sion from a debt security to an equity security, convertible securities have
characteristics similar to non-convertible debt securities in that they ordi-
narily provide a stream of income with generally higher yields than those of
common stock of the same or similar issuers. Convertible securities are hybrid
securities, combining the investment characteristics of both bonds and common
stocks. Like a bond, a convertible security pays a pre-determined interest
rate, but may be converted into common stock at a specific price or conversion
rate. An investor has the right to initiate conversion into a specified quan-
tity of the underlying stock, at a stated price, within a stipulated period of
time, into a specified quantity of the underlying stock. Convertible securi-
ties are generally senior to common stock and junior to non-convertible debt.
Under normal circumstances, the Advisor expects that the portfolio of the Fund
will be comprised of twenty to sixty convertible bonds in various countries in
the Asian markets.
MANY ASIAN CONVERTIBLE SECURITIES ARE UNRATED OR ARE RATED BELOW INVESTMENT
GRADE AND THE FUND MAY INVEST WITHOUT LIMIT IN SUCH SECURITIES. Investment
grade securities are securities rated Baa or higher by Moody's Investors Serv-
ice, Inc. ("Moody's") or BBB or higher by Standard & Poor's Corporation
("S&P") or if unrated are of comparable quality. IT IS EXPECTED THAT NOT MORE
THAN 50% OF THE FUND'S PORTFOLIO WILL CONSIST OF SECURITIES RATED CCC OR LOWER
BY S&P OR CAA OR LOWER BY MOODY'S OR, IF UNRATED, ARE OF COMPARABLE QUALITY,
AND ARE COMMONLY REFERRED TO AS JUNK BONDS. These securities are considered by
the rating agencies to be predominantly speculative and involve risk exposures
such as increased sensitivity to interest rate and economic changes and lim-
ited liquidity. The Fund does not intend to invest in issuers which are in de-
fault. See "RISK FACTORS."
Euroconvertible securities are denominated in a Eurocurrency, simultaneously
issued in more than one foreign country and issued by an international syndi-
cate. Frequently, with Euroconvertible notes and bonds, the currency of the
bond is different from the currency of the stock into which the bond is con-
vertible. This feature may provide some protection against disadvantageous lo-
cal currency movement. An issuer of debt securities purchased by the Fund may
be domiciled in a country other than the country in whose currency the instru-
ment is denominated. See "Risks Associated with Euroconvertible Securities"
under the heading "RISK FACTORS."
The average maturity of the Fund's portfolio will vary based upon the Advi-
sor's assessment of economic and market conditions, although it is not cur-
rently expected that the average maturity of the Fund's portfolio will exceed
ten years.
ASIAN-PACIFIC REGION OPPORTUNITY
The Advisor believes that in contrast to more developed economies, the newly
industrialized countries of the Asian markets are in an earlier, more dynamic
growth stage of their development. This growth has been characterized by,
among other factors, low labor costs, strong demand from export markets for
consumer products, high productivity, long work weeks, pro-business govern-
ments and a strong work ethic. Historically, South Korea, Hong Kong, Singapore
and Taiwan have been examples of these traits. Today, however, the economies
of Malaysia, Indonesia, Thailand and southern China are starting to exhibit
many of these same characteristics and appear to be accelerating.
Many of the stock markets of the Asia-Pacific region are either fully open for
foreign investors or are in the process of opening. The Advisor believes that
the opening of these markets offers particular opportunities for investment in
convertible securities.
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<PAGE>
INVESTMENT POLICIES AND RISKS
SPECIFIC TO MATTHEWS KOREA FUND
Equity securities in which the Fund may invest include South Korean common
stocks, preferred stocks (including convertible preferred stock), bonds, notes
and debentures convertible into common or preferred stocks, warrants and
rights, equity interests in trusts, partnerships, joint ventures or similar
enterprises and depositary receipts. At present, not all of these types of se-
curities are available for investment in South Korea.
The Fund may invest up to 35% of its total assets in non-convertible debt se-
curities provided that such securities are rated, at the time of investment,
BBB or higher by Standard & Poor's Corporation ("S&P") or Baa or higher by
Moody's Investors Service, Inc. ("Moody's") or rated of equivalent credit
quality by an internationally recognized statistical rating organization or,
if not rated, are of equivalent credit quality as determined by the Advisor.
Securities rated BBB by S&P or Baa by Moody's are considered to have specula-
tive characteristics. Non-convertible debt securities in which the Fund may
invest include U.S. dollar or Won-denominated debt securities issued by the
South Korean government or South Korean companies and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities. Korean
law does not currently permit foreign investors such as the Fund to acquire
debt securities denominated in Won or equity securities of companies organized
under the laws of Korea that are not listed on the Korea Stock Exchange
("KSE"). At the present time, however, foreign investors are permitted to in-
vest in debt securities issued by Korean companies outside of Korea and denom-
inated in currencies other than Won.
The Fund may invest up to 35% of its total assets in convertible securities.
Convertible securities are fixed-income securities such as corporate bonds,
notes and preferred stocks that can be exchanged for stock and other securi-
ties (such as warrants) that also offer equity participation. Convertible se-
curities are hybrid securities, combining the investment characteristics of
both bonds and common stocks. Convertible securities are generally senior to
common stock and junior to non-convertible debt.
THE FUND MAY INVEST UP TO 35% OF ITS TOTAL ASSETS IN SECURITIES RATED BELOW
INVESTMENT GRADE (securities rated below Baa by Moody's Investors Service,
Inc. or below BBB by Standard & Poor's Corporation or, if unrated, are compa-
rable in quality) commonly referred to as "junk bonds". Debt securities rated
below investment grade may have speculative characteristics that result in a
greater risk of loss of principal or interest. See "Risks Associated with
Lower Rated Securities".
The Fund may invest its assets in a broad spectrum of securities of Korean in-
dustries which are believed to have attractive long-term growth potential. The
Fund has the flexibility to invest in both large and small companies, as
deemed appropriate by the Advisor. Smaller companies often have limited prod-
uct lines, markets or financial resources, and they may be dependent upon one
or a few key people for management. The securities of such companies generally
are subject to more abrupt or erratic market movements and may be less liquid
than securities of larger, more established companies or the market averages
in general. In selecting industries and companies for investment, the Advisor
considers overall growth prospects, competitive position in export markets,
technology, research and development, productivity, labor costs, raw material
costs and sources, profit margins, capital resources, government regulation,
quality of management and other factors. After evaluation of all factors, the
Advisor attempts to identify those companies and industries that are best po-
sitioned and managed to take advantage of the varying economic and political
factors.
The Fund may invest up to 10% of its total assets in equity or debt securities
for which there is no ready market. The Fund may therefore not be able to
readily sell such securities. Such securities are unlike securities that are
traded in the open market and which can be expected to be sold immediately.
The sale price of securities that are not readily marketable may be lower or
higher than the Fund's most recent estimate of their fair value. Generally,
less public information is available with respect to the issuers of these se-
curities than with respect to companies whose securities are traded on an ex-
change. Securities not readily marketable are more likely to be issued by
start-up, small or family business and therefore subject to greater economic,
business and
11
<PAGE>
market risks than the listed securities of more well-established companies.
The Advisor intends to be as fully invested in the South Korean economy as is
practicable in light of economic and market conditions and the Fund's cash
needs. During periods in which, in the opinion of the Advisor, changes in Ko-
rean market conditions or other economic conditions in Korean political condi-
tions warrant, the Fund may reduce its position in equity securities and, sub-
ject to any applicable restrictions under Korean law (which currently limit
the amount of Government and corporate bonds that the Fund may acquire to 10%
of the Fund's net asset value), invest temporarily and without limitation in
money market instruments of U.S. or foreign issuers or maintain a cash posi-
tion. Such instruments include but are not limited to the following: obliga-
tions issued or guaranteed by the U.S. or foreign governments, their agencies
or instrumentalities; obligations of international organizations designed or
supported by multiple foreign governmental entities to promote economic recon-
struction or development; bank obligations, including bankers' acceptances,
certificates of deposit, time deposits, and demand deposits. The Fund's in-
vestment objective may not be achieved at such times when a temporary defen-
sive position is taken.
Certain investment practices in which the Fund is authorized to engage, such
as certain currency hedging techniques, the lending of portfolio securities,
forward commitments, standby commitment agreements and the purchase or sale of
put and call options are not currently permitted under Korean laws or regula-
tions. The Fund may engage in these investment practices to the extent the
practices become permissible under Korean law in the future or with respect to
investments outside of Korea.
The Fund is a non-diversified investment company and is able to invest more
than 5% and up to 25% of its total assets at the time of purchase in the secu-
rities of any one issuer. The Fund is also subject to the Korean Securities
and Exchange Commission rule limiting total foreign investment to 15% of each
class of a company's outstanding shares, while a single foreign investor may
only invest up to 3% of each class of outstanding shares. See "RISK FACTORS".
INVESTMENT STRATEGIES AND RISKS
COMMON TO ALL FUNDS
Below are explanations and the associated risks of certain unique securities
and investment techniques. Shareholders should understand that all investments
involve risk and there can be no guarantee against loss resulting from an in-
vestment in the Funds, nor can there be any assurance that the Funds' invest-
ment objectives will be attained.
ADRS AND EDRS
For many foreign securities, there are United States dollar denominated Ameri-
can Depositary Receipts ("ADRs"), which are bought and sold in the United
States and are issued by domestic banks. ADRs represent the right to receive
securities of foreign issuers deposited in the domestic bank or a correspon-
dent bank. ADRs do not eliminate all the risk inherent in investing in the se-
curities of foreign issuers. By investing in ADRs rather than directly in for-
eign issuer's stock however, the Funds will avoid currency risks during the
settlement period for either purchases or sales. In general, there is a large,
liquid market in the United States for most ADRs. The Funds may also invest in
European Depositary Receipts ("EDRs") which are receipts evidencing an ar-
rangement with a European bank similar to that for ADRs and are designed for
use in the European securities markets.
EDRs are not necessarily denominated in the currency of the underlying
security. The Funds have no current intention to invest in unsponsored ADRs
and EDRs.
IDRS
IDRs (International Depositary Receipts, also known as GDRs or Global Deposi-
tary Receipts) are similar to ADRs except that they are bearer securities for
investors or traders outside the U.S., and for companies wishing to raise eq-
uity capital in securities markets outside the U.S. Most IDRs have been used
to represent shares although it is possible to use them for bonds, commercial
paper and certificates of deposit. IDRs can be convertible to ADRs in New York
making them particularly useful for arbitrage between the markets. The Funds
have no current intention to invest in unsponsored IDRs.
12
<PAGE>
BORROWING
Each Fund has a fundamental policy that it may not borrow money, except that
it may (1) borrow money from banks for temporary or emergency purposes and not
for leveraging or investment and (2) enter into reverse repurchase agreements
for any purpose, so long as the aggregate amount of borrowings and reverse re-
purchase agreements does not exceed one-third of the Funds' total assets less
liabilities (other than borrowings). In the event that such asset coverage
shall at any time fall below 300%, the Fund shall, within three days thereaf-
ter (not including Sunday or holidays) or such longer period as the U.S. Secu-
rities and Exchange Commission may prescribe by rules and regulations, reduce
the amount of its borrowings to such an extent that the asset coverage of such
borrowings shall be at least 300%. Investment securities will not be purchased
while a Fund has an outstanding borrowing that exceeds 5% of the Funds' net
assets.
FOREIGN CURRENCY TRANSACTIONS
The Funds may engage in foreign currency transactions in connection with their
investment in foreign securities but will not speculate in foreign currency
exchange. The Funds will conduct their foreign currency exchange transactions
either on a spot (i.e. cash) basis at the spot rate prevailing in the foreign
currency exchange market, or through forward contracts to purchase or sell
foreign currencies. A forward foreign currency exchange contract involves an
obligation to purchase or sell a specified currency at a future date, which
may be any fixed number of days from the date of the contract agreed upon by
the parties, at a price set at the time of the contract. These contracts are
traded directly between currency traders and their customers.
When a Fund enters into a contract for the purchase or sale of a security de-
nominated in a foreign currency, it may want to establish the United States
dollar cost or proceeds, as the case may be. By entering into a forward con-
tract in United States dollars for the purchase or sale of the amount of for-
eign currency involved in an underlying security transaction, a Fund is able
to protect itself against a possible loss between trade and settlement dates
resulting from an adverse change in the relationship between the United States
dollar and such foreign currency. This tends to limit potential gains however,
that might result from a positive change in such currency relationships. The
Funds may also hedge their foreign currency exchange rate risk by engaging in
currency financial futures and options transactions.
When the Advisor believes that the currency of a particular foreign country
may suffer a substantial decline against the United States dollar, it may en-
ter into a forward contract to sell an amount of foreign currency
approximating the value of some or all of the Funds' securities denominated in
such foreign currency. In this situation the Funds may, in the alternative,
enter into a forward contract to sell a different foreign currency for a fixed
United States dollar amount where the Advisor believes that the United States
dollar value of the currency to be sold pursuant to the forward contract will
fall whenever there is a decline in the United States dollar value of the cur-
rency in which portfolio securities of the Funds are denominated ("cross-
hedge"). The forecasting of short-term currency market movement is extremely
difficult and whether such a short-term hedging strategy will be successful is
highly uncertain.
The Funds may enter into forward contracts to sell foreign currency with re-
spect to portfolio positions denominated or quoted in that currency provided
that no more than 15% of the Funds' total assets would be required to purchase
offsetting contracts. Foreign currency hedging transactions by MATTHEWS KOREA
FUND are not currently permitted under Korean laws and regulations.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Funds may purchase or sell securities on a when-issued or delayed-delivery
basis and make contracts to purchase or sell securities for a fixed price at a
future date beyond customary settlement time. Debt securities are often issued
on this basis. No income will accrue on securities purchased on a when-issued
or delayed delivery basis until the securities are delivered. Each Fund will
establish a segregated account in which it will maintain cash and U.S. Govern-
ment securities or other high-grade debt obligations at least equal in value
to commitments for when-issued securities, forward commitments and delayed-de-
livery transactions. Securities purchased or sold on a when-issued, delayed-
delivery or forward commitment basis involve a risk of loss if the
13
<PAGE>
value of the security to be purchased declines prior to the settlement date.
Although the Funds would generally purchase securities on a when-issued, de-
layed-delivery or a forward commitment basis with the intention of acquiring
the securities, the Funds may dispose of such securities prior to settlement
if the Advisor deems it appropriate to do so.
FUTURES CONTRACTS AND RELATED OPTIONS
The Funds may invest in futures contracts and options on futures contracts,
including index contracts or foreign currencies for hedging purposes or to
maintain liquidity. A Fund may not purchase or sell a futures contract; howev-
er, unless immediately after any such transaction the sum of the aggregate
amount of margin deposits on its existing futures positions and the amount of
premiums paid for related options is 10% or less of its total assets.
At maturity, a futures contract obligates the Funds to take or make delivery
of certain securities or the cash value of a securities index. A Fund may sell
a futures contract in order to offset a decrease in the market value of its
portfolio securities that might otherwise result from a market decline. A Fund
may do so either to hedge the value of its portfolio of securities as a whole,
or to protect against declines, occurring prior to sales of securities, in the
value of the securities to be sold. Conversely, the Funds may purchase a
futures contract in anticipation of purchases of securities. In addition, a
Fund may utilize futures contracts in anticipation of changes in the composi-
tion of its portfolio holdings.
The Funds may purchase and sell call and put options on futures contracts
traded on an exchange or board of trade. When a Fund purchases an option on a
futures contract, it has the right to assume a position as a purchaser or
seller of a futures contract at a specified exercise price at any time during
the option period. When a Fund sells an option on a futures contract, it be-
comes obligated to purchase or sell a futures contract if the option is exer-
cised. In anticipation of a market advance, the Funds may purchase call op-
tions on futures contracts as a substitute for the purchase of futures con-
tracts to hedge against a possible increase in the price of securities which
the Funds intend to purchase. Similarly, if the market is expected to decline,
the Funds might purchase put options or sell call options on futures contracts
rather than sell futures contracts. In connection with the Funds' position in
a futures contract or option thereon, the Funds will create a segregated ac-
count of liquid assets, such as cash, U.S. Government securities or other liq-
uid high grade debt obligations, or will otherwise cover its position in ac-
cordance with applicable requirements of the SEC.
RISK FACTORS OF OPTIONS, FUTURES AND FORWARD CONTRACTS
The primary risks associated with the use of futures contracts and options
(commonly referred to as "derivatives") are: (i) imperfect correlation between
the change in market value of the securities held by the Funds and the price
of futures contracts and options; (ii) possible lack of a liquid secondary
market for a futures contract and the resulting inability to close a futures
contract when desired; (iii) losses, which are potentially unlimited, due to
unanticipated market movements; and (iv) the Advisor's ability to predict cor-
rectly the direction of security prices, interest rates and other economic
factors. For a further discussion see "INVESTMENT POLICIES AND TECHNIQUES" in
the Statement of Additional Information.
ILLIQUID SECURITIES
MATTHEWS PACIFIC TIGER FUND and MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
will not knowingly invest more than 15% and MATTHEWS KOREA FUND will not know-
ingly invest more than 10% of the value of their net assets in securities that
are illiquid because of restrictions on transferability or other reasons. With
respect to liquidity determinations generally, the Company's Board of Trustees
has the ultimate responsibility for determining whether specific securities,
including restricted securities pursuant to Rule 144A, are liquid or illiquid.
Accordingly, the Board of Trustees is responsible for developing and estab-
lishing the guidelines and procedures for determining the liquidity of Rule
144A securities. Repurchase agreements with deemed maturities in excess of
seven days and securities that are not registered under the Securities Act of
1933 but that may be purchased by institutional buyers under SEC Rule 144A are
subject to this 15% limit. Rule 144A allows for a broader institutional trad-
ing market
14
<PAGE>
for securities otherwise subject to restriction on resale to the general pub-
lic by establishing a "safe harbor" from the registration requirements of the
Securities Act of 1933 for resales of certain securities to qualified institu-
tional buyers.
OPTIONS
The Funds may purchase and write put and call options on foreign or U.S. secu-
rities and indices and enter into related closing transactions. A call option
enables the purchaser, in return for the premium paid, to purchase securities
from the writer (the seller of the option) of the option at an agreed price up
to an agreed date. The advantage is that the purchaser may hedge against an
increase in the price of securities it ultimately wishes to buy or may take
advantage of a rise in a particular index. A Fund will only purchase call op-
tions to the extent premiums paid on all outstanding call options do not ex-
ceed 10% of that Fund's total assets. The Funds will only write call options
on a covered basis. The Funds will receive premium income from writing call
options, which may offset the cost of purchasing put options and may also con-
tribute to the Funds' total return. The Funds may lose potential market appre-
ciation, however, if the Advisor's judgment is incorrect with respect to in-
terest rates, security prices or the movement of indices.
A put option enables the purchaser of the option, in return for the premium
paid, to sell the security underlying the option to the writer (the seller of
the option) at the exercise price during the option period and the writer of
the option has the obligation to purchase the security from the purchaser of
the option. A Fund will only purchase put options to the extent that the pre-
miums on all outstanding put options do not exceed 10% of the Fund's total as-
sets. The advantage is that the purchaser can be protected should the market
value of the security decline or should a particular index decline. The Funds
will, at all times during which they hold a put option, own the security un-
derlying such option. The Funds will receive premium income from writing put
options, although they may be required, when the put is exercised, to purchase
securities at higher prices than the current market price.
PORTFOLIO TURNOVER RATE
The Advisor buys and sells securities for the Funds whenever it believes it is
appropriate to do so. The rate of portfolio turnover will not be a limiting
factor in making portfolio decisions. A high rate of portfolio turnover may
result in the realization of substantial capital gains and involves corre-
spondingly greater transaction costs. It is currently estimated that under
normal market conditions the annual portfolio turnover rate for the Funds will
not exceed 100%. Portfolio turnover rates may vary greatly from year to year
as well as within a particular year. High portfolio turnover rates (i.e. over
100%) will generally result in higher transaction costs to the Funds and also
may result in a higher level of taxable gain for a shareholder. Portfolio
turnover for the Funds' most recent fiscal period are set forth in "FINANCIAL
HIGHLIGHTS."
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements to earn income. The Funds may
only enter into repurchase agreements with financial institutions that are
deemed to be creditworthy by the Advisor, pursuant to guidelines established
by the Funds' Board of Trustees. During the term of any repurchase agreement,
the Advisor will continue to monitor the creditworthiness of the seller. Re-
purchase agreements are considered under the 1940 Act to be collateralized
loans by the Funds to the seller secured by the securities transferred to the
Funds. Repurchase agreements under the 1940 Act will be fully collateralized
by securities in which the Funds may invest directly. Such collateral will be
marked-to-market daily. If the seller of the underlying security under the re-
purchase agreement should default on its obligation to repurchase the under-
lying security, the Funds may experience delay or difficulty in exercising its
right to realize upon the security and, in addition, may incur a loss if the
value of the security should decline, as well as disposition costs in liqui-
dating the security. A Fund will not invest more than 15% of its net assets in
repurchase agreements maturing in more than seven days. The Funds must treat
each repurchase agreement as a security for tax diversification purposes and
not as cash, a cash equivalent or receivable. MATTHEWS KOREA FUND is not cur-
rently permitted to engage in repurchase transactions in Korea under Korean
laws and regulations.
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<PAGE>
SECURITIES LENDING
To increase return on portfolio securities, a Fund may lend its portfolio se-
curities on a short-term basis to banks, broker/dealers and other institu-
tional investors pursuant to agreements requiring that the loans be continu-
ously secured by collateral equal at all times in value to at least the market
value of the securities loaned. A Fund will not lend portfolio securities in
excess of 33% of the value of its total assets. There may be risks of delay in
receiving additional collateral or in recovering the securities loaned or even
a loss of rights in the collateral should the borrower of the securities fail
financially. Loans are made only to borrowers deemed by the Advisor to be of
good standing however, and when, in the Advisor's judgment, the income to be
earned from the loan justifies the attendant risks. Lending portfolio securi-
ties by MATTHEWS KOREA FUND is not currently permitted under Korean laws and
regulations.
SECURITIES OF OTHER INVESTMENT COMPANIES
MATTHEWS PACIFIC TIGER FUND and MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND may
invest in securities issued by other investment companies which invest in se-
curities in which the Funds are permitted to invest. MATTHEWS KOREA FUND may
invest in securities issued by other investment companies which invest a sub-
stantial portion of their assets in Korean securities to the extent permitted
by the 1940 Act. Under the 1940 Act, a Fund may invest up to 10% of its assets
in shares of investment companies and up to 5% of its assets in any one in-
vestment company as long as the investment does not represent more than 3% of
the voting stock of the acquired investment company. As a shareholder of an-
other investment company, a Fund would bear along with other shareholders, its
pro rata portion of the investment company's expenses, including advisory
fees. In the case of closed-end investment companies, these expenses would be
in addition to the advisory and other expenses that the Funds bear directly in
connection with their own operations.
INVESTMENT STRATEGIES AND RISKS SPECIFIC TO MATTHEWS ASIAN
CONVERTIBLE SECURITIES FUND
INTEREST RATE FUTURES CONTRACTS
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND may buy and sell interest rate
futures contracts relating to debt securities and write and buy put and call
options relating to interest rate futures contracts. This Fund may enter into
contracts for the future delivery of fixed-income securities commonly referred
to as "interest rate futures contracts." These futures contracts will be used
only as a hedge against anticipated interest rate changes. The Fund will not
enter into an interest rate futures contract if immediately thereafter more
than 5% of the value of the Fund's total assets will be committed to margin.
The Fund also will not enter into an interest rate futures contract if immedi-
ately thereafter the sum of the aggregate futures market prices of financial
instruments required to be delivered under open futures contract purchases
would exceed 20% of the value of the Fund's total assets.
REVERSE REPURCHASE AGREEMENTS
In reverse repurchase agreements, the Fund sells a portfolio instrument to an-
other party, such as a bank or broker-dealer, in return for cash and agrees to
repurchase the instrument at a particular price and time. While a reverse re-
purchase agreement is outstanding, the Fund will maintain appropriate liquid
assets in a segregated custodial account, cash, U.S. Government securities or
other liquid, high-grade debt securities in an amount at least equal to the
market value of the securities, plus accrued interest, subject to the agree-
ment. The Fund will enter into reverse repurchase agreements only with parties
whose creditworthiness has been found satisfactory by the Advisor. Such trans-
actions may increase fluctuations in the market value of the Fund's assets and
may be viewed as a form of leverage.
INVESTMENT STRATEGIES AND RISKS
SPECIFIC TO MATTHEWS KOREA FUND
SHORT-SELLING
MATTHEWS KOREA FUND may make short sales, which are transactions in which the
Fund sells a security it does not own in anticipation of a decline in the mar-
ket value of that security. The Fund is authorized to make short sales of se-
curities or maintain a short position only for the purpose of deferring reali-
zation of gain or loss for U.S. federal income tax purposes, provided that at
all times when a short sale position is open the Fund owns an equal amount of
such securities of the same issue as,
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and equal in amount to, the securities sold short. To complete such a transac-
tion, the Fund must borrow the security to make delivery to the buyer. The
Fund then is obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. The price at such time may be
more or less than the price at which the security was sold by the Fund. Until
the security is replaced, the Fund is required to pay the lender any dividends
or interest which accrue during the period of the loan. The proceeds of the
short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out. No securities
will be sold short if, after effect is given to any such short sale, the total
market value of all securities sold short would exceed 10% of the value of the
Fund's net assets.
RISK FACTORS
COMMON TO ALL FUNDS
RISKS ASSOCIATED WITH LOWER RATED SECURITIES
Securities rated below investment grade are subject to certain risks that may
not be present with higher rated securities. The prices of fixed income secu-
rities generally increase as interest rates fall and decrease as interest
rates rise. The prices of lower rated securities have been found to be less
sensitive to interest rate changes however, than higher-rated investments and
have been more sensitive to broad economic changes, changes in the equity mar-
kets and individual corporate developments. Thus, periods of economic uncer-
tainty and change can be expected to result in increased volatility in the
prices and yields of lower rated securities and thus in the Funds' net asset
value.
Many lower-rated securities are not as liquid as higher-grade securities of
the same maturity and amount outstanding. A Fund's responsibility to value ac-
curately and its ability to sell lower-rated securities at the value placed on
them by the Fund will be made more difficult to the extent that such securi-
ties are thinly traded or illiquid. During such periods, there may be less re-
liable objective information available and the judgment of the Company's Board
of Trustees plays a greater role. Further, adverse publicity about either the
economy or a particular issuer may adversely affect investor's perception of
the value, and thus liquidity, of a lower rated security, whether or not such
perceptions are based on a fundamental analysis.
RISKS ASSOCIATED WITH FOREIGN SECURITIES
Investments by the Funds in the securities of foreign issuers may involve in-
vestment risks different from those of U.S. issuers including possible politi-
cal or economic instability of the country of the issuer, the difficulty of
predicting international trade patterns, the possibility of currency exchange
controls, the possible imposition of foreign withholding tax on the interest
income payable on such instruments, the possible establishment of foreign con-
trols, the possible seizure or nationalization of foreign deposits or assets,
or the adoption of other foreign government restrictions that might adversely
affect the foreign securities held by the Funds. Foreign securities may also
be subject to greater fluctuations in price than securities of domestic corpo-
rations or the U.S. Government. There may be less publicly available informa-
tion about a foreign company than about a domestic company. Foreign companies
generally are not subject to uniform accounting, auditing, and financial re-
porting standards, practices and requirements comparable to those applicable
to domestic companies. There is generally less government regulation of stock
exchanges, brokers, and listed companies abroad than in the United States, and
the absence of negotiated brokerage commissions in certain countries may re-
sult in higher brokerage fees. With respect to certain foreign countries,
there is a possibility of expropriation, nationalization, confiscatory taxa-
tion, or diplomatic developments that could affect investments in those coun-
tries.
In addition, brokerage commissions, custodian services, withholding taxes, and
other costs relating to investment in foreign markets generally are more ex-
pensive than in the United States.
RISKS ASSOCIATED WITH EMERGING MARKETS
Investing in securities of issuers in Asia and the Pacific Basin involves spe-
cial risks. First, the Funds' investment focus on that region makes the Funds
particularly subject to political, social, or economic conditions experienced
in that region. Second, many of the countries in Asia and the Pacific Basin
constitute so-called "developing" or "emerging" economies and markets. The
17
<PAGE>
risks of investing in foreign markets generally are greater for investments in
developing markets. Additional risks of investment in such markets include (I)
less social, political, and economic stability; (ii) the smaller size of the
securities markets in such countries and the lower volume of trading, which
may result in a lack of liquidity and in greater price volatility; (iii) cer-
tain national policies which may restrict the Funds' investment opportunities,
including restrictions on investment in issuers or industries deemed sensitive
to national interests, or expropriation or confiscation of assets or property,
which could result in the Funds' loss of its entire investment in that market;
and (iv) less developed legal structures governing private or foreign invest-
ment or allowing for judicial redress for injury to private property.
For further information, see "SPECIAL CONSIDERATIONS AFFECTING THE PACIFIC BA-
SIN" in the Statement of Additional Information.
RISKS ASSOCIATED WITH FOREIGN CURRENCY
The U.S. dollar market value of the Funds' investments and of dividends and
interest earned by the Funds may be significantly affected by changes in cur-
rency exchange rates. The value of Funds assets denominated in foreign curren-
cies will increase or decrease in response to fluctuations in the value of
those foreign currencies relative to the U.S. dollar. Although the Funds may
attempt to manage currency exchange rate risks, there is no assurance that the
Funds will do so at an appropriate time or that they will be able to predict
exchange rates accurately. For example, if the Funds increase their exposure
to a currency and that currency's price subsequently falls, such currency man-
agement may result in increased losses to the Funds. Similarly, if the Funds
decrease their exposure to a currency and the currency's price rises, the
Funds will lose the opportunity to participate in the currency's appreciation.
Some currency prices may be volatile, and there is the possibility of govern-
mental controls on currency exchange or governmental intervention in currency
markets, which could adversely affect the Funds. Foreign investments which are
not U.S. dollar denominated may require the Funds to convert assets into for-
eign currencies or to convert assets and income from foreign currencies to
U.S. dollars. Normally, exchange transactions will be conducted on a spot,
cash or forward basis at the prevailing rate in the foreign exchange market.
RISK FACTORS SPECIFIC TO
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
The Asian convertible bond market has developed largely as a result of the
complementary interests of issuers seeking funding in international capital
markets, and international investors seeking to commit capital in the Pacific
Rim. The proceeds of these securities have typically been used to finance on-
going business activity (such as expansion of operations) or to retire more
costly debt. Proceeds typically have not been used for corporate restructuring
(such as leveraged buyouts). Despite the fact that many of the issuers are
well known in domestic and, sometimes, international capital markets, most
Asian convertible securities (excluding Japan) are unrated and many would
likely be considered below "investment grade" if they were rated. This lack of
an independent credit opinion constitutes an additional risk.
RISKS ASSOCIATED WITH EUROCONVERTIBLE SECURITIES
Most of the convertible securities in which the Fund will invest are unrated
by any rating agency and, therefore, there is no objective standard against
which the Advisor may evaluate such securities. Investing in a convertible se-
curity denominated in a currency different from that of the security into
which it is convertible exposes the Fund to currency risk.
The theoretical value of convertible securities varies with a number of fac-
tors including the value and volatility of the underlying stock, the level and
volatility of the interest rates, the passage of time, dividend policy, and
other variables. Euroconvertible securities, specifically, are also influenced
by the level and volatility of the foreign exchange rate between the
security's currency and the underlying stock's currency. While the volatility
of convertible fixed income securities will typically be less than that of the
underlying securities, the volatility of warrants will typically be greater
than that of the underlying securities.
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RISKS ASSOCIATED WITH FIXED-INCOME SECURITIES
All fixed-income securities are subject to two types of risks: the credit risk
and the interest rate risk. The credit risk relates to the ability of the is-
suer to meet interest or principal payments or both as they come due. The in-
terest rate risk refers to the fluctuations in the net asset value of any
portfolio of fixed-income securities resulting from the inverse relationship
between price and yield of fixed-income securities; that is, when the general
level of interest rates rises, the prices of outstanding fixed-income securi-
ties decline, and when interest rates fall, prices rise.
In addition, if the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase. Con-
versely, a rise in interest rates or a decline in the exchange rate of the
currency would adversely affect the value of the security expressed in dol-
lars. Fixed-income securities denominated in currencies other than the U.S.
dollar or in multinational currency units are evaluated on the strength of the
particular currency against the U.S. dollar as well as on the current and ex-
pected levels of interest rates in the country or countries.
RISK FACTORS SPECIFIC TO
MATTHEWS KOREA FUND
Because the Fund intends to invest primarily in equity securities of South Ko-
rean companies, an investor in the Fund should be aware of certain risks re-
lating to South Korea, the Korean securities markets and international invest-
ments generally which are not typically associated with U.S. domestic invest-
ments. In addition, the Fund may be more volatile than a geographically di-
verse fund.
SECURITY VALUATION CONSIDERATIONS
The Korean government currently imposes significant restrictions and controls
for foreign investors. As a result, the Fund may be limited in its investments
or precluded from investing in certain Korean companies, which may adversely
affect the performance of the Fund. Under the current regulations, foreign in-
vestors are allowed to invest in almost all shares listed on the Korean Stock
Exchange (the "KSE"), subject to a 3% limit by a particular foreign investor
and a 12% limit by all foreign investors as a group. The 3% and 12% limita-
tions are reduced to 1% and 8%, respectively, for certain government-desig-
nated public corporations with shares listed on the KSE. As a result of these
limitations, many of the securities trade among non-Korean residents at a pre-
mium over the market price. Foreign investors may effect transactions with
other foreign investors off the KSE in the shares of companies that have
reached the maximum aggregate foreign ownership limit through a securities
company in Korea. These transactions typically occur at a premium over prices
on the KSE. There can be no assurance that the Fund, if it purchases such
shares at a premium, will be able to realize such premium on the sale of such
shares or that such premium will not be adversely affected by changes in regu-
lations or otherwise. Such securities will be valued at fair value as deter-
mined in good faith by the Board of Trustees.
RISKS ASSOCIATED WITH INVESTING IN KOREAN SECURITIES
Investments by the Fund in the securities of Korean issuers may involve in-
vestment risks different from those of U.S. issuers, including possible polit-
ical, economic or social instability in Korea, and by changes in Korean law or
regulations. In addition, there is the possibility of the imposition of cur-
rency exchange controls, foreign withholding tax on the interest income pay-
able on such instruments, foreign controls, seizure or nationalization of for-
eign deposits or assets, or the adoption of other foreign government restric-
tions that might adversely affect the Korean securities held by the Fund. Po-
litical instability and/or military conflict involving North Korea may ad-
versely affect the value of the Fund's assets. Foreign securities may also be
subject to greater fluctuations in price than securities of domestic corpora-
tions or the U.S. Government. There may be less publicly available information
about a Korean company than about a domestic company. Brokers in Korea may not
be as well capitalized as those in the U.S., so that they are more susceptible
to financial failure in times of market, political, or economic stress. Addi-
tionally, Korean accounting, auditing and financial reporting standards and
requirements differ, in some cases, significantly, from those applicable to
U.S. issuers. In particular the assets and profits appearing on the financial
statements of a
19
<PAGE>
Korean issuer may not reflect its financial position or results of operations
in accordance with U.S. generally accepted accounting principles. There is a
possibility of expropriation, nationalization, confiscatory taxation, or dip-
lomatic developments that could affect investments in Korea.
In addition, brokerage commissions, custodian services, withholding taxes, and
other costs relating to investment in foreign markets generally are more ex-
pensive than in the United States. Therefore, the operating expense ratio of
the Fund can be expected to be higher than that of a fund investing primarily
in the securities of U.S. issuers.
RISKS ASSOCIATED WITH THE KOREAN SECURITIES MARKETS
The Korean securities markets are smaller than the securities markets of the
U.S. or Japan. Specifically, the following considerations should be considered
by investors of the Korean securities markets: (I) certain restrictions on
foreign investment in the Korean securities markets may preclude investments
in certain securities by the Fund and limit investment opportunities for the
Fund; (ii) fluctuations in the rate of exchange between the dollar and the Won
with the resultant fluctuations in the net asset value of the Fund; (iii) sub-
stantial government involvement in, and influence on, the economy and the pri-
vate sector; (iv) political, economic and social instability, including the
potential for increasing militarization in North Korea; (v) the substantially
smaller size and lower trading volume of the securities markets for Korean eq-
uity securities compared to the U.S. or Japanese securities markets, resulting
in a potential lack of liquidity and increased price volatility; (vi) the risk
that the sale of portfolio securities by the Korean Securities Stabilization
Fund (the "Stabilization Fund"), a fund established in order to stabilize the
Korean securities markets, or other large Korean institutional investors, may
adversely impact the market value of securities in the Fund's portfolio: (vii)
the risk that less information with respect to Korean companies may be avail-
able due to the fact that Korean accounting, auditing and financial reporting
standards are not equivalent to those applicable to U.S. companies; and (viii)
heavy concentration of market capitalization and trading volume in a small
number of issuers, which result in potentially fewer investment opportunities
for the Fund.
RISKS ASSOCIATED WITH NORTH KOREA
Following World War II, the Korean peninsula was partitioned. The demilita-
rized zone at the boundary between Korea and North Korea was established after
the Korean War of 1950-1953 and is supervised by United Nations forces. The
United States maintains a military force in Korea to help deter the ongoing
military threat from North Korean forces. The situation remains a source of
tension although negotiations to ease tensions and resolve the political divi-
sion of the Korean peninsula have been carried on from time to time. There
also have been efforts from time to time to increase economic, cultural and
humanitarian contacts between North Korea and Korea. There can be no assurance
that such negotiations or efforts will continue to occur or will result in an
easing of tension between North Korea and Korea.
Political, economic and social uncertainty in North Korea, and the risk of
military action may adversely affect the prices of the Fund's portfolio secu-
rities. Military action or the risk of military action or the economic col-
lapse of North Korea could have a material adverse effect on Korea, and conse-
quently, on the ability of the Fund to achieve its investment objective. Lack
of available information regarding North Korea may be the greatest risk fac-
tor.
RISKS ASSOCIATED WITH THE INFLUENCE OF THE KOREAN GOVERNMENT
The Korean government has historically exercised and continues to exercise
substantial influence over many aspects of the private sector. The Korean gov-
ernment from time to time has informally influenced the payment of dividends
and the prices of certain products, encouraged companies to invest or to con-
centrate in particular industries, induced mergers between companies in indus-
tries suffering from excess capacity and induced private companies to publicly
offer their securities. The Korean government has sought to minimize excessive
price volatility on the KSE through various steps, including the imposition of
limitations on daily price movements of securities.
RISKS ASSOCIATED WITH A NON-DIVERSIFIED INVESTMENT COMPANY
The Fund is a "non-diversified" investment company, which means that it may
invest a larger portion of its
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assets in the securities of a single issuer than a diversified fund. An in-
vestment in the Fund therefore will entail greater risk than an investment in
a diversified investment company because a higher percentage of investments
among fewer issuers may result in greater fluctuation in the total market
value of the Fund's portfolio, and economic, political or regulatory develop-
ments may have a greater impact on the value of the Fund's portfolio than
would be the case if the portfolio were diversified among more issuers. The
Fund intends to comply with the diversification and other requirements howev-
er, applicable to regulated investment companies under the Internal Revenue
Code of 1986, as amended. See "Dividends and Taxes."
MANAGEMENT OF THE FUNDS
THE BOARD OF TRUSTEES
The Company has a Board of Trustees that establishes the Funds' policies and
supervises and reviews the management of the Funds. The day-to-day operations
of the Funds are administered by the officers of the Company and by the Advi-
sor pursuant to the terms of the Investment Advisory Agreement with the Funds.
The Funds' Trustees review the various services provided by the Advisor to en-
sure that the Funds' general investment policies and programs are being prop-
erly carried out and that administrative services are being provided to the
Funds in a satisfactory manner. Information pertaining to the Trustees and ex-
ecutive officers of the Trust is set forth below.
G. PAUL MATTHEWS*, Chairman of the Board of Trustees and President; 655 Mont-
gomery Street, Suite 1438, San Francisco, CA 94111; President, founder and
Chief Investment Officer of Matthews International Capital Management since
1991; prior thereto President, G.T. Capital Holdings, San Francisco parent of
G.T.'s U.S. operations, with responsibility for all G.T.'s U.S. activities
from 1988 through 1989; prior thereto, Managing Director, G.T. Management
(Asia), based in Hong Kong, and member of G.T. Group's London board of direc-
tors from 1986 through 1989. Retained overall responsibility for all Asian in-
vestments of the group (excluding Japan); worked with G.T. Group in Hong Kong
from 1982 through 1988.
JOHN H. DRACOTT*, Trustee and Vice-President and Secretary; 655 Montgomery
Street, Suite 1438, San Francisco, CA 94111; International mutual fund consul-
tant since 1991; President, Tyndall Distributors from 1988 through 1990; prior
thereto Senior Vice President, Integrated Capital Services from 1983 through
1988.
CAROL CHUANG*, Trustee and Vice President and Treasurer; 655 Montgomery
Street, Suite 1438, San Francisco, CA 94111; Vice President and Senior Portfo-
lio Manager, Matthews International Capital Management, since January 1994;
prior thereto, President, JYCP Investment Management (USA) Inc. since 1992;
Assistant Director-Investment Manager, Prudential Asia Fund Management Ltd.,
Hong Kong from 1990 through 1992; prior thereto Senior Investment Analyst,
Baring Securities (Hong Kong) Ltd. from 1988 through 1989.
RICHARD K. LYONS, Trustee; Haas School of Business, University of California,
Berkeley, CA; Assistant Professor (Step V), Haas School of Business, Univer-
sity of California, Berkeley since Fall 1993; Associate Professor, Graduate
School of Business & School of International and Public Affairs, Columbia Uni-
versity, Fall 1991 to Fall 1993; Assistant Professor, Graduate School of Busi-
ness, Columbia University, Fall 1987 to Fall 1991; Visiting Scholar, Founda-
tion for Advanced Information and Research (FAIR), Tokyo, Japan, Summer 1989.
ROBERT K. CONNOLLY, Trustee; P.O. Box 94, Sonoma, CA 95476; Retired; Most re-
cently until August 1990, Institutional Sales Manager and Securities Analyst
for Barrington Research Associates; 32 years in Institutional Sales throughout
the U.S. and Europe; for 20 years acted as an Officer and Senior Officer to
New York Stock Exchange Member Firms; including Spencer Trask & Co., A.G.
Becker Paribas and Wheat First Securities.
DONG WOOK PARK*, Trustee; Director, Portfolio Manager and head of the Interna-
tional Department, Daewoo Capital Management Co., Ltd., Daewoo Securities
Building, 34-3, Yoido-dong, Yungdungpo-go, Seoul, Korea. Mr. Park has over
twenty years of investing experience and since 1984 has headed the investment
advisory team for a closed-end fund specializing in Korean investments. When
the Korea stock market was opened
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<PAGE>
to foreign investors in 1992, he pioneered in creating several investment ve-
hicles for foreign investors. Mr. Park has also launched two international
funds which invest in the Pacific Rim and Japan.
DAVID FITZWILLIAM-LAY, Trustee; 26 Chalfont House, 19 Chesham Street, London,
SWIX 8NG, United Kingdom; Director, USDC Investment Trust PLC and Berry
Starquest PLC; Mr. FitzWilliam-Lay retired in 1993 after three and a half
years as Chairman of G.T. Management PLC, an international investment manage-
ment company; prior thereto, Chairman of G.T. Management PLC's principal sub-
sidiary companies (United States, Japan and Hong Kong) and Group Chief Execu-
tive. Mr. FitzWilliam-Lay joined the G.T. Management Group in 1978 and was in-
volved in international business development and client services in the United
Kingdom, Europe, South East Asia, Australia, Japan and the United States. He
was a member of the Board of Governors of the National Association of Securi-
ties Dealers, Washington, DC between 1987 and 1990.
*These Trustees are considered "interested persons" of the Funds as defined
under the Act.
The Trustees of the Funds receive fees and expenses for each meeting of the
Board of Trustees they attend. However, no officer or employee of the Advisor
receives any compensation from the Funds for acting as a Trustee of the Funds.
The officers of the Funds receive no compensation directly from the Fund for
performing the duties of their offices.
THE INVESTMENT ADVISOR
The Advisor, which has its offices at 655 Montgomery Street, Suite 1438, San
Francisco, California 94111, serves as the Funds' investment advisor and man-
ager and is an investment advisor registered under the Investment Advisers Act
of 1940, as amended. The Advisor advises private and institutional accounts,
which include both U.S. and non-U.S. investors. The Advisor was founded in
1991 by G. Paul Matthews to manage international portfolios for North American
clients and to provide U.S. investments for non-U.S. clients. The Advisor spe-
cializes in Asian-Pacific investments and manages assets in a U.S. domiciled
partnership, offshore funds and separate accounts. Total assets under manage-
ment as of December 4, 1995 were $130 million. Mr. Matthews may be deemed to
be a control person of the Advisor on the basis of his ownership of stock of
the Advisor. The Advisor does not presently serve as investment advisor to any
other investment companies in the United States.
The Funds have retained the Advisor to invest the Funds' assets, manage the
Funds' business affairs and supervise its overall day-to-day operations. Pur-
suant to an investment advisory agreement with the Funds, the Advisor provides
advice on buying and selling securities in accordance with the Funds' invest-
ment policies, limitations and restrictions. The Advisor also furnishes the
Funds with office space and certain administrative and clerical services, and
provides the personnel needed by the Funds with respect to the Advisor's re-
sponsibilities under the investment advisory agreement.
For providing investment advisory services, the Funds pay the Advisor a
monthly fee calculated daily by applying an annual rate of 1.00% to the Funds'
assets. While the advisory fee paid by the Funds is higher than that paid by
most other investment companies, the fee is comparable to the fees paid by
other investment companies with similar investment objectives and policies.
From time to time, the Advisor may voluntarily waive all or a portion of its
management fee and/or absorb certain expenses of the Funds without further no-
tification of the commencement or termination of any such waiver or absorp-
tion. Any such waiver or absorption will have the effect of lowering the over-
all expense ratio of the Funds and increasing the Funds' overall return to in-
vestors at the time any such amounts are waived and/or absorbed. The Advisor
has agreed to waive that portion of its advisory fee equal to the total ex-
penses of the Funds for any fiscal year which exceeds the permissible limits
applicable to each Fund in any state in which its shares are then qualified
for sale. Any reductions made by the Advisor in its fees are subject to reim-
bursement by the Funds within the following three years provided the Funds are
able to effect such reimbursement and remain in compliance with applicable ex-
pense limitations. In addition, the Advisor may engage certain organizations,
at the Advisor's expense, to assist in the distribution of the shares of the
Fund or to provide services to the Funds' shareholders.
22
<PAGE>
The terms of the Funds' investment advisory agreement permit the Advisor, at
its own expense, to obtain statistical and other factual information and ad-
vice as it deems necessary or desirable to fulfill its investment responsibil-
ities under the contract.
As of December 29, 1995, the Advisor has voluntarily undertaken to reimburse
MATTHEWS PACIFIC TIGER FUND, MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND and
MATTHEWS KOREA FUND for operating expenses in excess of 1.90%, 1.90% and
2.50%, respectively. Such fee reimbursements may be terminated at the discre-
tion of the Advisor. The Advisor has also agreed to waive that portion of its
advisory fee equal to the total expenses of a Fund for any fiscal year which
exceeds the permissible limits applicable to a Fund in any state in which its
shares are then qualified for sale.
DAEWOO CAPITAL MANAGEMENT CO., LTD.
Daewoo Capital Management Co., Ltd. acts as Korean Advisor to the Advisor,
pursuant to a Research and Advisory Agreement with the Advisor. The Korean Ad-
visor has its main offices at 34-3, Yoido-dong, Yungdungpo-gu, Seoul 150-010,
Korea. The Korean Advisor, organized in 1988 under the laws of the Republic of
Korea, is an investment advisor registered under the United States Investment
Advisers Act of 1940. The Korean Advisor is a wholly owned subsidiary of
Daewoo Securities Co., Ltd., the largest Korean securities firm, and an affil-
iate of Daewoo Research Institute. Total assets under management as of Decem-
ber 4, 1995 were in excess of $2 billion. Daewoo Securities Co., Ltd. is af-
filiated with Daewoo Corporation, a conglomerate headquartered in Seoul, Ko-
rea. Daewoo Corporation and certain affiliates of Daewoo Corporation own ap-
proximately 12% of Daewoo Securities Co., Ltd. Orders for the purchase and
sale of securities of the Fund's portfolio may be placed with Daewoo Securi-
ties Co., Ltd., as well as with other Korean brokers.
The Korean Advisor provides an investment program for MATTHEWS KOREA FUND sub-
ject to the supervision of the Advisor in accordance with the objective and
policies of the Fund. The Korean Advisor provides such investment advice, re-
search and assistance as the Advisor may from time to time request. The Korean
Advisor makes specific investment recommendations, which are then evaluated by
the Advisor's research department and portfolio managers in light of their own
expertise and information from other sources in making investment decisions
for the Fund.
For its services, the Advisor pays the Korean Advisor a monthly fee equal to
an annual rate of 0.50% of the Fund's month-end net assets. For purposes of
computing the monthly fee, the value of the net assets of the Fund is deter-
mined as of the close of business on the last business day of each month. The
annual fee is payable in U.S. dollars.
PORTFOLIO MANAGEMENT
Investment decisions for the Funds are made by a team of portfolio managers at
Matthews International Capital Management, including G. Paul Matthews and
Carol Chuang. Mr. Matthews is responsible for overseeing all investments made
by the Funds.
Mr. Matthews is also General Partner and portfolio manager of the M.I.C. Asia-
Pacific L.P. and responsible for the overall management of the Emerging Asian
Strategies Fund and all other investment portfolios managed by Matthews Inter-
national Capital Management.
Ms. Chuang joined the Advisor as a senior portfolio manager in January 1994
bringing with her nine years of extensive experience in the portfolio manage-
ment of securities in the Asian markets. Both Ms. Chuang and Mr. Matthews
travel extensively to Asia to conduct research relating to those markets. See
"The Board of Trustees" for further biographical information on Ms. Chuang and
Mr. Matthews.
ADMINISTRATION OF THE FUNDS
THE UNDERWRITER
Fund/Plan Broker Services, Inc. (the "Underwriter"), 2 W. Elm Street, Consho-
hocken, PA 19428, has been engaged as the Underwriter of the shares of the
Company pursuant to a written agreement. The Underwriter's duties under the
agreement are limited to the facilitation of the registration of shares of the
Company under state securities laws.
23
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THE ADMINISTRATOR
Fund/Plan Services, Inc. ("Fund/Plan"), 2 W. Elm Street, Conshohocken, PA
19428 serves as administrator to the Company pursuant to an Administrative
Services Agreement. The services Fund/Plan provides to the Company include:
the coordination and monitoring of any third parties furnishing services to
the Funds; providing the necessary office space, equipment and personnel to
perform administrative and clerical functions for the Funds; preparing, filing
and distributing proxy materials and periodic reports to shareholders, regis-
tration statements and other documents; and responding to shareholder inqui-
ries. Pursuant to this agreement, Fund/Plan receives a fee at the annual rate
of .15% on the first $75 million of total average net assets, .10% on the next
$75 million of total average net assets and .05% of total average net assets
in excess of $150 million. Such fee shall not be less than $70,000 per year
for all series of the Company.
FUND EXPENSES
The Funds are responsible for their own operating expenses, including, but not
limited to: advisory fees; expenses for printing and distribution costs of
prospectuses and reports to shareholders; brokerage fees and commissions; fees
for the registration or qualification of Fund shares under federal or state
securities laws; expenses of the organization of the Company or of additional
Funds; transfer agent, custodian, administrator, legal and auditing fees; the
expenses of obtaining quotations of portfolio securities and of pricing the
Funds' shares; trade association dues; all costs associated with shareholder
meetings and the preparation and dissemination of proxy materials; and other
expenses relating to the Funds' operations; costs of liability insurance and
fidelity bonds; fees for Trustees who are not "interested persons" of the Ad-
visor; and any extraordinary and nonrecurring expenses which are not expressly
assumed by the Advisor.
THE CUSTODIAN, TRANSFER AGENT AND FUND ACCOUNTING AND PRICING AGENT
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
custodian for the cash and securities of the Funds. Fund/Plan serves as the
Funds' transfer agent. As transfer agent, it maintains the records of each
shareholder's account, answers shareholder inquiries concerning accounts,
processes purchases and redemptions of the Funds' shares, acts as dividend and
distribution disbursing agent and performs other shareholder service func-
tions. As fund accounting agent, Fund/Plan performs certain accounting and
pricing services for the Funds, including the daily calculation of the Funds'
net asset value.
PURCHASE OF SHARES
IN GENERAL
Shares of each Fund may be purchased directly from the Funds at the net asset
value next determined after receipt of the order in proper form by the trans-
fer agent. There is no sales load or charge in connection with the purchase of
shares. Each Fund's shares are offered for sale by Fund/Plan Broker Services,
Inc., the Funds' Underwriter, 2 W. Elm Street, Conshohocken, PA 19428, (800)
892-0382.
The minimum initial investment for each Fund is $1,000. Subsequent investments
for each Fund will be accepted in minimum amounts of $250. The minimum initial
investment for IRAs, 401(k), 403(b)(7) plans and other retirement plans is
$250. Subsequent investments for any retirement plan is $50.
The Funds reserve the right to reject any purchase order and to suspend the
offering of shares of the Funds. The Funds also reserve the right to vary the
initial investment minimum and minimums for additional investments at any
time. In addition, the Advisor may waive the minimum initial investment re-
quirement for any investor.
Purchase orders for shares of each Fund that are received by Fund/Plan in
proper form by the close of regular trading on the New York Stock Exchange
("NYSE") (currently 4:00 p.m. Eastern time), on any day that the NYSE is open
for trading, will be purchased at the Fund's next determined net asset value.
Orders for each Fund shares received after 4:00 p.m. Eastern time will be pur-
chased at the next-determined net asset value determined the business day fol-
lowing receipt of the order.
Shares of each Fund may be purchased by mail, by wire, by telephone and
through broker/dealers.
24
<PAGE>
PURCHASES BY MAIL
Shares of each Fund may be purchased initially by completing the application
accompanying this Prospectus and mailing it to the transfer agent, together
with a check payable to the respective Fund, c/o 2 W. Elm Street, P.O. Box
874, Conshohocken, PA 19428-0874.
Subsequent investments in an existing account in each Fund may be made at any
time by sending a check payable to the respective Fund c/o Fund/Plan Services,
Inc., P.O. Box 412797, Kansas City, MO 64141-2797. Please enclose the stub of
your account statement and indicate the amount of the investment.
PURCHASES BY WIRE
Investors who wish to purchase shares of each Fund by federal funds wire
should first call the transfer agent at (800) 892-0382 to advise the transfer
agent that you intend to make an investment by wire and to request an account
number if establishing a new account. You must also furnish the respective
Fund with your social security number or other tax identification number. Fol-
lowing notification to the transfer agent, federal funds and registration in-
structions should be wired through the Federal Reserve System to:
UNITED MISSOURI BANK KC NA
ABA # 10-10-00695
FOR: FUND/PLAN SERVICES, INC.
A/C 98-7037-071-9
FBO "MATTHEWS PACIFIC TIGER FUND"
"MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND"
OR
"MATTHEWS KOREA FUND"
"SHAREHOLDER NAME AND ACCOUNT NUMBER"
For initial purchases, the shareholder should complete and mail the applica-
tion with signature(s) of registrant(s) to the transfer agent subsequent to
the initial wire. Investors should be aware that banks generally impose a wire
service fee. The Funds will not be responsible for the consequence of delays,
including delays in the banking or Federal Reserve wire systems.
Federal funds wires and other direct purchase orders received by Fund/Plan by
4:00 p.m., Eastern time and accompanied by check or wire, are confirmed by
that day's public offering price. Direct purchase orders accompanied by check
or wire received by Fund/Plan after 4:00 p.m., Eastern time, are confirmed at
the public offering price determined on the following business day.
PURCHASES THROUGH BROKER/DEALERS
The Funds may accept telephone orders from brokers, financial institutions or
service organizations which have been previously approved by the Funds. It is
the responsibility of such brokers, financial institutions or service organi-
zations to promptly forward purchase orders and payments for the same to the
respective Fund. Shares of each Fund may be purchased through brokers, finan-
cial institutions, service organizations, banks, and bank trust departments,
each of which may charge the investor a transaction fee or other fee for its
services at the time of purchase. Such fees would not otherwise be charged if
the shares were purchased directly from the Funds.
Wire orders for shares of each Fund received by dealers prior to 4:00 p.m.,
Eastern time, and received by Fund/Plan before 5:00 p.m., Eastern time, on the
same day are confirmed at that days's public offering price. Orders received
by dealers after 4:00 p.m., Eastern time, are confirmed at the public offering
price on the following business day. It is the dealer's obligation to place
the order with Fund/Plan before 5:00 p.m., Eastern time.
SUBSEQUENT INVESTMENTS
Once an account has been opened, subsequent purchases may be made by mail,
bank wire, exchange, automatic investing or direct deposit. The minimum for
subsequent investments for each Fund is $250. The minimum for subsequent in-
vestments for all retirement accounts is $50. When making additional invest-
ments by mail, simply return the remittance portion of a previous confirmation
with your investment in the envelope provided with each confirmation state-
ment. Your check should be made payable to the respective Fund and mailed to
the respective Fund c/o Fund/Plan Services, Inc., P.O. Box 412797, Kansas
City, MO 64141-2797. Orders to purchase shares are effective on the day
Fund/Plan receives your check or money order.
All investments must be made in U.S. dollars, and, to avoid fees and delays,
checks must be drawn only on banks located in the U.S. A charge (minimum of
$20)
25
<PAGE>
will be imposed if any check used for the purchase of shares is returned. The
Funds and Fund/Plan each reserve the right to reject any purchase order in
whole or in part.
EXCHANGE OF SHARES
IN GENERAL
Shares of any of the Funds may be exchanged for shares of any of the other
Funds within the Company, provided such other shares may be sold legally in
the state of the investor's residence. The Company currently consists of three
separate Funds known as: MATTHEWS PACIFIC TIGER FUND, MATTHEWS ASIAN CONVERT-
IBLE SECURITIES FUND and MATTHEWS KOREA FUND.
Exchanges are subject to the minimum initial investment requirement for the
respective Fund. Requests for telephone exchanges must be received by
Fund/Plan by the close of regular trading on the NYSE (currently 4:00 p.m.
Eastern time) on any day that the NYSE is open for regular trading. Shares may
be exchanged by: (1) written request, or (2) telephone, if a special authori-
zation form has been completed in advance and is on file with the Transfer
Agent. A redemption fee may apply.
The exchange privilege is a convenient way to respond to changes in your in-
vestment goals or in market conditions. This privilege is not designed for
frequent trading in response to short-term market fluctuations. You may make
exchanges by mail or by telephone if you have previously signed a telephone
authorization on the application form. The telephone exchange privilege may be
difficult to implement during times of drastic economic or market changes. The
purchase of shares for any of the Funds through an exchange transaction is ac-
cepted immediately. You should keep in mind that for tax purposes an exchange
is treated as a redemption, which may result in taxable gain or loss, and a
new purchase, each at net asset value of the appropriate Fund. The Funds and
Fund/Plan reserve the right to limit, amend, impose charges upon, terminate or
otherwise modify the exchange privilege on 60 days' prior written notice to
shareholders.
REDEMPTION OF SHARES
IN GENERAL
Shareholders may redeem their shares of the Funds on any business day that the
NYSE is open for business. Redemptions will be effective at the net asset
value per share next determined after the receipt by the transfer agent of a
redemption request meeting the requirements described below. Such redemption
proceeds may however, be reduced by the amount of any applicable redemption
fee. See "Redemption Fee" below. The Funds normally send redemption proceeds
on the next business day, but in any event redemption proceeds are sent within
seven calendar days of receipt of a redemption request in proper form. Payment
may also be made by wire directly to any bank previously designated by the
shareholder on a shareholder account application. There is a $9.00 charge for
redemptions made by wire. Please note that the shareholder's bank may also im-
pose a fee for wire service. There may be fees for redemptions made through
brokers, financial institutions and service organizations.
Except as noted below, redemption requests received in proper form by the
transfer agent prior to the close of regular trading hours on the NYSE on any
business day that the Funds calculate their net asset value are effective that
day. Redemption requests received after the close of the NYSE will be effected
at the net asset value per share determined on the next business day following
receipt. No redemption will be processed until the transfer agent has received
a completed application with respect to the account.
The Funds will satisfy redemption requests in cash to the fullest extent fea-
sible, so long as such payments would not, in the opinion of the Board of
Trustees, result in the necessity of the Funds to sell assets under disadvan-
tageous conditions or to the detriment of the remaining shareholders of the
Funds.
Pursuant to the Funds' Trust Instrument, payment for shares redeemed may be
made either in cash or in kind, or partly in cash and partly in-kind. When
payments are made in-kind the securities used for such payment must be readily
marketable. The Funds have elected, pursuant to Rule 18f-1 under the 1940 Act
however, to redeem its shares solely in cash up to the lesser of $250,000 or
1% of the net asset value of the Funds, during any 90 day period for any one
shareholder. Payments in excess of this limit will also be made wholly in cash
unless the Board of Trustees believes that economic conditions ex-
26
<PAGE>
ist which would make such a practice detrimental to the best interests of the
Funds. Any portfolio securities paid or distributed in-kind would be valued as
described under "Net Asset Value." In the event that an in-kind distribution
is made, a shareholder may incur additional expenses, such as the payment of
brokerage commissions, on the sale or other disposition of the securities re-
ceived from the Funds. In-kind payments need not constitute a cross-section of
the Funds' portfolio. Where a shareholder has requested redemption of all or a
part of the shareholder's investment, and where the Funds complete such re-
demption in-kind, the Funds will not recognize gain or loss for federal tax
purposes, on the securities used to complete the redemption but the share-
holder will recognize gain or loss equal to the difference between the fair
market value of the securities received and the shareholder's basis in the
Fund shares redeemed.
The Funds may suspend the right of redemption or postpone the date of payment
for more than seven days during any period when (1) trading on the NYSE is re-
stricted or the NYSE is closed, other than customary weekend and holiday
closings; (2) the Securities and Exchange Commission has by order permitted
such suspension; (3) an emergency, as defined by rules of the Securities and
Exchange Commission, exists making disposal of portfolio investments or deter-
mination of the value of the net assets of the Funds not reasonably practica-
ble.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request for redemption to
Fund/Plan, 2 W. Elm Street, P.O. Box 874, Conshohocken, PA 19428-0874.
A written request must be in good order which means that it must: (i) identify
the shareholder's account name and account number; (ii) state the number of
shares or dollar amount to be redeemed; (iii) be signed by each registered
owner exactly as the shares are registered; and (iv) identify the name of the
Fund. To prevent fraudulent redemptions, a signature guarantee for the signa-
ture of each person in whose name the account is registered is required for
any of the following: (i) on all written redemptions requests over $100,000;
(ii) if the proceeds (any amount) are to be paid to someone other than the
registered owner(s) of the account; or (iii) if the proceeds are to be sent to
any address other than the shareholder's address of record, pre-authorized
bank account or brokerage firm account. Signatures must be guaranteed by an
"eligible guarantor institution" as defined in Rule 17Ad-15 under the Securi-
ties Exchange Act of 1934. Eligible guarantor institutions include banks, bro-
kers, dealers, credit unions, national securities exchanges, registered secu-
rities associations, clearing agencies and savings associations. Broker-deal-
ers guaranteeing signatures must be a member of a clearing corporation or
maintain net capital of at least $100,000. Notary public endorsement will not
be accepted.
Credit unions must be authorized to issue signature guarantees. Signature
guarantees will be accepted from any eligible guarantor institution which par-
ticipates in a signature guarantee program. A notarized signature will not be
sufficient for the request to be in proper form. The transfer agent may re-
quire additional supporting documents for redemptions made by corporations,
executors, administrators, trustees or guardians and retirement plans.
A redemption request will not be deemed to be properly received until the
transfer agent receives all required documents in proper form. Questions with
respect to the proper form for redemption requests should be directed to the
transfer agent at (800) 892-0382.
REDEMPTION BY TELEPHONE
Shareholders who have so indicated on the application, or have subsequently
arranged in writing to do so, may redeem shares by instructing the transfer
agent by telephone. In order to arrange for redemption by wire or telephone
after an account has been opened, or to change the bank or account designated
to receive redemption proceeds, a written request must be sent to the transfer
agent with a signature guarantee at the address listed under "Redemption by
Mail," above.
The Funds reserve the right to refuse a wire or telephone redemption if it is
believed advisable to do so. Pro-cedures for redeeming Fund shares by wire or
telephone may be modified or terminated at any time.
Shares of the Funds may be redeemed through certain brokers, financial insti-
tutions or service organizations,
27
<PAGE>
banks and bank trust departments who may charge the investor a transaction fee
or other fee for their services at the time of redemption. Such fees would not
otherwise be charged if the shares were purchased from the Funds.
REDEMPTION FEE
With certain exceptions, the Funds may impose a redemption fee of 1.00% on
shares that are redeemed within ninety days of purchase. The charge will be
assessed on an amount equal to the net asset value of the shares at the time
of redemption. If imposed, the redemption fee is deducted from the redemption
proceeds otherwise payable to the shareholder. The redemption fee is returned
to the assets of the Funds by the Advisor.
The redemption fee will be waived under the following circumstances: 1) total
or partial redemptions made following the death or disability of a sharehold-
er; 2) minimum required distribution made in connection with an IRA, retire-
ment plan or custodial account under Section 403(b) or other retirement plan
following attainment of age 70 1/2; 3) total or partial redemption resulting
from a distribution following retirement in the case of a tax-qualified em-
ployer-sponsored retirement plan; 4) when a redemption results from a tax-free
return of an excess contribution or from the death or disability of the em-
ployer; or 5) redemptions pursuant to the Funds' right to liquidate a share-
holder's account involuntarily.
MINIMUM BALANCES
Due to the relatively high cost of maintaining smaller accounts, the Funds re-
serve the right to make involuntary redemptions of shares in any account for
their then current net asset value (which will be promptly paid to the share-
holder) if at any time the total investment does not have a value of at least
$1,000 due to redemptions but not market fluctuations. The shareholder will be
notified that the value of his or her account is less than the required mini-
mum and will be allowed at least 60 days to bring the value of the account up
to at least $1,000 before the redemption is processed.
TELEPHONE TRANSACTIONS
Shareholders who wish to initiate purchase or redemption transactions by tele-
phone must first elect the option, as described above. Neither the Funds nor
any of their service contractors will be liable for any loss or expense in
acting upon telephone instructions that are reasonably believed to be genuine.
In this regard, the Funds and their transfer agent require personal identifi-
cation information before accepting a telephone redemption. To the extent that
the Funds or their transfer agent fail to use reasonable procedures to verify
the genuineness of telephone instructions, the Funds may be liable for losses
due to fraudulent or unauthorized instructions. Written confirmation will be
provided for all purchase, exchange and redemption transactions initiated by
telephone.
SHAREHOLDER SERVICES
The following special services are available to shareholders. An investor may
change or stop these plans at any time by written notice to the Funds.
AUTOMATIC INVESTING
The Funds offer an automatic monthly investment plan, details of which can be
obtained from the transfer agent. Shareholders simply authorize the automatic
withdrawal of funds from their bank account into the respective Fund. The min-
imum subsequent investment pursuant to this plan is $100 per month. The ini-
tial account must be opened first with the $1,000 minimum prior to participat-
ing in this plan. Please complete the appropriate section on the New Account
Application enclosed with this Prospectus indicating the amount of the auto-
matic investment and bank account information.
RETIREMENT PLANS
The Funds are available for investment by pension and profit sharing plans in-
cluding Individual Retirement Accounts, 401(k) plans, and 403(b)(7) Retirement
Plans through which investors may purchase Fund shares. For details concerning
any of the retirement plans, please call the Funds at (800) 789-ASIA.
NET ASSET VALUE
The net asset value per share of the Funds is computed once daily as of the
close of regular trading on the
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<PAGE>
NYSE, currently 4:00 p.m. Eastern time. Currently, the NYSE is closed on the
following holidays or days on which the following holidays are observed: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, La-
bor Day, Thanksgiving Day and Christmas Day.
The net asset value per share is computed by adding the value of all securi-
ties and other assets in the portfolio, deducting any liabilities, and divid-
ing by the total number of outstanding shares. Expenses are accrued daily and
applied when determining the net asset value. The Funds' equity securities are
valued based on market quotations or, when no market quotations are available,
at fair value as determined in good faith by or under direction of the Board
of Trustees. Foreign securities are valued as of the close of trading on the
primary exchange on which they trade.
The value is then converted to U.S. dollars using current exchange rates. Se-
curities listed on any national securities exchange are valued at their last
sale price on the exchange where the securities are principally traded or, if
there has been no sale on that date, at the mean between the last reported bid
and asked prices. Securities traded over-the-counter are priced at the mean of
the last bid and asked prices. Securities are valued through valuations ob-
tained from a commercial pricing service or at the most recent mean of the bid
and asked prices provided by investment dealers in accordance with procedures
established by the Board of Trustees. Options, futures and options on futures
are valued at the price as determined by the appropriate clearing corporation.
Short-term investments having a maturity of 60 days or less are valued at am-
ortized cost, which the Board of Trustees believes represents fair value. When
a security is valued at amortized cost, it is valued at its cost when pur-
chased, and thereafter by assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. All other securities and other assets are
valued at their fair value as determined in good faith under procedures estab-
lished by and under the supervision of the Board of Trustees. Foreign currency
exchange rates are generally determined prior to the close of trading on the
NYSE. Occasionally, events affecting the value of foreign investments and such
exchange rates occur between the time at which they are determined and the
close of trading on the NYSE. Such events would not normally be reflected in a
calculation of the Funds' net asset value on that day. If events that materi-
ally affect the value of the Funds' foreign investments or the foreign cur-
rency exchange rates occur during such period, the investments will be valued
at their fair value as determined in good faith by or under the direction of
the Board of Trustees. Foreign securities held by the Funds may be traded on
days and at times when the NYSE is closed. Accordingly, the net asset value of
the Funds may be significantly affected on days when shareholders have no ac-
cess to the Funds.
For valuation purposes, quotations of foreign portfolio securities, other as-
sets and liabilities and forward contracts stated in foreign currency are
translated into U.S. dollar equivalents at the prevailing market rates.
DIVIDENDS AND TAXES
DIVIDENDS
MATTHEWS PACIFIC TIGER FUND and MATTHEWS KOREA FUND will distribute its net
investment income annually in December. MATTHEWS ASIAN CONVERTIBLE SECURITIES
FUND will distribute its net investment income semi-annually in June and De-
cember. Any net realized gain from the sale of portfolio securities and net
realized gains from foreign currency transactions are distributed at least
once each year unless they are used to offset losses carried forward from
prior years, in which case no such gain will be distributed. Such income divi-
dends and capital gain distributions are reinvested automatically in addi-
tional shares at net asset value, unless a shareholder elects to receive them
in cash. Distribution options may be changed at any time by requesting a
change in writing.
Any check in payment of dividends or other distributions which cannot be de-
livered by the Post Office or which remains uncashed for a period of more than
one year may be reinvested in the shareholder's account at the then current
net asset value and the dividend option may be changed from cash to reinvest.
Dividends are reinvested on the ex-dividend date (the "ex-date") at the net
asset value determined at the close of business
29
<PAGE>
on that date. Dividends and distributions are treated the same for tax pur-
poses whether received in cash or reinvested in additional shares. Please note
that shares purchased shortly before the record date for a dividend or distri-
bution may have the effect of returning capital although such dividends and
distributions are subject to taxes.
TAXES
The Funds intend to qualify and elect to be treated as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986. Such quali-
fication relieves the Funds of liability for Federal income taxes to the ex-
tent the Funds' earnings are distributed in accordance with the Code. To so
qualify, among other requirements, the Funds will limit its investments so
that, at the close of each quarter of its taxable year, (I) not more than 25%
of the market value of the Funds' total assets will be invested in the securi-
ties of a single issuer, and (ii) with respect to 50% of the market value of
its total assets, not more than 5% of the market value of its total assets
will be invested in the securities of a single issuer, and it will not own
more than 10% of the outstanding voting securities of a single issuer.
An investment in the Funds has certain tax consequences, depending on the type
of account. Distributions are subject to federal income tax and may also be
subject to state and local income taxes. Distributions are generally taxable
when they are paid, whether in cash or by reinvestment in additional shares,
except that distributions declared in October, November or December and paid
in the following January are taxable as if they were paid on December 31. If
you have a qualified retirement account, taxes are generally deferred until
distributions are made from the retirement account.
For federal income tax purposes, income dividends and short-term capital gain
distributions are taxed as ordinary income. Distributions of net capital gains
(the excess of net long-term capital gain over net short-term capital loss)
are usually taxed as long-term capital gains, regardless of how long a share-
holder has held the Funds' shares. The tax treatment of distributions of ordi-
nary income or capital gains will be the same whether the shareholder rein-
vests the distributions or elects to receive them in cash.
Shareholders may be subject to a 31 percent back-up withholding on reportable
dividend and redemption payments ("back-up withholding") if a certified tax-
payer identification number is not on file with the Funds, or if to the Funds'
knowledge, an incorrect number has been furnished. An individual's taxpayer
identification number is his/her social security number.
Shareholders will be advised annually of the source and tax status of all dis-
tributions for federal income tax purposes. Information accompanying a share-
holder's statement will show the portion of those distributions that are not
taxable in certain states. Further information regarding the tax consequences
of investing in the Funds is included in the Statement of Additional Informa-
tion. The above discussion is intended for general information only. Investors
should consult their own tax advisors for more specific information on the tax
consequences of particular types of distributions.
Dividends and interest received by the Funds with respect to foreign securi-
ties may give rise to withholding and other taxes imposed by foreign coun-
tries. Tax consequences between certain countries and the United States may
reduce or eliminate such taxes. In addition, foreign countries generally do
not impose taxes on capital gains with respect to investments by non-resident
investors. MATTHEWS KOREA FUND does not intend to engage in activities that
will create a permanent establishment in Korea within the meaning of the Ko-
rea-U.S. Tax Treaty. Therefore, MATTHEWS KOREA FUND generally will not be sub-
ject to any Korean income taxes other than Korean withholding taxes. Exemp-
tions or reductions in these taxes apply if the Korea-U.S. Tax Treaty applies
to the Fund. If the treaty provisions are not, or cease to be, applicable to
MATTHEWS KOREA FUND, significant additional withholding taxes would apply.
PERFORMANCE INFORMATION
IN GENERAL
Performance information such as yield or total return for the Funds may be
quoted in advertisements or in communications to shareholders. Such perfor-
mance informa-
30
<PAGE>
tion may be useful in reviewing the performance of the Funds and for providing
a basis for comparison with other investment alternatives. Since net invest-
ment return of the Funds changes in response to fluctuations in market condi-
tions, interest rates and the Funds' expenses however, any given performance
quotation should not be considered representative of the Funds' performance
for any future period. The value of an investment in the Funds will fluctuate
and an investor's shares, when redeemed, may be worth more or less than their
original cost.
TOTAL RETURN
The Funds' total return is the change in value of an investment in the Funds
over a particular period, assuming that all distributions have been reinvest-
ed. Thus, total return reflects not only income earned, but also variations in
share prices at the beginning and end of the period. Average annual return re-
flects the average percentage change per year in the value of an investment in
the Funds. Aggregate total return reflects the total percentage change over
the stated period. Please refer to the Statement of Additional Information for
more information on performance.
YIELD
The current yield will be calculated by dividing the net investment income
earned per share by the Funds during the period stated by the maximum net as-
set value per share on the last day of the period and annualizing the result
on a semi-annual compounded basis.
You may obtain current performance information about the Funds by calling the
Funds at (800) 789-ASIA.
GENERAL INFORMATION
ORGANIZATION
Each Fund is a separate series of shares of Matthews International Funds, a
Delaware business trust organized pursuant to a Trust Instrument dated April
8, 1994. The Company is registered under the 1940 Act as an open-end manage-
ment investment company, commonly known as a mutual fund. The Trustees of the
Company may establish additional series or classes of shares without the ap-
proval of shareholders. The assets of each series will belong only to that se-
ries, and the liabilities of each series will be borne solely by that series
and no other.
TRUSTEES AND OFFICERS
The Trustees of the Company have overall responsibility for the operations of
the Funds. The Statement of Additional Information contains general background
information about each Trustee and officer of the Trust. The officers of the
Company who are employees or officers of the Advisor serve without compensa-
tion from the Funds.
DESCRIPTION OF SHARES
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with a par value of $0.001. Shares of each Fund represent equal pro-
portionate interests in the assets of that Fund only and have identical vot-
ing, dividend, redemption, liquidation, and other rights. All shares issued
are fully paid and non-assessable, and shareholders have no preemptive or
other right to subscribe to any additional shares. Currently, there is only
one class of shares issued by the Company. The validity of shares of benefi-
cial interest offered by this prospectus will be passed on by Shartsis, Friese
& Ginsburg, One Maritime Plaza, 18th Floor, San Francisco, California 94111.
VOTING RIGHTS
Each issued and outstanding full and fractional share of each Fund is entitled
to one full and fractional vote in each Fund and all shares of each Fund par-
ticipate equally in dividends, distributions, and liquidations. Shareholders
do not have preemptive, conversion or cumulative voting rights.
SHAREHOLDER MEETINGS
The Trustees of the Company do not intend to hold annual meetings of share-
holders of the Funds. The Trustees have undertaken to the SEC, however, that
they will promptly call a meeting for the purpose of voting upon the question
of removal of any Trustee when requested to do so by holders of not less than
10% of the outstanding shares of the respective Fund. In addition, subject to
certain conditions, shareholders of each Fund may apply
31
<PAGE>
to the Funds to communicate with other shareholders to request a shareholders'
meeting to vote upon the removal of a Trustee or Trustees.
CERTAIN PROVISIONS OF TRUST INSTRUMENT
Under Delaware law, the shareholders of the Funds will not be personally lia-
ble for the obligations of any Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations.
SHAREHOLDER SERVICING AGENTS
The Funds may enter into Shareholder Servicing Agreements with one or more un-
affiliated Shareholder Servicing Agents. The Shareholder Servicing Agent may,
as agent for its customers, among other things: answer customer inquiries re-
garding account history and purchase and redemption procedures; assist share-
holders in designating and changing dividend options, account designations and
addresses; provide necessary personnel and facilities to establish and main-
tain shareholder accounts and records; assist in processing purchase and re-
demption transactions; arrange for the wiring of funds; transmit and receive
funds with customer orders to purchase or redeem shares; verify and guarantee
shareholder signatures in connection with redemption orders and transfers and
changes in shareholder-designated accounts; furnish monthly and year-end
statements and confirmations of purchases and redemptions; transmit, on behalf
of the Funds, proxy statements, annual reports, updated prospectuses and other
communications to shareholders of the Funds; receive, tabulate and transmit to
the Funds proxies executed by shareholders with respect to meetings of share-
holders of the Funds; and provide such other related services as the Funds or
a shareholder may request. For these services, each Shareholder Servicing
Agent receives fees to cover its out of pocket and operating costs to provide
these services, which may be paid periodically, provided that such fees will
not exceed, on an annual basis, 0.25% of the average daily net assets of the
Funds represented by shares owned during the period for which payment is made.
Each Shareholder Servicing Agent may, from time to time, voluntarily waive all
or a portion of the fees payable to it.
SHAREHOLDER REPORTS AND INQUIRIES
Shareholders will receive annual financial statements which are examined by
the Funds' independent accountants, as well as unaudited semiannual financial
statements. Shareholder inquiries should be addressed to the respective Fund
c/o Matthews International Funds, 655 Montgomery Street, Suite 1438, San Fran-
cisco, CA 94111, (800) 789-ASIA.
32
<PAGE>
APPENDIX
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") DESCRIBES CLASSIFICATIONS OF COR-
PORATE BONDS AS FOLLOWS:
Aaa Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an excep-
tionally stable margin and principal is secure. While the various protec-
tive 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 stan-
dards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because mar-
gins of protection may not be as large as in Aaa securities or fluctuation
of protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving se-
curity 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 pay-ments
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.
Bonds rated Aaa, Aa, A and Baa are considered investment grade bonds.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of in-
terest and principal payments may be very moderate, and therefore not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B Bonds which are rated B generally lack characteristics of desirable in-
vestments. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
Caa Bonds which are rated Caa are of poor standing. Such issues may be in de-
fault or there may be present elements of danger with respect to principal
or interest.
Ca Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market short-
comings.
C Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2, and 3 in each
generic rating classification from Aa through B in its corporate and municipal
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-
ranking; and the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
STANDARD & POOR'S CORPORATION ("S&P") describes classification of corporate
and municipal debt as follows:
AAA Debt rated AAA has the highest rating assigned by S&P. Capacity to pay in-
terest and repay principal is extremely strong.
A-1
<PAGE>
AA Debt rated AA has a very strong capacity to pay interest and repay princi-
pal and differs from the highest-rated issues only in small degree.
A Debt rated A has a strong capacity to pay interest and repay principal al-
though they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay interest
and repay principal. Whereas it normally exhibits adequate protection pa-
rameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for debt in this category than for debt in higher-rated categories.
Bonds rated AAA, AA, A and BBB are considered investment grade bonds.
BB Debt rated BB has less near-term vulnerability to default than other spec-
ulative grade debt. However, it faces major ongoing uncertainties or expo-
sure to adverse business, financial or economic conditions which could
lead to inadequate capacity to meet timely interest and principal payment.
B Debt rated B has a greater vulnerability to default but presently has the
capacity to meet interest payments and principal repayments. Adverse busi-
ness, financial or economic conditions would likely impair capacity or
willingness to pay interest and repay principal.
CCC Debt rated CCC has a current identifiable vulnerability to default, and is
dependent upon favorable business, financial and economic conditions to
meet timely payments of interest and repayments of principal. In the event
of adverse business, financial or economic conditions, it is not likely to
have the capacity to pay interest and repay principal.
CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC--debt rating.
CI The rating CI is reserved for income bonds on which no interest is being
paid.
D Debt rated D is in default. The D rating is assigned on the day an inter-
est or principal payment is missed.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that S&P does not rate a particu-
lar type of obligation as a matter of policy.
A-2
<PAGE>
BOARD OF TRUSTEES
G. Paul Matthews
John H. Dracott
Carol Chuang
Richard K. Lyons
Robert K. Connolly
Dong Wook Park
David FitzWilliam-Lay
OFFICERS
G. Paul Matthews
John H. Dracott
Carol Chuang
INVESTMENT ADVISOR
Matthews International Capital Management
655 Montgomery Street, Suite 1438
San Francisco, CA 94111
(800) 789-ASIA
UNDERWRITER
Fund/Plan Broker Services, Inc.
2 W. Elm Street
Conshohocken, PA 19428
(800) 892-0382
SHAREHOLDER SERVICES
Fund/Plan Services, Inc.
2 W. Elm Street
Conshohocken, PA 19428
(800) 892-0382
CUSTODIAN
The Bank of New York
90 Washington Street
New York, NY 10286
LEGAL COUNSEL
Shartsis, Friese & Ginsburg
One Maritime Plaza, 18th Floor
San Francisco, CA 94111
AUDITORS
Coopers & Lybrand L.L.P
2400 Eleven Penn Center
Philadelphia, PA 19103
For Additional Information about the
Matthews International Funds call:
(800) 789-ASIA
(ART)
Matthews Pacific Tiger Fund
Matthews Asian Convertible Securities Fund
Matthews Korea Fund
Prospectus
December 29, 1995
- --------------------------------------------------------------------------------
Matthews International Funds
- --------------------------------------------------------------------------------
<PAGE>
MATTHEWS INTERNATIONAL FUNDS
----------------------------
MATTHEWS KOREA FUND
MATTHEWS PACIFIC TIGER FUND
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
December 29, 1995
- --------------------------------------------------------------------------------
This Statement of Additional Information provides supplementary information
pertaining to shares representing interests in three investment portfolios of
Matthews International Funds -- MATTHEWS PACIFIC TIGER FUND, MATTHEWS ASIAN
CONVERTIBLE SECURITIES FUND and MATTHEWS KOREA FUND. This Statement of
Additional Information dated December 29, 1995 is not a prospectus and should be
read in conjunction with the Prospectus dated December 29, 1995. No investment
in shares should be made without first reading the Prospectus. A copy of each
Prospectus may be obtained without charge from the Company at the addresses and
telephone numbers below.
UNDERWRITER: ADVISOR:
Fund/Plan Broker Services, Inc. Matthews International Capital Management
2 W. Elm Street 655 Montgomery Street, Suite 1438
Conshohocken, PA 19428 San Francisco, CA 94111
(800) 892-0382 (800) 789-ASIA
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS STATEMENT OF ADDITIONAL INFORMATION OR IN
THE PROSPECTUS IN CONNECTION WITH THE OFFERING MADE BY THE PROSPECTUS AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR ITS DISTRIBUTOR. THE PROSPECTUS DOES
NOT CONSTITUTE AN OFFERING BY THE COMPANY OR BY THE DISTRIBUTOR IN ANY
JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
Page 41
<PAGE>
TABLE OF CONTENTS
-----------------
THE FUNDS...................................................................
INVESTMENT POLICIES AND TECHNIQUES..........................................
RISKS RELATED TO LOWER RATED DEBT SECURITIES................................
SPECIAL CONSIDERATIONS AFFECTING THE PACIFIC BASIN..........................
INVESTMENT RESTRICTIONS.....................................................
TRUSTEES AND OFFICERS.......................................................
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.........................
INVESTMENT ADVISORY AND OTHER SERVICES......................................
Investment Advisory Agreement..........................................
Korean Research and Advisory Agreement.................................
The Administrator......................................................
The Underwriter........................................................
PORTFOLIO TRANSACTIONS AND BROKERAGE........................................
PORTFOLIO TURNOVER..........................................................
DETERMINATION OF NET ASSET VALUE............................................
TAXES.......................................................................
PERFORMANCE INFORMATION.....................................................
OTHER INFORMATION...........................................................
FINANCIAL STATEMENTS........................................................
Page 42
<PAGE>
THE FUNDS
---------
Matthews International Funds, 655 Montgomery Street, Suite 1438, San Francisco,
California 94111, is a no load, open-end investment company which currently
offers three separate investment series: MATTHEWS PACIFIC TIGER FUND, MATTHEWS
ASIAN CONVERTIBLE SECURITIES FUND and MATTHEWS KOREA FUND (collectively referred
to as the "Funds" or individually as a "Fund").
INVESTMENT POLICIES AND TECHNIQUES
----------------------------------
The following supplements the information contained in the Prospectus concerning
the investment policies of the Funds. Except as otherwise stated below or in the
Prospectus, the Funds may invest in the portfolio investments included in this
section. A description of applicable credit ratings is set forth in the Appendix
to the Prospectus.
The investment practices described below, except for the discussion of portfolio
loan transactions, are not fundamental and may be changed by the Board of
Trustees without the approval of the shareholders of the Funds.
LOANS OF PORTFOLIO SECURITIES
- -----------------------------
The Funds may lend portfolio securities to broker-dealers and financial
institutions, although at the present time they have no intention of lending
portfolio securities in the foreseeable future. The Funds may lend portfolio
securities provided: (1) the loan is secured continuously by collateral marked-
to-market daily and maintained in an amount at least equal to the current market
value of the securities loaned; (2) the Funds may call the loan at any time and
receive the securities loaned; (3) the Funds will receive any interest or
dividends paid on the loaned securities; and (4) the aggregate market value of
securities loaned by a Fund will not at any time exceed 33% of the total assets
of such Fund.
Collateral will consist of U.S. government securities, cash equivalents or
irrevocable letters of credit. Loans of securities involve a risk that the
borrower may fail to return the securities or may fail to maintain the proper
amount of collateral. Therefore, the Funds will only enter into portfolio loans
after a review by the Advisor, under the supervision of the Board of Trustees,
including a review of the creditworthiness of the borrower. Such reviews will be
monitored on an ongoing basis.
REPURCHASE AGREEMENTS
- ---------------------
Although the Funds may purchase repurchase agreements, they do not have the
current intention of doing so in the foreseeable future. The repurchase price
under the repurchase agreements described in the Prospectuses generally equals
the price paid by each Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Repurchase agreements may be considered to
be loans by the Funds under the Investment Company Act of 1940, as amended (the
"Act").
The financial institutions with whom the Funds may enter into repurchase
agreements are banks and non-bank dealers of U.S. Government securities that are
listed on the Federal Reserve Bank of New York's list of reporting dealers and
banks, if such banks and non-bank dealers are deemed creditworthy by the
Advisor. The Advisor will continue to monitor the creditworthiness of the seller
under a repurchase agreement, and will require the seller to maintain during the
term of the agreement the value of the securities subject to the agreement at
not less than the repurchase price. The Funds will only enter into a repurchase
agreement where the market value of the underlying security, including interest
accrued, will be at all times equal to or exceed the value of the repurchase
agreement.
The Funds may invest in repurchase agreements with foreign parties, or in a
repurchase agreement based on securities denominated in foreign currencies.
Legal structures in foreign countries, including bankruptcy laws,
Page 43
<PAGE>
may offer less protection to investors such as the Funds, and foreign repurchase
agreements generally involve greater risks than a repurchase agreement in the
United States.
REVERSE REPURCHASE AGREEMENTS
- -----------------------------
The Funds may enter into reverse repurchase agreements but they do not currently
have the intentions of doing so in the foreseeable future. Reverse repurchase
agreements involve the sale of securities held by the Funds pursuant to the
Funds' agreement to repurchase the securities at an agreed upon price, date and
rate of interest. Such agreements are considered to be borrowings under the Act,
and may be entered into only for temporary or emergency purposes. While reverse
repurchase transactions are outstanding, the Funds will maintain in a segregated
account cash, U.S. Government securities or other liquid, high grade debt
securities in an amount at least equal to the market value of the securities,
plus accrued interest, subject to the agreement. Reverse repurchase agreements
involve the risk that the market value of the securities sold by the Funds may
decline below the price of the securities the Funds are obligated to repurchase
such securities.
SECURITIES OF OTHER INVESTMENT COMPANIES
- ----------------------------------------
The Funds may invest in the securities of other investment companies and
currently intend to limit their investments in securities issued by other
investment companies so that, as determined immediately after a purchase of such
securities is made: (i) not more than 5% of the value of the Funds' total assets
will be invested in the securities of any one investment company; (ii) not more
than 10% of its total assets will be invested in the aggregate in securities of
investment companies as a group; and (iii) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the respective Fund.
ILLIQUID SECURITIES
- -------------------
The Board of Trustees has delegated the function of making day to day
determinations of liquidity to Matthews International Capital Management,
pursuant to guidelines reviewed by the Board of Trustees. Matthews International
Capital Management will monitor the liquidity of securities held by each Fund
and report periodically on such decisions to the Board of Trustees.
RULE 144A SECURITIES
- --------------------
The Funds may invest in securities that are exempt under SEC Rule 144A from the
registration requirements of the Securities Act of 1933. Those securities,
purchased under Rule 144A, are traded among qualified institutional investors
and are subject to the Fund's limitation on illiquid investment.
Investing in securities under Rule 144A could have the effect of increasing the
levels of the Funds' illiquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing these securities. The
Funds will limit their investments in securities of issuers which the Fund is
restricted from selling to the public without registration under the Securities
Act of 1933 to no more than 15% of the Fund's net assets, excluding restricted
securities eligible for resale pursuant to Rule 144A that have been determined
to be liquid by the Funds' Board of Trustees.
CONVERTIBLE SECURITIES
- ----------------------
Each Fund may invest in convertible securities of Asia and the Pacific Basin as
well as the United States. Common stock occupies the most junior position in a
company's capital structure. Convertible securities entitle the holder to
exchange the securities for a specified number of shares of common stock,
usually of the same company, at specified prices within a certain period of time
and to receive interest or dividends until the holder elects to convert. The
provisions of any convertible security determine its ranking in a company's
capital structure. In the case of subordinated convertible debentures, the
holder's claims on assets and earnings are subordinated to the claims of other
creditors, and are senior to the claims of preferred and common shareholders. In
the case of preferred stock and convertible preferred stock, the holder's claims
on assets and earnings are subordinated to the claims of all creditors but are
senior to the claims of common shareholders.
Page 44
<PAGE>
To the extent that a convertible security's investment value is greater than its
conversion value, its price will be primarily a reflection of such investment
value and its price will be likely to increase when interest rates fall and
decrease when interest rates rise, as with a fixed-income security. If the
conversion value exceeds the investment value, the price of the convertible
security will rise above its investment value and, in addition, may sell at some
premium over its conversion value. At such times the price of the convertible
security will tend to fluctuate directly with the price of the underlying equity
security.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
- -----------------------------------------------------------------------------
Although the Funds may purchase securities on a when-issued basis, or purchase
or sell securities on a forward commitment basis or purchase securities on a
delayed delivery basis, the Funds do not have the current intention of doing so
in the foreseeable future. The Funds will normally realize a capital gain or
loss in connection with these transactions. For purposes of determining the
Funds' average dollar-weighted maturity, the maturity of when-issued or forward
commitment securities will be calculated from the commitment date.
When the Funds purchase securities on a when-issued, delayed delivery or forward
commitment basis, the Funds' custodian will maintain in a segregated account:
cash, U.S. Government securities or other high grade liquid debt obligations
having a value (determined daily) at least equal to the amount of the Funds'
purchase commitments. In the case of a forward commitment to sell portfolio
securities, the custodian will hold the portfolio securities themselves in a
segregated account while the commitment is outstanding. These procedures are
designed to ensure that the Funds will maintain sufficient assets at all times
to cover its obligations under when-issued purchases, forward commitments and
delayed delivery transactions.
SHORT-SELLING
- -------------
MATTHEWS KOREA FUND may make short sales. The Fund may incur a loss as a result
of a short sale if the price of the security increases between the date of the
short sale and the date on which the Fund replaced the borrowed security. The
Fund may realize a gain if the security declines in price between those dates.
The amount of any gain will be decreased, and the amount of any loss increased,
by the amount of any premium, dividends or interest the Fund may be required to
pay in connection with a short sale. No securities will be sold short if, after
effect is given to any such short sale, the total market value of all securities
sold short would exceed 10% of the value of the Fund's net assets. The Fund will
place in a segregated account with its custodian bank an amount of cash or U.S.
government securities equal to the difference between the market value of the
securities sold short at the time they were sold short and any cash or U.S.
government securities required to be deposited as collateral with the broker in
connection with the short sale. This segregated account will be marked to market
daily, provided that at no time will the amount deposited in it plus the amount
deposited with the broker as collateral be less than the market value of the
securities at the time they were sold short.
OTHER INVESTMENTS
- -----------------
Subject to prior disclosure to shareholders, the Board of Trustees may, in the
future, authorize a Fund to invest in securities other than those listed here
and in the prospectus, provided that such investment would be consistent with
the respective Fund's investment objective and that it would not violate any
fundamental investment policies or restrictions applicable to the respective
Fund.
HEDGING AND DERIVATIVES
- -----------------------
INTEREST RATE FUTURES CONTRACTS
- -------------------------------
The Funds may enter into contracts for the future delivery of fixed income
securities commonly referred to as "interest rate futures contracts." These
futures contracts will be used only as a hedge against anticipated interest rate
changes. The Funds will not enter into an interest rate futures contract if
immediately thereafter more than 5% of the value of the respective Fund's total
assets will be committed to margin. The principal risks related to the use of
such instruments are (1) the offsetting correlation between movements in the
market price of the portfolio investments being hedged and in the price of the
futures contract or option may be imperfect; (2) possible lack of a liquid
secondary market for closing out futures or option positions; (3) the need for
additional portfolio management skills and techniques; and (4) losses due to
unanticipated market price movements.
Page 45
<PAGE>
FUTURES TRANSACTIONS
- --------------------
Although the Funds may engage in futures transactions for the purchase or sale
for future delivery of securities, the Funds do not have the current intention
of doing so in the foreseeable future. While futures contracts provide for the
delivery of securities, deliveries usually do not occur. Contracts are generally
terminated by entering into offsetting transactions.
The Funds may engage in futures transactions on U.S. or foreign exchanges or
boards of trade. In the U.S., futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. government agency.
The Funds may enter into such futures contracts to protect against the adverse
effects of fluctuations in security prices, or interest rates, without actually
buying or selling the securities underlying the contract. A stock index futures
contract obligates the seller to deliver (and the purchaser to take) an amount
of cash equal to a specific dollar amount times 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 was made.
With respect to options on futures contracts, when the Funds are temporarily not
fully invested, they may purchase a call option on a futures contract to hedge
against a market advance due to declining interest rates. The purchase of a call
option on a futures contract is similar in some respects to the purchase of a
call option on an individual security. Depending on the pricing of the option
compared to either the price of the futures contract upon which it is based, or
the price of the underlying debt securities, it may or may not be less risky
than ownership of the futures contract or underlying debt securities.
The writing of a call option on a futures contract constitutes a partial hedge
against the declining price of the security or foreign currency which is
deliverable upon exercise of the futures contract. The writing of a put option
on a futures contract constitutes a partial hedge against the increasing price
of the security or foreign currency which is deliverable upon exercise of the
futures contract.
To the extent that market prices move in an unexpected direction, the Funds may
not achieve the anticipated benefits of futures contracts or options on futures
contracts or may realize a loss. Further, with respect to options on futures
contracts, the Funds may seek to close out an option position by writing or
buying an offsetting position covering the same securities or contracts and have
the same exercise price and expiration date. The ability to establish and close
out positions on options will be subject to the maintenance of a liquid
secondary market, which cannot be assured.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS
- --------------------------------------------
The Funds may enter into futures contracts provided that such obligations
represent no more than 20% of the Funds' net assets. Under the Commodity
Exchange Act, the Funds may enter into futures transactions for hedging purposes
without regard to the percentage of assets committed to initial margin and for
other than hedging purposes provided that assets committed to initial margin do
not exceed 5% of the Funds' net assets. To the extent required by law, the Funds
will set aside cash and appropriate liquid assets in a segregated account to
cover its obligations related to futures contracts.
FOREIGN CURRENCY HEDGING STRATEGIES -- SPECIAL CONSIDERATIONS
- -------------------------------------------------------------
Although the Funds may use options and futures on foreign currencies and forward
currency contracts to hedge against movements in the values of the foreign
currencies in which the Funds' securities are denominated, the Funds do not
currently intend to use such hedging strategies in the foreseeable future. Such
currency hedges can protect against price movements in a security the Funds own
or intend to acquire that are attributable to changes in the value of the
currency in which it is denominated. Such hedges do not, however, protect
against price movements in the securities that are attributable to other causes.
Page 46
<PAGE>
The value of hedging instruments on foreign currencies depends on the value of
the underlying currency relative to the U.S. dollar. Because foreign currency
transactions occurring in the interbank market might involve substantially
larger amounts than those involved in the use of such hedging instruments, the
Fund could be disadvantaged by having to deal in the odd lot market (generally
consisting of transactions of less than $1 million) for the underlying foreign
currencies at prices that are less favorable than for round lots.
The Funds might seek to hedge against changes in the value of a particular
currency when no hedging instruments on that currency are available or such
hedging instruments are more expensive than certain other hedging instruments.
In such cases, the Funds may hedge against price movements in that currency by
entering into transactions using hedging instruments on other currencies, the
values of which the Advisor believes will have a high degree of positive
correlation to the value of the currency being hedged. The risk that movements
in the price of the hedging instrument will not correlate perfectly with
movements in the price of the currency being hedged is magnified when this
strategy is used.
Settlement of hedging transactions involving foreign currencies might be
required to take place within the country issuing the underlying currency. Thus,
the Funds might be required to accept or make delivery of the underlying foreign
currency in accordance with any U.S. or foreign regulations regarding the
maintenance of foreign banking arrangements by U.S. residents and might be
required to pay any fees, taxes and charges associated with such delivery
assessed in the issuing country.
FORWARD CURRENCY CONTRACTS
- --------------------------
A forward currency contract involves an obligation to purchase or sell a
specific currency at a specified future date, which may be any fixed number of
days from the contract date agreed upon by the parties, at a price set at the
time the contract is entered into.
The Funds may enter into forward currency contracts to purchase or sell foreign
currencies for a fixed amount of U.S. dollars or another foreign currency. The
Fund also may use forward currency contracts for "cross-hedging." Under this
strategy, the Funds would increase their exposure to foreign currencies that the
Advisor believes might rise in value relative to the U.S. dollar, or the Funds
would shift their exposure to foreign currency fluctuations from one country to
another.
The cost to each Fund of engaging in forward currency contracts varies with
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because forward currency contracts are
usually entered into on a principal basis, no fees or commissions are involved.
When the Fund enters into a forward currency contract, it relies on the contra
party to make or take delivery of the underlying currency at the maturity of the
contract. Failure by the contra party to do so would result in the loss of any
expected benefit of the transaction.
As is the case with futures contracts, holders and writers of forward currency
contracts can enter into offsetting closing transactions, similar to closing
transactions on futures, by selling or purchasing, respectively, an instrument
identical to the instrument held or written. Secondary markets generally do not
exist for forward currency contracts, with the result that closing transactions
generally can be made for forward currency contracts only by negotiating
directly with the contra party. Thus, there can be no assurance that the Funds
will in fact be able to close out a forward currency contract at a favorable
price prior to maturity. In addition, in the event of insolvency of the contra
party, the Funds might be unable to close out a forward currency contract at any
time prior to maturity. In either event, the Funds would continue to be subject
to market risk with respect to the position, and would continue to be required
to maintain a position in securities denominated in the foreign currency or to
maintain cash or securities in a segregated account.
The precise matching of forward currency contracts amounts and the value of the
securities involved generally will not be possible because the value of such
securities, measured in the foreign currency, will change after the foreign
currency contract has been established. Thus, the Funds might need to purchase
or sell foreign currencies
Page 47
<PAGE>
in the spot (cash) market to the extent such foreign currencies are not covered
by forward contracts. The projection of short-term currency market movements is
extremely difficult, and the successful execution of a short-term hedging
strategy is highly uncertain.
LIMITATIONS ON THE USE OF FORWARD CURRENCY CONTRACTS
- ----------------------------------------------------
The Funds may enter into forward currency contracts or maintain a net exposure
to such contracts only if (1) the consummation of the contracts would not
obligate the Funds to deliver an amount of foreign currency in excess of the
value of its portfolio securities or other assets denominated in that currency,
or (2) the Funds maintain cash, U.S. government securities or liquid, high-grade
debt securities in a segregated account in an amount not less than the value of
its total assets committed to the consummation of the contract and not covered
as provided in (1) above, as marked to market daily.
OPTIONS
- -------
The Funds may buy put and call options and write covered call and secured put
options but have no current intention of actively engaging in such transactions.
Such options may relate to particular securities, stock indices, or financial
instruments and may or may not be listed on a national securities exchange and
issued by the Options Clearing Corporation. Options trading is a highly
specialized activity which entails greater than ordinary investment risk.
Options on particular securities may be more volatile than the underlying
securities, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
securities themselves.
The Funds will write call options only if they are "covered." In the case of a
call option on a security, the option is "covered" if a Fund owns the security
underlying the call or has an absolute and immediate right to acquire that
security without additional cash consideration (or, if additional cash
consideration is required, liquid assets, such as cash, U.S. Government
securities or other liquid high grade debt obligations, in such amount held in a
segregated account by its custodian) upon conversion or exchange of other
securities held by it. For a call option on an index, the option is covered if a
Fund maintains with its custodian a diversified stock portfolio, or liquid
assets equal to the contract value. A call option is also covered if a Fund
holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written; or (ii) greater than the exercise price of the call written
provided the difference is maintained by the Fund in liquid assets such as cash,
U.S. Government securities and other high-grade debt obligations in a segregated
account with its custodian. The Funds will write put options only if they are
"secured" by liquid assets maintained in a segregated account by the Funds'
custodian in an amount not less than the exercise price of the option at all
times during the option period.
PURCHASING CALL OPTIONS
- -----------------------
The Funds may purchase call options to the extent that premiums paid by the
Funds do not aggregate more than 10% of the Funds' total assets. When the Funds
purchase a call option, in return for a premium paid by the Fund to the writer
of the option, the Fund obtains the right to buy the security underlying the
option at a specified exercise price at any time during the term of the option.
The writer of the call option, who receives the premium upon writing the option,
has the obligation, upon exercise of the option, to deliver the underlying
security against payment of the exercise price. The advantage of purchasing call
options is that the Fund may alter portfolio characteristics and modify
portfolio maturities without incurring the cost associated with transactions.
The Funds may, following the purchase of a call option, liquidate their position
by effecting a closing sale transaction. This is accomplished by selling an
option of the same series as the option previously purchased. The Funds will
realize a profit from a closing sale transaction if the price received on the
transaction is more than the premium paid to purchase the original call option;
the Funds will realize a loss from a closing sale transaction if the price
received on the transaction is less than the premium paid to purchase the
original call option.
Although the Funds will generally purchase only those call options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an Exchange will exist for any
Page 48
<PAGE>
particular option, or at any particular time, and for some options no secondary
market on an Exchange may exist. In such event, it may not be possible to effect
closing transactions in particular options, with the result that the Funds would
have to exercise their options in order to realize any profit and would incur
brokerage commissions upon the exercise of such options and upon the subsequent
disposition of the underlying securities acquired through the exercise of such
options. Further, unless the price of the underlying security changes
sufficiently, a call option purchased by the Funds may expire without any value
to the Funds, in which event the Funds would realize a capital loss which will
be short-term unless the option was held for more than one year.
COVERED CALL WRITING
- --------------------
Although the Funds may write covered call options from time to time on such
portions of their portfolios, the Funds do not have the current intention of
doing so in the foreseeable future. The Funds may write covered call options,
without limit, as the Advisor determines is appropriate in pursuing a Fund's
investment objective. The advantage to the Funds of writing covered calls is
that each Fund receives a premium which is additional income. However, if the
security rises in value, the respective Fund may not fully participate in the
market appreciation. The Funds' obligation under a covered call option is
terminated upon the expiration of the option or upon entering a closing purchase
transaction. In a closing purchase transaction, a Fund, as writer of an option,
terminates its obligation by purchasing an option of the same series as the
option previously written.
Closing purchase transactions will ordinarily be effected to realize a profit on
an outstanding call option, to prevent an underlying security from being called,
to permit the sale of the underlying security or to enable the Fund to write
another call option on the underlying security with either a different exercise
price or expiration date or both. The Funds may realize a net gain or loss from
a closing purchase transaction depending upon whether the net amount of the
original premium received on the call option is more or less than the cost of
effecting the closing purchase transaction. Any loss incurred in a closing
purchase transaction may be partially or entirely offset by the premium received
from a sale of a different call option on the same underlying security. Such a
loss may also be wholly or partially offset by unrealized appreciation in the
market value of the underlying security. Conversely, a gain resulting from a
closing purchase transaction could be offset in whole or in part by a decline in
the market value of the underlying security.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker-dealer through whom such call option was sold,
requiring the writer to deliver the underlying security against payment of the
exercise price. A closing purchase transaction cannot be effected with respect
to an option once the option writer has received an exercise notice for such
option.
The Funds will write call options only on a covered basis, which means that the
Fund will own the underlying security subject to a call option at all times
during the option period. Unless a closing purchase transaction is effected, the
Fund would be required to continue to hold a security which it might otherwise
wish to sell or deliver a security it would want to hold. The exercise price of
a call option may be below, equal to or above the current market value of the
underlying security at the time the option is written.
PURCHASING PUT OPTIONS
- ----------------------
Although each Fund may invest up to 10% of its total assets in the purchase of
put options, the Funds do not have the current intention of doing so in the
foreseeable future. Each Fund will, at all times during which it holds a put
option, own the security covered by such option. With regard to the writing of
put options, each Fund will limit the aggregate value of the obligations
underlying such put options to 50% of its total net assets. The purchase of the
put on substantially identical securities held will constitute a short sale for
tax purposes, the effect of which is to create short-term capital gain on the
sale of the security and to suspend running of its holding period (and treat it
as commencing on the date of the closing of the short sale) or that of a
security acquired to cover the same if at the time the put was acquired, the
security had not been held for more than one year.
A put option purchased by a Fund gives it the right to sell one of its
securities for an agreed price up to an agreed date. Each Fund intends to
purchase put options in order to protect against a decline in the market value
of the
Page 49
<PAGE>
underlying security below the exercise price less the premium paid for the
option ("protective puts"). The Funds may sell a put option which it has
previously purchased prior to the sale of the securities underlying such option.
Such sale will result in a net gain or loss depending on whether the amount
received on the sale is more or less than the premium and other transaction
costs paid on the put option which is sold.
The Funds may sell a put option purchased on individual portfolio securities.
Additionally, the Funds may enter into closing sale transactions. A closing sale
transaction is one in which the Funds, when they are the holder of an
outstanding option, liquidate their respective position by selling an option of
the same series as the option previously purchased.
WRITING PUT OPTIONS
- -------------------
Although the Funds may also write put options on a secured basis, the Funds do
not have the current intention of doing so in the foreseeable future. Writing
put options on a secured basis means that each Fund will maintain in a
segregated account with its custodian, cash or U.S. Government securities in an
amount not less than the exercise price of the option at all times during the
option period. The amount of cash or U.S. Government securities held in the
segregated account will be adjusted on a daily basis to reflect changes in the
market value of the securities covered by the put option written by the
respective Fund. Secured put options will generally be written in circumstances
where the Advisor wishes to purchase the underlying security for the Funds'
portfolio at a price lower than the current market price of the security.
Following the writing of a put option, the Fund may wish to terminate the
obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Fund may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
FOREIGN CURRENCY TRANSACTIONS
- -----------------------------
Although the Funds value their assets daily in U.S. dollars, they are not
required to convert their respective holdings of foreign currencies to U.S.
dollars on a daily basis. The Funds' foreign currencies generally will be held
as "foreign currency call accounts" at foreign branches of foreign or domestic
banks. These accounts bear interest at negotiated rates and are payable upon
relatively short demand periods. If a bank became insolvent, the Funds could
suffer a loss of some or all of the amounts deposited. The Funds may convert
foreign currency to U.S. dollars from time to time. Although foreign exchange
dealers generally do not charge a stated commission or fee for conversion, the
prices posted generally include a "spread", which is the difference between the
prices at which the dealers are buying and selling foreign currencies.
RISKS RELATED TO LOWER RATED DEBT SECURITIES
--------------------------------------------
Debt securities rated lower than Baa by Moody's Investor's Service or BBB by
Standard & Poor's Corporation (commonly referred to as "junk bonds") are
considered to be of poor standing and predominantly speculative. Such securities
are subject to a substantial degree of credit risk. There can be no assurance
that the Funds would be protected from widespread bond defaults brought about by
a sustained economic downturn or other market and interest rate changes.
The value of lower-rated debt securities will be influenced not only by changing
interest rates, but also by the bond market's perception of credit quality and
the outlook for economic growth. When economic conditions appear to be
deteriorating, low and medium-rated bonds may decline in market value due to
investors' heightened concern over credit quality, regardless of prevailing
interest rates. Adverse publicity and investor perceptions, whether or not based
on fundamental analysis, may decrease the value and liquidity (liquidity refers
to the ease or difficulty which the Fund could sell a security at its perceived
value) of lower-rated securities held by a Fund, especially in a thinly traded
foreign market.
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<PAGE>
To the extent that an established secondary market does not exist and a
particular lower rated debt security is thinly traded, that security's fair
value may be difficult to determine because of the absence of reliable objective
data. As a result, a Fund's valuation of the security and the price it could
obtain upon its disposition could differ. Adverse publicity and investor
perceptions, whether or not based on fundamental analysis, may decrease the
values and liquidity of lower-rated securities held by the Funds, especially in
a thinly traded market.
The credit ratings of S&P and Moody's are evaluations of the safety of principal
and interest payments, not market value risk, of lower-rated securities. These
ratings are available as an Appendix to the MATTHEWS PACIFIC TIGER FUND /
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND prospectus. Also, credit rating
agencies may fail to change timely the credit ratings to reflect subsequent
events. Therefore, in addition to using recognized rating agencies and other
sources, the Advisor may perform its own analysis of issuers in selecting
investments for the Funds. The Advisor's analysis of issuers may include, among
other things, historic and current financial condition and current and
anticipated cash flows.
SPECIAL CONSIDERATIONS AFFECTING THE PACIFIC BASIN
--------------------------------------------------
The Advisor believes that, in contrast to more developed economies, the newly
industrialized countries of the Asia-Pacific region are in an earlier, more
dynamic growth stage of their development. This growth has been characterized
by, among other things, low labor costs, strong demand from export markets for
consumer products, high productivity, long work weeks, pro-business governments
and a strong work ethic. Historically, South Korea, Hong Kong, Singapore and
Taiwan have been examples of these traits. Today, however, the economies of
Malaysia, Indonesia, Thailand and southern China are starting to exhibit many of
these same characteristics and appear to be accelerating.
In terms of Gross National Product, industrial standards and level of education,
South Korea is second only to Japan in Asia. It enjoys the benefits of a
diversified economy with well-developed sectors in electronics, automobiles,
textiles and shoe manufacture, steel and shipbuilding among others. The driving
force behind the economy's dynamic growth has been the planned development of an
export-oriented economy in a vigorously entrepreneurial society.
The Advisor believes that over the next five to fifteen years the growth of the
less developed economies of the Asia-Pacific region will be higher on average
than that of the more developed economies of the United States and Western
Europe, although no assurances can be given that this will happen.
The Tiger economies are separated by different cultures, political systems and
economic policies and are highly diverse in natural resources. Despite these
differences, they share certain characteristics such as the hard work and
enterprise ethic, as well as an emphasis on thrift, which have enabled their
economies to sustain rapid growth since the 1960's. However, some of the Asian
countries in which the Funds may invest may be subject to a greater degree of
political, social or economic instability than in the U.S. or western Europe.
This may result from a number of factors including: authoritarian governments or
military involvement in the political, social or economic arena; ethnic,
religious or racial tensions; popular unrest in connection with demands for
improved political, social or economic conditions; and border disputes with
neighboring countries.
In general, however, overall levels of democracy and stability in Asia are
increasing as a result of rising standards of living and education.
INVESTMENT RESTRICTIONS
-----------------------
The investment restrictions set forth below are fundamental policies and may not
be changed as to a Fund without the approval of a majority of the outstanding
voting shares (as defined in the Act) of the Fund. Unless otherwise indicated,
all percentage limitations listed below apply to the Funds and apply only at the
time of the transaction.
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<PAGE>
Accordingly, if a percentage restriction is adhered to at the time of
investment, a later increase or decrease in the percentage which results from a
relative change in values or from a change in a Fund's total assets will not be
considered a violation.
Except as set forth under "INVESTMENT OBJECTIVES AND POLICIES" and "INVESTMENT
STRATEGIES" in the Prospectus, each Fund may not:
(1) As to 75% of the total assets of MATTHEWS PACIFIC TIGER FUND AND
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND, purchase the securities of
any one issuer (other than securities issued by the U.S. Government or
its agencies or instrumentalities) if immediately after such purchase
more than 5% of the value of the respective Fund's total assets would
be invested in securities of such issuer;
(2) As to the total assets of the MATTHEWS KOREA FUND, purchase the
securities of any issuer, if, as a result, more than 25% of the Fund's
total assets would be invested in securities of such issuer.
(3) Purchase or sell real estate (but this restriction shall not prevent
the Funds from investing directly or indirectly in portfolio
instruments secured by real estate or interests therein or acquiring
securities of real estate investment trusts or other issuers that deal
in real estate), real estate limited partnership interests, interests
in oil, gas and/or mineral exploration or development programs or
leases;
(4) Purchase or sell commodities or commodity contracts, except that a
Fund may purchase or sell currencies, may enter into futures contracts
on securities, currencies, or on indexes of such securities or
currencies, or any other financial instruments, and may purchase or
sell options on such futures contracts;
(5) Make investments in securities for the purpose of exercising control;
(6) Purchase the securities of any one issuer if, immediately after such
purchase, a Fund would own more than 10% of the outstanding voting
securities of such issuer;
(7) Sell securities short or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of
transactions. For this purpose, the deposit or payment by a Fund for
initial or maintenance margin in connection with futures contracts is
not considered to be the purchase or sale of a security on margin
(notwithstanding the foregoing, MATTHEWS KOREA FUND may make short
sales, but no securities will be sold short if, after effect is given
to any such short sale, the total market value of all securities sold
short would exceed 10% of the value of the Fund's net assets);
(8) Make loans, except that this restriction shall not prohibit (a) the
purchase and holding of debt instruments in accordance with a Fund's
investment objectives and policies, (b) the lending of portfolio
securities, or (c) entry into repurchase agreements with banks or
broker-dealers;
(9) Borrow money or issue senior securities, except that each Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts up to one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge, or
hypothecate any assets, except in connection with any such borrowing
and in amounts not in excess of the lesser of the dollar amounts
borrowed or 10% of the value of the total assets of the Fund at the
time of its borrowing. All borrowings will be done from a bank and
asset coverage of at least 300% is required. A Fund will not purchase
securities when borrowings exceed 5% of that Fund's total assets;
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<PAGE>
(10) Purchase the securities of issuers conducting their principal business
activities in the same industry (other than obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities)
if immediately after such purchase the value of a Fund's investments
in such industry would exceed 25% of the value of the total assets of
the Fund;
(11) Act as an underwriter of securities, except that, in connection with
the disposition of a security, a Fund may be deemed to be an
"underwriter" as that term is defined in the Securities Act of 1933;
(12) Invest in puts, calls, straddles or combinations thereof except to the
extent disclosed in the Prospectus; and
(13) Invest more than 5% of its total assets in securities of companies
less than three years old. Such three-year period shall include the
operation of any predecessor company or companies.
Although not considered fundamental, in order to comply with certain state "blue
sky" restrictions, the Funds will not invest: (1) more than 5% of their
respective net assets in warrants, including within that amount no more than 2%
in warrants which are not listed on the New York or American Stock Exchanges,
except warrants acquired as a result of its holdings of common stocks; and (2)
purchase or retain the securities of any issuer if, any officer or director of
the Fund or of its investment manager owns beneficially more than 1/2 of 1% of
the outstanding securities of such issuer, and such officers and directors of
the Fund or of its investment manager who own more than 1/2 of 1%, own in the
aggregate, more than 5% of the outstanding securities of such issuer.
TRUSTEES AND OFFICERS
---------------------
Information pertaining to the Trustees and executive officers of the Company is
set forth below.
<TABLE>
<CAPTION>
AGGREGATE COMPENSA- TOTAL COMPENSATION
POSITION(S) PRINCIPAL OCCUPATION TION FROM TRUST FOR FROM TRUST AND
NAME, ADDRESS HELD WITH DURING PAST FIVE FISCAL YEAR ENDED FUND COMPLEX PAID
AND AGE REGISTRANT YEARS AUG. 31, 1995 TO TRUSTEES
- -------------------------- ------------ ------------------------- ------------------- ------------------
<S> <C> <C> <C> <C> <C>
G. Paul Matthews* 39 Chairman Chief Investment N/A N/A
655 Montgomery Street of the Officer of Matthews
Suite 1438 Board and International Cap. Mgmt.
San Francisco, CA 94111 President since 1991. President GT
Cap. Holdings
John H. Dracott* 67 Trustee Vice-President, Secretary N/A N/A
655 Montgomery Street and Trustee, International
Suite 1438 mutual fund consultant since
San Francisco, CA 94111 1991. President,
Tyndall Distributors.
Carol Chuang* 34 Trustee Vice-President, and Senior N/A N/A
655 Montgomery Street Portfolio Manager, Matthews
Suite 1438 International Cap. Mgmt.
San Francisco, CA 94111 since 1994. President JYCP
Investment Mgmt Inc.
Assistant Director-
Investment Mgr., Prudential
Asia Fund Mgmt. Ltd.
</TABLE>
Page 53
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Richard K. Lyons 34 Trustee Assistant Professor Haas $5,000 $5,000
University of California School of Business since
350 Barrows Hill 1993. Associate Professor,
Berkeley, CA 94720 Grad School of Business &
School of Int'l & Public
Affairs, Columbia Univ
Assistant Professor
Robert K. Connolly 63 Trustee Retired; Until Aug. 1990, $5,000 $5,000
P.O. Box 94 Institutional Sales Manager
Sonoma, CA 95476 and Securities Analyst for
Barrington Research
Associates.
Dong Wook Park* 48 Trustee Director, Portfolio Mgr & N/A N/A
Daewoo Capital Mgmt Co. Ltd. head of the International
Daewoo Securities Building, 34-3 Dept. of Daewoo.
Yoido-dong, Yungdungpo-go,
Seoul, Korea
David FitzWilliam-Lay 64 Trustee Director, USDC Investment $2,500 $2,500
26 Chalfont House, Trust PLC & Berry Starquest
19 Chesham Street PLC. Retired in 1993 after
London SWIX 8NG 3 1/2 yrs. as Chairman of
United Kingdom GT Mgmt, PLC.
</TABLE>
* These Trustees and officers are considered "interested persons" of the Funds
as defined under the Act.
The Trustees of the Funds receive a retainer of $4,000 per year, plus $250 per
meeting and expenses for each meeting of the Board of Trustees they attend.
However, no officer or employee of Matthews International Capital Management
receives any compensation from the Funds for acting as a Trustee of the Funds.
The officers of the Funds receive no compensation directly from the Funds for
performing the duties of their offices.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
---------------------------------------------------
As of December 4, 1995, the Trustees and officers as a group owned 7,106.061
(2.3%), 3,592.999 (3.5%) and 1,178.442 (1.3%) shares of the MATTHEWS PACIFIC
TIGER FUND, MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND and MATTHEWS KOREA FUND,
respectively. As a group, the Trustees and officers owned beneficially
11,877.502 (2.4%) of the Company.
As of December 4, 1995, the following persons owned of record or beneficially
more than 5% of the outstanding voting shares of the:
Page 54
<PAGE>
<TABLE>
<CAPTION>
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
NAME & ADDRESS OF BENEFICIAL OWNERS NUMBER OF SHARES PERCENTAGE
- ----------------------------------- ---------------- ----------
<S> <C> <C>
Donald L. Schwarz 10,558.794 10.15
Sherman Oaks, CA
Jack L. Mattingley 6,521.053 6.27
Los Angeles, CA
Katharine D. Weber 5,443.075 5.23
Westport, CT
<CAPTION>
MATTHEWS KOREA FUND
NAME & ADDRESS OF BENEFICIAL OWNERS NUMBER OF SHARES PERCENTAGE
- ----------------------------------- ---------------- ----------
<S> <C> <C>
Matthews International Capital Management* 7,288.503 8.24
San Francisco, CA
</TABLE>
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<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
--------------------------------------
INVESTMENT ADVISORY AGREEMENT
- -----------------------------
The advisory services provided by Matthews International Capital Management (the
"Advisor"), and the fees received by it for such services, are described in each
Prospectus. As stated in each Prospectus, the Advisor may from time to time
voluntarily waive its advisory fees with respect to any Fund. In addition, if
the total expenses borne by any Fund in any fiscal year exceed the expense
limitations imposed by applicable state securities regulations, the Advisor will
bear the amount of such excess to the extent required by such regulations. The
Advisor has agreed to waive its advisory fee in an amount equal to the total
expenses of a Fund for any fiscal year which exceeds the permissible limits
applicable to that Fund in any state in which its shares are then qualified for
sale.
Under the respective Investment Advisory Agreements, the Advisor is not liable
for any error of judgment or mistake of law or for any loss suffered by the
Company or a Fund in connection with the performance of the Advisory Agreement,
except a loss resulting from willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or from reckless disregard of its
duties and obligations thereunder.
Under its terms, the Advisory Agreements will continue from year to year
thereafter, provided continuance of the Advisory Agreement is approved at least
annually by the vote of the holders of at least a majority of the outstanding
shares of the respective Fund, or by the Trustees of the respective Fund. The
Advisory Agreements are terminable with respect to a Fund by vote of the Board
of Trustees or by the holders of a majority of the outstanding voting securities
of the Fund, at any time without penalty, on 60 days' written notice to the
Advisor. The Advisor may also terminate its advisory relationship with respect
to a Fund on 60 days' written notice to the Company. The Advisory Agreements
terminate automatically in the event of its assignment.
Under the respective Advisory Agreement, each Fund pays the following expenses:
(1) the fees and expenses of the Company's disinterested directors; (2) the
salaries and expenses of any of the Company's officers or employees who are not
affiliated with the Advisor; (3) interest expenses; (4) taxes and governmental
fees; (5) brokerage commissions and other expenses incurred in acquiring or
disposing of portfolio securities; (6) the expenses of registering and
qualifying shares for sale with the SEC and with various state securities
commissions; (7) accounting and legal costs; (8) insurance premiums; (9) fees
and expenses of the Company's custodian, Administrator and Transfer Agent and
any related services; (10) expenses of obtaining quotations of the Funds'
portfolio securities and of pricing the Funds' shares; (11) expenses of
maintaining the Company's legal existence and of shareholders' meetings; (12)
expenses of preparation and distribution to existing shareholders of reports,
proxies and prospectuses; and (13) fees and expenses of membership in industry
organizations.
The ratio of each Fund's expenses to its relative net assets can be expected to
be higher than the expense ratios of funds investing solely in domestic
securities, since the cost of maintaining the custody of foreign securities and
the rate of investment management fees paid by each Fund generally are higher
than the comparable expenses of such other funds.
General expenses of the Company (such as costs of maintaining corporate
existence, legal fees, insurance, etc.) and expenses shares by the Funds will be
allocated among the Funds on a basis deemed fair and equitable, which may be
based on the relative net assets of the Funds or the nature of the services
performed and relative applicability to each Fund. Expenses which relate
exclusively to a particular Fund, such as certain registration fees, brokerage
commissions and other portfolio expenses, will be borne directly by that Fund.
During the fiscal year ended August 31, 1995; MATTHEWS PACIFIC TIGER FUND paid
the Advisor fees aggregating $6,524, MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
paid the Advisor fees aggregating $6,697, and MATTHEWS KOREA FUND paid the
Advisor fees aggregating $2,648.
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<PAGE>
KOREAN RESEARCH AND ADVISORY AGREEMENT
- --------------------------------------
Pursuant to a Research and Advisory Agreement ("Research Agreement") between
Matthews International Capital Management and Daewoo Capital Management Co.,
Ltd. (the "Korean Advisor"), the Korean Advisor provides an investment program
for MATTHEWS KOREA FUND, including investment research and the determination
from time to time of the securities that will be purchased and sold by the Fund,
subject to the supervision of the Advisor and the Board of Trustees of the
Company. As compensation for its services, the Korean Advisor receives from the
Advisor an annual fee of 0.50%.
Under the Research Agreement, the Korean Advisor is not liable for any error of
judgment or mistake of law or for any loss suffered by the Fund or the Trust in
connection with the performance of the Research Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard of its duties and
obligations thereunder.
The Research Agreement is initially effective for two years. The Agreement may
be renewed by the parties after its initial term only so long as such renewal
and continuance are specifically approved at least annually by the Board of
Trustees or by a vote of a majority of the outstanding securities of the Fund,
and only if the terms of the renewal thereof have been approved by the vote of
the majority of the Trustees of the Company who are not parties thereto or
interested persons of any such party, cast in person at the meeting called for
the purpose of voting on such approval. The Research Agreement will terminate
automatically upon termination of the investment advisory agreement between the
Advisor and MATTHEWS KOREA FUND (accompanied by simultaneous notice to the
Korean Advisor) or upon sixty days' written notice to the Korean Advisor that
such investment advisory agreement has been terminated by the Trustees or by the
holder of a majority of the outstanding voting securities of the Fund. The
Research Agreement will terminate automatically in the event of its assignment.
THE ADMINISTRATOR
- -----------------
Fund/Plan Services, Inc., 2 W. Elm Street, Conshohocken, PA 19428 (the
"Administrator"), provides certain administrative services to the Company
pursuant to an Administrative Services Agreement. The administrator receives a
fee at the annual rate of 0.15% of the first $50 million of average daily net
assets of the Company, 0.10% of the next $50 million of such average daily net
assets, and 0.05% on assets in excess of $100 million.
Under the Administrative Services Agreement, the Administrator: (1) coordinates
with the Custodian and Transfer Agent and monitors the services they provide to
the Funds; (2) coordinates with and monitors any other third parties furnishing
services to the Funds; (3) provides the Funds with necessary office space,
telephones and other communications facilities and personnel competent to
perform administrative and clerical functions; (4) supervises the maintenance by
third parties of such books and records of the Funds as may be required by
applicable federal or state law; (5) prepares or supervises the preparation by
third parties of all federal, state and local tax returns and reports of the
Funds required by applicable law; (6) prepares and, after approval by the Funds,
files and arranges for the distribution of proxy materials and periodic reports
to shareholders of the Funds as required by applicable law; (7) prepares and,
after approval by the Funds, arranges for the filing of such registration
statements and other documents with the SEC and other federal and state
regulatory authorities as may be required by applicable law; (8) reviews and
submits to the officers of the Company for their approval invoices or other
requests for payment of the Funds' expenses and instructs the Custodian to issue
checks in payment thereof; and (9) takes such other action with respect to the
Company or the Funds as may be necessary in the opinion of the Administrator to
perform its duties under the agreement.
For the fiscal year ending August 31, 1995, the Administrator received
administration fees of $23,558, $23,306 and $15,704 from MATTHEWS PACIFIC TIGER
FUND, MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND and MATTHEWS KOREA FUND,
respectively.
Page 57
<PAGE>
THE UNDERWRITER
- ---------------
Fund/Plan Broker Services, Inc. ("FPBS"), 2 W. Elm Street, Conshohocken, PA
19428, acts as an underwriter of the Funds' shares for the purpose of
facilitating the registration of shares of the Funds under state securities laws
and to assist in sales of shares pursuant to an underwriting agreement (the
"Underwriting Agreement") approved by the Company's Trustees.
In this regard, FPBS has agreed at its own expense to qualify as a broker-dealer
under all applicable federal or state laws in those states which the Company
shall from time to time identify to FPBS as states in which it wishes to offer
its shares for sale, in order that state registrations may be maintained for the
Funds.
FPBS is a broker-dealer registered with the SEC and a member in good standing of
the National Association of Securities Dealers, Inc.
The Underwriting Agreement may be terminated by either party upon 60 days' prior
written notice to the other party, and if so terminated, the pro-rated portion
of the unearned fee will be returned to the Advisor.
PORTFOLIO TRANSACTIONS AND BROKERAGE
------------------------------------
The Advisor is responsible for decisions to buy and sell securities for the
Funds and for the placement of its portfolio business and the negotiation of
commissions, if any, paid on such transactions. Fixed-income securities and many
equity securities in which the Funds invest are traded in over-the-counter
markets. These securities are generally traded on a net basis with dealers
acting as principal for their own accounts without a stated commission. In over-
the-counter transactions, orders are placed directly with a principal market-
maker unless a better price and execution can be obtained by using a broker.
Brokerage commissions are paid on transactions in listed securities, futures
contracts and options thereon.
The Advisor is responsible for effecting portfolio transactions and will do so
in a manner deemed fair and reasonable to the Funds. The primary consideration
in all portfolio transactions will be prompt execution of orders in an efficient
manner at the most favorable price. In selecting and monitoring broker-dealers
and negotiating commissions, the Advisor may consider a number of factors,
including, for example, net price, reputation, financial strength and stability,
efficiency of execution and error resolution, block trading and block
positioning capabilities, willingness to execute related or unrelated difficult
transactions in the future, order of call, offering to the Advisor on-line
access to computerized data regarding the Funds' accounts, and other matters
involved in the receipt of brokerage services generally. The Advisor may also
purchase from a broker or allow a broker to pay for certain research services,
economic and market information, portfolio strategy advice, industry and company
comments, technical data, recommendations, general reports, consultations,
performance measurement data and on-line pricing and news service and periodical
subscription fees. The Advisor may pay a brokerage commission in excess of that
which another broker/dealer might charge for effecting the same transaction in
recognition of the value of these research services. In such a case, however,
the Advisor will determine in good faith that such commission is reasonable in
relation to the value of brokerage and research provided by such broker/dealer,
viewed in terms of either the specific transaction or the Advisor's overall
responsibilities to the portfolios over which Applicant exercises investment
authority. Research services furnished by brokers through whom the Advisor
intends to effect securities transactions may be used in servicing all of the
Advisor's accounts; not all of such services may be used by the Advisor in
connection with accounts which paid commissions to the broker providing such
services. In conducting all of its soft dollar relationships, the Advisor will
seek to take advantage of the safe harbor provided by Section 28(e) of the
Securities Exchange Act of 1934, as amended.
The Advisor will attempt to equitably allocate portfolio transactions among the
Funds and other accounts whenever concurrent decisions are made to purchase or
sell securities by the Funds and other accounts. In making such allocations
between the Funds and others, the main factors to be considered are the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability
Page 58
<PAGE>
of cash for investment, the size of investment commitments generally held, and
the opinions of the persons responsible for recommending investments to the
Funds and the others. In some cases, this procedure could have an adverse effect
on the Fund. In the opinion of the Advisor, however, the results of such
procedures will, on the whole, be in the best interests of each of the clients.
For the fiscal year ended August 31, 1995, the investment operations brokerage
commissions paid by MATTHEWS PACIFIC TIGER FUND, MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND and MATTHEWS KOREA FUND were $12,222.14, $909.12 and $3,720.39,
respectively.
PORTFOLIO TURNOVER
------------------
The portfolio turnover rate for the Funds is calculated by dividing the lesser
of purchases or sales of portfolio investments for the reporting period by the
monthly average value of the portfolio investments owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Portfolio turnover may vary greatly from year to year as well as within a
particular year, and may be affected by cash requirements for redemption of
shares and by requirements which enable the Fund to receive favorable tax
treatment.
The portfolio turnover rates for the fiscal year ended August 31, 1995 were
92.53%, 121.63% and 42.16% for MATTHEWS PACIFIC TIGER FUND, MATTHEWS ASIAN
CONVERTIBLE FUND and MATTHEWS KOREA FUND. The rate of portfolio turnover will
not be a limiting factor in making portfolio decisions. A high rate of portfolio
turnover may result in the realization of substantial capital gains and involves
correspondingly greater transaction costs.
DETERMINATION OF NET ASSET VALUE
--------------------------------
A more complete discussion of the Funds' determination of net asset value is
contained in each Fund's Prospectus. Generally, the net asset value of a Fund
will be determined as of the close of trading on each day the New York Stock
Exchange is open for trading. The Funds do not determine net asset value on days
that the New York Stock Exchange is closed and at other times described in the
respective Prospectus. The New York Stock Exchange is closed on New Year's Day,
President's Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day. Additionally, if any of the aforementioned
holidays falls on a Saturday, the New York Stock Exchange will not be open for
trading on the preceding Friday and when such holiday falls on a Sunday, the New
York Stock Exchange will not be open for trading on the succeeding Monday,
unless unusual business conditions exist, such as the ending of a monthly or the
yearly accounting period.
Trading in securities on Asian and Pacific Basin securities exchanges and over-
the-counter markets is normally completed well before the close of the business
day in New York. In addition, Far Eastern securities trading may not take place
on all business days in New York. Furthermore, trading takes place in Japanese
markets on certain Saturdays and in various foreign markets on days which are
not business days the New York Stock Exchange is open and therefore the Fund's
respective net asset values are not calculated.
The calculation of the Funds' net asset values may not take place
contemporaneously with the determination of the prices of portfolio securities
held by the Funds. Events affecting the values of portfolio securities that
occur between the time their prices are determined and the close of the New York
Stock Exchange will not be reflected in the Funds' calculation of net asset
value unless the Board of Trustees deems that the particular event would
materially affect the net asset value, in which case an adjustment will be made.
Assets or liabilities initially expressed in terms of foreign currencies are
translated prior to the next determination of the net asset value of the Funds'
shares into U.S. dollars at the prevailing market rates. The fair value of all
other assets is added to the value of securities to arrive at the total assets.
Page 59
<PAGE>
Portfolio securities for MATTHEWS KOREA FUND which are traded on the Korean
exchange are valued at the most recent sale price reported on the exchange. If
no sale occurred, the security is then valued at the calculated mean between the
most recent bid and asked quotations. If there are no such bid and asked
quotations, the most recent bid quotation is used. All other securities are
valued (and would be considered illiquid securities and subject to the 10%
limitation) at fair value as determined in good faith by the Board of Trustees
including certain investments in Korean equity securities that have met the
limit for aggregate foreign ownership and for which premiums to the local stock
exchange prices are offered by prospective foreign investors.
TAXES
-----
IN GENERAL
- ----------
Each Fund intends to qualify each year as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code"). In
order to so qualify for any taxable year, a fund must, among other things, (i)
derive at least 90% of its gross income from dividends, interest, payments with
respect to certain securities loans, gains from the sale of securities or
foreign currencies, or 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; (ii) derive less than 30% of
its gross income from gains from the sale or other disposition of securities or
certain futures and options thereon held for less than three months; (iii)
distribute at least 90% of its dividend, interest and certain other taxable
income each year; and (iv) at the end of each fiscal quarter maintain at least
50% of the value of its total assets in cash, government securities, securities
of other regulated investment companies, and other securities of issuers which
represent, with respect to each issuer, no more than 5% of the value of a fund's
total assets and 10% of the outstanding voting securities of such issuer, and
have no more than 25% of its assets invested in the securities (other than those
of the government or other regulated investment companies) of any one issuer or
of two or more issuers which the fund controls and which are engaged in the
same, similar or related trades and businesses.
To the extent the Funds qualify for treatment as a regulated investment company,
they will not be subject to federal income tax on income paid to shareholders in
the form of dividends or capital gains distributions.
An excise tax at the rate of 4% will be imposed on the excess, if any, of the
Funds' "required distributions" over actual distributions in any calendar year.
Generally, the "required distribution" is 98% of a fund's ordinary income for
the calendar year plus 98% of its capital gain net income recognized during the
one-year period ending on October 31 plus undistributed amounts from prior
years. The Funds intend to make distributions sufficient to avoid imposition of
the excise tax. For a distribution to qualify as such with respect to a calendar
year under the foregoing rules, it must be declared by the Funds during October,
November or December to shareholders of record during such month and paid by
January 31 of the following year. Such distributions will be taxable in the year
they are declared, rather than the year in which they are received.
Shareholders will be subject to federal income taxes on distributions made by
the Funds whether received in cash or additional shares of the Funds.
Distributions of net investment income and net short-term capital gains, if any,
will be taxable to shareholders as ordinary income. Distributions of net long-
term capital gains, if any, will be taxable to shareholders as long-term capital
gains, without regard to how long a shareholder has held shares of the Fund. A
loss on the sale of shares held for six months or less will be treated as a
long-term capital loss to the extent of any long-term capital gain dividend paid
to the shareholder with respect to such shares. Dividends paid by the Funds may
qualify in part for the 70% dividends received deduction for corporations,
provided however, that those shares have been held for at least 45 days.
The Funds will notify shareholders each year of the amount of dividends and
distributions, including the amount of any distribution of long-term capital
gains, and the portion of its dividends which qualify for the 70% deduction.
Page 60
<PAGE>
FOREIGN TAXES
- -------------
Foreign governments may withhold taxes from dividends or interest paid with
respect to foreign securities typically at a rate between 10% and 35%. Tax
conversions between certain countries and the United States may reduce or
eliminate such taxes. The Funds intend to elect to pass-through foreign taxes
paid in order for a shareholder to take a credit or deduction if, at the close
of its fiscal year, more than 50% of a Fund's total assets are invested in
securities of foreign issuers.
Under the United States-Korea income tax treaty, as presently in effect, the
government of Korea imposes a nonrecoverable withholding tax and resident tax
aggregating 16.125% on dividends and 12.9% on interest paid to MATTHEWS KOREA
FUND by Korean issuers. Under United States-Korea income tax treaty, there is no
Korean withholding tax on realized capital gains.
OPTIONS, FUTURES AND FOREIGN CURRENCY TRANSACTIONS
- --------------------------------------------------
When the Funds write a call, or purchase a put option, an amount equal to the
premium received or paid by them is included in the Funds' accounts as an asset
and as an equivalent liability. In writing a call, the amount of the liability
is subsequently "marked-to-market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an option
which a Fund has written expires on its stipulated expiration date, the Fund
recognizes a short-term capital gain. If the Fund enters into a closing purchase
transaction with respect to an option which the Fund has written, the Fund
realizes a short-term gain (or loss if the cost of the closing transaction
exceeds the premium received when the option was sold) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option is extinguished. If a call option which the Fund has written is
exercised, the Fund realizes a capital gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received.
The premium paid by the Fund for the purchase of a put option is recorded in the
Fund's assets and liabilities as an investment and subsequently adjusted daily
to the current market value of the option. For example, if the current market
value of the option exceeds the premium paid, the excess would be unrealized
appreciation and, conversely, if the premium exceeds the current market value,
such excess would be unrealized depreciation. The current market value of a
purchased option is the last sale price on the principal exchange on which such
option is traded or, in the absence of a sale, the mean between the last bid and
asked prices. If an option which the Fund has purchased expires on the
stipulated expiration date, the Fund realizes a short-term or long-term capital
loss for federal income tax purposes in the amount of the cost of the option. If
the Fund exercises a put option, it realizes a capital gain or loss (long-term
or short-term, depending on the holding period of the underlying security) from
the sale which will be decreased by the premium originally paid.
Accounting for options on certain stock indices will be in accordance with
generally accepted accounting principles. The amount of any realized gain or
loss on closing out such a position will result in a realized gain or loss for
tax purposes. Such options held by a Fund at the end of each fiscal year on a
broad-based stock index will be required to be "marked-to-market" for federal
income tax purposes. Sixty percent of any net gain or loss recognized on such
deemed sales or on any actual sales will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss
("60/40 gain or loss"). Certain options, futures contracts and options on
futures contracts utilized by the Fund are "Section 1256 contracts." Any gains
or losses on Section 1256 contracts held by the Fund at the end of each taxable
year (and on October 31 of each year for purposes of the 4% excise tax) are
"marked-to-market" with the result that unrealized gains or losses are treated
as though they were realized and the resulting gain or loss is treated as a
60/40 gain or loss.
The above discussion and the related discussion in the Prospectus are not
intended to be complete discussions of all applicable federal tax consequences
of an investment in the Funds. The law firm of Shartsis, Friese & Ginsburg has
expressed no opinion in respect thereof. Dividends and distributions also may be
subject to state and
Page 61
<PAGE>
local taxes. Shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local taxes.
The foregoing discussion relates solely to U.S. federal income tax law. Non-U.S.
investors should consult their tax advisors concerning the tax consequences of
ownership of shares of the Funds, including the possibility that distributions
may be subject to a 30% United States withholding tax (or a reduced rate of
withholding provided by treaty).
PERFORMANCE INFORMATION
-----------------------
IN GENERAL
- ----------
From time to time, the Company may include general comparative information, such
as statistical data regarding inflation, securities indices or the features or
performance of alternative investments, in advertisements, sales literature and
reports to shareholders. The Company may also include calculations, such as
hypothetical compounding examples or tax-free compounding examples, which
describe hypothetical investment results in such communications. Such
performance examples will be based on an express set of assumptions and are not
indicative of the performance of any Fund.
From time to time, the yield and total return of a Fund may be quoted in
advertisements, shareholder reports or other communications to shareholders.
TOTAL RETURN CALCULATION
- ------------------------
The Funds compute their average annual total return by determining the average
annual compounded rate of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
payment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result. This calculation can be expressed as
follows:
ERV = P (1 + T)/n/
Where: ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
T = average annual total return.
The Funds compute their aggregate total return by determining the aggregate
compounded rate of return during specified period that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
Aggregate Total Return = [ ERV - 1 ]
---
P
Where: ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
Page 62
<PAGE>
Based upon the foregoing calculations, the average annual total return for:
MATTHEWS PACIFIC TIGER FUND AND MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND for
the period September 13, 1994 (commencement of operations) through the fiscal
year end August 31, 1995 were (2.07) and 0.89, respectively; and, MATTHEWS KOREA
FUND for the period January 3, 1995 (commencement of operations) through the
fiscal year end August 31, 1995 was (8.70).
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
reinvestment dates during the period. The ending redeemable value (variable
"ERV" in each formula) is determined by assuming complete redemption of the
hypothetical investment and the deduction of all nonrecurring charges at the end
of the period covered by the computations.
Since performance will fluctuate, performance data for the Funds should not be
used to compare an investment in the Funds' shares with bank deposits, savings
accounts and similar investment alternatives which often provide an agreed-upon
or guaranteed fixed yield for a stated period of time. Shareholders should
remember that performance is generally a function of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses and
market conditions.
YIELD CALCULATION
- -----------------
Yield, in its simplest form, is the ratio of income per share derived from the
Fund's investments to a current maximum offering price expressed in terms of
percent. The yield is quoted on the basis of earnings after expenses have been
deducted. The yield of a Fund is calculated by dividing the net investment
income per share earned during a 30-day (or one month) period by the maximum
offering price per share on the last day of the period and annualizing the
result. The Funds' net investment income per share earned during the period is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
/6/
YIELD = 2 [ ( a - b + 1) - 1 ]
-----
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = maximum offering price per share on the last day of the
period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on any debt obligations held by the Fund is calculated by computing the
yield to maturity of each obligation held by that Fund based on the market value
of the obligation (including actual accrued interest) at the close of business
on the last business day of the month, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held by that Fund. For purposes of this
calculation, it is assumed that each month contains 30 days. The date on which
the obligation reasonably may be expected to be called or, if none, the maturity
date. With respect to debt
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<PAGE>
obligations purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market values of such debt
obligations.
Expenses accrued for the period (variable "b" in the formula) include all
recurring fees charged by a Fund to all shareholder accounts in proportion to
the length of the base period and the Fund's mean (or median) account size.
Undeclared earned income will be subtracted from the offering price per capital
share (variable "d" in the formula).
PERFORMANCE AND ADVERTISEMENTS
- ------------------------------
From time to time, in marketing and other fund literature, the Funds'
performance may be compared to the performance of other mutual funds in general
or to the performance of particular types of mutual funds with similar
investment goals, as tracked by independent organizations. Among these
organizations, Lipper Analytical Services, Inc. ("Lipper"), a widely used
independent research firm which ranks mutual funds by overall performance,
investment objectives, and assets, may be cited. Lipper performance figures are
based on changes in net asset value, with all income and capital gains dividends
reinvested. Such calculations do not include the effect of any sales charges
imposed by other funds. The Funds will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings. The Funds'
performance may also be compared to the average performance of its Lipper
category.
The Funds' performance may also be compared to the performance of other mutual
funds by Morningstar, Inc. which ranks funds on the basis of historical risk and
total return. Morningstar's rankings range from five stars (highest) to one star
(lowest) and represent Morningstar's assessment of the historical risk level and
total return of a fund as a weighted average for three, five and ten year
periods. Ranks are not absolute or necessarily predictive of future performance.
The Funds may compare their performance to a wide variety of indices including
the Morgan Stanley Pacific Basin Index (excluding Japan) and the Peregrine Asia
100 Index. The Peregrine Asia 100 Index tracks stocks representative of foreign
interest in eight markets: Hong Kong, Singapore, Malaysia, Indonesia, Korea and
Taiwan. Coverage by the 118 constituent stocks is over 50 percent of total
market capitalization. The index is expressed in US dollars to provide a
benchmark for US dollar denominated investors.
In assessing such comparisons of yield, return, or volatility, an investor
should keep in mind that the composition of the investments in the reported
indices and averages is not identical to those of the Funds, that the averages
are generally unmanaged, and that the items included in the calculations of such
averages may not be identical to the formula used by a Fund to calculate its
figures.
Because the Funds' investments primarily are denominated in foreign currencies,
the strength or weakness of the U.S. dollar as against these currencies may
account for part of the Funds' investment performance. Historical information
regarding the value of the dollar versus foreign currencies may be used from
time to time in advertisements concerning the Funds. Marketing materials may
cite country and economic statistics and historical stock market performance for
any of the countries in which the Funds invest. Sources for such statistics may
include official publications of various foreign governments, exchanges, or
investment research firms.
OTHER INFORMATION
-----------------
The Prospectus and this Statement of Additional Information do not contain all
the information included in the Registration Statement filed with the SEC under
the Securities Act of 1933 with respect to the securities offered by the
Prospectuses. Certain portions of the Registration Statement have been omitted
from the Prospectuses and this Statement of Additional Information pursuant to
the rules and regulations of the SEC. The Registration Statement including the
exhibits filed therewith may be examined at the office of the SEC in
Washington, D.C.
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<PAGE>
Statements contained in the Prospectuses or in this Statement of Additional
Information as to the contents of any contract or other document referred to are
not necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement of which the Prospectuses and this Statement of Additional Information
forms a part. Each such statement is qualified in all respects by such
reference.
CUSTODIAN
- ---------
The Bank of New York, 90 Washington Street, New York, New York 10286 is
custodian of the Company's assets pursuant to a custodian agreement. Under the
custodian agreement, The Bank of New York (i) maintains a separate account or
accounts in the name of each Fund (ii) holds and transfers portfolio securities
on account of each Fund, (iii) accepts receipts and makes disbursements of money
on behalf of each Fund, (iv) collects and receives all income and other payments
and distributions on account of each Fund's securities and (v) makes periodic
reports to the Board of Trustees concerning each Fund's operations.
INDEPENDENT ACCOUNTANTS
- -----------------------
Coopers & Lybrand L.L.P., 2400 Eleven Penn Center, Philadelphia, PA 19103 have
been selected as the independent accountants for the Company. Coopers & Lybrand
L.L.P. provide audit services and assistance and consultation with respect to
regulatory filings with the SEC. The books of each Fund will be audited at least
once each year by Coopers & Lybrand L.L.P.
REPORTS TO SHAREHOLDERS
- -----------------------
Shareholders will receive unaudited semi-annual reports describing the Funds'
investment operations and annual financial statements audited by independent
certified public accountants. Inquiries regarding the Funds may be directed to
the Advisor at (800) 789-ASIA.
Page 65
<PAGE>
FINANCIAL STATEMENTS AS OF AUGUST 31, 1995
Schedule of Investments
Statement of Assets and Liabilites
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights
Notes to Financial Statements
Page 66
<PAGE>
Matthews International Funds - Schedule of Investments August 31, 1995
================================================================================
Matthews Pacific Tiger Fund
<TABLE>
<CAPTION>
Market
Shares Value
-------- ---------
<S> <C> <C>
Equities - 85.65%
China - 4.51%
Ek Chor China Motorcycle Co. ........................ 1,700 $ 33,788
Shanghai Dazhong Taxi Co. Class "B"................... 18,000 15,120
--------
Total China ......................................... 48,908
--------
Hong Kong - 31.20%
C. P. Pokphand Co. .................................. 68,000 26,792
Cheung Kong ......................................... 6,000 29,763
China Hong Kong Photo Products ....................... 49,000 21,679
Citic Pacific Ltd .................................... 6,000 17,090
Dao Heng Bank Group Ltd. ............................ 9,000 28,717
Elec & Eltek International .......................... 100,000 14,597
Esprit Asia Holdings Ltd.............................. 58,000 22,477
Henderson Investment Ltd.............................. 29,000 22,103
Hopewell Holdings .................................... 25,000 18,085
J.C.G. Holdings Ltd................................... 44,000 32,967
New World Development ................................ 12,000 43,714
Peregrine Investment Holdings ........................ 16,000 22,839
Union Bank of Hong Kong ............................. 15,000 12,789
Varitronix International Ltd. ....................... 13,000 24,098
--------
Total Hong Kong ..................................... 337,710
--------
Indonesia - 6.15%
Pt Aneka Kimia Raya .................................. 8,000 22,677
Pt Bank Dagang Nasional .............................. 24,500 24,861
Pt Semen Cibinong .................................... 7,000 18,994
--------
Total Indonesia ..................................... 66,532
--------
Korea - 8.10%
Hanil Bank # ......................................... 2,000 24,961
Lucky Co. Ltd. # .................................... 660 13,742
Samsung Electronics Co. # ............................ 2 362
Samsung Electronics Co.-GDS # ....................... 300 19,200
Ssangyong Oil Refining Co. # ......................... 570 15,112
Tongyang Nylon Co. #................................. 390 14,274
--------
Total Korea ......................................... 87,651
--------
Malaysia - 11.51%
Arab Malaysian Finance ............................... 6,000 24,050
Commerce Asset Holdings .............................. 4,000 22,126
Commerce Asset Holdings Warrants .................... 5,000 14,430
I.O.I Corp. Berhad ................................... 8,000 9,877
I.O.I Corp. Berhad Warrants ......................... 8,000 5,964
I.O.I Properties Berhad .............................. 8,000 28,860
Renong Berhad ........................................ 10,000 19,320
--------
Total Malaysia ...................................... 124,627
--------
Philippines - 5.28%
Alaska Milk Corp. # .................................. 61,000 12,472
Filinvest Land Inc. # ................................ 62,500 23,388
Metropolitan Bank & Trust ............................ 1,094 21,314
--------
Total Philippines ................................... 57,174
--------
Singapore - 7.55%
Courts Ltd. ......................................... 16,000 25,343
DBS Land ............................................. 7,000 20,106
Hotel Properties .................................... 11,000 17,733
Overseas Union Bank ................................. 3,000 18,585
--------
Total Singapore ..................................... 81,767
--------
Thailand - 11.35%
Bank Of Ayudhya ..................................... 5,000 28,131
Industrial Finance Corp. ............................ 9,166 24,872
Land and House Co. Ltd ............................... 1,400 24,245
Ruang Khao Fund ..................................... 30,000 17,657
Siam City Cement Co................................... 1,700 27,812
--------
Total Thailand ...................................... 122,717
--------
</TABLE>
<PAGE>
Matthews International Funds - Schedule of Investments August 31, 1995
================================================================================
Matthews Pacific Tiger Fund
<TABLE>
<CAPTION>
Market
Shares Value
-------- ----------
<S> <C> <C>
Total Equities
(Cost $924,811) ......................... $ 927,086
----------
Face
Amount
--------
International Dollar Bonds - 5.00%
United Engineers Malaysia
2.000%, due 03/01/04...................... $ 20,000 23,500
Acer, Inc. Taiwan
4.000%, due 06/10/39 ..................... 10,000 30,500
----------
Total International Dollar Bonds
(Cost $47,770) ........................... 54,000
----------
Shares
--------
Investment Company - 2.49%
(Cost $26,500)
Formosa Growth Fund Ltd. # ................ 2,000 27,000
----------
TOTAL INVESTMENTS - 93.14%*
(Cost $999,081) ......................... 1,008,086
----------
CASH AND OTHER ASSETS,
LESS LIABILITIES - 6.86% ................. 74,279
----------
NET ASSETS - 100% ......................... $1,082,365
==========
* Cost of Federal income tax purposes is $999,081 and net unrealized appreciation consists of:
Gross unrealized appreciation ............ $ 973,012
Gross unrealized depreciation ............ (964,007)
----------
Net unrealized appreciation ....... $ 9,005
==========
</TABLE>
# Non-income producing securities
See accompanying notes to financial statements.
<PAGE>
Matthews International Funds - Schedule of Investments August 31, 1995
================================================================================
Matthews Asian Convertible Securities Fund
<TABLE>
<CAPTION>
Market
Shares Value
-------- ---------
<S> <C> <C>
Equities - 5.90%
Hong Kong - 3.80%
China Hong Kong Photo Products ..................... 21,000 $ 9,291
Merrill Lynch International-HSBC Warrants #........ 20,000 4,625
Peregrine Investment Holdings ...................... 9,000 12,847
Swire Pacific Class "A" Warrants #................... 50,000 6,071
---------
Total Hong Kong .................................... 32,834
---------
Taiwan - 2.10%
JP Morgan Jersey Warrants # ......................... 300 8,175
Tung Ho Steel GDR # ................................. 900 9,900
---------
Total Taiwan ........................................ 18,075
---------
Total Equities
(Cost $64,504) .................................... 50,909
---------
Face
Amount
--------
International Dollar Bonds - 83.21%
Australia - 2.50%
Gold Mines Of Kalgoorlie
7.500%, due 02/28/00 .............................. $ 20,000 21,550
---------
Hong Kong - 22.82%
Guangdong Investment Ltd.
4.500%, due 10/07/98 .............................. 20,000 23,150
Gold Lion Capital (BVI)
4.875%, due 02/01/99 .............................. 20,000 18,900
Hysan Development Finance
6.750%, due 06/01/00 .............................. 10,000 9,875
Wharf Capital International, Ltd.
5.000%, due 07/15/00 .............................. 15,000 14,588
Peregrine Investment Holdings
4.500%, due 12/01/00 .............................. 10,000 8,150
Hon Kwok Land Treasury
4.875%, due 12/15/00 .............................. 30,000 24,600
Shangri La Asia Capital
2.875%, due 12/16/00 .............................. 30,000 23,100
Hong Kong and Shanghai Hotel
5.000%, due 01/06/01 .............................. 20,000 18,250
Hong Kong Land Company
4.000%, due 02/23/01 .............................. 15,000 12,187
Regal Hotels International Holdings
5.250%, due 12/13/08 .............................. 25,000 19,313
Amoy Properties Ltd.
5.500%, due 12/29/49 .............................. 35,000 24,763
---------
Total Hong Kong .................................... 196,876
---------
India - 1.99%
Sterlite Industries Ltd
3.500%, due 06/30/99 .............................. 20,000 17,200
---------
Indonesia - 2.71%
Pt Inti Indorayon Utama
5.500%, due 10/01/02 .............................. 20,000 23,400
---------
Malaysia - 6.21%
Commerce Asset Holdings
1.750%, due 09/26/04 .............................. 30,000 32,925
Renong Berhad
2.000%, due 07/15/05 .............................. 20,000 20,650
---------
Total Malaysia ..................................... 53,575
---------
</TABLE>
<PAGE>
Matthews International Funds - Schedule of Investments August 31, 1995
================================================================================
Matthews Asian Convertible Securities Fund
<TABLE>
<CAPTION>
Face Market
Amount Value
--------- ----------
<S> <C> <C>
Singapore - 5.54%
Jardine Strategic Holdings
7.500%, due 05/07/49 ...................... $ 20,000 $ 21,400
Dairy Farm International Holdings
6.500%, due 05/10/49 ...................... 35,000 26,381
----------
Total Singapore ............................ 47,781
----------
South Korea - 5.72%
Goldstar Co. Ltd.
3.250%, due 12/31/06 ...................... 30,000 36,750
Daewoo Electronics
3.500%, due 12/31/07 ...................... 10,000 12,600
----------
Total South Korea .......................... 49,350
----------
Taiwan - 10.86%
Far Eastern Department Stores
3.000%, due 07/06/01 ...................... 30,000 25,125
Nan Ya Plastic Corp.
1.750%. due 07/19/01 ...................... 25,000 24,875
President Enterprises
0.000%. due 07/22/01 #..................... 10,000 12,050
Yangming Marine Transportation
2.000%, due 10/06/01 ...................... 30,000 31,650
----------
Total Taiwan ............................... 93,700
----------
Thailand - 24.86%
MDX Public Co.
4.750%, due 09/17/03 ...................... 25,000 14,250
Phatra Thanakit
3.500%, due 12/13/03 ...................... 10,000 11,450
Sino Thai Engineering
1.750%, due 12/17/03 ...................... 30,000 29,775
Somprasong Land
3.875%, due 01/21/04 ...................... 30,000 19,650
Siam Commercial Bank Co.
3.250%, due 01/24/04 ...................... 30,000 27,000
Tanayong Public Co.
3.500%, due 03/01/04 ...................... 30,000 22,425
Bangkok Bank Pub Co.
3.250%, due 03/03/04 ...................... 30,000 29,325
Banpu Coal
3.500%, due 08/25/04 ...................... 25,000 31,437
Sahaviriya Steel
3.500%, due 07/26/05 ...................... 20,000 18,625
NTS Steel Group
4.000%, due 12/16/08 ...................... 15,000 10,537
----------
Total Thailand ............................. 214,474
----------
Total International Dollar Bonds
(Cost $700,805) ........................... 717,906
----------
Shares
---------
Investment Company - 0.57 %
(Cost $6,712)
The India Fund .............................. 500 4,875
----------
TOTAL INVESTMENTS - 89.68%*
(Cost $772,021) .......................... 773,690
----------
CASH AND OTHER ASSETS,
LESS LIABILITIES - 10.32% ................. 88,987
----------
NET ASSETS - 100% .......................... $ 862,677
==========
* Cost of Federal income tax purposes is $772,021 and net unrealized appreciation consists of:
Gross unrealized appreciation ............... $ 508,649
Gross unrealized depreciation ............... (506,980)
----------
Net unrealized appreciation .......... $ 1,669
==========
</TABLE>
# Non-income producing securities
See accompanying notes to financial statements.
<PAGE>
Matthews International Funds - Schedule of Investments August 31, 1995
================================================================================
Matthews Korea Fund
<TABLE>
<CAPTION>
Market
Shares Value
-------- ----------
<S> <C> <C>
Equities - Korea 85.00%
Asia Paper Manufacturing Co.# ................. 333 $ 10,303
Cho Hung Bank ................................. 1,500 19,593
Dae Won Kang Up Co.# .......................... 700 17,201
Daewoo Corp. # ................................ 1,000 14,097
Daewoo Electronics Co. #....................... 1,500 18,526
Daihan Paint and Ink Co.# ..................... 479 22,240
Dong-Ah Construction Ind Co.# ................. 700 27,250
Haitai Confectionery Co. # .................... 1,000 15,649
Hyundai Precision Industry #................... 900 19,322
Inchon Iron and Steel Co. #.................... 500 18,429
Korea Electronics Co.# ....................... 400 13,967
Korea Kumho Petrochemical-Preferred # ......... 1,800 14,107
LG Electronics#................................ 600 18,546
LG Industrial Systems#......................... 500 14,938
Orient Beverages Ltd #........................ 1,000 10,088
Oriental Chemical Ind. Co.# ................... 700 20,822
Orion Electric Co.# ........................... 600 13,269
Sam Lip Industrial Co# ........................ 170 7,695
Samsung Electronics Co.# ...................... 170 30,341
Shinhung Co. #................................. 600 16,373
Ssangyong Cement Co.# ......................... 300 8,458
Ssangyong Oil Refining Co.# ................... 500 13,256
Taegu Department Store Co.# ................... 600 18,158
Taihan Electric Wire Co. # .................... 800 26,590
The Citizens National Bank# ................... 1,000 19,270
----------
428,488
----------
Total Equities
(Cost $454,345) ............................. 428,488
----------
TOTAL INVESTMENTS - 85.00%
(Cost $454,345) ............................. 428,488
----------
CASH AND OTHER ASSETS,
LESS LIABILITIES - 15.00% ................... 75,613
----------
NET ASSETS - 100% ............................ $ 504,101
==========
* Cost for Federal income tax purposes is $454,345 and net unrealized depreciation consists of:
Gross unrealized appreciation ................ $ 473,690
Gross unrealized depreciation ................ (499,547)
----------
Net unrealized depreciation ........... $ (25,857)
==========
</TABLE>
# Non-income producing securities
See accompanying notes to financial statements.
<PAGE>
Statement of Assets and Liabilities August 31, 1995
================================================================================
<TABLE>
<CAPTION>
Matthews
Matthews Asian
Pacific Convertible Matthews
Tiger Securities Korea
Fund Fund Fund
---------- ----------- ----------
<S> <C> <C> <C>
Assets:
Investments, at market value (Cost $999,081,
$772,021 and $454,345, respectively)...................... $1,008,086 $773,690 $428,488
Cash......................................................... 46,809 27,948 67,054
Dividends and interest receivable............................ 7,257 14,531 0
Receivable for securities sold .............................. 21,037 41,227 0
Deferred organization costs (Note E)......................... 27,179 27,179 13,899
Due from Advisor (Note 2) ................................... 40,560 33,617 14,239
Other assets................................................. 497 436 4,395
---------- -------- --------
Total assets......................................... 1,151,425 918,628 528,075
---------- -------- --------
Liabilities:
Payable for securities purchased ............................ 37,609 33,092 0
Accrued expenses ............................................ 31,451 22,859 23,974
---------- -------- --------
Total liabilities.................................... 69,060 55,951 23,974
---------- -------- --------
Net Assets:
Applicable to 110,736, 87,319
and 55,186 shares outstanding, respectively............... $1,082,365 $862,677 $504,101
========== ======== ========
Net Assets Consist of:
Capital paid-in.............................................. $1,090,619 $852,980 $521,928
Undistributed net investment income (loss)................... (197) 1,904 6
Accumulated realized gain (loss) on investments and foreign
currency related transactions............................. (17,122) 6,124 8,024
Net unrealized appreciation (depreciation) on investments and
foreign currency related transactions..................... 9,065 1,669 (25,857)
---------- -------- --------
$1,082,365 $862,677 $504,101
========== ======== ========
Net asset value and redemption price per share................. $9.77 $9.88 $9.13
========== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Statement of Operations For the Period Ended August 31, 1995
================================================================================
<TABLE>
<CAPTION>
Matthews
Matthews Asian
Pacific Convertible Matthews
Tiger Securities Korea
Fund* Fund* Fund**
-------- ----------- --------
<S> <C> <C> <C>
Investment Income:
Dividends ............................................................. $12,055 $ 5,116 $ 0
Interest............................................................... 4,465 24,593 2,852
------- ------- -------
Total investment income.................................. 16,520 29,709 2,852
------- ------- -------
Expenses:
Investment advisory fees (Note 2)...................................... 6,524 6,697 2,648
Transfer agent fees.................................................... 30,213 27,430 18,730
Administration fees.................................................... 23,558 23,306 15,704
Accounting fees........................................................ 43,010 43,388 30,000
Auditing fees.......................................................... 5,750 5,750 5,000
Custodian fees......................................................... 21,343 9,177 17,416
Directors fees (Note 2)................................................ 5,000 5,000 2,500
Legal fees............................................................. 801 801 801
Amortization of organization costs (Note E)............................ 6,494 6,494 1,712
Printing expense....................................................... 5,299 4,635 4,979
Registration expenses.................................................. 19,398 19,852 13,554
Miscellaneous expenses................................................. 1,877 2,250 597
------- ------- -------
Total expenses........................................... 169,267 154,780 113,641
Expenses reimbursed and waived (Note 2)................................ (155,108) (139,642) (113,008)
------- ------- -------
Net expenses............................................. 14,159 15,138 633
------- ------- -------
Net Investment Income.................................................... 2,361 14,571 2,219
------- ------- -------
Realized and Unrealized Gain (Loss) on Investments and Foreign Currency:
Net realized gain (loss) on investments ............................... (17,122) 6,116 8,024
Net realized loss on foreign currency related transactions ............ (1,119) (42) (2,213)
Net change in unrealized appreciation (depreciation) on investments
and foreign currency related transactions ........................... 9,065 1,669 (25,857)
------- ------- -------
Net realized and unrealized gain (loss) on investments and
foreign currency related transactions ............................... (9,176) 7,743 (20,046)
------- ------- -------
Increase (Decrease) in Net Assets from Operations........................ ($6,815) $22,314 ($17,827)
======= ======= =======
</TABLE>
* The Funds commenced operations on September 13, 1994.
** The Fund commenced operations on January 3, 1995.
See accompanying notes to financial statements.
<PAGE>
Statement of Changes in Net Assets For the Period Ended August 31, 1995
================================================================================
<TABLE>
<CAPTION>
Matthews
Matthews Asian
Pacific Convertible Matthews
Tiger Securities Korea
Fund* Fund* Fund**
---------- ----------- ----------
<S> <C> <C> <C>
Operations:
Net investment income................................................... $2,361 $14,571 $2,219
Net realized gain (loss) on investments and foreign currency
related transactions ................................................. (18,241) 6,074 5,811
Net change in unrealized appreciation (depreciation) on investments
and foreign currency related transactions ............................ 9,065 1,669 (25,857)
---------- ---------- ----------
Increase (Decrease) in net assets from operations....................... (6,815) 22,314 (17,827)
---------- ---------- ----------
Dividends and Distributions to Shareholders:
From net investment income.............................................. (1,439) (12,617) 0
---------- ---------- ----------
Capital Share Transactions (net) - Note H................................. 1,040,619 802,980 421,928
---------- ---------- ----------
Total increase in net assets............................................ 1,032,365 812,677 404,101
Net Assets:
Beginning of period..................................................... 50,000 50,000 100,000
---------- ---------- ----------
End of period .......................................................... $1,082,365 $862,677 $504,101
========== ========== ==========
</TABLE>
* The Funds commenced operations on September 13, 1994.
** The Fund commenced operations on January 3, 1995.
See accompanying notes to financial statements.
<PAGE>
Financial Highlights For the Period Ended August 31, 1995
================================================================================
The tables below set forth financial data for a share of beneficial interest
outstanding throughout the period presented.
<TABLE>
<CAPTION>
Matthews
Matthews Asian
Pacific Convertible Matthews
Tiger Securities Korea
Fund* Fund* Fund**
-------- ----------- --------
<S> <C> <C> <C>
Net Asset Value, beginning of period..................................... $10.00 $10.00 $10.00
-------- -------- --------
Income from investment operations
Net investment income.................................................. 0.02 0.23 0.08 ***
Net realized and unrealized loss on investments and foreign currency... (0.23) (0.14) (0.95)***
-------- -------- --------
Total from investment operations............................... (0.21) 0.09 (0.87)
-------- -------- --------
Less Distributions:
From net investment income............................................. (0.02) (0.21) 0.00
-------- -------- --------
Total distributions............................................ (0.02) (0.21) 0.00
-------- -------- --------
Net Asset Value, end of period........................................... $9.77 $9.88 $9.13
======== ======== ========
Total return ............................................................ (2.07%) 0.89% (8.70%)
Ratios/Supplemental Data
Net assets, end of period (in 000's)................................... $1,082 $863 $504
Ratio of expenses to average net assets before reimbursement
and waiver of expenses by Advisor and Administrator.................. 25.95%# 23.11%# 42.87%#
Ratio of expenses to average net assets after reimbursement
and waiver of expenses by Advisor and Administrator.................. 2.17%# 2.26%# 0.24%#
Ratio of net investment loss to average net assets before
reimbursement and waiver of expenses by Advisor and Administrator.... (23.41%)# (18.68%)# (41.79%)#
Ratio of net investment income to average net assets after
reimbursement and waiver of expenses by Advisor and Administrator.... 0.36%# 2.17%# 0.84%#
Portfolio turnover .................................................... 92.53% 121.63% 42.16%
</TABLE>
# Annualized
* The Funds commenced operations on September 13, 1994.
** The Fund commenced operations on January 3, 1995.
*** Calculated using the average shares method.
See accompanying notes to financial statements.
<PAGE>
MATTHEWS INTERNATIONAL FUNDS - NOTES TO FINANCIAL STATEMENTS August 31, 1995
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Matthews International Funds (the "Company") is a no-load, open-end investment
management company registered under the Investment Company Act of 1940, as
amended, as a series company. The Company currently consists of three separate
investment series (each a "Fund" and collectively, the "Funds"): Matthews
Pacific Tiger Fund, Matthews Asian Convertible Securities Fund and Matthews
Korea Fund. The following is a summary of significant accounting policies
consistently followed by the Funds in the preparation of their financial
statements.
A. SECURITY VALUATION: Securities listed on any national securities
exchange are valued at their last sale price on the exchange where the
securities are principally traded or, if there has been no sale on that
date, at the mean between the last reported bid and asked prices.
Securities traded over-the-counter are priced at the mean of the last bid
and asked prices. Securities are valued through valuations obtained from a
commercial pricing service or at the most recent mean of the bid and asked
prices provided by investment dealers in accordance with procedures
established by the Board of Trustees. Options, futures and options on
futures are valued at the price as determined by the appropriate clearing
corporation.
The books and records of the Funds are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in
foreign currencies are translated into U.S. dollars at the current exchange
rate. Translation gains or losses resulting from changes in the exchange
rate during the reporting period and realized gains and losses on the
settlement of foreign currency transactions are reported in the results of
operations for the current period. The Funds do not isolate that portion of
gains and losses on investments in equity securities which is due to
changes in the foreign exchange rate from that which is due to changes in
market prices of equity securities.
Portfolio securities traded on a foreign exchange are generally valued at
the respective current prevailing exchange rates. The securities' values
are translated into U.S. dollars using these rates. If subsequent to the
time a rate has been established and it has been determined to have
materially changed, the fair value of those securities, (considering the
changing conditions) will be determined by (or under the direction of) the
Funds' Board of Trustees.
B. RISKS ASSOCIATED WITH FOREIGN SECURITIES: Investments by the Funds in
the securities of foreign issuers may involve investment risks different
from those of U.S. issuers including possible political or economic
instability of the country of the issuer, the difficulty of predicting
international trade patterns, the possibility of currency exchange
controls, the possible imposition of foreign withholding tax on the
interest income payable on such instruments, the possible establishment of
foreign controls, the possible seizure or nationalization of foreign
deposits or assets, or the adoption of other foreign government
restrictions that might adversely affect the foreign securities held by the
Funds. Foreign securities may also be subject to greater fluctuations in
price than securities of domestic corporations or the U. S. Government.
C. FEDERAL INCOME TAXES: It is the policy of the Funds to comply with all
requirements of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. The Funds have met the requirements of
the Code applicable to regulated investment companies for the period ended
August 31, 1995. Therefore, no federal income tax provision is required.
D. DETERMINATION OF GAINS OR LOSSES ON SALES OF SECURITIES: Gains or losses
on the sale of securities are determined on the identified cost basis.
E. ORGANIZATION COSTS: Organization costs are being amortized on a
straight-line basis over five years from each Fund's respective
commencement of operations.
F. DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of Matthews Asian
Convertible Securities Fund to distribute their respective net investment
income on a semi-annual basis and capital gains annually. Matthews Pacific
Tiger Fund and Matthews Korea Fund distribute net investment income and
capital gains annually. Distributions to shareholders are recorded on the
ex-dividend date. Income and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles.
Page 70
<PAGE>
MATTHEWS INTERNATIONAL FUNDS - NOTES TO FINANCIAL STATEMENTS August 31, 1995
(continued)
- --------------------------------------------------------------------------------
G. OTHER: Securities transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the
accrual basis and dividend income on the ex-dividend date.
H. CAPITAL SHARE TRANSACTIONS: Each Fund is authorized to issue an
unlimited number of shares of beneficial interest with a par value of
$0.001 per share. Transactions in shares of beneficial interest from the
commencement of investment operations through August 31, 1995 were as
follows:
<TABLE>
<CAPTION>
ASIAN CONVERTIBLE
PACIFIC TIGER FUND SECURITIES FUND
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Shares sold..................... 138,867 $1,365,306 126,985 $1,254,801
Shares issued through
reinvestment of dividends.... 144 1,365 1,196 11,927
Shares redeemed................. (28,275) (276,052) (40,862) (413,748)
------- ---------- ------- ----------
Net Increase.................... 110,736 $1,090,619 87,319 $ 852,980
======= ========== ======= ==========
<CAPTION>
KOREA FUND
----------
SHARES AMOUNT
------- ---------
<S> <C> <C>
Shares sold..................... 59,910 $565,969
Shares issued through
reinvestment of dividends.... 0 0
Shares redeemed................. (4,724) (44,041)
------ --------
Net Increase.................... 55,186 $521,928
====== ========
</TABLE>
2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Matthews International Capital Management (the "Advisor"), a registered
investment advisor, provides the Funds with investment management services. As
compensation for these services, the Funds pay the Advisor a monthly fee based
on each Fund's respective average daily net assets. In accordance with Blue Sky
limitations, the Advisor has agreed to waive its fees and voluntarily reimburse
each Fund to the extent total annualized expenses exceed permissible limits
applicable to each Fund in any state in which its shares are then qualified for
sale. Certain officers and trustees of the Funds are also officers and directors
of the Advisor. All officers serve without direct compensation from the Funds.
Investment advisory fees and other transactions with affiliates, for the period
ended August 31, 1995, are as follows:
<TABLE>
<CAPTION>
ADVISORY WAIVED AND
ADVISORY EXPENSE FEES REIMBURSED DUE FROM DAEWOO
FEE CAP PAID FROM ADVISOR ADVISOR SECURITIES
--------- ----------- -------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Pacific Tiger Fund............ 1.00% 2.50% $6,524 $146,858 $40,560 ---
Asian Convertible Securities
Fund........................ 1.00 2.50 6,697 131,392 33,617 ---
Korea Fund.................... 1.00 2.50 2,648 113,008 14,239 $1,457
</TABLE>
Fund/Plan Services, Inc. (the "Administrator") provides the Funds with
administrative, pricing and shareholder services. As compensation for these
services, the Funds pay the Administrator a monthly fee based on a minimal
contractual basis. The Administrator voluntarily agreed to waive a portion of
its fees for the various services as follows:
<TABLE>
<S> <C>
Pacific Tiger Fund............................. $8,250
Asian Convertible Securities Fund.............. 8,250
</TABLE>
3. INVESTMENT TRANSACTIONS
Investment transactions for the period ended August 31, 1995, excluding
temporary short-term investments, are as follows:
<TABLE>
<CAPTION>
PURCHASES PROCEEDS FROM SALES
---------- -------------------
<S> <C> <C>
Pacific Tiger Fund.................... $1,555,475 $540,798
Asian Convertible Securities Fund..... 1,436,718 674,978
Korea Fund............................ 592,957 146,636
</TABLE>
4. CAPITAL LOSS CARRYOVER
At August 31, 1995, the Matthews Pacific Tiger Fund has a capital loss carryover
of $17,122 expiring in 2003 to offset possible future capital gains of the Fund.
Page 71
<PAGE>
MATTHEWS INTERNATIONAL FUNDS
----------------------------
Form N-1A
Part C - Other Information
Item 24. Financial Statements and Exhibits
- ------- ----------------------------------
(a) Financial Statements Included in Part A:
None
Financial Statements Included in Part B:
Annual Report to Shareowners dated August 31, 1995
(b) Exhibits filed pursuant to Form N-1A:
(1) Copies of Charter -- Trust Instrument and Certificate of
Trust are incorporated by reference to Exhibit No. (1) of
Registration Statement No. 33-78960 filed May 13, 1994
(2) Copies of existing By-Laws -- By Laws are incorporated by
reference to Exhibit No. (2) of Registration Statement
No. 33-78960 filed May 13, 1994
(3) Copies of any voting trust agreement -- Not Applicable
(4) Copies of all instruments defining the rights of holders
of the securities -- Not Applicable - Registrant proposes
to maintain investments as non-certificated book entry
shares
(5) Copies of all investment advisory contracts --
(a) Investment Advisory Agreement for MATTHEWS PACIFIC
TIGER FUND and MATTHEWS ASIAN CONVERTIBLE SECURITIES
FUND with Matthews International Capital
Management -- Incorporated herein by reference to
Exhibit No. (5) of Registration Statement No. 33-
78960 filed August 19, 1994.
(b) Investment Advisory Agreement for MATTHEWS KOREA
FUND with Matthews International Capital
Management -- Incorporated herein by reference to
Exhibit No. (5)(b) of Registration Statement No. 33-
78960 filed July 3, 1995.
(c) Research and Advisory Agreement between Matthews
International Capital Management, Inc. and Daewoo
Capital Management Co., Ltd. -- Incorporated herein
by reference to Exhibit No. (5)(c) of Registration
Statement No. 33-78960 filed July 3, 1995.
(6) Copies of each underwriting or distribution contract:
(a) Underwriting Agreement for MATTHEWS INTERNATIONAL
FUNDS with Fund/Plan Broker Services, Inc. --
Incorporated herein by reference to Exhibit No. (6)
of Registration Statement No. 33-78960 filed
August 19, 1994.
(b) Amended Underwriting Agreement adding MATTHEWS KOREA
FUND -- Incorporated herein by reference to
Exhibit No. (6)(b) to Registration Statement
No. 33-78960 filed July 3, 1995 .
(7) Copies of all bonus, profit sharing, pension or other
similar contracts -- Not Applicable.
(8) Copies of all custodian agreements:
Page 72
<PAGE>
(a) Custody Administration Agreement for Matthews
International Funds with Fund/Plan Services, Inc. --
Incorporated herein by reference to Exhibit No. (8)
of Registration Statement No. 33-78960 filed
August 19, 1994.
(b) Amended Custody Agreement adding MATTHEWS
KOREA FUND -- Incorporated herein by reference to
Exhibit No. (8)(b) to Registration Statement
No. 33-78960 filed July 3, 1995.
(c) Custodial Services Agreement for Matthews
International Funds with Citibank, N.A. -- Filed
herewith.
(d) Custodial Services Agreement for Matthews
International Funds on behalf of Matthews Korea Fund
with Citibank, N.A. -- Filed herewith.
(e) Custody Agreement with The Bank of New York -- Filed
herewith.
(9) Copies of all other material contracts not made in the
ordinary course of business which are to be performed.
(a) Transfer Agent Services Agreement for Matthews
International Funds with Fund/Plan Services,
Inc. --
(i) Incorporated herein by reference to Exhibit
No. (9)(a) of Registration Statement
No. 33-78960 filed August 19, 1994;
(ii) Amended Transfer Agent Services Agreement
adding MATTHEWS KOREA FUND -- Incorporated
herein by reference to Exhibit No. (9)(a)(ii)
filed July 3, 1995 .
(b) Administration Agreement for Matthews International
Funds with Fund/Plan Services, Inc. --
(i) Incorporated herein by reference to Exhibit
No. (9)(b) of Registration Statement No. 33-
78960 filed August 19, 1994;
(ii) Amended Administration Agreement adding
MATTHEWS KOREA FUND -- Incorporated herein by
reference to Exhibit No. (9)(b)(ii) filed
July 3, 1995 .
(c) Accounting Services Agreement for Matthews
International Funds with Fund/Plan Services,
Inc. --
(i) Incorporated herein by reference to Exhibit
No. (9)(c) of Registration Statement
No. 33-78960 filed August 19, 1994;
(ii) Amended Accounting Services Agreement adding
MATTHEWS KOREA FUND -- Incorporated herein by
reference to Exhibit No. (9)(c)(ii) filed
July 3, 1995.
(10) (a) Consent of Counsel -- Not Applicable.
(b) See Opinion of Counsel filed as attachment to
Registrant's Rule 24f-2 Notice filed
October 26, 1995, and incorporated herein by
reference.
(11) Copies of any other opinions, appraisals or rulings --
(a) Consent of Independent Auditors - Filed herewith.
(12) All financial statements omitted from Item 23. --
Not Applicable.
(13) Copies of any agreements or understandings made in
consideration for providing the initial capital between or
among the Registrant --Incorporated by reference to
Exhibit No. (13) of Registration Statement No. 33-78960
filed September 2, 1994.
Page 73
<PAGE>
(14) Copies of the model plan -- Not Applicable.
(15) Copies of any plan entered into by Registrant pursuant to
Rule 12b-1 -- Not Applicable.
(16) Schedule for Computation of Performance Quotations --
Filed herewith .
(17) Electronic Filers -- Not Applicable
(18) Powers of attorney for: (a) G. Paul Matthews; (b) John
Dracott; (c) Carol Chuang; (d) Robert K. Connolly; and (e)
Richard K. Lyons --
(a) Incorporated herein by reference to Exhibit No. (18)
of Registration Statement No. 33-78960 filed
August 19, 1994;
(b) Incorporated herein by reference to Exhibit
No. (18)(b) of Registration No. 33-78960 filed
July 3, 1995.
Item 25. Persons Controlled by or under Common Control with Registrant
- -------- -------------------------------------------------------------
None
Item 26. Number of Holders of Securities as of December 4, 1995:
- -------- -------------------------------------------------------
Matthews Pacific Tiger Fund 74
Matthews Asian Convertible Securities Fund 40
Matthews Korea Fund 31
Item 27. Indemnification
- -------- ---------------
Section 10.2 of the Registrant's Trust Instrument provides as
follows:
10.2 Indemnification. The Trust shall indemnify each of
----------------
its Trustees against all liabilities and expenses (including
amounts paid in satisfaction of judgments, in compromise, as
fines and penalties, and as counsel fees) reasonably incurred
by him in connection with the defense or disposition of any
action, suit or other proceeding, whether civil or criminal, in
which he may be involved or with which he may be threatened,
while as a Trustee or thereafter, by reason of his being or
having been such a Trustee except with respect to any matter
------
as to which he shall have been adjudicated to have acted in bad
faith, willful misfeasance, gross negligence or reckless
disregard of his duties, provided that as to any matter
--------
disposed of by a compromise payment by such person, pursuant to
a consent decree or otherwise, no indemnification either for
said payment or for any other expenses shall be provided unless
the Trust shall have received a written opinion from
independent legal counsel approved by the Trustees to the
effect that if either the matter of willful misfeasance, gross
negligence or reckless disregard of duty, or the matter of bad
faith had been adjudicated, it would in the opinion of such
counsel have been adjudicated in favor of such person. The
rights accruing to any person under these provisions shall not
exclude any other right to which he may be lawfully entitled,
provided that no person may satisfy any right of indemnity or
--------
reimbursement hereunder except out of the property of the
Trust. The Trustees may make advance payments in connection
with the indemnification under this Section 10.2, provided that
--------
the indemnified person shall have given a written undertaking
to reimburse the Trust in the event it is subsequently
determined that he is not entitled to such indemnification.
The Trust shall indemnify officers, and shall have the
power to indemnify representatives and employees of the Trust,
to the same extent that Trustees are entitled to
indemnification pursuant to this Section 10.2
Insofar as indemnification for liability arising under the
Securities Act of 1933 may be permitted to trustees, officers
and controlling persons of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in
the opinion of the SEC such indemnification is against public
policy as expressed in that Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a trustee, officer or
controlling person of Registrant in the successful defense of
any action, suit or proceeding) is asserted by such trustee,
officer or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of
Page 74
<PAGE>
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
that Act and will be governed by the final adjudication of such
issue.
Section 10.3 of the Registrant's Trust Instrument, filed
herein as Exhibit 1, also provides for the indemnification of
shareholders of the Registrant. Section 10.3 states as follows:
10.3 Shareholders. In case any Shareholder or former
------------
Shareholder of any Series shall be held to be personally liable
solely by reason of his being or having been a shareholder of
such Series and not because of his acts or omissions or for
some other reason, the Shareholder or former Shareholder (or
his heirs, executors, administrators or other legal
representatives or, in the case of a corporation or other
entity, its corporate or other general successor) shall be
entitled out of the assets belonging to the applicable Series
to be held harmless from and indemnified against all loss and
expense arising from such liability. The Trust, on behalf of
the affected Series, shall, upon request by the Shareholder,
assume the defense of any claim made against the Shareholder
for any act or obligation of the Trust and satisfy any judgment
thereon from the assets of the Series.
In addition, Registrant currently has a trustees and officers
liability policy covering certain types of errors and
ommissions.
Item 28. Business and Other Connections of Advisor and Korean Advisor:
- -------- -------------------------------------------------------------
Matthews International Capital Management provides investment
advisory services to individual and institutional investors,
and as of December 4, 1995 had approximately $___ million in
assets under management.
For information as to any other business, vocation or
employment of a substantial nature in which each Trustee or
officer of the Registrant's investment advisor has been engaged
for his own account or in the capacity of Trustee, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-39520) filed by it under the Investment Advisers Act
of 1940.
Daewoo International Capital Management, Ltd. (the "Korean
Advisor") was organized in February 1988 under the laws of the
Republic of Korea. The Korean Advisor is wholly owned by Daewoo
Securities Co., Ltd., Daewoo Securities Building, 34-3 Yoido-
dong, Yungdungpo-gu, Seoul, Korea, the largest Korean
securities firm in terms of paid-in capital and revenues in
1992. Daewoo Securities Co., Ltd. is affiliated with Daewoo
Corporation, a conglomerate headquartered in Seoul, Korea.
Daewoo Corporation and certain affiliates of Daewoo Corporation
own approximately 12% of Daewoo Securities Co., Ltd. For
information as to any other business, vocation or employment of
a substantial nature in which each Trustee or officer of the
Registrant's Korean Advisor has been engaged for his own
account or in the capacity of Trustee, officer, employee,
partner or trustee, reference is made to the Form ADV (File
#801-32282) filed by it under the Investment Advisers Act of
1940.
Item 29. Principal Underwriter
- -------- ---------------------
(a) Fund/Plan Broker Services, Inc. ("FPBS"), the principal
underwriter for the Registrant's securities, currently
acts as principal underwriter for the following entities:
The Brinson Funds, Inc.
CT&T Funds
Farrell Alpha Strategies
First Mutual Funds
Focus Trust, Inc.
IAA Trust Mutual Funds
Matthews International Funds
McM Funds
The Roulston Family of Funds
Smith Breeden Series Fund
Smith Breeden Short Duration U.S. Government Fund
Smith Breeden Trust
The Stratton Funds, Inc.
Stratton Growth Fund, Inc.
Page 75
<PAGE>
Stratton Monthly Dividend Shares, Inc.
The Timothy Plan
(b) The table below sets forth certain information as
to the Underwriter's Directors, Officers and Control
Persons:
<TABLE>
<CAPTION>
POSITION POSITION AND
NAME AND PRINCIPAL AND OFFICES OFFICES WITH
BUSINESS ADDRESS WITH UNDERWRITER REGISTRANT
- ------------------ ---------------- ------------
<S> <C> <C>
Kenneth J. Kempf Director, President None
2 W. Elm Street and Prinicpal
Conshohocken, PA 19428-0874
Lynne M. Cannon Vice President None
2 W. Elm Street and Principal
Conshohocken, PA 19428-0874
Rocco C. Cavalieri Director and None
2 W. Elm Street Vice President
Conshohocken, PA 19428-0874
Gerald J. Holland Director, Vice President None
2 W. Elm Street and Principal
Conshohocken, PA 19428-0874
Joseph M. O'Donnell, Esq. Director and None
2 W. Elm Street Vice President
Conshohocken, PA 19428-0874
Sandra L. Adams Assistant Vice President None
2 W. Elm Street and Principal
Conshohocken, PA 19428-0874
John H. Leven Treasurer None
2 W. Elm Street
Conshohocken, PA 19428-0874
Mary P. Efstration Secretary None
2 W. Elm Street
Conshohocken, PA 19428-0874
</TABLE>
James W. Stratton may be considered a control person of the Underwriter due to
his direct or indirect ownership of Fund/Plan Services, Inc., the parent of the
Underwriter.
(c) Not Applicable.
Item 30. Location of Accounts and Records
- -------- --------------------------------
All records described in Section 31(a) of the 1940 Act and the
Rules 17 CFR 270.31a-1 to 31a-31 promulgated thereunder, are
maintained by the Fund's Investment Advisor, Matthews
International Capital Management, 655 Montgomery Street, Suite
1438, San Francisco, CA 94111, except for those maintained by
the Fund's Custodian, The Bank of New York, and the Fund's
Administrator, Transfer Agent and Fund Accounting Services
Agent, Fund/Plan Services Inc. 2 W. Elm Street, Conshohocken,
PA 19428.
Item 31. Management Services
- -------- -------------------
There are no management-related service contracts not discussed
in Part A or Part B.
Page 76
<PAGE>
Item 32. Undertakings
- -------- ------------
(a) The Registrant hereby undertakes to promptly call a
meeting of shareholders for the purpose of voting upon the
question of removal of any director or directors when
requested in writing to do so by the record holders of not
less than 10 percent of the Registrant's outstanding
shares and to assist its shareholders in accordance with
the requirements of Section 16(c) of the Investment
Company Act of 1940 relating to shareholder
communications.
(b) Registrant hereby undertakes to furnish a copy of the
Registrant's most recent Annual Report, upon request and
without charge, to every person for whom a Prospectus is
delivered.
Page 77
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940 the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of San Francisco, and State of California on the 27th day of December 1995.
MATTHEWS INTERNATIONAL FUNDS
Registrant
By /s/ G. Paul Matthews*
-------------------------------------------
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement of Matthews International Funds has been signed below by the following
persons in the capacities and on the date indicated.
Signature Capacity Date
- --------- -------- ----
/s/ G. Paul Matthews* As President and December 27, 1995
- -------------------------- Principal Executive Officer
G. Paul Matthews
/s/ John Dracott* As Vice President, Secretary, December 27, 1995
- -------------------------- Trustee and Principal
John Dracott Accounting and Financial
Officer
/s/ Carol Chuang* As Vice President, Treasurer December 27, 1995
- -------------------------- and Trustee
/s/ Robert K. Connolly* As Trustee December 27, 1995
- --------------------------
/s/ Richard K. Lyons* As Trustee December 27, 1995
- ---------------------------
/s/ D. W. Park* As Trustee December 27, 1995
- ---------------------------
/s/ David FitzWilliam-Lay* As Trustee December 27, 1995
- ---------------------------
- --------------------------------------
* By: /s/ Michelle A. Whalen, as
Attorney-in-Fact and Agent
pursuant to Power of Attorney
Page 78
<PAGE>
MATTHEWS INTERNATIONAL FUNDS
INDEX TO EXHIBITS TO FORM N-1A
Exhibit Sequentially
Number Description of Exhibit Numbered Page
- ------ ---------------------- -------------
(8)(c) Custodial Services Agreement
(8)(d) Custodial Services Agreement
(8)(e) Custody Agreement
(11)(a) Consent of Independent Auditors
(16) Schedules for Computation of Performance
Quotations
Page 79
<PAGE>
FOR FUND/PLAN CLIENTS ONLY
--------------------------
(2/3/94)
U.S. INVESTMENT COMPANY
CUSTODIAL SERVICES AGREEMENT
CUSTODIAL SERVICES AGREEMENT dated as of August, 1994 among CITIBANK, N.A.,
a national banking association having an office at 111 Wall Street, New York New
York 10005 and acting through such office in New York (the "Bank"), CITICORP, a
corporation organized under the laws of the State of Delaware, having an office
at Citicorp Center, 153 East 53rd Street, New York New York 10043 and MATTHEWS
INTERNATIONAL FUNDS (a Business Trust organized under the laws of Delaware)
having an office at 655 Montgomery Street, Suite 1438, San Francisco, California
94111. (the "Fund").
W I T N E S S E T H:
THAT WHEREAS, the Fund represents that it is a management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, the Fund further represents that it is duly incorporated,
organized or associated and in good standing under the laws of its state of
incorporation, organization or association and the consummation of transactions
contemplated hereby or directed by it hereunder will not violate any applicable
laws, regulations or orders; and
WHEREAS, the Fund represents that it is authorized to (a) open and maintain
one or more custody accounts (collectively, the "Custody Account") with the Bank
to hold certain property ("Property"), including but not limited to stocks,
bonds or other securities ("Securities"), cash and other property owned or held
by the Fund, (b) enter into this Agreement and (c) direct all actions and
transactions contemplated hereunder; and
WHEREAS, on June 12, 1992, the Securities and Exchange Commission issued an
order (the "Exemptive Order") which, among other things, exempts certain
indirect subsidiaries of Citicorp (the "Exempt Subsidiaries") from the
shareholders' equity requirements of Rule 17f-5 promulgated under the Investment
Company Act; and
WHEREAS, the Fund represents that by separate agreement between Fund/Plan
Services, Inc. ("Fund/Plan") and the Fund, Fund/Plan (a) has agreed to perform
certain administrative functions which may include the functions of
administrator, transfer agent and accounting services agent and (b) has been
appointed by the Fund to act as its agent in respect of the transactions
contemplated in this Agreement; and
WHEREAS, the Fund represents that (a) Fund/Plan has agreed to act as Fund's
agent in respect of the transactions contemplated in this Agreement and (b) the
Bank is authorized and directed to rely upon and follow directions and
instructions given by Fund/Plan, the Fund's agent, in respect of transactions
contemplated in the Agreement.
NOW, THEREFORE, in consideration of the premises and of the agreements
hereinafter set forth, the parties hereby agree as follows:
1. APPOINTMENT AND ACCEPTANCE
The Fund hereby appoints the Bank as custodian of the Property and as
its agent hereunder, and the Bank agrees to act as such upon the terms
and conditions hereinafter provided. The Fund hereby directs the Bank to
recognize Fund/Plan as its agent and to follow Fund/Plan's instructions
and directions in respect of the Property.
2. DELIVERY; SAFEKEEPING
The Fund has heretofore delivered, or will deliver or cause to be
delivered, Property to the Bank, which Property the Bank agrees to keep
safely as custodian for the Fund. The Bank shall not surrender
possession of Property except upon properly authorized Instructions (as
hereinafter defined) of the Fund or as may be required by due process of
applicable law.
3. IDENTIFICATION AND SEGREGATION OF ASSETS
With respect to Property in the Custody Account:
Page 81
<PAGE>
(A) Except as otherwise provided in this Agreement, the Bank will
separately identify on its books as belonging to the Fund and, to the
extent practicable, segregate all Property held pursuant to this
Agreement by the Bank or any other entity authorized to hold Property in
accordance with Section 6 or 7 hereof; and
(B) The Bank shall supply to the Fund, addressed care of its agent,
Fund/Plan, from time to time as mutually agreed upon a written statement
with respect to all of the Property in the Custody Account. In the event
that the Fund, acting through its agent, Fund/Plan, does not inform the
Bank in writing of any exceptions or objections within thirty (30) days
after receipt of such statement, the Fund shall be deemed to have
approved such statement.
4. STANDARD OF CARE
(A) The Bank shall exercise the same standard of care that it exercises
over its own assets in the safekeeping, handling, servicing, and
disposition of the Property in accordance with this Agreement. The Bank
will exercise the due care expected of a professional custodian for hire
with respect to the Property in its possession or control.
(B) The Bank shall be responsible for the acts or omissions of any
Exempt Subsidiary acting as a foreign subcustodian pursuant to the
Exemptive Order or any subsequent exemptive order issued by the
Securities and Exchange Commission to the same extent as if the act or
omission of such Exempt Subsidiary were that of the Bank.
(C) Except as otherwise provided above, the Bank shall use reasonable
care in selecting, and shall be responsible only for the proper
selection of, any foreign subcustodian or foreign depository; provided,
---------
however, that the Bank shall have no responsibility for the selection of
--------
foreign depositories if under the circumstances existing the foreign
depository is the sole depository of securities in a specific
jurisdiction.
(D) The Bank's delegation of duties to an Exempt Subsidiary shall not
relieve the Bank of any responsibility to the Fund for any loss due to
such delegation, except such losses or damages which may result from (i)
political risk, including, but not limited to losses resulting from
exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities and
(ii) other risk of loss for which neither the Bank nor any foreign
subcustodian would be liable under Rule 17f-5 promulgated under the
Investment Company Act.
(E) In the event the Fund enters into triparty repurchase agreements
pursuant to which collateral therefor is to be held by a custodian other
than the Bank and the Fund instructs the Bank to deliver Property to
such custodian, the Bank shall be under no duty to determine whether
such custodian satisfies the requirements of Section 17 of the
Investment Company Act or the Rules promulgated thereunder. Citibank
shall have no further duties or obligations under this Agreement with
respect to such Property.
(F) The Bank is not under any duty to supervise the investments of the
Fund, or to advise or make any recommendation to the Fund with respect
to the purchase or sale of any of the Securities or the investment of
any cash. The Fund shall have the sole and exclusive responsibility for
investment of Property held hereunder.
5. PERFORMANCE BY THE BANK
(A) General
-------
The Bank's performance of its duties hereunder and the day-to-day
operations of the Custody Account shall be in accordance with written
service standards furnished to the Fund, care of the Fund's agent,
Fund/Plan, by the Bank from time to time. Such service standards, as
amended from time to time, are incorporated herein by reference.
(B) Receipt, Delivery and Disposal of Securities
--------------------------------------------
The Bank shall, or shall instruct any other entity authorized to hold
Property in accordance with Section 6 or 7 hereof to, receive or deliver
Securities and credit or debit the Fund's account, in accordance with
properly authorized Instructions from the Fund. The Bank or such entity
shall also receive in custody all stock dividends, rights and similar
securities issued in connection with Securities held hereunder, shall
surrender for payment, in a timely manner, all items maturing or called
for redemption and shall take such other action as the Fund may direct
in properly authorized Instructions.
(C) Registration
------------
Securities held hereunder may be registered in the name of the Bank, any
entity authorized to hold Property in accordance with Section 6 or 7
hereof, or a nominee of the Bank or any such authorized entity, and the
Fund shall be informed upon request of all such registrations.
Securities in registered form will be transferred upon request of the
Fund into such names or registrations as it may specify in properly
authorized Instructions.
Page 82
<PAGE>
(D) Cash Accounts
-------------
(i) All cash received or held by the Bank or by any entity
authorized to hold Property in accordance with Section 7 hereof as
interest, dividends, proceeds from transfer, and other payments for or
with respect to the Securities shall be (x) held in a cash account in
accordance with properly authorized Instructions received by the Bank or
such entity, or (y) if specified in the Fund's Instructions, converted
to or from U.S. dollars and remitted to the Fund. The Fund shall bear
any foreign exchange risk in connection with any such conversion. In
effecting any currency conversions hereunder, the Bank or such entity
may use any methods or agencies as it may see fit including the Bank's
or such entity's own facilities at customary rates.
(ii) The Fund agrees, with respect to all payments for purchases of
Securities to be deposited in the Custody Account, that funds for
settlement will be on deposit by the settlement date at the location of
settlement, in good available funds and in the currency of settlement.
The Fund acknowledges that nothing in this Agreement shall obligate the
Bank to extend credit, grant financial accommodation or otherwise
advance moneys to the Fund for the purpose of making any payments for
purchases or part thereof or otherwise carrying out any Instructions.
(E) Reports
-------
(i) If the Bank has in place a system for providing
telecommunication access or other means of electronic access by
customers to the Bank's reporting system for Property in the Custody
Account, then, at the Fund's election, the Bank shall provide the Fund
with such instructions and passwords as may be necessary in order for
the Fund to have such electronic access through the Fund's terminal
device. Such electronic access shall be restricted to information
relating to the Custody Account. If electronic access to such reporting
system is requested by the Fund, the Fund agrees to assume full
responsibility for the consequences of such use, including any misuse or
unauthorized use of the terminal device, instructions or passwords
referred to above, and agrees to defend and indemnify the Bank and hold
the Bank harmless from and against any and all liabilities, losses,
damages, costs, counsel fees, and other expenses of every nature
suffered or incurred by the Bank by reason of or in connection with such
use by the Fund or others of such terminal device, unless such
liabilities, losses, damages, costs, counsel fees and other expenses can
be shown to be the result of negligent or wrongful acts of the Bank, the
Bank's employees or the Bank's agents. Further, in the event the Fund
elects to have electronic access, the Bank shall provide the Fund on
each business day a report of the preceding business day's transactions
relating to the Custody Account and of the closing or net balances of
each business day. If the Fund does not choose to have electronic
access, the Bank shall provide the Fund with such reports of
transactions in the Custody Account by such means as may be mutually
agreed upon.
(ii) The Bank agrees to use reasonable efforts to furnish the Fund
with such information regarding Property held hereunder as the Fund may
reasonably request in connection with its complying with requests of any
regulatory authorities having jurisdiction over the Fund.
(iii) The Bank shall also, subject to restrictions under applicable
law, seek to obtain from any entity with which the Bank maintains the
physical possession of any of the Property in the Custody Account
records of such entity relating to the Property in the Custody Account
as may be required by the Fund or its agents in connection with an
internal examination by the Fund of its own affairs. Upon a reasonable
request from the Fund, the Bank shall use its best efforts to furnish to
the Fund reports (or portions thereof) of the external auditors of each
such entity relating directly to such entity's system of internal
accounting controls applicable to its duties under its agreement with
the Bank.
(F) Access during the Bank's regular banking hours and upon receipt of
reasonable notice from the Fund, any officer or employee of the Fund,
any independent accountant(s) selected by the Fund and any person
designated by any regulatory authority having jurisdiction over the Fund
shall be entitled to examine on the Bank's premises, Property held by
the Bank on its premises and the Bank's records regarding Property held
hereunder deposited with entities authorized to hold Property in
accordance with Section 6 or 7 hereof, but only upon the Fund's
furnishing the Bank with properly authorized written Instructions to
that effect, provided that such examination shall be consistent with the
--------
Bank's obligations of confidentiality to other parties. The Bank's costs
and expenses in facilitating such examinations shall be borne by the
Fund, provided that such costs and expenses shall not be deemed to
examination shall be consistent with the Bank's obligations of
confidentiality to other parties. The Bank's costs and expenses in
facilitating such examinations shall be borne by the Fund, provided that
--------
such costs and expenses shall not be deemed to include the Bank's costs
in providing to the Fund: (i) the "single audit report" of the
independent certified public accountants engaged by the Bank and (ii)
such reports and documents as this Agreement contemplates that the Bank
shall furnish routinely to the Fund.
(G) Voting and other Action
-----------------------
(i) The Bank will transmit to the Fund upon receipt, and will
instruct any entities authorized to hold Property in accordance with
Section 6 or 7 hereof to transmit to the Fund upon receipt, all
financial reports, stockholder communications, notices, proxies and
proxy soliciting materials received from issuers of the Securities, and
all information relating to exchange or tender offers received from
offerors with respect to the Securities. Such
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<PAGE>
proxies will be executed by the registered holder if the registered
holder is other than the Fund, but the manner in which Securities are to
be voted will not be indicated. Neither the Bank nor any other entity
holding Property hereunder shall vote any Securities or authorize the
voting of any Securities or give any consent or take any other action
with respect thereto, except as otherwise provided herein.
(ii) In the event of tender offers, the Fund will hand deliver or
telecopy Instructions to the Bank as to the action to be taken with
respect thereto, designating such Instructions as being related to a
tender offer. The Fund shall hold the Bank harmless from any adverse
consequences of the Fund's use of telecopier transmission of, or any
other method for transmitting, Instructions relating to a tender offer.
(iii) The Fund agrees that if it gives an Instruction for the
performance of an act on the last permissible date of a period
established by a tender offer or on the last permissible date for the
performance of such act, the Fund shall hold the Bank harmless from any
adverse consequences in connection with acting upon or failing to act
upon such Instructions.
(iv) The Bank is authorized to accept and open on the Fund's behalf
all mail or communications relating to the Property received by the Bank
or directed in its care.
6. AUTHORIZED USE OF U.S. DEPOSITORIES
The Fund authorizes the Bank, for any Securities held hereunder, to use
the services of any United States securities depository permitted to
perform such services for registered investment companies and their
custodians under Rule 17f-4 promulgated under the Investment Company
Act, including but not limited to, The Depository Trust Company, the
Federal Reserve Book Entry System and Participants Trust Company ("U.S.
Depositories"). The Bank will deposit Securities held hereunder with a
U.S. Depository only in an account which holds assets of customers of
the Bank.
7. USE OF FOREIGN CUSTODIANS
(A) Authorization
(i) The Bank may cause Securities which are foreign securities
within the meaning of Rule 17f-5(c)(1) promulgated under the
Investment Company Act ("Foreign Securities") and amounts of cash
and cash equivalents reasonably required to effect the Fund's
Foreign Securities transactions ("Cash") in the Custody Account to
be held in such country or other jurisdiction as the Fund shall
direct in properly authorized Instructions.
(ii) Subject to prior approval by the Fund, the Bank may hold
such Foreign Securities and Cash in subcustody accounts, which shall
be deemed part of the Custody Account and which have been
established by the Bank with (x) branches of "Qualified U.S. Banks",
as defined in Rule 17f-5(c)(3) promulgated under the Investment
Company Act ("Branches"), or (y) foreign custodians which satisfy
the provisions of Rule 17f-5(c)(2)(i) or (ii) promulgated under the
Investment Company Act, or Exempt Subsidiaries or other foreign
custodians which are exempt from such provisions under the Exemptive
Order or any other order or release issued by the Securities and
Exchange Commission (such Branches, foreign custodians and Exempt
Subsidiaries, collectively, the Eligible Foreign Custodians"). The
Fund shall deliver to the Bank a certified copy of the resolution
approving both the use of each Eligible Foreign Custodian with which
the Foreign Securities and Cash of the Fund will be kept and, with
respect to Eligible Foreign Custodians other than Branches, the
Bank's contract with such Eligible Foreign Custodian.
(iii) Subject to prior approval by the Fund, the Bank or an
Eligible Foreign Custodian is authorized to hold Foreign Securities
of the Fund in an account with any foreign securities depository or
foreign clearing agency which in the Bank's judgment satisfies the
provisions of Rule 17f-5(c)(iii) or (iv) promulgated under the
Investment Company Act, or which is exempt from such provisions
under an order, no-action letter or release issued by the Securities
and Exchange Commission ("Eligible Foreign Securities Depository").
The Fund shall deliver to the Bank a certified copy of the
resolution approving the use of each Eligible Foreign Securities
Depository with which Foreign Securities of the Fund will be
deposited.
(iv) Any Foreign Securities or Cash held by an Eligible Foreign
Custodian or an Eligible Foreign Securities Depository, shall be
subject to applicable laws, regulations, restrictions, customs,
procedures, and market practices as exist in the country in which
such Foreign Securities and Cash is held. In the event that local
laws or regulations to which an Eligible Foreign Custodian or
Eligible Foreign Securities Depository is subject change in a way
that would prevent or limit the performance of duties and
obligations by the Eligible Foreign Custodian or Foreign Securities
Depository, such duties and obligations shall be superseded and
neither the Bank nor any other Citicorp affiliated company
organization shall be liable therefor or for any damages in any way
resulting from such prevented or limited performance.
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<PAGE>
(B) Provision of Information Regarding Foreign Custodians and Securities
--------------------------------------------------------------------
Depositories
------------
(i) The Bank shall use its best efforts to assist the Fund in
obtaining the following:
(a) As to each country in which Property is held, information
concerning whether, and to what extent, applicable foreign law
would restrict the access afforded the Fund's independent
public accountants to books and records kept by a foreign
custodian or foreign securities depository used in that
country;
(b) As to each country in which Property is held, information
concerning whether, and to what extent, applicable foreign law
would restrict the Fund's ability to recover its assets in the
event of the bankruptcy of a foreign custodian or foreign
securities depository used in that country;
(c) As to each country in which Property is held, information
concerning whether, and to what extent, applicable foreign law
would restrict the Fund's ability to recover assets that are
lost while under the control of a foreign custodian or foreign
securities depository used in that country;
(d) As to each country in which Property is held, information
concerning whether under applicable foreign currency exchange
regulations the Fund's cash and cash equivalents held in that
country are readily convertible to U S. dollars;
(e) Information relating to whether each foreign custodian or
foreign securities depository used would provide a level of
safeguards for maintaining the Fund's Securities not materially
different from that provided by the Bank in maintaining the
Securities in the United States;
(f) Information concerning whether each foreign custodian or
foreign securities depository used has offices in the United
States in order to facilitate the assertion of jurisdiction
over and enforcement of judgments against such custodian or
depository; and
(g) As to each foreign securities depository used, information
concerning the number of participants in, and operating history
of, such depository.
(ii) During the term of this Agreement, the Bank shall use its best
efforts to provide the Fund with prompt notice of any material changes
in the facts or circumstances upon which any of the foregoing
information or statements were based.
(iii) Notwithstanding any of the foregoing provisions of this
subsection (b) of this Section 7, the Bank's undertaking to assist the
Fund in obtaining the information referred to in this subsection (b) of
the this Section 7 shall neither increase the Bank's duty of care nor
reduce the Fund's responsibility to determine for itself the prudence of
entrusting its assets to any particular foreign custodian or foreign
securities depository.
(C) Segregation and Identification of Assets
----------------------------------------
The Bank will deposit Property of the Fund with an Eligible Foreign
Custodian only in an account which holds exclusively assets of customers
of the Bank. In the event that an Eligible Foreign Custodian is
authorized to hold any of the Foreign Securities placed in its care in
an Eligible Foreign Securities Depository pursuant to the provisions of
subsection (A) of this Section 7, the Bank will direct such Eligible
Foreign Custodian to identify such Foreign Securities on its books as
being held for the account of the Bank as custodian for its customers.
(D) Instructions to Eligible Foreign Custodians; Instructions to
------------------------------------------------------------
Eligible Foreign Securities Depositories
----------------------------------------
Any Property in the Custody Account held by an Eligible Foreign
Custodian will be subject only to the instructions of the Bank or its
agents; and any Foreign Securities held in an Eligible Foreign
Securities Depository for the account of an Eligible Foreign Custodian
will be subject only to the instructions of such Eligible Foreign
Custodian, as subcustodian for the Bank.
(E) Contracts between the Bank and Exempt Subsidiaries.
---------------------------------------------------
The Bank's contract with each Exempt Subsidiary provides:
(i) an acknowledgement by such Exempt Subsidiary that it is acting
as a foreign custodian for U.S. Investment Companies or their custodians
pursuant to the terms of the Exemptive Order; and
(ii) that the Fund is entitled to enforce the terms of the
subcustodian agreement between the Bank and the Exempt Subsidiary and is
entitled to seek relief directly against the Exempt Subsidiary.
Page 85
<PAGE>
8. CITICORP GUARANTEE
Citicorp agrees that it shall be liable, in accordance with the terms of
a guarantee issued in compliance with the conditions of the Exemptive
Order, for losses incurred by the Fund resulting from bankruptcy or
insolvency of Exempt Subsidiaries operating pursuant to the terms of the
Exemptive Order.
9. USE OF AGENTS
The Bank may, subject to applicable laws, rules and regulations, appoint
agents, whether in its own name or that of the Fund, to perform any of
the duties of the Bank hereunder, and the Bank may delegate to any such
agent so appointed any of its functions under this Agreement.
10. INSTRUCTIONS
(A) The Bank is authorized to rely and act upon instructions
("Instructions") in writing which are signed by persons ("Authorized
Persons") named in a list provided to the Bank from time to time, which
list must be certified by the Fund's Secretary or Assistant Secretary
and include authenticated specimen signatures of all Authorized Persons.
Such list shall separately designate those Authorized Persons who may
authorize the withdrawal of the Securities free of payment, those
Authorized Persons who may authorize the unconditional transfer of
funds, and those Authorized Persons who may give Instructions by
electronic access.
(B) The Fund agrees that the Bank is authorized to rely and act upon
such Instructions in accordance with this Section 10 and the Funds
Transfer Procedures attached hereto and incorporated herein by reference
(including each Schedule A) to this Agreement and to debit or credit the
applicable account(s) of the Fund accordingly and that such Funds
Transfer Procedures and method(s) of transmission are commercially
reasonable.
(C) The Bank shall be entitled to rely upon the continued authority of
any Authorized Person to give Instructions until the Bank receives
notice from the Fund to the contrary; and the Bank shall be entitled to
rely upon any Instructions it believes in good faith to have been given
by an Authorized Person.
(D) The Bank is further authorized to rely upon any Instructions
received by any other means and identified as having been given or
authorized by any Authorized Person, regardless of whether such
Instructions shall in fact have been authorized or given by any of such
Authorized Persons, provided that the Bank and the Fund shall have
agreed upon the means of transmission and the method of identification
for such Instructions. Instructions received by any other means shall
include but not be limited to verbal Instructions only in connection
with delivery against payment or receipt against payment transactions
and transfer from one account with the Bank to another with the Bank and
provided that such verbal Instructions are promptly confirmed in writing
by the Fund. Notwithstanding the foregoing, in the event any such verbal
Instructions are not subsequently confirmed in writing, as provided
above, the Fund agrees to hold the Bank harmless and without liability
for any claims or losses in connection with such verbal Instructions.
(E) The Fund agrees to be bound by any Instruction, whether or not
authorized, given to the Bank in its name and accepted by the Bank in
accordance with the provisions hereof (including but not limited to the
Funds Transfer Procedures and Schedule A thereto) and further agrees to
indemnify and hold the Bank harmless from and against any loss,
liability, claim or expense (including legal fees and expenses)
associated with the Bank's acting upon such Instructions as provided
herein, except such as may arise from the Bank's own negligence, bad
faith or willful misconduct.
(F) The Fund may appoint one or more investment managers ("Investment
Managers") with respect to the Custody Account. The Bank is authorized
to act upon Instructions received from any Investment Manager to the
same extent that the Bank would act upon the Instructions of an
Authorized Person, provided that the Bank has received written evidence
of the Investment Manager's appointment and written confirmation from
the Investment Manager evidencing acceptance of such appointment. The
Investment Manager shall provide to the Bank from time to time a list of
persons authorized to give Instructions on behalf of the Investment
Manager. The list must be certified by the Investment Manager's
Secretary or Assistant Secretary and include authenticated specimen
signatures of such persons.
(G) If the Fund should choose to have telecommunication or other means
of electronic access to the Bank's reporting system for Property in the
Custody Account, pursuant to paragraph (E) of Section 5, the Bank is
also authorized to rely and act upon any Instructions received by it
through a terminal device, provided that such Instructions are
accompanied by code words which the Bank has furnished to the Fund, or
an Authorized Person, by any method mutually agreed to by the Bank and
the Fund, provided that the Bank has not been notified by the Fund, or
any such Authorized Person to cease to recognize such code words,
regardless of whether such Instructions shall in fact have been given or
authorized by the Fund or any such Authorized Person.
Page 86
<PAGE>
(H) The Bank is authorized to act upon Instructions of the Fund's agent,
Fund/Plan, to the same extent that the Bank would act upon Instructions
of an Authorized Person provided that (i) the Bank has received
confirmation from Fund/Plan evidencing acceptance of its appointment as
agent by the Fund, (ii) the Bank shall have received from Fund/Plan a
list of persons (and such persons specimen signatures) authorized to
give Instructions on behalf of Fund/Plan, which list shall have been
certified by Fund/Plan's Secretary or Assistant Secretary, and (iii) the
Bank shall not have received written notice from (x) Fund/Plan that it
is no longer acting as the Fund's agent or directing the Bank to cease
recognizing Instructions from a designated Fund/Plan person, or (y) the
Fund to cease recognizing Instructions from Fund/Plan.
11. THE FUND
(A) The Fund agrees that no printed material or other matter in any
language (including without limitation, prospectuses, statements of
additional information, notices to shareholders, annual reports and
promotional material) which mention the Bank's or Citicorp's name or the
rights, powers or duties of the custodian of the Fund shall be issued by
the Fund or on the Fund's behalf unless the Bank shall first have given
its specific written consent thereto; provided, however, that no prior
consent shall be required if the only reference to the Bank's or
Citicorp's name is in identifying the Bank as the Fund's custodian.
(B) The Fund shall give prior notice to the Bank of any change in its
place of incorporation or organization, mailing address, or sponsors,
any significant change in management, investment objectives, fees or
redemption rights and any change to the appointment of Fund/Plan as its
agent.
(C) The Fund confirms that it is, and agrees that in the future it will
be, audited at least annually by an independent accounting firm and that
it mails, and in the future will mail, an audited financial report of
the Fund to its shareholders at least annually.
12. FEES AND EXPENSES
Payment of the Bank's compensation for services rendered hereunder shall
be the responsibility of the Fund. The Fund represents that by separate
agreement it has appointed Fund/Plan as its agent, and that Fund/Plan,
as agent for the Fund, has agreed to pay the compensation payable in
respect of such services promptly upon receipt of statements
therefore. The Fund shall pay to Fund/Plan fees for services (including
the Bank's custodial services) in accordance with the terms of an
agreement between Fund/Plan and the Fund. The Fund hereby directs the
Bank to (i) send all statements for compensation to its attention care
of Fund/Plan at the following address: Fund/Plan Services, Inc., 2 W.
Elm Street, Conshohocken, PA 19428, Attention: Mr. Elmer Gardner, Senior
Vice President, and (ii) accept all payments made by Fund/Plan in the
Fund's name as if such payments were made directly by the Fund. The
Custodian's compensation for services rendered hereunder is set forth in
an agreement between the Bank and Fund/Plan Should Fund/Plan fail to pay
or remit such compensation to the Bank, the Bank will be entitled to
debit the Custody Account directly for such compensation. In the absence
of sufficient cash in the Custody Account to cover compensation, the
Fund shall promptly pay the bank for the unpaid compensation due
hereunder. In the absence of prompt payments by the Fund of the unpaid
compensation, the Bank shall be entitled to exercise, in addition to all
other rights existing in law or equity, the rights set forth in Section
13 hereof.
13. LIENS
The Bank shall have a lien on the Property in the Custody Account to
secure payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of its duties hereunder,
except such as may arise from its or its nominee's negligent action,
negligent failure to act or willful misconduct, any Property at any time
held for the Custody Account shall be security therefor and the Fund
hereby grants a security interest therein to the Bank. The Fund shall
promptly reimburse the Bank for any such advance of cash or securities
or any such taxes, charges, expenses, assessments, claims or liabilities
upon request for payment, but should the Fund fail to so reimburse the
Bank, the Bank shall be entitled to dispose of such Property to the
extent necessary to obtain reimbursement. The Bank shall be entitled to
debit any account of the Fund with the Bank including, without
limitation, the Custody Account, in connection with any such advance and
any interest on such advance as the Bank deems reasonable.
14. TAX STATUS
The Fund's Tax Identification Number is: 94-320561.7
-----------
15. AMENDMENT
This Agreement may not be amended except by a written agreement among
the parties hereto.
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<PAGE>
16. TERMINATION
Either the Bank or the Fund may terminate this Agreement upon sixty (60)
days' written notice to the other parties.
17. CONFIDENTIALITY
Subject to the foregoing provisions of this Agreement and subject to any
applicable law, the Fund and the Bank shall each use best efforts to
maintain the confidentiality of matters concerning Property in the
Custody Account. The Fund expressly agrees that the Bank may disclose
any and all information concerning the Custody Account to the Fund's
agent, Fund/Plan.
18. NOTICES
All notices and other communications hereunder, except for Instructions
and reports relating to the Property which are transmitted through the
Bank's electronic reporting system for Property in the Custody Account,
shall be in writing, telex or telecopy or, if verbal, shall be promptly
confirmed in writing, and shall be hand-delivered, telexed, telecopied
or mailed by prepaid first class mail (except that notice of
termination, if mailed, shall be by prepaid registered or certified
mail), to each party at its address set forth above, if to the Fund,
marked "Attention G. Paul Matthews" and if to the Bank, marked
-----------------
"Citibank as Custodian for Matthews Pacific Tiger", and if to Citicorp,
------------------------
marked "Attention of Office of Corporate Finance, Gregory C. Ehlke, Vice
President", or at such other address as each party may give notice of to
the others.
19. ASSIGNMENT
No party may assign, transfer or charge all or any of its rights and
benefits hereunder without the written consent of the other parties. Any
purported assignments made in contravention of this Section shall be
null and void and of no effect whatsoever.
20. GOVERNING LAW
This Agreement shall be governed by and construed according to the laws
of the State of New York and the parties agree that the courts of the
State of New York shall have jurisdiction to hear and determine any
suit, action or proceeding and to settle any disputes which may arise
out of, or in connection with, this Agreement, and, for such purposes,
each irrevocably submits to the non-exclusive jurisdiction of such
courts.
21. MISCELLANEOUS
(A) This Agreement may be executed in several counterparts, each of
which shall be an original, but all of which shall constitute one and
the same instrument.
(B) This Agreement contains the entire agreement among the parties
relating to custody of Property and supersedes all prior agreements on
this subject.
(C) The captions of the various sections and subsections of this
Agreement have been inserted only for the purposes of convenience and
shall not be deemed in any manner to modify, explain, enlarge or
restrict any of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers hereunto duly authorized.
CITIBANK, N A. CITICORP
BY: BY:
--------------------------------- ---------------------------------
NAME: NAME:
------------------------------- -------------------------------
TITLE: TITLE:
------------------------------ ------------------------------
[FUND]
BY:
-----------------------------------
NAME:
---------------------------------
TITLE:
--------------------------------
Page 88
<PAGE>
FOR FUND/PLAN CLIENTS ONLY
--------------------------
(2/3/94)
U.S. INVESTMENT COMPANY
CUSTODIAL SERVICES AGREEMENT
CUSTODIAL SERVICES AGREEMENT dated as of October 15, 1994 among CITIBANK,
N.A., a national banking association having an office at 111 Wall Street, New
York, New York 10005 and acting through such office in New York (the "Bank"),
CITICORP, a corporation organized under the laws of the State of Delaware,
having an office at Citicorp Center, 153 East 53rd Street, New York, New York
10043 and MATTHEWS INTERNATIONAL FUNDS* (a Business Trust organized under the
laws of Delaware) having an office at 655 Montgomery Street, Suite 1438, San
Francisco, California 94111. (the "Fund"). *on behalf of Matthews Korea Fund.
W I T N E S S E T H:
THAT WHEREAS, the Fund represents that it is a management investment
company registered under the Investment Company Act of 1940, as amended (the
"Investment Company Act"); and
WHEREAS, the Fund further represents that it is duly incorporated,
organized or associated and in good standing under the laws of its state of
incorporation, organization or association and the consummation of transactions
contemplated hereby or directed by it hereunder will not violate any applicable
laws, regulations or orders; and
WHEREAS, the Fund represents that it is authorized to (a) open and maintain
one or more custody accounts (collectively, the "Custody Account") with the Bank
to hold certain property ("Property"), including but not limited to stocks,
bonds or other securities ("Securities"), cash and other property owned or held
by the Fund, (b) enter into this Agreement and (c) direct all actions and
transactions contemplated hereunder; and
WHEREAS, on June 12, 1992, the Securities and Exchange Commission issued an
order (the "Exemptive Order") which, among other things, exempts certain
indirect subsidiaries of Citicorp (the "Exempt Subsidiaries") from the
shareholders' equity requirements of Rule 17f-5 promulgated under the Investment
Company Act; and
WHEREAS, the Fund represents that by separate agreement between Fund/Plan
Services, Inc. ("Fund/Plan") and the Fund, Fund/Plan (a) has agreed to perform
certain administrative functions which may include the functions of
administrator, transfer agent and accounting services agent and (b) has been
appointed by the Fund to act as its agent in respect of the transactions
contemplated in this Agreement; and
WHEREAS, the Fund represents that (a) Fund/Plan has agreed to act as Fund's
agent in respect of the transactions contemplated in this Agreement and (b) the
Bank is authorized and directed to rely upon and follow directions and
instructions given by Fund/Plan, the Fund's agent, in respect of transactions
contemplated in the Agreement.
NOW, THEREFORE, in consideration of the premises and of the agreements
hereinafter set forth, the parties hereby agree as follows:
1. APPOINTMENT AND ACCEPTANCE
The Fund hereby appoints the Bank as custodian of the Property and as
its agent hereunder, and the Bank agrees to act as such upon the terms
and conditions hereinafter provided. The Fund hereby directs the Bank to
recognize Fund/Plan as its agent and to follow Fund/Plan's instructions
and directions in respect of the Property.
2. DELIVERY; SAFEKEEPING
The Fund has heretofore delivered, or will deliver or cause to be
delivered, Property to the Bank, which Property the Bank agrees to keep
safely as custodian for the Fund. The Bank shall not surrender
possession of Property except upon properly
Page 90
<PAGE>
authorized Instructions (as hereinafter defined) of the Fund or as may
be required by due process of applicable law.
3. IDENTIFICATION AND SEGREGATION OF ASSETS
With respect to Property in the Custody Account:
(A) Except as otherwise provided in this Agreement, the Bank will
separately identify on its books as belonging to the Fund and, to the
extent practicable, segregate all Property held pursuant to this Agreement
by the Bank or any other entity authorized to hold Property in accordance
with Section 6 or 7 hereof; and
(B) The Bank shall supply to the Fund, addressed care of its agent,
Fund/Plan, from time to time as mutually agreed upon a written statement
with respect to all of the Property in the Custody Account. In the event
that the Fund, acting through its agent, Fund/Plan, does not inform the
Bank in writing of any exceptions or objections within thirty (30) days
after receipt of such statement, the Fund shall be deemed to have approved
such statement.
4. STANDARD OF CARE
(A) The Bank shall exercise the same standard of care that it exercises
over its own assets in the safekeeping, handling, servicing, and
disposition of the Property in accordance with this Agreement. The Bank
will exercise the due care expected of a professional custodian for hire
with respect to the Property in its possession or control.
(B) The Bank shall be responsible for the acts or omissions of any Exempt
Subsidiary acting as a foreign subcustodian pursuant to the Exemptive Order
or any subsequent exemptive order issued by the Securities and Exchange
Commission to the same extent as if the act or omission of such Exempt
Subsidiary were that of the Bank.
(C) Except as otherwise provided above, the Bank shall use reasonable care
in selecting, and shall be responsible only for the proper selection of,
any foreign subcustodian or foreign depository; provided, however, that the
------------------
Bank shall have no responsibility for the selection of foreign depositories
if under the circumstances existing the foreign depository is the sole
depository of securities in a specific jurisdiction.
(D) The Bank's delegation of duties to an Exempt Subsidiary shall not
relieve the Bank of any responsibility to the Fund for any loss due to such
delegation, except such losses or damages which may result from (i)
political risk, including, but not limited to losses resulting from
exchange control restrictions, confiscation, expropriation,
nationalization, insurrection, civil strife or armed hostilities and (ii)
other risk of loss for which neither the Bank nor any foreign subcustodian
would be liable under Rule 17f-5 promulgated under the Investment Company
Act.
(E) In the event the Fund enters into triparty repurchase agreements
pursuant to which collateral therefor is to be held by a custodian other
than the Bank and the Fund instructs the Bank to deliver Property to such
custodian, the Bank shall be under no duty to determine whether such
custodian satisfies the requirements of Section 17(0 of the Investment
Company Act or the Rules promulgated thereunder. Citibank shall have no
further duties or obligations under this Agreement with respect to such
Property.
(F) The Bank is not under any duty to supervise the investments of the
Fund, or to advise or make any recommendation to the Fund with respect to
the purchase or sale of any of the Securities or the investment of any
cash. The Fund shall have the sole and exclusive responsibility for
investment of Property held hereunder.
5. PERFORMANCE BY THE BANK
(A) General
-------
The Bank's performance of its duties hereunder and the day-to-day
operations of the Custody Account shall be in accordance with written
service standards furnished to the Fund, care of the Fund's agent,
Fund/Plan, by the Bank from time to time. Such service standards, as
amended from time to time, are incorporated herein by reference.
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<PAGE>
(B) Receipt, Delivery and Disposal of Securities
--------------------------------------------
The Bank shall, or shall instruct any other entity authorized to hold
Property in accordance with Section 6 or 7 hereof to, receive or deliver
Securities and credit or debit the Fund's account, in accordance with
properly authorized Instructions from the Fund. The Bank or such entity
shall also receive in custody all stock dividends, rights and similar
securities issued in connection with Securities held hereunder, shall
surrender for payment, in a timely manner, all items maturing or called for
redemption and shall take such other action as the Fund may direct in
properly authorized Instructions.
(C) Registration
------------
Securities held hereunder may be registered in the name of the Bank, any
entity authorized to hold Property in accordance with Section 6 or 7
hereof, or a nominee of the Bank or any such authorized entity, and the
Fund shall be informed upon request of all such registrations. Securities
in registered form will be transferred upon request of the Fund into such
names or registrations as it may specify in properly authorized
Instructions.
(D) Cash Accounts
-------------
(i) All cash received or held by the Bank or by any entity authorized
to hold Property in accordance with Section 7 hereof as interest,
dividends, proceeds from transfer, and other payments for or with respect
to the Securities shall be (x) held in a cash account in accordance with
properly authorized Instructions received by the Bank or such entity, or
(y) if specified in the Fund's Instructions, converted to or from U.S.
dollars and remitted to the Fund. The Fund shall bear any foreign exchange
risk in connection with any such conversion. In effecting any currency
conversions hereunder, the Bank or such entity may use any methods or
agencies as it may see fit including the Bank's or such entity's own
facilities at customary rates.
(ii) The Fund agrees, with respect to all payments for purchases of
Securities to be deposited in the Custody Account, that funds for
settlement will be on deposit by the settlement date at the location of
settlement, in good available funds and in the currency of settlement. The
Fund acknowledges that nothing in this Agreement shall obligate the Bank to
extend credit, grant financial accommodation or otherwise advance moneys to
the Fund for the purpose of making any payments for purchases or part
thereof or otherwise carrying out any Instructions.
(E) Reports
-------
(i) If the Bank has in place a system for providing telecommunication
access or other means of electronic access by customers to the Bank's
reporting system for Property in the Custody Account, then, at the Fund's
election, the Bank shall provide the Fund with such instructions and
passwords as may be necessary in order for the Fund to have such electronic
access through the Fund's terminal device. Such electronic access shall be
restricted to information relating to the Custody Account. If electronic
access to such reporting system is requested by the Fund, the Fund agrees
to assume full responsibility for the consequences of such use, including
any misuse or unauthorized use of the terminal device, instructions or
passwords referred to above, and agrees to defend and indemnify the Bank
and hold the Bank harmless from and against any and all liabilities,
losses, damages, costs, counsel fees, and other expenses of every nature
suffered or incurred by the Bank by reason of or in connection with such
use by the Fund or others of such terminal device, unless such liabilities,
losses, damages, costs, counsel fees and other expenses can be shown to be
the result of negligent or wrongful acts of the Bank, the Bank's employees
or the Bank's agents. Further, in the event the Fund elects to have
electronic access, the Bank shall provide the Fund on each business day a
report of the preceding business day's transactions relating to the Custody
Account and of the closing or net balances of each business day. If the
Fund does not choose to have electronic access, the Bank shall provide the
Fund with such reports of transactions in the Custody Account by such means
as may be mutually agreed upon.
(ii) The Bank agrees to use reasonable efforts to furnish the Fund with
such information regarding Property held hereunder as the Fund may
reasonably request in connection with its complying with requests of any
regulatory authorities having jurisdiction over the Fund.
(iii) The Bank shall also, subject to restrictions under applicable law,
seek to obtain from any entity with which the Bank maintains the physical
possession of any of the Property in the Custody Account records of such
entity relating to the Property in the Custody Account as may be required
by the Fund or its agents in connection with an internal examination by the
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Fund of its own affairs. Upon a reasonable request from the Fund, the Bank
shall use its best efforts to furnish to the Fund reports (or portions
thereof) of the external auditors of each such entity relating directly to
such entity's system of internal accounting controls applicable to its
duties under its agreement with the Bank.
(F) Access During the Bank's regular banking hours and upon receipt of
reasonable notice from the Fund, any officer or employee of the Fund, any
independent accountant(s) selected by the Fund and any person designated by
any regulatory authority having jurisdiction over the Fund shall be
entitled to examine on the Bank's premises, Property held by the Bank on
its premises and the Bank's records regarding Property held hereunder
deposited with entities authorized to hold Property in accordance with
Section 6 or 7 hereof, but only upon the Fund's furnishing the Bank with
properly authorized written Instructions to that effect, provided that such
--------
examination shall be consistent with the Bank's obligations of
confidentiality to other parties. The Bank's costs and expenses in
facilitating such examinations shall be borne by the Fund, provided that
such costs and expenses shall not be deemed to examination shall be
consistent with the Bank's obligations of confidentiality to other parties.
The Bank's costs and expenses in facilitating such examinations shall be
borne by the Fund, provided that such costs and expenses shall not be
--------
deemed to include the Bank's costs in providing to the Fund: (i) the
"single audit report" of the independent certified public accountants
engaged by the Bank and (ii) such reports and documents as this Agreement
contemplates that the Bank shall furnish routinely to the Fund.
(G) Voting and other Action
-----------------------
(i) The Bank will transmit to the Fund upon receipt, and will instruct
any entities authorized to hold Property in accordance with Section 6 or 7
hereof to transmit to the Fund upon receipt, all financial reports,
stockholder communications, notices, proxies and proxy soliciting materials
received from issuers of the Securities, and all information relating to
exchange or tender offers received from offerors with respect to the
Securities. Such proxies will be executed by the registered holder if the
registered holder is other than the Fund, but the manner in which
Securities are to be voted will not be indicated. Neither the Bank nor any
other entity holding Property hereunder shall vote any Securities or
authorize the voting of any Securities or give any consent or take any
other action with respect thereto, except as otherwise provided herein.
(ii) In the event of tender offers, the Fund will hand deliver or
telecopy Instructions to the Bank as to the action to be taken with respect
thereto, designating such Instructions as being related to a tender offer.
The Fund shall hold the Bank harmless from any adverse consequences of the
Fund's use of telecopier transmission of, or any other method for
transmitting, Instructions relating to a tender offer.
(iii) The Fund agrees that if it gives an Instruction for the
performance of an act on the last permissible date of a period established
by a tender offer or on the last permissible date for the performance of
such act, the Fund shall hold the Bank harmless from any adverse
consequences in connection with acting upon or failing to act upon such
Instructions.
(iv) The Bank is authorized to accept and open on the Fund's behalf all
mail or communications relating to the Property received by the Bank or
directed in its care.
6. AUTHORIZED USE OF U.S. DEPOSITORIES
The Fund authorizes the Bank, for any Securities held hereunder, to use the
services of any United States securities depository permitted to perform
such services for registered investment companies and their custodians
under Rule 17f-4 promulgated under the Investment Company Act, including
but not limited to, The Depository Trust Company, the Federal Reserve Book
Entry System and Participants Trust Company ("U.S. Depositories"). The Bank
will deposit Securities held hereunder with a U.S. Depository only in an
account which holds assets of customers of the Bank.
7. USE OF FOREIGN CUSTODIANS
(A) Authorization
(i) The Bank may cause Securities which are foreign securities
within the meaning of Rule 17f-5(c)(1) promulgated under the Investment
Company Act ("Foreign Securities")
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and amounts of cash and cash equivalents reasonably required to effect
the Fund's Foreign Securities transactions ("Cash") in the Custody
Account to be held in such country or other jurisdiction as the Fund
shall direct in properly authorized Instructions.
(ii) Subject to prior approval by the Fund, the Bank may hold such
Foreign Securities and Cash in subcustody accounts, which shall be
deemed part of the Custody Account and which have been established by
the Bank with (x) branches of "Qualified U.S. Banks", as defined in Rule
17f-5(c)(3) promulgated under the Investment Company Act ("Branches"),
or (y) foreign custodians which satisfy the provisions of Rule 17f-
5(c)(2)(i) or (ii) promulgated under the Investment Company Act, or
Exempt Subsidiaries or other foreign custodians which are exempt from
such provisions under the Exemptive Order or any other order or release
issued by the Securities and Exchange Commission (such Branches, foreign
custodians and Exempt Subsidiaries, collectively, the Eligible Foreign
Custodians"). The Fund shall deliver to the Bank a certified copy of the
resolution approving both the use of each Eligible Foreign Custodian
with which the Foreign Securities and Cash of the Fund will be kept and,
with respect to Eligible Foreign Custodians other than Branches, the
Bank's contract with such Eligible Foreign Custodian.
(iii) Subject to prior approval by the Fund, the Bank or an Eligible
Foreign Custodian is authorized to hold Foreign Securities of the Fund
in an account with any foreign securities depository or foreign clearing
agency which in the Bank's judgment satisfies the provisions of
Rule 17f-5(c)(iii) or (iv) promulgated under the Investment Company Act,
or which is exempt from such provisions under an order, no-action letter
or release issued by the Securities and Exchange Commission ("Eligible
Foreign Securities Depository"). The Fund shall deliver to the Bank a
certified copy of the resolution approving the use of each Eligible
Foreign Securities Depository with which Foreign Securities of the Fund
will be deposited.
(iv) Any Foreign Securities or Cash held by an Eligible Foreign
Custodian or an Eligible Foreign Securities Depository, shall be subject
to applicable laws, regulations, restrictions, customs, procedures, and
market practices as exist in the country in which such Foreign
Securities and Cash is held. In the event that local laws or regulations
to which an Eligible Foreign Custodian or Eligible Foreign Securities
Depository is subject change in a way that would prevent or limit the
performance of duties and obligations by the Eligible Foreign Custodian
or Foreign Securities Depository, such duties and obligations shall be
superseded and neither the Bank nor any other Citicorp affiliated
company organization shall be liable therefor or for any damages in any
way resulting from such prevented or limited performance.
(B) Provision of Information Regarding Foreign Custodians and Securities
--------------------------------------------------------------------
Depositories
------------
(i) The Bank shall use its best efforts to assist the Fund in
obtaining the following:
(a) As to each country in which Property is held, information
concerning whether, and to what extent, applicable foreign law
would restrict the access afforded the Fund's independent
public accountants to books and records kept by a foreign
custodian or foreign securities depository used in that
country;
(b) As to each country in which Property is held, information
concerning whether, and to what extent, applicable foreign law
would restrict the Fund's ability to recover its assets in the
event of the bankruptcy of a foreign custodian or foreign
securities depository used in that country;
(c) As to each country in which Property is held, information
concerning whether, and to what extent, applicable foreign law
would restrict the Fund's ability to recover assets that are
lost while under the control of a foreign custodian or foreign
securities depository used in that country;
(d) As to each country in which Property is held, information
concerning whether under applicable foreign currency exchange
regulations the Fund's cash and cash equivalents held in that
country are readily convertible to U S. dollars;
(e) Information relating to whether each foreign custodian or
foreign securities depository used would provide a level of
safeguards for maintaining the Fund's Securities not materially
different from that provided by the Bank in maintaining the
Securities in the United States;
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(f) Information concerning whether each foreign custodian or
foreign securities depository used has offices in the United
States in order to facilitate the assertion of jurisdiction
over and enforcement of judgments against such custodian or
depository; and
(g) As to each foreign securities depository used, information
concerning the number of participants in, and operating history
of, such depository.
(ii) During the term of this Agreement, the Bank shall use its best
efforts to provide the Fund with prompt notice of any material changes
in the facts or circumstances upon which any of the foregoing
information or statements were based.
(iii) Notwithstanding any of the foregoing provisions of this
subsection (b) of this Section 7, the Bank's undertaking to assist the
Fund in obtaining the information referred to in this subsection (b) of
the this Section 7 shall neither increase the Bank's duty of care nor
reduce the Fund's responsibility to determine for itself the prudence of
entrusting its assets to any particular foreign custodian or foreign
securities depository.
(C) Segregation and Identification of Assets
----------------------------------------
The Bank will deposit Property of the Fund with an Eligible Foreign
Custodian only in an account which holds exclusively assets of customers
of the Bank. In the event that an Eligible Foreign Custodian is
authorized to hold any of the Foreign Securities placed in its care in
an Eligible Foreign Securities Depository pursuant to the provisions of
subsection (A) of this Section 7, the Bank will direct such Eligible
Foreign Custodian to identify such Foreign Securities on its books as
being held for the account of the Bank as custodian for its customers.
(D) Instructions to Eligible Foreign Custodians; Instructions to
------------------------------------------------------------
Eligible Foreign Securities Depositories
----------------------------------------
Any Property in the Custody Account held by an Eligible Foreign
Custodian will be subject only to the instructions of the Bank or its
agents; and any Foreign Securities held in an Eligible Foreign
Securities Depository for the account of an Eligible Foreign Custodian
will be subject only to the instructions of such Eligible Foreign
Custodian, as subcustodian for the Bank.
(E) Contracts between the Bank and Exempt Subsidiaries.
---------------------------------------------------
The Bank's contract with each Exempt Subsidiary provides:
(i) an acknowledgement by such Exempt Subsidiary that it is acting
as a foreign custodian for U.S. Investment Companies or their custodians
pursuant to the terms of the Exemptive Order; and
(ii) that the Fund is entitled to enforce the terms of the
subcustodian agreement between the Bank and the Exempt Subsidiary and is
entitled to seek relief directly against the Exempt Subsidiary.
8. CITICORP GUARANTEE
Citicorp agrees that it shall be liable, in accordance with the terms of
a guarantee issued in compliance with the conditions of the Exemptive
Order, for losses incurred by the Fund resulting from bankruptcy or
insolvency of Exempt Subsidiaries operating pursuant to the terms of the
Exemptive Order.
9. USE OF AGENTS
The Bank may, subject to applicable laws, rules and regulations, appoint
agents, whether in its own name or that of the Fund, to perform any of
the duties of the Bank hereunder, and the Bank may delegate to any such
agent so appointed any of its functions under this Agreement.
10. INSTRUCTIONS
(A) The Bank is authorized to rely and act upon instructions
("Instructions") in writing which are signed by persons ("Authorized
Persons") named in a list provided to the Bank from time to time, which
list must be certified by the Fund's Secretary or Assistant Secretary
and include authenticated specimen signatures of all Authorized Persons.
Such
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<PAGE>
list shall separately designate those Authorized Persons who may
authorize the withdrawal of the Securities free of payment, those
Authorized Persons who may authorize the unconditional transfer of
funds, and those Authorized Persons who may give Instructions by
electronic access.
(B) The Fund agrees that the Bank is authorized to rely and act upon
such Instructions in accordance with this Section 10 and the Funds
Transfer Procedures attached hereto and incorporated herein by reference
(including each Schedule A) to this Agreement and to debit or credit the
applicable account(s) of the Fund accordingly and that such Funds
Transfer Procedures and method(s) of transmission are commercially
reasonable.
(C) The Bank shall be entitled to rely upon the continued authority of
any Authorized Person to give Instructions until the Bank receives
notice from the Fund to the contrary; and the Bank shall be entitled to
rely upon any Instructions it believes in good faith to have been given
by an Authorized Person.
(D) The Bank is further authorized to rely upon any Instructions
received by any other means and identified as having been given or
authorized by any Authorized Person, regardless of whether such
Instructions shall in fact have been authorized or given by any of such
Authorized Persons, provided that the Bank and the Fund shall have
agreed upon the means of transmission and the method of identification
for such Instructions. Instructions received by any other means shall
include but not be limited to verbal Instructions only in connection
with delivery against payment or receipt against payment transactions
and transfer from one account with the Bank to another with the Bank and
provided that such verbal Instructions are promptly confirmed in writing
by the Fund. Notwithstanding the foregoing, in the event any such verbal
Instructions are not subsequently confirmed in writing, as provided
above, the Fund agrees to hold the Bank harmless and without liability
for any claims or losses in connection with such verbal Instructions.
(E) The Fund agrees to be bound by any Instruction, whether or not
authorized, given to the Bank in its name and accepted by the Bank in
accordance with the provisions hereof (including but not limited to the
Funds Transfer Procedures and Schedule A thereto) and further agrees to
indemnify and hold the Bank harmless from and against any loss,
liability, claim or expense (including legal fees and expenses)
associated with the Bank's acting upon such Instructions as provided
herein, except such as may arise from the Bank's own negligence, bad
faith or willful misconduct.
(F) The Fund may appoint one or more investment managers ("Investment
Managers") with respect to the Custody Account. The Bank is authorized
to act upon Instructions received from any Investment Manager to the
same extent that the Bank would act upon the Instructions of an
Authorized Person, provided that the Bank has received written evidence
of the Investment Manager's appointment and written confirmation from
the Investment Manager evidencing acceptance of such appointment. The
Investment Manager shall provide to the Bank from time to time a list of
persons authorized to give Instructions on behalf of the Investment
Manager. The list must be certified by the Investment Manager's
Secretary or Assistant Secretary and include authenticated specimen
signatures of such persons.
(G) If the Fund should choose to have telecommunication or other means
of electronic access to the Bank's reporting system for Property in the
Custody Account, pursuant to paragraph (E) of Section 5, the Bank is
also authorized to rely and act upon any Instructions received by it
through a terminal device, provided that such Instructions are
accompanied by code words which the Bank has furnished to the Fund, or
an Authorized Person, by any method mutually agreed to by the Bank and
the Fund, provided that the Bank has not been notified by the Fund, or
any such Authorized Person to cease to recognize such code words,
regardless of whether such Instructions shall in fact have been given or
authorized by the Fund or any such Authorized Person.
(H) The Bank is authorized to act upon Instructions of the Fund's agent,
Fund/Plan, to the same extent that the Bank would act upon Instructions
of an Authorized Person provided that (i) the Bank has received
confirmation from Fund/Plan evidencing acceptance of its appointment as
agent by the Fund, (ii) the Bank shall have received from Fund/Plan a
list of persons (and such persons specimen signatures) authorized to
give Instructions on behalf
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of Fund/Plan, which list shall have been certified by Fund/Plan's
Secretary or Assistant Secretary, and (iii) the Bank shall not have
received written notice from (x) Fund/Plan that it is no longer acting
as the Fund's agent or directing the Bank to cease recognizing
Instructions from a designated Fund/Plan person, or (y) the Fund to
cease recognizing Instructions from Fund/Plan.
11. THE FUND
(A) The Fund agrees that no printed material or other matter in any
language (including without limitation, prospectuses, statements of
additional information, notices to shareholders, annual reports and
promotional material) which mention the Bank's or Citicorp's name or the
rights, powers or duties of the custodian of the Fund shall be issued by
the Fund or on the Fund's behalf unless the Bank shall first have given
its specific written consent thereto; provided, however, that no prior
consent shall be required if the only reference to the Bank's or
Citicorp's name is in identifying the Bank as the Fund's custodian.
(B) The Fund shall give prior notice to the Bank of any change in its
place of incorporation or organization, mailing address, or sponsors,
any significant change in management, investment objectives, fees or
redemption rights and any change to the appointment of Fund/Plan as its
agent.
(C) The Fund confirms that it is, and agrees that in the future it will
be, audited at least annually by an independent accounting firm and that
it mails, and in the future will mail, an audited financial report of
the Fund to its shareholders at least annually.
12. FEES AND EXPENSES
Payment of the Bank's compensation for services rendered hereunder shall
be the responsibility of the Fund. The Fund represents that by separate
agreement it has appointed Fund/Plan as its agent, and that Fund/Plan,
as agent for the Fund, has agreed to pay the compensation payable in
respect of such services promptly upon receipt of statements
therefore. The Fund shall pay to Fund/Plan fees for services (including
the Bank's custodial services) in accordance with the terms of an
agreement between Fund/Plan and the Fund. The Fund hereby directs the
Bank to (i) send all statements for compensation to its attention care
of Fund/Plan at the following address: Fund/Plan Services, Inc., 2 W.
Elm Street, Conshohocken, PA 19428, Attention: Mr. Elmer Gardner, Senior
Vice President, and (ii) accept all payments made by Fund/Plan in the
Fund's name as if such payments were made directly by the Fund. The
Custodian's compensation for services rendered hereunder is set forth in
an agreement between the Bank and Fund/Plan Should Fund/Plan fail to pay
or remit such compensation to the Bank, the Bank will be entitled to
debit the Custody Account directly for such compensation. In the absence
of sufficient cash in the Custody Account to cover compensation, the
Fund shall promptly pay the bank for the unpaid compensation due
hereunder. In the absence of prompt payments by the Fund of the unpaid
compensation, the Bank shall be entitled to exercise, in addition to all
other rights existing in law or equity, the rights set forth in Section
13 hereof.
13. LIENS
The Bank shall have a lien on the Property in the Custody Account to
secure payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any
purpose or in the event that the Bank or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or
liabilities in connection with the performance of its duties hereunder,
except such as may arise from its or its nominee's negligent action,
negligent failure to act or willful misconduct, any Property at any time
held for the Custody Account shall be security therefor and the Fund
hereby grants a security interest therein to the Bank. The Fund shall
promptly reimburse the Bank for any such advance of cash or securities
or any such taxes, charges, expenses, assessments, claims or liabilities
upon request for payment, but should the Fund fail to so reimburse the
Bank, the Bank shall be entitled to dispose of such Property to the
extent necessary to obtain reimbursement. The Bank shall be entitled to
debit any account of the Fund with the Bank including, without
limitation, the Custody Account, in connection with any such advance and
any interest on such advance as the Bank deems reasonable.
14. TAX STATUS
The Fund's Tax Identification Number is: 94-320561.7
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<PAGE>
15. AMENDMENT
This Agreement may not be amended except by a written agreement among
the parties hereto.
16. TERMINATION
Either the Bank or the Fund may terminate this Agreement upon sixty (60)
days' written notice to the other parties.
17. CONFIDENTIALITY
Subject to the foregoing provisions of this Agreement and subject to any
applicable law, the Fund and the Bank shall each use best efforts to
maintain the confidentiality of matters concerning Property in the
Custody Account. The Fund expressly agrees that the Bank may disclose
any and all information concerning the Custody Account to the Fund's
agent, Fund/Plan.
18. NOTICES
All notices and other communications hereunder, except for Instructions
and reports relating to the Property which are transmitted through the
Bank's electronic reporting system for Property in the Custody Account,
shall be in writing, telex or telecopy or, if verbal, shall be promptly
confirmed in writing, and shall be hand-delivered, telexed, telecopied
or mailed by prepaid first class mail (except that notice of
termination, if mailed, shall be by prepaid registered or certified
mail), to each party at its address set forth above, if to the Fund,
marked "Attention G. Paul Matthews" and if to the Bank, marked
-----------------
"Citibank as Custodian for Matthews Pacific Tiger", and if to Citicorp,
------------------------
marked "Attention of Office of Corporate Finance, Gregory C. Ehlke, Vice
President", or at such other address as each party may give notice of to
the others.
19. ASSIGNMENT
No party may assign, transfer or charge all or any of its rights and
benefits hereunder without the written consent of the other parties. Any
purported assignments made in contravention of this Section shall be
null and void and of no effect whatsoever.
20. GOVERNING LAW
This Agreement shall be governed by and construed according to the laws
of the State of New York and the parties agree that the courts of the
State of New York shall have jurisdiction to hear and determine any
suit, action or proceeding and to settle any disputes which may arise
out of, or in connection with, this Agreement, and, for such purposes,
each irrevocably submits to the non-exclusive jurisdiction of such
courts.
21. MISCELLANEOUS
(A) This Agreement may be executed in several counterparts, each of
which shall be an original, but all of which shall constitute one and
the same instrument.
(B) This Agreement contains the entire agreement among the parties
relating to custody of Property and supersedes all prior agreements on
this subject.
(C) The captions of the various sections and subsections of this
Agreement have been inserted only for the purposes of convenience and
shall not be deemed in any manner to modify, explain, enlarge or
restrict any of the provisions of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers hereunto duly authorized.
CITIBANK, N A. CITICORP
BY: BY:
------------------------------- --------------------------------
NAME: NAME:
------------------------------- ------------------------------
TITLE: TITLE:
------------------------------ -----------------------------
[FUND]
BY:
-------------------------------
NAME:
-------------------------------
TITLE:
------------------------------
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CUSTODY AGREEMENT
-----------------
Agreement made as of this 1st day of June, 1995, between Matthews
International Funds, a Delaware business trust organized and existing under the
laws of the State of De}aware, having its principal office and place of business
at 655 Montgomery Street, Suite 1438, San Francisco, CA 94111 (hereinafter
called the "Fund"), and THE BANK OF NEW YORK, a New York corporation authorized
to do a banking business, having its principal office and place of business at
48 Wall Street, New York, New York 10286 (hereinafter called the "Custodian").
W I T N E S S E T H :
WHEREAS, the Fund represents that pursuant to the Custody Administration
and Agency Agreement between Fund/Plan Services, Inc. ("Fund/Plan") and the
Fund, Fund/Plan (a) has agreed to perform certain administrative functions which
may include the functions of administrator, transfer agent and accounting
services agent and (b) has been appointed by the Fund to act as its agent in
respect of certain transactions contemplated in this Agreement; and
WHEREAS, the Fund represents that (a) Fund/Plan has agreed to act as Fund's
agent in respect of certain transactions contemplated in this Agreement and (b)
the Bank is authorized and directed to rely upon and follow Certificates and
instructions given by Fund/Plan, the Fund's agent, in respect of transactions
contemplated in this Agreement.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set
forth, the Fund and the Custodian agree as follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and phrases, unless
the context otherwise requires, shall have the following meanings:
1. "Administrator" shall mean Fund/Plan Services, Inc. and such successors
or permitted assigns as may succeed and perform its duties under the
Administration Agreement.
2. "Administration Agreement" shall mean that certain separate agreement
entitled "Custody Administration and Agency Agreement" dated as of June 1, 1995
between the Fund and the Fund/Plan Services, Inc.
3. "Book-Entry System" shall mean the Federal Reserve/Treasury book-entry
system for United States and federal agency securities, its successor or
successors and its nominee or nominees.
4. "Call Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and payment of the
exercise price, as specified therein, to purchase from the writer thereof the
specified underlying Securities.
5. "Certificate" shall mean any notice, instruction, or other instrument in
writing, authorized or required by this Agreement to be given to the Custodian
which is actually received by the Custodian and signed on behalf of the Fund by
any Officer, and the term Certificate shall also include instructions
communicated to the Custodian by the Administrator by Terminal Link.
6. "Clearing Member" shall mean a registered broker-dealer which is a
clearing member under the rules of O.C.C. and a member of a national securities
exchange qualified to act as a custodian for an investment company, or any
broker-dealer reasonably believed by the Custodian to be such a clearing member.
7. "Collateral Account" shall mean a segregated account so denominated
which is specifically allocated to a Series and pledged to the Custodian as
security for, and in consideration of, the Custodian's issuance of (a) any Put
Option guarantee letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII herein.
8. "Covered Call Option" shall mean an exchange traded option entitling the
holder, upon timely exercise and payment of the exercise price, as specified
therein, to purchase from the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer thereof and subject
to appropriate restrictions.
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<PAGE>
9. "Depository" shall mean The Depository Trust Company ("DTC"), a clearing
agency registered with the Securities and Exchange Commission, its successor or
successors and its nominee or nominees. The term "Depository" shall further mean
and include any other person authorized to act as a depository under the
Investment Company Act of 1940, its successor or successors and its nominee or
nominees, specifically identified in a certified copy of a resolution of the
Fund's Board of Trustees specifically approving deposits therein by the
Custodian.
10. "Financial Futures Contract" shall mean the firm commitment to buy or
sell fixed income securities including, without limitation, U.S. Treasury Bills,
U.S. Treasury Notes, U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar certificates of deposit, during a specified month at an agreed
upon price.
11. "Futures Contract" shall mean a Financial Futures Contract and/or Stock
Index Futures Contracts.
12. "Futures Contract Option" shall mean an option with respect to a
Futures Contract.
13. "Margin Account" shall mean a segregated account in the name of a
broker, dealer, futures commission merchant, or a Clearing Member, or in the
name of the Fund for the benefit of a broker, dealer, futures commission
merchant, or Clearing Member, or otherwise, in accordance with an agreement
between the Fund, the Custodian and a broker, dealer, futures commission
merchant or a Clearing Member (a "Margin Account Agreement"), separate and
distinct from the custody account, in which certain Securities and/or money of
the Fund shall be deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time determine. Securities held
in the Book-Entry System or the Depository shall be deemed to have been
deposited in, or withdrawn from, a Margin Account upon the Custodian's effecting
an appropriate entry in its books and records.
14. "Money Market Security" shall be deemed to include, without limitation,
certain Reverse Repurchase Agreements, debt obligations issued or guaranteed as
to interest and principal by the government of the United States or agencies or
instrumentalities thereof, any tax, bond or revenue anticipation note issued by
any state or municipal government or public authority, commercial paper,
certificates of deposit and bankers' acceptances, repurchase agreements with
respect to the same and bank time deposits, where the purchase and sale of such
securities normally requires settlement in federal funds on the same day as such
purchase or sale.
15. "O.C.C." shall mean the Options Clearing Corporation, a clearing agency
registered under Section 17A of the Securities Exchange Act of 1934, its
successor or successors, and its nominee or nominees.
16. "Officers" shall be deemed to include the President, any Vice
President, the Secretary, the Clerk, the Treasurer, the Controller, any
Assistant Secretary, any Assistant Clerk, any Assistant Treasurer, and any other
person or persons, including officers or employees of the Administrator, whether
or not any such other person is an officer of the Fund, duly authorized by the
Board of Trustees of the Fund to execute any Certificate, instruction, notice or
other instrument on behalf of the Fund and listed in the Certificate annexed
hereto as Appendix A or such other Certificate as may be received by the
Custodian from time to time.
17. "Option" shall mean a Call Option, Covered Call Option, Stock Index
Option and/or a Put Option.
18. "Oral Instructions" shall mean verbal instructions actually received by
the Custodian from an Officer or from a person reasonably believed by the
Custodian to be an Officer.
19. "Put Option" shall mean an exchange traded option with respect to
Securities other than Stock Index Options, Futures Contracts, and Futures
Contract Options entitling the holder, upon timely exercise and tender of the
specified underlying Securities, to sell such Securities to the writer thereof
for the exercise price.
20. "Reverse Repurchase Agreement" shall mean an agreement pursuant to
which the Fund sells Securities and agrees to repurchase such Securities at a
described or specified date and price.
21. "Security" shall be deemed to include, without limitation, Money Market
Securities, Call Options, Put Options, Stock Index Options, Stock Index Futures
Contracts, Stock Index Futures Contract Options, Financial Futures Contracts,
Financial Futures Contract Options, Reverse Repurchase Agreements, common stocks
and other securities having characteristics
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similar to common stocks, preferred stocks, debt obligations issued by state or
municipal governments and by public authorities, (including, without limitation,
general obligation bonds, revenue bonds, industrial bonds and industrial
development bonds), bonds, debentures, notes, mortgages or other obligations,
and any certificates, receipts, warrants or other instruments representing
rights to receive, purchase, sell or subscribe for the same, or evidencing or
representing any other rights or interest therein, or any property or assets.
22. "Senior Security Account" shall mean an account maintained and
specifically allocated to a Series under the terms of this Agreement as a
segregated account, by recordation or otherwise, within the custody account in
which certain Securities and/or other assets of the Fund specifically allocated
to such Series shall be deposited and withdrawn from time to time in accordance
with Certificates received by the Custodian in connection with such transactions
as the Fund may from time to time determine.
23. "Series" shall mean the various portfolios, if any, of the Fund as
described from time to time in the current and effective prospectus for the Fund
and listed on Appendix B hereto as amended from time to time.
24. "Shares" shall mean the shares of beneficial interest of the Fund, each
of which is, in the case of a Fund having Series, allocated to a particular
Series.
25. "Stock Index Futures Contract" shall mean a bilateral agreement
pursuant to which the parties agree to take or make delivery of an amount of
cash equal to a specified dollar amount times the difference between the value
of a particular stock index at the close of the last business day of the
contract and the price at which the futures contract is originally struck.
26. "Stock Index Option" shall mean an exchange traded option entitling the
holder, upon timely exercise, to receive an amount of cash determined by
reference to the difference between the exercise price and the value of the
index on the date of exercise.
26. "Terminal Link" shall mean an electronic data transmission link between
the Administrator on behalf of the Fund and the Custodian requiring in
connection with each use of the Terminal Link by or on behalf of the
Administrator on behalf of the Fund use of an authorization code provided by the
Custodian and at least one access code established by the Administrator on
behalf of the Fund.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the Custodian as custodian of
the Securities and moneys at any time owned by the Fund during the period of
this Agreement.
2. The Custodian hereby accepts appointment as such custodian and agrees to
perform the duties thereof as hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, the Fund will deliver or cause to be delivered to the Custodian
all Securities and all moneys owned by it, at any time during the period of this
Agreement, and shall specify with respect to such Securities and money the
Series to which the same are specifically allocated. The Custodian shall
segregate, keep and maintain the assets of the Series separate and apart. The
Custodian will not be responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any credits made on
the Fund's behalf where such credits have been previously made and moneys are
not finally collected. The Fund shall deliver to the Custodian a certified
resolution of the Board of Trustees of the Fund, substantially in the form of
Exhibit A hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis to deposit in the Book-Entry System all Securities
eligible for deposit therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to the extent
possible in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities and deliveries and returns
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of Securities collateral. Prior to a deposit of Securities specifically
allocated to a Series in the Depository, the Fund shall deliver to the Custodian
a certified resolution of the Board of Trustees of the Fund, substantially in
the form of Exhibit B hereto, approving, authorizing and instructing the
Custodian on a continuous and ongoing basis until instructed to the contrary by
a Certificate actually received by the Custodian to deposit in the Depository
all Securities specifically allocated to such Series eligible for deposit
therein, and to utilize the Depository to the extent possible with respect to
such Securities in connection with its performance hereunder, including, without
limitation, in connection with settlements of purchases and sales of Securities,
loans of Securities, and deliveries and returns of Securities collateral.
Securities and moneys deposited in either the Book-Entry System or the
Depository will be represented in accounts which include only assets held by the
Custodian for customers, including, but not limited to, accounts in which the
Custodian acts in a fiduciary or representative capacity and will be
specifically allocated on the Custodian's books to the separate account for the
applicable Series. Prior to the Custodian's accepting, utilizing and acting with
respect to Clearing Member confirmations for Options and transactions in Options
for a Series as provided in this Agreement, the Custodian shall have received a
certified resolution of the Fund's Board of Trustees, substantially in the form
of Exhibit C hereto, approving, authorizing and instructing the Custodian on a
continuous and on-going basis, until instructed to the contrary by a Certificate
actually received by the Custodian, to accept, utilize and act in accordance
with such confirmations as provided in this Agreement with respect to such
Series.
2. The Custodian shall establish and maintain separate accounts, in the
name of each Series, and shall credit to the separate account for each Series
all moneys received by it for the account of the Fund with respect to such
Series. Money credited to a separate account for a Series shall be disbursed by
the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name and address of the
person to whom the payment is to be made, the Series account from which payment
is to be made and the purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of the expenses and
liabilities of the Custodian attributable to such Series.
3. Promptly after the close of business on each day, the Custodian shall
furnish the Administrator with confirmations and a summary, on a per Series
basis, of all transfers to or from the account of the Fund for a Series, either
hereunder or with any co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are transferred to the account
of the Fund for a Series, the Custodian shall also by book-entry or otherwise
identify as belonging to such Series a quantity of Securities in a fungible bulk
of Securities registered in the name of the Custodian (or its nominee) or shown
on the Custodian's account on the books of the Book-Entry System or the
Depository. At least monthly and from time to time, the Custodian shall furnish
the Administrator with a detailed statement, on a per Series basis, of the
Securities and moneys held by the Custodian for the Fund.
4. Except as otherwise provided in paragraph 7 of this Article and in
Article VIII, all Securities held by the Custodian hereunder, which are issued
or issuable only in bearer form, except such Securities as are held in the Book-
Entry System, shall be held by the Custodian in that form; all other Securities
held hereunder may be registered in the name of the Fund, in the name of any
duly appointed registered nominee of the Custodian as the Custodian may from
time to time determine, or in the name of the Book-Entry System or the
Depository or their successor or successors, or their nominee or nominees. The
Fund agrees to furnish or cause to be furnished to the Custodian appropriate
instruments to enable the Custodian to hold or deliver in proper form for
transfer, or to register in the name of its registered nominee or in the name of
the Book-Entry System or the Depository any Securities which it may hold
hereunder and which may from time to time be registered in the name of the Fund.
The Custodian shall hold all such Securities specifically allocated to a Series
which are not held in the Book-Entry System or in the Depository in a separate
account in the name of such Series physically segregated at all times from those
of any other person or persons.
5. Except as otherwise provided in this Agreement and unless otherwise
instructed to the contrary by a Certificate, the Custodian by itself, or through
the use of the Book-Entry System or the Depository with respect to Securities
held hereunder and therein deposited, shall with respect to all Securities held
for the Fund hereunder in accordance with preceding paragraph 4:
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(a) Collect all income due or payable;
(b) Present for payment and collect the amount payable upon such Securities
which are called, but only if either (i) the Custodian receives a written notice
of such call, or (ii) notice of such call appears in one or more of the
publications listed in Appendix C annexed hereto, which may be amended at any
time by the Custodian without the prior notification or consent of the Fund;
(c) Present for payment and collect the amount payable upon all Securities
which mature;
(d) Surrender Securities in temporary form for definitive Securities;
(e) Execute, as custodian, any necessary declarations or certificates of
ownership under the Federal Income Tax Laws or the laws or regulations of any
other taxing authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System or the Depository with
respect to Securities therein deposited, for the account of a Series, all rights
and similar securities issued with respect to any Securities held by the
Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the Custodian, directly
or through the use of the Book-Entry System or the Depository, shall:
(a) Execute and deliver to such persons as may be designated in such
Certificate proxies, consents, authorizations, and any other instruments whereby
the authority of the Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may be exercised;
(b) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate in exchange for other Securities or cash issued or
paid in connection with the liquidation, reorganization, refinancing, merger,
consolidation or recapitalization of any corporation, or the exercise of any
conversion privilege and receive and hold hereunder specifically allocated to
such Series any cash or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian hereunder for the Series
specified in such Certificate to any protective committee, reorganization
committee or other person in connection with the reorganization, refinancing,
merger, consolidation, recapitalization or sale of assets of any corporation,
and receive and hold hereunder specifically allocated to such Series such
certificates of deposit, interim receipts or other instruments or documents as
may be issued to it to evidence such delivery;
(d) Make such transfers or exchanges of the assets of the Series specified
in such Certificate, and take such other steps as shall be stated in such
Certificate to be for the purpose of effectuating any duly authorized plan of
liquidation, reorganization, merger, consolidation or recapitalization of the
Fund; and
(e) Present for payment and collect the amount payable upon Securities not
described in preceding paragraph 5(b) of this Article which may be called as
specified in the Certificate.
7. Notwithstanding any provision elsewhere contained herein, the Custodian
shall not be required to obtain possession of any instrument or certificate
representing any Futures Contract, any Option, or any Futures Contract Option
until after it shall have determined, or shall have received a Certificate from
the Fund stating, that any such instruments or certificates are available. The
Fund shall deliver to the Custodian such a Certificate no later than the
business day preceding the availability of any such instrument or certificate.
Prior to such availability, the Custodian shall comply with Section 17(f) of the
Investment Company Act of 1940, as amended, in connection with the purchase,
sale, settlement, closing out or writing of Futures Contracts, Options, or
Futures Contract Options by making payments or deliveries specified in
Certificates received by the Custodian in connection with any such purchase,
sale, writing, settlement or closing out upon its receipt from a broker, dealer,
or futures commission merchant of a statement or confirmation reasonably
believed by the Custodian to be in the form customarily used by brokers,
dealers, or future commission merchants with respect to such Futures Contracts,
Options, or Futures Contract Options, as the case may be, confirming that such
Security is held by such broker, dealer or futures commission merchant, in book-
entry form or otherwise, in the name of the Custodian (or any nominee of the
Custodian) as custodian for the Fund, provided, however, that notwithstanding
the foregoing, payments to or deliveries from the Margin Account and payments
with respect to Securities to which a Margin Account relates, shall be made in
accordance with the terms and
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conditions of the Margin Account Agreement. Whenever any such instruments or
certificates are available, the Custodian shall, notwithstanding any provision
in this Agreement to the contrary, make payment for any Futures Contract,
Option, or Futures Contract Option for which such instruments or such
certificates are available only against the delivery to the Custodian of such
instrument or such certificate, and deliver any Futures Contract, Option or
Futures Contract Option for which such instruments or such certificates are
available only against receipt by the Custodian of payment therefor. Any such
instrument or certificate delivered to the Custodian shall be held by the
Custodian hereunder in accordance with, and subject to, the provisions of this
Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the Fund, other than a
purchase of an Option, a Futures Contract, or a Futures Contract Option, the
Fund shall deliver or cause the Administrator to deliver to the Custodian (i)
with respect to each purchase of Securities which are not Money Market
Securities, a Certificate, and (ii) with respect to each purchase of Money
Market Securities, a Certificate or Oral Instructions, specifying with respect
to each such purchase: (a) the Series to which such Securities are to be
specifically allocated; (b) the name of the issuer and the title of the
Securities; (c) the number of shares or the principal amount purchased and
accrued interest, if any; (d) the date of purchase and settlement; (e) the
purchase price per unit; (f) the total amount payable upon such purchase; (g)
the name of the person from whom or the broker through whom the purchase was
made, and the name of the clearing broker, if any; and (h) the name of the
broker to whom payment is to be made. The Custodian shall, upon receipt of
Securities purchased by or for the Fund, pay to the broker specified in the
Certificate out of the moneys held for the account of such Series the total
amount payable upon such purchase, provided that the same conforms to the total
amount payable as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund, other than a sale of
any Option, Futures Contract, Futures Contract Option, or any Reverse Repurchase
Agreement, the Fund shall deliver or cause the Administrator to deliver to the
Custodian (i) with respect to each sale of Securities which are not Money Market
Securities, a Certificate, and (ii) with respect to each sale of Money Market
Securities, a Certificate or Oral Instructions, specifying with respect to each
such sale: (a) the Series to which such Securities were specifically allocated;
(b) the name of the issuer and the title of the Security; (c) the number of
shares or principal amount sold, and accrued interest, if any; (d) the date of
sale; (e) the sale price per unit; (f) the total amount payable to the Fund upon
such sale; (g) the name of the broker through whom or the person to whom the
sale was made, and the name of the clearing broker, if any; and (h) the name of
the broker to whom the Securities are to be delivered. The Custodian shall
deliver the Securities specifically allocated to such Series to the broker
specified in the Certificate against payment upon receipt of the total amount
payable to the Fund upon such sale, provided that the same conforms to the total
amount payable as set forth in such Certificate or Oral Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the Fund, the Fund shall
deliver or cause the Administrator to deliver to the Custodian a Certificate
specifying with respect to each Option purchased: (a) the Series to which such
Option is specifically allocated; (b) the type of Option (put or call); (c) the
name of the issuer and the title and number of shares subject to such Option or,
in the case of a Stock Index Option, the stock index to which such Option
relates and the number of Stock Index Options purchased; (d) the expiration
date; (e) the exercise price; (f) the dates of purchase and settlement; (g) the
total amount payable by the Fund in connection with such purchase; (h) the name
of the Clearing Member through whom such Option was purchased; and (i) the name
of the broker to whom payment is to be made. The Custodian shall pay, upon
receipt of a Clearing Member's statement confirming the purchase of such Option
held by such Clearing Member for the account of the Custodian (or any duly
appointed and registered nominee of the Custodian) as custodian for the Fund,
out of moneys held for the account of the Series to which such Option is to be
specifically allocated, the total amount payable upon such purchase to the
Clearing Member through whom the purchase was made, provided that the same
conforms to the total amount payable as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by the Fund pursuant to
paragraph 1
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hereof, the Fund shall deliver or cause the Administrator to deliver to the
Custodian a Certificate specifying with respect to each such sale: (a) the
Series to which such Option was specifically allocated; (b) the type of Option
(put or call); (c) the name of the issuer and the title and number of shares
subject to such Option or, in the case of a Stock Index Option, the stock index
to which such Option relates and the number of Stock Index Options sold; (d) the
date of sale; (e) the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale; and (h) the name of the Clearing
Member through whom the sale was made. The Custodian shall consent to the
delivery of the Option sold by the Clearing Member which previously supplied the
confirmation described in preceding paragraph 1 of this Article with respect to
such Option against payment to the Custodian of the total amount payable to the
Fund, provided that the same conforms to the total amount payable as set forth
in such Certificate.
3. Promptly after the exercise by the Fund of any Call Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the
Administrator to deliver to the Custodian a Certificate specifying with respect
to such Call Option: (a) the Series to which such Call Option was specifically
allocated; (b) the name of the issuer and the title and number of shares subject
to the Call Option; (c) the expiration date; (d) the date of exercise and
settlement; (e) the exercise price per share; (f) the total amount to be paid by
the Fund upon such exercise; and (g) the name of the Clearing Member through
whom such Call Option was exercised. The Custodian shall, upon receipt of the
Securities underlying the Call Option which was exercised, pay out of the moneys
held for the account of the Series to which such Call Option was specifically
allocated the total amount payable to the Clearing Member through whom the Call
Option was exercised, provided that the same conforms to the total amount
payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the
Administrator to deliver to the Custodian a Certificate specifying with respect
to such Put Option: (a) the Series to which such Put Option was specifically
allocated; (b) the name of the issuer and the title and number of shares subject
to the Put Option; (c) the expiration date; (d) the date of exercise and
settlement; (e) the exercise price per share; (f) the total amount to be paid to
the Fund upon such exercise; and (g) the name of the Clearing Member through
whom such Put Option was exercised. The Custodian shall, upon receipt of the
amount payable upon the exercise of the Put Option, deliver or direct the
Depository to deliver the Securities specifically allocated to such Series,
provided the same conforms to the amount payable to the Fund as set forth in
such Certificate.
5. Promptly after the exercise by the Fund of any Stock Index Option
purchased by the Fund pursuant to paragraph 1 hereof, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certificate specifying
with respect to such Stock Index Option: (a) the Series to which such Stock
Index Option was specifically allocated; (b) the type of Stock Index Option (put
or call); (c) the number of Options being exercised; (d) the stock index to
which such Option relates; (e) the expiration date; (f) the exercise price; (g)
the total amount to be received by the Fund in connection with such exercise;
and (h) the Clearing Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the Fund shall deliver
or cause the Administrator to deliver to the Custodian a Certificate specifying
with respect to such Covered Call Option: (a) the Series for which such Covered
Call Option was written; (b) the name of the issuer and the title and number of
shares for which the Covered Call Option was written and which underlie the
same; (c) the expiration date; (d) the exercise price; (e) the premium to be
received by the Fund; (f) the date such Covered Call Option was written; and (g)
the name of the Clearing Member through whom the premium is to be received. The
Custodian shall deliver or cause to be delivered, in exchange for receipt of the
premium specified in the Certificate with respect to such Covered Call Option,
such receipts as are required in accordance with the customs prevailing among
Clearing Members dealing in Covered Call Options and shall impose, or direct the
Depository to impose, upon the underlying Securities specified in the
Certificate specifically allocated to such Series such restrictions as may be
required by such receipts. Notwithstanding the foregoing, the Custodian has the
right, upon prior written notification to the Fund, at any time to refuse to
issue any receipts for Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Option.
7. Whenever a Covered Call Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certificate instructing
the Custodian to deliver, or to direct the Depository to deliver, the Securities
subject to such Covered Call Option and specifying: (a) the Series for which
such Covered Call Option was written; (b) the name of the issuer and the title
and number of
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shares subject to the Covered Call Option; (c) the Clearing Member to whom the
underlying Securities are to be delivered; and (d) the total amount payable to
the Fund upon such delivery. Upon the return and/or cancellation of any receipts
delivered pursuant to paragraph 6 of this Article, the Custodian shall deliver,
or direct the Depository to deliver, the underlying Securities as specified in
the Certificate against payment of the amount to be received as set forth in
such Certificate.
8. Whenever the Fund writes a Put Option, the Fund shall deliver or cause
the Administrator to deliver to the Custodian a Certificate specifying with
respect to such Put Option: (a) the Series for which such Put Option was
written; (b) the name of the issuer and the title and number of shares for which
the Put Option is written and which underlie the same; (c) the expiration date;
(d) the exercise price; (e) the premium to be received by the Fund; (f) the date
such Put Option is written; (g) the name of the Clearing Member through whom the
premium is to be received and to whom a Put Option guarantee letter is to be
delivered; (h) the amount of cash, and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in the Senior
Security Account for such Series; and (i) the amount of cash and/or the amount
and kind of Securities specifically allocated to such Series to be deposited
into the Collateral Account for such Series. The Custodian shall, after making
the deposits into the Collateral Account specified in the Certificate, issue a
Put Option guarantee letter substantially in the form utilized by the Custodian
on the date hereof, and deliver the same to the Clearing Member specified in the
Certificate against receipt of the premium specified in said Certificate.
Notwithstanding the foregoing, the Custodian shall be under no obligation to
issue any Put Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and described in the preceding
paragraph is exercised, the Fund shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying: (a) the Series to which such
Put Option was written; (b) the name of the issuer and title and number of
shares subject to the Put Option; (c) the Clearing Member from whom the
underlying Securities are to be received; (d) the total amount payable by the
Fund upon such delivery; (e) the amount of cash and/or the amount and kind of
Securities specifically allocated to such Series to be withdrawn from the
Collateral Account for such Series and (f) the amount of cash and/or the amount
and kind of Securities, specifically allocated to such Series, if any, to be
withdrawn from the Senior Security Account. Upon the return and/or cancellation
of any Put Option guarantee letter or similar document issued by the Custodian
in connection with such Put Option, the Custodian shall pay out of the moneys
held for the account of the Series to which such Put Option was specifically
allocated the total amount payable to the Clearing Member specified in the
Certificate as set forth in such Certificate against delivery of such
Securities, and shall make the withdrawals specified in such Certificate.
10. Whenever the Fund writes a Stock Index Option, the Fund shall deliver
or cause the Administrator to deliver to the Custodian a Certificate specifying
with respect to such Stock Index Option: (a) the Series for which such Stock
Index Option was written; (b) whether such Stock Index Option is a put or a
call; (c) the number of options written; (d) the stock index to which such
Option relates; (e) the expiration date; (f) the exercise price; (g) the
Clearing Member through whom such Option was written; (h) the premium to be
received by the Fund; (i) the amount of cash and/or the amount and kind of
Securities, if any, specifically allocated to such Series to be deposited in the
Senior Security Account for such Series; (j) the amount of cash and/or the
amount and kind of Securities, if any, specifically allocated to such Series to
be deposited in the Collateral Account for such Series; and (k) the amount of
cash and/or the amount and kind of Securities, if any, specifically allocated to
such Series to be deposited in a Margin Account, and the name in which such
account is to be or has been established. The Custodian shall, upon receipt of
the premium specified in the Certificate, make the deposits, if any, into the
Senior Security Account specified in the Certificate, and either (1) deliver
such receipts, if any, which the Custodian has specifically agreed to issue,
which are in accordance with the customs prevailing among Clearing Members in
Stock Index Options and make the deposits into the Collateral Account specified
in the Certificate, or (2) make the deposits into the Margin Account specified
in the Certificate.
11. Whenever a Stock Index Option written by the Fund and described in the
preceding paragraph of this Article is exercised, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certificate specifying
with respect to such Stock Index Option: (a) the Series for which such Stock
Index Option was written; (b) such information as may be necessary to identify
the Stock Index Option being exercised; (c) the Clearing Member through whom
such Stock Index Option is being exercised; (d) the total amount payable upon
such exercise, and whether such amount is to be paid by or to the Fund; (e) the
amount of cash and/or amount and
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kind of Securities, if any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series; and the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn from the Collateral
Account for such Series. Upon the return and/or cancellation of the receipt, if
any, delivered pursuant to the preceding paragraph of this Article, the
Custodian shall pay out of the moneys held for the account of the Series to
which such Stock Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any, as specified
therein.
12. Whenever the Fund purchases any Option identical to a previously
written Option described in paragraphs, 6, 8 or 10 of this Article in a
transaction expressly designated as a "Closing Purchase Transaction" in order to
liquidate its position as a writer of an Option, the Fund shall deliver or cause
the Administrator to deliver to the Custodian a Certificate specifying with
respect to the Option being purchased: (a) that the transaction is a Closing
Purchase Transaction; (b) the Series for which the Option was written; (c) the
name of the issuer and the title and number of shares subject to the Option, or,
in the case of a Stock Index Option, the stock index to which such Option
relates and the number of Options held; (d) the exercise price; (e) the premium
to be paid by the Fund; (f) the expiration date; (g) the type of Option (put or
call); (h) the date of such purchase; (i) the name of the Clearing Member to
whom the premium is to be paid; and (j) the amount of cash and/or the amount and
kind of Securities, if any, to be withdrawn from the Collateral Account, a
specified Margin Account, or the Senior Security Account for such Series. Upon
the Custodian's payment of the premium and the return and/or cancellation of any
receipt issued pursuant to paragraphs 6, 8 or 10 of this Article with respect to
the Option being liquidated through the Closing Purchase Transaction, the
Custodian shall remove, or direct the Depository to remove, the previously
imposed restrictions on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a Closing Purchase
Transaction with respect to any Option purchased or written by the Fund and
described in this Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3 Article III herein, and
upon the return and/or cancellation of any receipts issued by the Custodian,
shall make such withdrawals from the Collateral Account, and the Margin Account
and/or the Senior Security Account as may be specified in a Certificate received
in connection with such expiration, exercise, or consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures Contract, the Fund shall
deliver or cause the Administrator to deliver to the Custodian a Certificate
specifying with respect to such Futures Contract, (or with respect to any number
of identical Futures Contract(s)): (a) the Series for which the Futures Contract
is being entered; (b) the category of Futures Contract (the name of the
underlying stock index or financial instrument); (c) the number of identical
Futures Contracts entered into; (d) the delivery or settlement date of the
Futures Contract(s); (e) the date the Futures Contract(s) was (were) entered
into and the maturity date; (f) whether the Fund is buying (going long) or
selling (going short) on such Futures Contract(s); (g) the amount of cash and/or
the amount and kind of Securities, if any, to be deposited in the Senior
Security Account for such Series; (h) the name of the broker, dealer, or futures
commission merchant through whom the Futures Contract was entered into; and (i)
the amount of fee or commission, if any, to be paid and the name of the broker
dealer, or futures commission merchant to whom such amount is to be paid. The
Custodian shall make the deposits, if any, to the Margin Account in accordance
with the terms and conditions of the Margin Account Agreement. The Custodian
shall make payment out of the moneys specifically allocated to such Series of
the fee or commission, if any, specified in the Certificate and deposit in the
Senior Security Account for such Series the amount of cash and/or the amount and
kind of Securities specified in said Certificate.
2. (a) Any variation margin payment or similar payment required to be made
by the Fund to a broker, dealer, or futures commission merchant with respect to
an outstanding Futures Contract, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
(b) Any variation margin payment or similar payment from a broker,
dealer, or futures commission merchant to the Fund with respect to an
outstanding Futures Contract, shall be received and dealt with by the Custodian
in accordance with the terms and conditions of the Margin Account Agreement.
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3. Whenever a Futures Contract held by the Custodian hereunder is retained
by the Fund until delivery or settlement is made on such Futures Contract, the
Fund shall deliver or cause the Administrator to deliver to the Custodian a
Certificate specifying: (a) the Futures Contract and the Series to which the
same relates; (b) with respect to a Stock Index Futures Contract, the total cash
settlement amount to be paid or received, and with respect to a Financial
Futures Contract, the Securities and/or amount of cash to be delivered or
received; (c) the broker, dealer, or futures commission merchant to or from whom
payment or delivery is to be made or received; and (d) the amount of cash and/or
Securities to be withdrawn from the Senior Security Account for such Series. The
Custodian shall make the payment or delivery specified in the Certificate, and
delete such Futures Contract from the statements delivered to the Fund pursuant
to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures Contract to offset a
Futures Contract held by the Custodian hereunder, the Fund shall deliver or
cause the Administrator to deliver to the Custodian a Certificate specifying:
(a) the items of information required in a Certificate described in paragraph 1
of this Article, and (b) the Futures Contract being offset. The Custodian shall
make payment out of the money specifically allocated to such Series of the fee
or commission, if any, specified in the Certificate and delete the Futures
Contract being offset from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein, and make such withdrawals from the Senior
Security Account for such Series as may be specified in such Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract Option by the Fund,
the Fund shall deliver or cause the Administrator to deliver to the Custodian a
Certificate specifying with respect to such Futures Contract Option: (a) the
Series to which such Option is specifically allocated; (b) the type of Futures
Contract Option (put or call); (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract underlying the
Futures Contract Option purchased; (d) the expiration date; (e) the exercise
price; (f) the dates of purchase and settlement; (g) the amount of premium to be
paid by the Fund upon such purchase; (h) the name of the broker or futures
commission merchant through whom such option was purchased; and (i) the name of
the broker, or futures commission merchant, to whom payment is to be made. The
Custodian shall pay out of the moneys specifically allocated to such Series, the
total amount to be paid upon such purchase to the broker or futures commissions
merchant through whom the purchase was made, provided that the same conforms to
the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Option purchased by the
Fund pursuant to paragraph 1 hereof, the Fund shall deliver or cause the
Administrator to deliver to the Custodian a Certificate specifying with respect
to each such sale: (a) Series to which such Futures Contract Option was
specifically allocated; (b) the type of Future Contract Option (put or call);
(c) the type of Futures Contract and such other information as may be necessary
to identify the Futures Contract underlying the Futures Contract Option; (d) the
date of sale; (e) the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale and (h) the name of the broker of
futures commission merchant through whom the sale was made. The Custodian shall
consent to the cancellation of the Futures Contract Option being closed against
payment to the Custodian of the total amount payable to the Fund, provided the
same conforms to the total amount payable as set forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the Fund pursuant to
paragraph 1 is exercised by the Fund, the Fund shall deliver or cause the
Administrator to deliver to the Custodian a Certificate specifying: (a) the
Series to which such Futures Contract Option was specifically allocated; (b) the
particular Futures Contract Option (put or call) being exercised; (c) the type
of Futures Contract underlying the Futures Contract Option; (d) the date of
exercise; (e) the name of the broker or futures commission merchant through whom
the Futures Contract Option is exercised; (f) the net total amount, if any,
payable by the Fund; (g) the amount, if any, to be received by the Fund; and (h)
the amount of cash and/or the amount and kind of Securities to be deposited in
the Senior Security Account for such Series. The Custodian shall make, out of
the moneys and Securities specifically allocated to such Series, the payments,
if any, and the deposits, if any, into the Senior Security Account as specified
in the Certificate. The deposits, if any, to be made to the Margin Account shall
be made by the Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
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4. Whenever the Fund writes a Futures Contract Option, the Fund shall
deliver or cause the Administrator to deliver to the Custodian a Certificate
specifying with respect to such Futures Contract Option: (a) the Series for
which such Futures Contract Option was written; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and such other
information as may be necessary to identify the Futures Contract underlying the
Futures Contract Option; (d) the expiration date; (e) the exercise price; (f)
the premium to be received by the Fund; (g) the name of the broker or futures
commission merchant through whom the premium is to be received; and (h) the
amount of cash and/or the amount and kind of Securities, if any, to be deposited
in the Senior Security Account for such Series. The Custodian shall, upon
receipt of the premium specified in the Certificate, make out of the moneys and
Securities specifically allocated to such Series the deposits into the Senior
Security Account, if any, as specified in the Certificate. The deposits, if any,
to be made to the Margin Account shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the Fund which is a call
is exercised, the Fund shall deliver or cause the Administrator to deliver to
the Custodian a Certificate specifying: (a) the Series to which such Futures
Contract Option was specifically allocated; (b) the particular Futures Contract
Option exercised; (c) the type of Futures Contract underlying the Futures
Contract Option; (d) the name of the broker or futures commission merchant
through whom such Futures Contract Option was exercised; (e) the net total
amount, if any, payable to the Fund upon such exercise; (f) the net total
amount, if any, payable by the Fund upon such exercise; and (g) the amount of
cash and/or the amount and kind of Securities to be deposited in the Senior
Security Account for such Series. The Custodian shall, upon its receipt of the
net total amount payable to the Fund, if any, specified in such Certificate make
the payments, if any, and the deposits, if any, into the Senior Security Account
as specified in the Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
6. Whenever a Futures Contract Option which is written by the Fund and
which is a put is exercised, the Fund shall deliver or cause the Administrator
to deliver to the Custodian a Certificate specifying: (a) the Series to which
such Option was specifically allocated; (b) the particular Futures Contract
Option exercised; (c) the type of Futures Contract underlying such Futures
Contract Option; (d) the name of the broker or futures commission merchant
through whom such Futures Contract Option is exercised; (e) the net total
amount, if any, payable to the Fund upon such exercise; (f) the net total
amount, if any, payable by the Fund upon such exercise; and (g) the amount and
kind of Securities and/or cash to be withdrawn from or deposited in, the Senior
Security Account for such Series, if any. The Custodian shall, upon its receipt
of the net total amount payable to the Fund, if any, specified in the
Certificate, make out of the moneys and Securities specifically allocated to
such Series, the payments, if any, and the deposits, if any, into the Senior
Security Account as specified in the Certificate. The deposits to and/or
withdrawals from the Margin Account, if any, shall be made by the Custodian in
accordance with the terms and conditions of the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract Option identical to a
previously written Futures Contract Option described in this Article in order to
liquidate its position as a writer of such Futures Contract Option, the Fund
shall deliver or cause the Administrator to deliver to the Custodian a
Certificate specifying with respect to the Futures Contract Option being
purchased: (a) the Series to which such Option is specifically allocated; (b)
that the transaction is a closing transaction; (c) the type of Future Contract
and such other information as may be necessary to identify the Futures Contract
underlying the Futures Option Contract; (d) the exercise price; (e) the premium
to be paid by the Fund; (f) the expiration date; (g) the name of the broker or
futures commission merchant to whom the premium is to be paid; and (h) the
amount of cash and/or the amount and kind of Securities if any, to be withdrawn
from the Senior Security Account for such Series. The Custodian shall effect the
withdrawals from the Senior Security Account specified in the Certificate. The
withdrawals, if any, to be made from the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the Margin Account
Agreement.
8. Upon the expiration, exercise, or consummation of a closing transaction
with respect to, any Futures Contract Option written or purchased by the Fund
and described in this Article, the Custodian shall (a) delete such Futures
Contract Option from the statements delivered to the Fund pursuant to paragraph
3 of Article III herein and, (b) make such withdrawals from and/or in the case
of an exercise such deposits into the Senior Security Account as may be
specified in a Certificate. The deposits to and/or withdrawals from the Margin
Account, if any, shall be made by the Custodian in accordance with the terms and
conditions of the Margin Account Agreement.
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9. Futures Contracts acquired by the Fund through the exercise of a Futures
Contract Option described in this Article shall be subject to Article VI hereof.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the Fund, the Fund shall
deliver or cause the Administrator to deliver to the Custodian a Certificate
specifying: (a) the Series for which such short sale was made; (b) the name of
the issuer and the title of the Security; (c) the number of shares or principal
amount sold, and accrued interest or dividends, if any; (d) the dates of the
sale and settlement; (e) the sale price per unit; (f) the total amount credited
to the Fund upon such sale, if any, (g) the amount of cash and/or the amount and
kind of Securities, if any, which are to be deposited in a Margin Account and
the name in which such Margin Account has been or is to be established; (h) the
amount of cash and/or the amount and kind of Securities, if any, to be deposited
in a Senior Security Account, and (i) the name of the broker through whom such
short sale was made. The Custodian shall upon its receipt of a statement from
such broker confirming such sale and that the total amount credited to the Fund
upon such sale, if any, as specified in the Certificate is held by such broker
for the account of the Custodian (or any nominee of the Custodian) as custodian
of the Fund, issue a receipt or make the deposits into the Margin Account and
the Senior Security Account specified in the Certificate.
2. In connection with the closing-out of any short sale, the Fund shall
deliver or cause the Administrator to deliver to the Custodian a Certificate
specifying with respect to each such closing out: (a) the Series for which such
transaction is being made; (b) the name of the issuer and the title of the
Security; (c) the number of shares or the principal amount, and accrued interest
or dividends, if any, required to effect such closing-out to be delivered to the
broker; (d) the dates of closing-out and settlement; (e) the purchase price per
unit; (f) the net total amount payable to the Fund upon such closing-out; (g)
the net total amount payable to the broker upon such closing-out; (h) the amount
of cash and the amount and kind of Securities to be withdrawn, if any, from the
Margin Account; (i) the amount of cash and/or the amount and kind of Securities,
if any, to be withdrawn from the Senior Security Account; and (j) the name of
the broker through whom the Fund is effecting such closing-out. The Custodian
shall, upon receipt of the net total amount payable to the Fund upon such
closing-out, and the return and/or cancellation of the receipts, if any, issued
by the Custodian with respect to the short sale being closed-out, pay out of the
moneys held for the account of the Fund to the broker the net total amount
payable to the broker, and make the withdrawals from the Margin Account and the
Senior Security Account, as the same are specified in the Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase Agreement with
respect to Securities and money held by the Custodian hereunder, the Fund shall
deliver or cause the Administrator to deliver to the Custodian a Certificate, or
in the event such Reverse Repurchase Agreement is a Money Market Security, a
Certificate or Oral Instructions specifying: (a) the Series for which the
Reverse Repurchase Agreement is entered; (b) the total amount payable to the
Fund in connection with such Reverse Repurchase Agreement and specifically
allocated to such Series; (c) the broker or dealer through or with whom the
Reverse Repurchase Agreement is entered; (d) the amount and kind of Securities
to be delivered by the Fund to such broker or dealer; (e) the date of such
Reverse Repurchase Agreement; and (f) the amount of cash and/or the amount and
kind of Securities, if any, specifically allocated to such Series to be
deposited in a Senior Security Account for such Series in connection with such
Reverse Repurchase Agreement. The Custodian shall, upon receipt of the total
amount payable to the Fund specified in the Certificate or Oral Instructions
make the delivery to the broker or dealer, and the deposits, if any, to the
Senior Security Account, specified in such Certificate or Oral Instructions.
2. Upon the termination of a Reverse Repurchase Agreement described in
preceding paragraph 1 of this Article, the Fund shall deliver or cause the
Administrator to deliver a Certificate or, in the event such Reverse Repurchase
Agreement is a Money Market Security, a Certificate or Oral Instructions to the
Custodian specifying: (a) the Reverse Repurchase Agreement being terminated and
the Series for which same was entered; (b) the total amount payable by the Fund
in connection with such termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series in connection
with such termination; (d) the date of termination; (e) the name of the broker
or dealer with or through whom the Reverse Repurchase Agreement is to be
terminated; and (f) the amount of cash and/or the amount and kind of Securities
to be withdrawn from the Senior Securities Account for such
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Series. The Custodian shall, upon receipt of the amount and kind of Securities
to be received by the Fund specified in the Certificate or Oral Instructions,
make the payment to the broker or dealer, and the withdrawals, if any, from the
Senior Security Account, specified in such Certificate or Oral Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities specifically allocated
to a Series held by the Custodian hereunder, the Fund shall deliver or cause the
Administrator to deliver to the Custodian a Certificate specifying with respect
to each such loan: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the title of the
Securities, (c) the number of shares or the principal amount loaned, (d) the
date of loan and delivery, (e) the total amount to be delivered to the Custodian
against the loan of the Securities, including the amount of cash collateral and
the premium, if any, separately identified, and (f) the name of the broker,
dealer, or financial institution to which the loan was made. The Custodian shall
deliver the Securities thus designated to the broker, dealer or financial
institution to which the loan was made upon receipt of the total amount
designated as to be delivered against the loan of Securities. The Custodian may
accept payment in connection with a delivery otherwise than through the Book-
Entry System or Depository only in the form of a certified or bank cashier's
check payable to the order of the Fund or the Custodian drawn on New York
Clearing House funds and may deliver Securities in accordance with the customs
prevailing among dealers in securities.
2. Promptly after each termination of the loan of Securities by the Fund,
the Fund shall deliver or cause the Administrator to deliver to the Custodian a
Certificate specifying with respect to each such loan termination and return of
Securities: (a) the Series to which the loaned Securities are specifically
allocated; (b) the name of the issuer and the title of the Securities to be
returned, (c) the number of shares or the principal amount to be returned, (d)
the date of termination, (e) the total amount to be delivered by the Custodian
(including the cash collateral for such Securities minus any offsetting credits
as described in said Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be returned. The Custodian
shall receive all Securities returned from the broker, dealer, or financial
institution to which such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the total amount
payable upon such return of Securities as set forth in the Certificate.
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such deposits to, or
withdrawals from, a Senior Security Account as specified in a Certificate
received by the Custodian. Such Certificate shall specify the Series for which
such deposit or withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such Series to be
deposited in, or withdrawn from, such Senior Security Account for such Series.
In the event the Certificate fails to specify the Series, the name of the
issuer, the title and the number of shares or the principal amount of any
particular Securities to be deposited by the Custodian into, or withdrawn from,
a Senior Securities Account, the Custodian shall be under no obligation to make
any such deposit or withdrawal and shall so notify the Administrator.
2. The Custodian shall make deliveries or payments from a Margin Account to
the broker, dealer, futures commission merchant or Clearing Member in whose
name, or for whose benefit, the account was established as specified in the
Margin Account Agreement.
3. Amounts received by the Custodian as payments or distributions with
respect to Securities deposited in any Margin Account shall be dealt with in
accordance with the terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and security interest in and
to any property at any time held by the Custodian in any Collateral Account
described herein. In accordance with applicable law the Custodian may enforce
its lien and realize on any such property whenever the Custodian has made
payment or delivery pursuant to any Put Option guarantee letter or similar
document or any receipt issued hereunder by the Custodian. In the event the
Custodian should realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee letter or similar
document or any receipt, such deficiency shall be a debt owed the Custodian by
the Fund within the scope of Article XIV herein.
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5. On each business day the Custodian shall furnish the Fund with a
statement with respect to each Margin Account in which money or Securities are
held specifying as of the close of business on the previous business day: (a)
the name of the Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The Custodian shall make
available upon request to any broker, dealer, or futures commission merchant
specified in the name of a Margin Account a copy of the statement furnished the
Fund with respect to such Margin Account.
6. Promptly after the close of business on each business day in which cash
and/or Securities are maintained in a Collateral Account for any Series, the
Custodian shall furnish the Administrator with a statement with respect to such
Collateral Account specifying the amount of cash and/or the amount and kind of
Securities held therein. No later than the close of business next succeeding the
delivery to the Fund of such statement, the Fund shall deliver or cause the
Administrator to deliver to the Custodian a Certificate specifying the then
market value of the Securities described in such statement. In the event such
then market value is indicated to be less than the Custodian's obligation with
respect to any outstanding Put Option guarantee letter or similar document, the
Fund shall promptly specify or cause the Administrator to promptly specify in a
Certificate the additional cash and/or Securities to be deposited in such
Collateral Account to eliminate such deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall deliver or cause the Administrator to deliver to the
Custodian a copy of the resolution of the Board of Trustees of the Fund,
certified by the Secretary, the Clerk, any Assistant Secretary or any Assistant
Clerk, either (i) setting forth with respect to the Series specified therein the
date of the declaration of a dividend or distribution, the date of payment
thereof, the record date as of which shareholders entitled to payment shall be
determined, the amount payable per Share of such Series to the shareholders of
record as of that date and the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein the declaration of
dividends and distributions on a daily basis and authorizing the Custodian to
rely on Oral Instructions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall be determined,
the amount payable per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent on the payment
date.
2. Upon the payment date specified in such resolution, Oral Instructions or
Certificate, as the case may be, the Custodian shall pay out of the moneys held
for the account of each Series the total amount payable to the Dividend Agent
and any sub-dividend agent or co-dividend agent of the Fund with respect to such
Series.
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall deliver or cause the
Administrator to deliver to the Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade date, and price; and
(b) The amount of money to be received by the Custodian for the sale of
such Shares and specifically allocated to the separate account in the name of
such Series.
2. Upon receipt of such money from the Transfer Agent, the Custodian shall
credit such money to the separate account in the name of the Series for which
such money was received.
3. Upon issuance of any Shares of any Series described in the foregoing
provisions of this Article, the Custodian shall pay, out of the money held for
the account of such Series, all original issue or other taxes required to be
paid by the Fund in connection with such issuance upon the receipt of a
Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund desires the Custodian
to make payment out of the money held by the Custodian hereunder in connection
with a redemption of any Shares, it shall deliver or cause the Administrator to
deliver to the Custodian a Certificate specifying:
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(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice setting forth the
Series and number of Shares received by the Transfer Agent for redemption and
that such Shares are in good form for redemption, the Custodian shall make
payment to the Transfer Agent out of the moneys held in the separate account in
the name of the Series the total amount specified in the Certificate delivered
pursuant to the foregoing paragraph 4 of this Article.
6. Notwithstanding the above provisions regarding the redemption of any
Shares, whenever any Shares are redeemed pursuant to any check redemption
privilege which may from time to time be offered by the Fund, the Custodian,
unless otherwise instructed by a Certificate, shall, upon receipt of an advice
from the Fund or its agent setting forth that the redemption is in good form for
redemption in accordance with the check redemption procedure, honor the check
presented as part of such check redemption privilege out of the moneys held in
the separate account of the Series of the Shares being redeemed.
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion advance funds on behalf
of any Series which results in an overdraft because the moneys held by the
Custodian in the separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities specifically allocated to
such Series, as set forth in a Certificate or Oral Instructions, or which
results in an overdraft in the separate account of such Series for some other
reason, or if the Fund is for any other reason indebted to the Custodian with
respect to a Series, including any indebtedness to The Bank of New York under
the Fund's Cash Management and Related Services Agreement, (except a borrowing
for investment or for temporary or emergency purposes using Securities as
collateral pursuant to a separate agreement and subject to the provisions of
paragraph 2 of this Article), such overdraft or indebtedness shall be deemed to
be a loan made by the Custodian to the Fund for such Series payable on demand
and shall bear interest from the date incurred at a rate per annum (based on a
360-day year for the actual number of days involved) equal to 1/2% over
Custodian's prime commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such prime commercial
lending rate but in no event to be less than 6' per annum. In addition, the Fund
hereby agrees that the Custodian shall have a continuing lien and security
interest in and to any property specifically allocated to such Series at any
time held by it for the benefit of such Series or in which the Fund may have an
interest which is then in the Custodian's possession or control or in possession
or control of any third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any time to charge any such
overdraft or indebtedness together with interest due thereon against any balance
of account standing to such Series' credit on the Custodian's books. In
addition, the Fund hereby covenants that on each Business Day on which either it
intends to enter a Reverse Repurchase Agreement and/or otherwise borrow from a
third party, or which next succeeds a Business Day on which at the close of
business the Fund had outstanding a Reverse Repurchase Agreement or such a
borrowing, it shall prior to 9 a.m., New York City time, advise the Custodian,
in writing, of each such borrowing, shall specify the Series to which the same
relates, and shall not incur any indebtedness not so specified other than from
the Custodian.
2. The Fund will cause to be delivered to the Custodian by any bank
(including, if the borrowing is pursuant to a separate agreement, the Custodian)
from which it borrows money for investment or for temporary or emergency
purposes using Securities held by the Custodian hereunder as collateral for such
borrowings, a notice or undertaking in the form currently employed by any such
bank setting forth the amount which such bank will loan to the Fund against
delivery of a stated amount of collateral. The Fund shall promptly deliver to
the Custodian a Certificate specifying with respect to each such borrowing: (a)
the Series to which such borrowing relates; (b) the name of the bank, (c) the
amount and terms of the borrowing, which may be set forth by incorporating by
reference an attached promissory note, duly endorsed by the Fund, or other loan
agreement, (d) the time and date, if known, on which the loan is to be entered
into, (e) the date on which the loan becomes due and payable, (f) the total
amount payable to the Fund on the borrowing date, (g) the market value of
Securities to be delivered as collateral for such loan, including the name of
the issuer, the title and the number of shares or the principal amount of any
particular Securities, and (h) a statement specifying whether such loan is for
investment purposes or for temporary or emergency purposes and that such loan is
in conformance with the Investment Company Act of 1940 and the Fund's
prospectus. The Custodian shall deliver on the borrowing date specified in a
Certificate the specified collateral and the executed promissory note, if any,
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against delivery by the lending bank of the total amount of the loan payable,
provided that the same conforms to the total amount payable as set forth in the
Certificate. The Custodian may, at the option of the lending bank, keep such
collateral in its possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory note or loan
agreement. The Custodian shall deliver such Securities as additional collateral
as may be specified in a Certificate to collateralize further any transaction
described in this paragraph. The Fund shall cause all Securities released from
collateral status to be returned directly to the Custodian, and the Custodian
shall receive from time to time such return of collateral as may be tendered to
it. In the event that the Fund fails to specify in a Certificate the Series, the
name of the issuer, the title and number of shares or the principal amount of
any particular Securities to be delivered as collateral by the Custodian, the
Custodian shall not be under any obligation to deliver any Securities.
ARTICLE XV
TERMINAL LINK
1. At no time and under no circumstances shall the Administrator on behalf
of the Fund be obligated to have or utilize the Terminal Link, and the
provisions of this Article shall apply if, but only if, the Fund in its sole and
absolute discretion directs the Administrator to utilize the Terminal Link to
transmit Certificates to the Custodian.
2. The Terminal Link shall be utilized by the Administrator on behalf of
the Fund only for the purpose of providing Certificates to the Custodian with
respect to transactions involving Securities or for the transfer of money to be
applied to the payment of dividends, distributions or redemptions of Fund
Shares, and shall be utilized by the Custodian only for the purpose of providing
notices to the Administrator. Such use shall commence only after the Fund shall
have delivered or caused the Administrator to have delivered to the Custodian a
Certificate substantially in the form of Exhibit D and shall have established
access codes. Each use of the Terminal Link by the Administrator shall
constitute a representation and warranty that the Terminal Link is being used
only for the purposes permitted hereby, that at least one Officer has utilized
an access code, that such safekeeping procedures have been established, and that
such use does not contravene the Investment Company Act of 1940, as amended, or
the rules or regulations thereunder.
3. The Administrator shall obtain and maintain at its own cost and expense
all equipment and services, including, but not limited to communications
services, necessary for it to utilize the Terminal Link, and the Custodian shall
not be responsible for the reliability or availability of any such equipment or
services.
4. The Fund and the Administrator acknowledges that any data bases made
available as part of, or through the Terminal Link and any proprietary data,
software, processes, information and documentation (other than any such which
are or become part of the public domain or are legally required to be made
available to the public) (collectively, the "Information"), are the exclusive
and confidential property of the Custodian. The Fund and the Administrator
shall, and shall cause others to which either discloses the Information, to keep
the Information confidential by using the same care and discretion it uses with
respect to its own confidential property and trade secrets, and shall neither
make nor permit any disclosure without the express prior written consent of the
Custodian.
5. Upon termination of this Agreement for any reason, the Fund and the
Administrator shall return to the Custodian any and all copies of the
Information which are in its respective possession or under its respective
control, or which either distributed to third parties. The provisions of this
Article shall not affect the copyright status of any of the Information which
may be copyrighted and shall apply to all Information whether or not
copyrighted.
6. The Custodian reserves the right to modify the Terminal Link from time
to time without notice to the Fund or the Administrator except that the
Custodian shall give the Administrator notice not less than 75 days in advance
of any modification which would materially adversely affect the Administrator's
operation, and the Administrator agrees that the it shall not modify or attempt
to modify the Terminal Link without the Custodian's prior written consent. The
Fund acknowledges that any software or procedures provided the Fund as part of
the Terminal Link are the property of the Custodian and, accordingly, the
Administrator agrees that any modifications to the Terminal Link, whether by the
Administrator, or by the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
7. Neither the Custodian nor any manufacturers and suppliers it utilizes or
the Fund utilizes in connection with the Terminal Link makes any warranties or
representations, express or implied,
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in fact or in law, including but not limited to warranties of merchantability
and fitness for a particular purpose.
8. The Administrator will cause its officers and employees to treat the
authorization codes and the access codes applicable to Terminal Link with
extreme care, and the Fund and the Administrator irrevocably authorizes the
Custodian to act in accordance with and rely on Certificates received by it
through the Terminal Link. The Fund and the Administrator acknowledge that it is
their respective responsibility to assure that only Officers use the Terminal
Link, and that Custodian shall not be responsible nor liable for use of the
Terminal Link by persons other than such persons or Officers, or by only a
single Officer, nor for any alteration, omission, or failure to promptly
forward.
9(a). Except as otherwise specifically provided in Section 9(b) of this
Article, the Custodian shall have no liability for any losses, damages,
injuries, claims, costs or expenses arising out of or in connection with any
failure, malfunction or other problem relating to the Terminal Link except for
money damages suffered as the direct result of the negligence of the Custodian
in an amount not exceeding for any incident $25,000 provided, however, that the
Custodian shall have no liability under this Section 9 if the Administrator
fails to comply with the provisions of Section 11.
9(b). The Custodian's liability for its negligence in executing or failing
to execute in accordance with a Certificate received through Terminal Link shall
be only with respect to a transfer of funds which is not made in accordance with
such Certificate after such Certificate shall have been duly acknowledged by the
Custodian, and shall be contingent upon the Administrator complying with the
provisions of Section 12 of this Article, and shall be limited to (i)
restoration of the principal amount mistransferred, if and to the extent that
the Custodian would be required to make such restoration under applicable law,
and (ii) the lesser of (A) the Fund's actual pecuniary loss incurred by reason
of its loss of use of the mistransferred funds or the funds which were not
transferred, as the case may be, or (B) compensation for the loss of the use of
the mistransferred funds or the funds which were not transferred, as the case
may be, at a rate per annum equal to the average federal funds rate as computed
from the Federal Reserve Bank of New York's daily determination of the effective
rate for federal funds, for the period during which a Fund has lost use of such
funds. In no event shall the Custodian have any liability for failing to execute
in accordance with a Certificate a transfer of funds where the Certificate is
received by the Custodian through Terminal Link other than through the
applicable transfer module for the particular instructions contained in such
Certificate.
10. Without limiting the generality of the foregoing, in no event shall the
Custodian or any manufacturer or supplier of its computer equipment, software or
services relating to the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which the Fund or the Administrator may
incur or experience by reason of its use of the Terminal Link even if the
Custodian or any manufacturer or supplier has been advised of the possibility of
such damages, nor with respect to the use of the Terminal Link shall the
Custodian or any such manufacturer or supplier be liable for acts of God, or
with respect to the following to the extent beyond such person's reasonable
control: machine or computer breakdown or malfunction, interruption or
malfunction of communication facilities, labor difficulties or any other similar
or dissimilar cause.
11. The Fund shall cause the Administrator to notify the Custodian of any
errors, omissions or interruptions in, or delay or unavailability of, the
Terminal Link as promptly as practicable, and in any event within 24 hours after
the earliest of (i) discovery thereof, (ii) the Business Day on which discovery
should have occurred through the exercise of reasonable care and (iii) in the
case of any error, the date of actual receipt of the earliest notice which
reflects such error, it being agreed that discovery and receipt of notice may
only occur on a business day. The Custodian shall promptly advise the Fund
whenever the Custodian learns of any errors, omissions or interruption in, or
delay or unavailability of, the Terminal Link.
12. The Custodian shall verify to the Administrator, by use of the Terminal
Link, receipt of each Certificate the Custodian receives through the Terminal
Link, and in the absence of such verification the Custodian shall not be liable
for any failure to act in accordance with such Certificate and neither the Fund
nor the Administrator may claim that such Certificate was received by the
Custodian. Such verification, which may occur after the Custodian has acted upon
such Certificate, shall be accomplished on the same day on which such
Certificate is received.
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
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OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to employ, as sub-custodian
for each Series' Foreign Securities (as such term is defined in paragraph (c)(1)
of Rule 17f-5 under the Investment Company Act of 1940, as amended) and other
assets, the foreign banking institutions and foreign securities depositories and
clearing agencies designated on Schedule I hereto ("Foreign Sub-Custodians") to
carry out their respective responsibilities in accordance with the terms of the
sub-custodian agreement between each such Foreign SubCustodian and the
Custodian, copies of which have been previously delivered to the Fund and
receipt of which is hereby acknowledged (each such agreement, a "Foreign
SubCustodian Agreement"). Upon receipt of a Certificate, together with a
certified resolution substantially in the form attached as Exhibit E of the
Fund's Board of Trustees, the Fund may designate any additional foreign sub-
custodian with which the Custodian has an agreement for such entity to act as
the Custodian's agent, as its sub-custodian and any such additional foreign sub-
custodian shall be deemed added to Schedule I. Upon receipt of a Certificate
from the Fund, the Custodian shall cease the employment of any one or more
Foreign Sub-Custodians for maintaining custody of the Fund's assets and such
Foreign Sub-Custodian shall be deemed deleted from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be substantially in the form
previously delivered to the Fund and will not be amended in a way that
materially adversely affects the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as belonging to each Series of
the Fund the Foreign Securities of such Series held by each Foreign Sub-
Custodian. At the election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claims by the Fund or any Series
against a Foreign Sub-Custodian as a consequence of any loss, damage, cost,
expense, liability or claim sustained or incurred by the Fund or any Series if
and to the extent that the Fund or such Series has not been made whole for any
such loss, damage, cost, expense, liability or claim.
4. Upon request of the Fund, the Custodian will, consistent with the terms
of the applicable Foreign SubCustodian Agreement, use reasonable efforts to
arrange for the independent accountants of the Fund to be afforded access to the
books and records of any Foreign Sub-Custodian insofar as such books and records
relate to the performance of such Foreign Sub-Custodian under its agreement with
the Custodian on behalf of the Fund.
5. The Custodian will supply to the Fund from time to time, as mutually
agreed upon, statements in respect of the securities and other assets of each
Series held by Foreign Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series' Foreign Securities
and other assets, and advices or notifications of any transfers of Foreign
Securities to or from each custodial account maintained by a Foreign Sub-
Custodian for the Custodian on behalf of the Series.
6. The Custodian shall furnish annually to the Fund, as mutually agreed
upon, information concerning the Foreign Sub-Custodians employed by the
Custodian. Such information shall be similar in kind and scope to that furnished
to the Fund in connection with the Fund's initial approval of such Foreign Sub-
Custodians and, in any event, shall include information pertaining to (i) the
Foreign Custodians' financial strength, general reputation and standing in the
countries in which they are located and their ability to provide the custodial
services required, and (ii) whether the Foreign Sub-Custodians would provide a
level of safeguards for safekeeping and custody of securities not materially
different from those prevailing in the United States. The Custodian shall
monitor the general operating performance of each Foreign Sub-Custodian, and at
least annually obtain and review the annual financial report published by such
Foreign SubCustodian to determine that it meets the financial criteria of an
"Eligible Foreign Custodian" under Rule 17f-5(c)(2)(i) or (ii). The Custodian
will promptly inform the Fund in the event that the Custodian learns that a
Foreign Sub-Custodian no longer satisfies the financial criteria of an "Eligible
Foreign Custodian" under such Rule. The Custodian agrees that it will use
reasonable care in monitoring compliance by each Foreign Sub-Custodian with the
terms of the relevant Foreign Sub-Custodian Agreement and that if it learns of
any breach of such Foreign Sub-Custodian Agreement believed by the Custodian to
have a material adverse effect on the Fund or any Series it will promptly notify
the Fund of such breach. The Custodian also agrees to use reasonable and
diligent efforts to enforce its rights under the relevant Foreign Sub-Custodian
Agreement.
7. The Custodian shall transmit promptly to the Fund all notices, reports
or other written information received pertaining to the Fund's Foreign
Securities, including without limitation,
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notices of corporate action, proxies and proxy solicitation materials.
8. Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for securities received for the account of any Series and
delivery of securities maintained for the account of such Series may be effected
in accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser or
dealer) against a receipt with the expectation of receiving later payment for
such securities from such purchaser or dealer.
9. Notwithstanding any other provision in this Agreement to the contrary,
with respect to any losses or damages arising out of or relating to any actions
or omissions of any Foreign Sub-Custodian the sole responsibility and liability
of the Custodian shall be to take appropriate action at the Fund's expense to
recover such loss or damage from the Foreign Sub-Custodian. It is expressly
understood and agreed that the Custodian's sole responsibility and liability
shall be limited to amounts so recovered from the Foreign SubCustodian.
ARTICLE XVII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in Article XVI neither
the Custodian nor its nominee shall be liable for any loss or damage, including
counsel fees, resulting from its action or omission to act or otherwise, either
hereunder or under any Margin Account Agreement, except for any such loss or
damage arising out of its own negligence or willful misconduct. In no event
shall the Custodian be liable to the Fund or any third party for special,
indirect or consequential damages or lost profits or loss of business, arising
under or in connection with this Agreement, even if previously informed of the
possibility of such damages and regardless of the form of action. The Custodian
may, with respect to questions of law arising hereunder or under any Margin
Account Agreement, apply for and obtain the advice and opinion of counsel to the
Fund or of its own counsel, at the expense of the Fund, and shall be fully
protected with respect to anything done or omitted by it in good faith in
conformity with such advice or opinion. The Custodian shall be liable to the
Fund for any loss or damage resulting from the use of the Book-Entry System or
any Depository arising by reason of any negligence or willful misconduct on the
part of the Custodian or any of its employees or agents.
2. Without limiting the generality of the foregoing, the Custodian shall be
under no obligation to inquire into, and shall not be liable for:
(a) The validity of the issue of any Securities purchased, sold, or written
by or for the Fund, the legality of the purchase, sale or writing thereof, or
the propriety of the amount paid or received therefor;
(b) The legality of the sale or redemption of any Shares, or the propriety
of the amount to be received or paid therefor;
(c) The legality of the declaration or payment of any dividend by the Fund;
(d) The legality of any borrowing by the Fund using Securities as
collateral;
(e) The legality of any loan of portfolio Securities, nor shall the
Custodian be under any duty or obligation to see to it that any cash collateral
delivered to it by a broker, dealer, or financial institution or held by it at
any time as a result of such loan of portfolio Securities of the Fund is
adequate collateral for the Fund against any loss it might sustain as a result
of such loan. The Custodian specifically, but not by way of limitation, shall
not be under any duty or obligation periodically to check or notify the Fund
that the amount of such cash collateral held by it for the Fund is sufficient
collateral for the Fund, but such duty or obligation shall be the sole
responsibility of the Fund.
In addition, the Custodian shall be under no duty or obligation to see that
any broker, dealer or financial institution to which portfolio Securities of the
Fund are lent pursuant to Article XIV of this Agreement makes payment to it of
any dividends or interest which are payable to or for the account of the Fund
during the period of such loan or at the termination of such loan, provided,
however, that the Custodian shall promptly notify the Fund in the event that
such dividends or interest are not paid and received when due; or
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(f) The sufficiency or value of any amounts of money and/or Securities held
in any Margin Account, Senior Security Account or Collateral Account in
connection with transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer, futures commission
merchant or Clearing Member makes payment to the Fund of any variation margin
payment or similar payment which the Fund may be entitled to receive from such
broker, dealer, futures commission merchant or Clearing Member, to see that any
payment received by the Custodian from any broker, dealer, futures commission
merchant or Clearing Member is the amount the Fund is entitled to receive, or to
notify the Fund of the Custodian's receipt or non-receipt of any such payment.
3. The Custodian shall not be liable for, or considered to be the Custodian
of, any money, whether or not represented by any check, draft, or other
instrument for the payment of money, received by it on behalf of the Fund until
the Custodian actually receives and collects such money directly or by the final
crediting of the account representing the Fund's interest at the Book-Entry
System or the Depository.
4. The Custodian shall have no responsibility and shall not be liable for
ascertaining or acting upon any calls, conversions, exchange offers, tenders,
interest rate changes or similar matters relating to Securities held in the
Depository, unless the Custodian shall have actually received timely notice from
the Depository. In no event shall the Custodian have any responsibility or
liability for the failure of the Depository to collect, or for the late
collection or late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be redeemed, retired,
called or otherwise become payable. However, upon receipt of a Certificate from
the Fund of an overdue amount on Securities held in the Depository the Custodian
shall make a claim against the Depository on behalf of the Fund, except that the
Custodian shall not be under any obligation to appear in, prosecute or defend
any action suit or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or liability, unless
indemnity satisfactory to it against all expense and liability be furnished as
often as may be required.
5. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount due to the Fund from the Transfer Agent of
the Fund nor to take any action to effect payment or distribution by the
Transfer Agent of the Fund of any amount paid by the Custodian to the Transfer
Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obligation to take action
to effect collection of any amount if the Securities upon which such amount is
payable are in default, or if payment is refused after due demand or
presentation, unless and until (i) it shall be directed to take such action by a
Certificate and (ii) it shall be assured to its satisfaction of reimbursement of
its costs and expenses in connection with any such action.
7. The Custodian may in addition to the employment of Foreign Sub-
Custodians pursuant to Article XVI appoint one or more banking institutions as
Depository or Depositories, as Sub-Custodian or Sub-Custodians, or as Co-
Custodian or Co-Custodians including, but not limited to, banking institutions
located in foreign countries, of Securities and moneys at any time owned by the
Fund, upon such terms and conditions as may be approved in a Certificate or
contained in an agreement executed by the Custodian, the Fund and the appointed
institution.
8. The Custodian shall not be under any duty or obligation (a) to ascertain
whether any Securities at any time delivered to, or held by it or by any Foreign
Sub-Custodian, for the account of the Fund and specifically allocated to a
Series are such as properly may be held by the Fund or such Series under the
provisions of its then current prospectus, or (b) to ascertain whether any
transactions by the Fund, whether or not involving the Custodian, are such
transactions as may properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the Fund agrees to pay to
the Custodian all out-of-pocket expenses and such compensation as may be agreed
upon from time to time between the Custodian and the Fund. The Fund represents
that the Administrator has agreed to pay such compensation and expenses promptly
upon receipt of statements therefor, and hereby directs the Custodian to (i)
send all statements for compensation to its attention care Fund/Plan at the
following address: Fund/Plan Services, Inc., 2 W. Elm Street, Conshohocken, PA
19428, Attention: Mr. Elmer Gardner, Senior Vice President, and (ii) accept all
payments made by Fund/Plan in the Fund's name as if such payments were made
directly by the Fund. The Fund shall pay to Fund/Plan fees for services
(including custodian services provided by the Custodian) in accordance with the
Administration Agreement. The Custodian's compensation for services rendered
hereunder is set forth in a separate agreement between the Custodian and
Fund/Plan.
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Should Fund/Plan fail to pay or remit such compensation to the Custodian, the
Custodian will be entitled to debit the Custody Account directly for such
compensation. The Custodian may charge such compensation and any expenses with
respect to a Series incurred by the Custodian in the performance of its duties
pursuant to such agreement against any money specifically allocated to such
Series. Unless and until the Fund or the Administrator instructs the Custodian
by a Certificate to apportion any loss, damage, liability or expense among the
Series in a specified manner, the Custodian shall also be entitled to charge
against any money held by it for the account of a Series such Series' pro rata
share (based on such Series net asset value at the time of the charge to the
aggregate net asset value of all Series at that time) of the amount of any loss,
damage, liability or expense, including counsel fees, for which it shall be
entitled to reimbursement under the provisions of this Agreement. The expenses
for which the Custodian shall be entitled to reimbursement hereunder shall
include, but are not limited to, the expenses of sub-custodians and foreign
branches of the Custodian incurred in settling outside of New York City
transactions involving the purchase and sale of Securities of the Fund.
10. The Custodian shall be entitled to rely upon any Certificate, notice or
other instrument in writing received by the Custodian and reasonably believed by
the Custodian to be a Certificate. The Custodian shall be entitled to rely upon
any Oral Instructions actually received by the Custodian. The Fund agrees to
forward or cause the Administrator to forward to the Custodian a Certificate or
facsimile thereof confirming such Oral Instructions in such manner so that such
Certificate or facsimile thereof is received by the Custodian, whether by hand
delivery, telecopier or other similar device, or otherwise, by the close of
business of the same day that such Oral Instructions are given to the Custodian.
The Fund agrees that the fact that such confirming instructions are not received
by the Custodian shall in no way affect the validity of the transactions or
enforceability of the transactions hereby authorized by the Fund. The Fund
agrees that the Custodian shall incur no liability to the Fund in acting upon
Oral Instructions given to the Custodian hereunder concerning such transactions
provided such instructions reasonably appear to have been received from an
Officer.
11. The Custodian shall be entitled to rely upon any instrument,
instruction or notice received by the Custodian and reasonably believed by the
Custodian to be given in accordance with the terms and conditions of any Margin
Account Agreement. Without limiting the generality of the foregoing, the
Custodian shall be under no duty to inquire into, and shall not be liable for,
the accuracy of any statements or representations contained in any such
instrument or other notice including, without limitation, any specification of
any amount to be paid to a broker, dealer, futures commission merchant or
Clearing Member.
12. The books and records pertaining to the Fund which are in the
possession of the Custodian shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the Investment Company
Act of 1940, as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representatives, shall have
access to such books and records during the Custodian's normal business hours.
Upon the reasonable request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's authorized
representative, and the Fund shall reimburse the Custodian its expenses of
providing such copies. Upon reasonable request of the Fund, the Custodian shall
provide in hard copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by the Custodian on a
computer disc, or are similarly maintained, and the Fund shall reimburse the
Custodian for its expenses of providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report obtained by the
Custodian on the system of internal accounting control of the Book-Entry System,
the Depository or O.C.C., and with such reports on its own systems of internal
accounting control as the Fund may reasonably request from time to time.
14. The Fund agrees to indemnify the Custodian against and save the
Custodian harmless from all liability, claims, losses and demands whatsoever,
including attorney's fees, howsoever arising or incurred because of or in
connection with this Agreement, including the Custodian's payment or non-payment
of checks pursuant to paragraph 6 of Article XIII as part of any check
redemption privilege program of the Fund, except for any such liability, claim,
loss and demand arising out of the Custodian's own negligence or willful
misconduct.
15. Subject to the foregoing provisions of this Agreement, including,
without limitation, those contained in Article XVI the Custodian may deliver and
receive Securities, and receipts with respect to such Securities, and arrange
for payments to be made and received by the Custodian in accordance with the
customs prevailing from time to time among brokers or dealers in such
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Securities. When the Custodian is instructed to deliver Securities against
payment, delivery of such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility and liability for
all credit risks involved in connection with the Custodian's delivery of
Securities pursuant to Certificates or instructions of the Fund or the
Administrator which responsibility and liability shall continue until final
payment in full has been received by the Custodian.
16. In the event the Custodian is advised by the Fund that the Fund is no
longer utilizing the services of the Administrator, then the Custodian shall
furnish or give to the Fund the statements or notices described above as to be
furnished or given to the Administrator.
17. The Custodian shall have no duties or responsibilities whatsoever
except such duties and responsibilities as are specifically set forth in this
Agreement, and no covenant or obligation shall be implied in this Agreement
against the Custodian. Without limiting the generality of the foregoing, the
Custodian shall have no duties or responsibilities by reason of any terms or
provisions in the Administration Agreement, and if such Administration Agreement
shall cease to be in effect the Custodian shall have no additional duties
hereunder.
ARTICLE XVIII
TERMINATION
1. Either of the parties hereto may terminate this Agreement by giving to
the other party a notice in writing specifying the date of such termination,
which shall be not less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it shall be accompanied
by a copy of a resolution of the Board of Trustees of the Fund, certified by the
Secretary, the Clerk, any Assistant Secretary or any Assistant Clerk, electing
to terminate this Agreement and designating a successor custodian or custodians,
each of which shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits. In the event such notice is
given by the Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board of Trustees of the
Fund, certified by the Secretary, the Clerk, any Assistant Secretary or any
Assistant Clerk, designating a successor custodian or custodians. In the absence
of such designation by the Fund, the Custodian may designate a successor
custodian which shall be a bank or trust company having not less than $2,000,000
aggregate capital, surplus and undivided profits. Upon the date set forth in
such notice this Agreement shall terminate, and the Custodian shall upon receipt
of a notice of acceptance by the successor custodian on that date deliver
directly to the successor custodian all Securities and moneys then owned by the
Fund and held by it as Custodian, after deducting all fees, expenses and other
amounts for the payment or reimbursement of which it shall then be entitled.
2. If a successor custodian is not designated by the Fund or the Custodian
in accordance with the preceding paragraph, the Fund shall upon the date
specified in the notice of termination of this Agreement and upon the delivery
by the Custodian of all Securities (other than Securities held in the Book-Entry
System which cannot be delivered to the Fund) and moneys then owned by the Fund
be deemed to be its own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement, other than the duty
with respect to Securities held in the Book Entry System which cannot be
delivered to the Fund to hold such Securities hereunder in accordance with this
Agreement.
ARTICLE XIX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed by two of the
present Officers of the Fund under its seal, setting forth the names and the
signatures of the present Officers. The Fund agrees to furnish to the Custodian
a new Certificate in similar form in the event that any such present Officer
ceases to be an Officer or in the event that other or additional Officers are
elected or appointed. Until such new Certificate shall be received, the
Custodian shall be fully protected in acting under the provisions of this
Agreement upon Oral Instructions or signatures of the present Officers as set
forth in the last delivered Certificate.
2. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Custodian, shall be sufficiently given if
addressed to the Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such
Page 121
<PAGE>
other place as the Custodian may from time to time designate in writing.
3. Any notice or other instrument in writing, authorized or required by
this Agreement to be given to the Fund shall be sufficiently given if addressed
to the Fund and mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund may from time to
time designate in writing, and any notice or other instrument in writing
authorized or required to be given to the Administrator shall be sufficiently
given if addressed to the Administrator at such address as the Administrator may
from time to time designate in writing.
4. This Agreement may not be amended or modified in any manner except by a
written agreement executed by both parties with the same formality as this
Agreement and approved by a resolution of the Board of Trustees of the Fund.
5. This Agreement shall extend to and shall be binding upon the parties
hereto, and their respective successors and assigns; provided, however, that
this Agreement shall not be assignable by the Fund without the written consent
of the Custodian, or by the Custodian without the written consent of the Fund,
authorized or approved by a resolution of the Fund's Board of Trustees.
6. This Agreement shall be construed in accordance with the laws of the
State of New York without giving effect to conflict of laws principles thereof.
Each party hereby consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any dispute arising
hereunder and hereby waives its right to trial by jury.
7. This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original, but such counterparts shall, together,
constitute only one instrument.
Page 122
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective Officers, "hereunto duly authorized and their
respective seals to be hereunto affixed, as of the day and year first above
written.
MATTHEWS INTERNATIONAL
FUNDS
[SEAL] By:
--------------------------
Attest:
--------------------------
THE BANK OF NEW YORK
[SEAL] By:
--------------------------
Attest:
--------------------------
Page 123
<PAGE>
APPENDIX A
I, G. Paul Matthews, President and I, Carol Chuang, Treasurer of MATTHEWS
INTERNATIONAL FUNDS, a Delaware business trust (the "Fund"), do hereby certify
that:
The following individuals including officers and employees of the
Administrator have been duly authorized by the Board of Trustees of the Fund in
conformity with the Fund's Declaration of Trust and By-Laws to give Certificates
or Oral Instructions on behalf of the Fund, and the signatures set forth
opposite their respective names are their true and correct signatures:
Name Signature
G. Paul Matthews
---------------------------
Carol Chuang
---------------------------
Michael Ellis
---------------------------
Edward Moodie
---------------------------
Mark Headley
---------------------------
Brian Stableford
---------------------------
Page 124
<PAGE>
APPENDIX B
SERIES
Matthews Pacific Tiger Fund
Matthews Asian Convertible Securities Fund
Matthews Korea Fund
Page 125
<PAGE>
APPENDIX C
I, Vincent M. Blazewicz, a Vice President with THE BANK OF NEW YORK do
hereby designate the following publications:
The Bond Buyer
Depository Trust Company Notices
Financial Daily Card Service
JJ Kenney Municipal Bond Service
London Financial Times
New York Times
Standard & Poor's Called Bond Record
Wall Street Journal
Page 126
<PAGE>
EXHIBIT A
CERTIFICATION
The undersigned, G. Paul Matthews, hereby certifies that he or she is the
duly elected and acting President of MATTHEWS INTERNATIONAL FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on 1st
June, 1995, at which a quorum was at all times present and that such resolution
has not been modified or rescinded and is in full force and effect as of the
date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of 1st June, 1995,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to deposit in the BookEntry System, as defined in the Custody
Agreement, all securities eligible for deposit therein, regardless of the Series
to which the same are specifically allocated, and to utilize the Book-Entry
System to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Matthews
International Funds, as of the 1st day of June, 1995.
[SEAL]
----------------------------------
Page 127
<PAGE>
EXHIBIT B
CERTIFICATION
The undersigned, G. Paul Matthews, hereby certifies that he or she is the
duly elected and acting President of MATTHEWS INTERNATIONAL FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on 1st
June, 1995, at which a quorum was at all times present and that such resolution
has not been modified or rescinded and is in full force and effect as of the
date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of 1st June, 1995,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary to deposit in the Depository, as defined in
the Custody Agreement, all securities eligible for deposit therein, regardless
of the Series to which the same are specifically allocated, and to utilize the
Depository to the extent possible in connection with its performance thereunder,
including, without limitation, in connection with settlements of purchases and
sales of securities, loans of securities, and deliveries and returns of
securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Matthews
International Funds, as of the 1st day of June, 1995.
[SEAL]
----------------------------------
Page 128
<PAGE>
EXHIBIT B-1
CERTIFICATION
The undersigned, G. Paul Matthews, hereby certifies that he or she is the
duly elected and acting President of MATTHEWS INTERNATIONAL FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on 1st
June, 1995, at which a quorum was at all times present and that such resolution
has not been modified or rescinded and is in full force and effect as of the
date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of 1st June, 1995,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary to deposit in the Participants Trust Company
as Depository, as defined in the Custody Agreement, all securities eligible for
deposit therein, regardless of the Series to which the same are specifically
allocated, and to utilize the Participants Trust Company to the extent possible
in connection with its performance thereunder, including, without limitation, in
connection with settlements of purchases and sales of securities, loans of
securities, and deliveries and returns of securities collateral.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Matthews
International Funds, as of the 1st day of June, 1995.
[SEAL]
----------------------------------
Page 129
<PAGE>
EXHIBIT C
CERTIFICATION
The undersigned, G. Paul Matthews, hereby certifies that he or she is the
duly elected and acting President of MATTHEWS INTERNATIONAL FUNDS, a Delaware
business trust (the "Fund"), and further certifies that the following resolution
was adopted by the Board of Trustees of the Fund at a meeting duly held on 1st
June, 1995, at which a quorum was at all times present and that such resolution
has not been modified or rescinded and is in full force and effect as of the
date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to a Custody
Agreement between The Bank of New York and the Fund dated as of 1st June, 1995,
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis until such time as it receives a Certificate, as defined in the
Custody Agreement, to the contrary, to accept, utilize and act with respect to
Clearing Member confirmations for Options and transaction in Options, regardless
of the Series to which the same are specifically allocated, as such terms are
defined in the Custody Agreement, as provided in the Custody Agreement.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Matthews
International Funds, as of the 1st day of June, 1995.
[SEAL]
----------------------------------
Page 130
<PAGE>
EXHIBIT D
The undersigned, G. Paul Matthews, hereby certifies that he or she is the
duly elected and acting President of MATTHEWS INTERNATIONAL FUNDS, a Delaware
business trust (the "Fund"), further certifies that the following resolutions
were adopted by the Board of Trustees of the Fund at a meeting duly held on
___________________, 1995, at which a quorum was at all times present and that
such resolutions have not been modified or rescinded and are in full force and
effect as of the date hereof.
RESOLVED, that The Bank of New York, as Custodian pursuant to the Custody
Agreement between The Bank of New York and the Fund dated as of 1st June, 1995
(the "Custody Agreement") is authorized and instructed on a continuous and
ongoing basis to act in accordance with, and to rely on Certificates (as defined
in the Custody Agreement) given by to the Custodian by a Terminal Link (as
defined in the Custody Agreement).
RESOLVED, that the Fund shall establish access codes and grant us of such
access codes only to Officers of the Fund as defined in the Custody Agreement,
shall establish internal safekeeping procedures to safeguard and protect the
confidentiality and availability of such access codes, shall limit its use of
the Terminal Link to those purposes permitted by the Custody Agreement, shall
require at least one Officer to utilize his access code in connection with each
such Certificate, and shall use the Terminal Link only in a manner that does not
contravene the Investment Company Act of 1940, as amended, or the rules and
regulations thereunder.
RESOLVED, that Officers of the Fund shall, following the establishment of
such access codes and such internal safekeeping procedures, advise the Custodian
that the same have been established by delivering a Certificate, as defined in
the Custody Agreement, and the Custodian shall be entitled to rely upon such
advice.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of Matthews
International Funds, as of the 1st day of June, 1995.
[SEAL]
----------------------------------
Page 131
<PAGE>
EXHIBIT E
The undersigned, G. Paul Matthews, hereby certifies that he or she is the
duly elected and acting President of MATTHEWS INTERNATIONAL FUNDS, a Delaware
business trust (the "Fund"), further certifies that the following resolutions
were adopted by the Board of Trustees of the Fund at a meeting duly held on 1st
June, 1995, at which a quorum was at all times present and that such resolutions
have not been modified or rescinded and are in full force and effect as of the
date hereof.
RESOLVED, that the maintenance of the Fund's assets in each country listed
in Schedule I hereto be, and hereby is, approved by the Board of Trustees as
consistent with the best interests of the Fund and its shareholders; and further
RESOLVED, that the maintenance of the Fund's assets with the foreign
branches of The Bank of New York (the "Bank") listed in Schedule I located in
the countries specified therein, and with the foreign subcustodians and
depositories listed in Schedule I located in the countries specified therein be,
and hereby is, approved by the Board of Directors as consistent with the best
interest of the Fund and its shareholders; and further
RESOLVED, that the Subcustodian Agreements presented to this meeting
between the Bank and each of the foreign subcustodians and depositories listed
in Schedule I providing for the maintenance of the Fund's assets with the
applicable entity, be and hereby are, approved by the Board of Trustees as
consistent with the best interests of the Fund and its shareholders; and further
RESOLVED, that the appropriate officers of the Fund are hereby authorized
to place assets of the Fund with the aforementioned foreign branches and foreign
subcustodians and depositories as hereinabove provided; and further
RESOLVED, that the appropriate officers of the Fund, or any of them, are
authorized to do any and all other acts, in the name of the Fund and on its
behalf, as they, or any of them, may determine to be necessary or desirable and
proper in connection with or in furtherance of the foregoing resolutions.
IN WITNESS WHEREOF, I hereunto set my hand and the seal of Matthews
International Funds, as of the 1st day of June, 1995.
[SEAL]
----------------------------------
Page 132
<PAGE>
[LETTERHEAD OF COOPERS & LYBRAND APPEARS HERE]
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the inclusion in this Post-Effective Amendment No. 4 to the Reg-
istration Statement under the Securities Act of 1933 on Form N-1A (File No.
33-78960) of our report dated September 29, 1995 on our audit of the financial
statements and financial highlights of Matthews International Funds. We also
consent to the reference to our Firm under the captions "Financial Highlights"
and "Independent Auditors."
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, PA 19103
December 28, 1995
<PAGE>
Exhibit 11
THE MATTHEWS INTERNATIONAL FUNDS
PACIFIC TIGER FUND
TOTAL RETURN PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
Aggregate Total Return Average
--------------------------------------------------------------- Annual
Previous Calendar One Since --------------
Date Monthly 3 Months YTD Year 09/12/94 One Year
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
09/30/94 -- -- -- -- 0.00% 0.00%
10/31/94 1.90% -- -- -- 1.90% 15.05%
11/30/94 -4.61% -- -- -- -2.80% -12.30%
12/31/94 -2.35% -5.08% -- -- -5.08% -15.89%
01/31/95 -6.65% -13.05% -6.65% -- -11.39% -26.89%
02/28/95 4.30% -4.92% -2.64% -- -7.59% -15.67%
03/31/95 -0.65% -3.27% -3.27% -- -8.19% -14.43%
04/30/95 -2.62% 0.90% -5.81% -- -10.59% -16.28%
05/31/95 8.74% 5.21% 2.43% -- -2.77% -3.86%
06/30/95 0.21% 6.11% 2.64% -- -2.57% -3.21%
07/31/95 4.63% 14.01% 7.39% -- 1.94% 2.19%
08/31/95 -3.93% 0.72% 3.17% -- -2.07% -2.14%
</TABLE>
<PAGE>
THE MATTHEWS INTERNATIONAL FUNDS
PACIFIC TIGER FUND
TOTAL RETURN PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
- ----------------------------- ----------------------------------- ---------------------------------------------------------
PRINCIPAL DIVIDENDS
----------------------------------- ---------------------------------------------------------
Date N.A.V. Desc. Invstmnt # Shares Value Div/Sh Total $ Cuml $ Sh Reinv Cuml Sh Value Sh
- ----------------------------- ----------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
09/12/94 $10.00 $10,000 1,000.000 $10,000.00 $0.00 0.000 $0.00
09/30/94 $10.00 $0 1,000.000 $10,000.00 $0.00 0.000 $0.00
10/31/94 $10.19 $0 1,000.000 $10,190.00 $0.00 0.000 $0.00
11/30/94 $9.72 $0 1,000.000 $9,720.00 $0.00 0.000 $0.00
12/28/94 $9.47 Div $0 1,000.000 $9,470.00 0.022 $22.00 $22.00 2.323 2.323 $22.00
12/31/94 $9.47 $0 1,000.000 $9,470.00 $22.00 2.323 $22.00
01/31/95 $8.84 $0 1,000.000 $8,840.00 $22.00 2.323 $20.54
02/28/95 $9.22 $0 1,000.000 $9,220.00 $22.00 2.323 $21.42
03/31/95 $9.16 $0 1,000.000 $9,160.00 $22.00 2.323 $21.28
04/30/95 $8.92 $0 1,000.000 $8,920.00 $22.00 2.323 $20.72
05/31/95 $9.70 $0 1,000.000 $9,700.00 $22.00 2.323 $22.53
06/30/95 $9.72 $0 1,000.000 $9,720.00 $22.00 2.323 $22.58
07/31/95 $10.17 $0 1,000.000 $10,170.00 $22.00 2.323 $23.63
08/31/95 $9.77 $0 1,000.000 $9,770.00 $22.00 2.323 $22.70
<CAPTION>
- ---------- --------------------------------------------------------- -----------------------
CAPITAL GAINS TOTALS
- ---------- --------------------------------------------------------- -----------------------
Date CG/Sh Total $ Cuml $ Sh Reinv Cuml Sh Value Sh Shares Value
- ---------- --------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
09/12/94 $0.00 0.000 $0.00 1,000.000 $10,000.00
09/30/94 $0.00 0.000 $0.00 1,000.000 $10,000.00
10/31/94 $0.00 0.000 $0.00 1,000.000 $10,190.00
11/30/94 $0.00 0.000 $0.00 1,000.000 $9,720.00
12/28/94 0.000 $0.00 $0.00 0.000 0.000 $0.00 1,002.323 $9,492.00
12/31/94 $0.00 0.000 $0.00 1,002.323 $9,492.00
01/31/95 $0.00 0.000 $0.00 1,002.323 $8,860.54
02/28/95 $0.00 0.000 $0.00 1,002.323 $9,241.42
03/31/95 $0.00 0.000 $0.00 1,002.323 $9,181.28
04/30/95 $0.00 0.000 $0.00 1,002.323 $8,940.72
05/31/95 $0.00 0.000 $0.00 1,002.323 $9,722.53
06/30/95 $0.00 0.000 $0.00 1,002.323 $9,742.58
07/31/95 $0.00 0.000 $0.00 1,002.323 $10,193.63
08/31/95 $0.00 0.000 $0.00 1,002.323 $9,792.70
</TABLE>
<PAGE>
THE MATTHEWS INTERNATIONAL FUNDS
ASIAN CONVERTIBLE FUND
TOTAL RETURN PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Aggregate Total Return Average
------------------------------------------------------------------ Annual
Previous Calendar One Since -------------
Date Monthly 3 Months YTD Year 09/12/94 One Year
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
09/30/94 0.10% -- -- -- 0.10% 2.05%
10/31/94 4.00% -- -- -- 4.10% 34.89%
11/30/94 -4.61% -- -- -- -0.70% -3.19%
12/31/94 -1.59% -2.38% -- -- -2.28% -7.37%
01/31/95 -4.01% -9.89% -4.01% -- -6.20% -15.26%
02/28/95 3.64% -2.10% -0.51% -- -2.78% -5.91%
03/31/95 -0.31% -0.82% -0.82% -- -3.08% -5.56%
04/30/95 -0.41% 2.89% -1.23% -- -3.49% -5.48%
05/31/95 6.56% 5.79% 5.24% -- 2.84% 4.00%
06/30/95 -0.61% 5.47% 4.60% -- 2.22% 2.78%
07/31/95 0.10% 6.01% 4.71% -- 2.32% 2.62%
08/31/95 -1.40% -1.90% 3.24% -- 0.89% 0.92%
</TABLE>
<PAGE>
THE MATTHEWS INTERNATIONAL FUNDS
ASIAN CONVERTIBLE FUND
TOTAL RETURN PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
- ---------------------------- ----------------------------------- -----------------------------------------------------------
PRINCIPAL DIVIDENDS
----------------------------------- -----------------------------------------------------------
Date N.A.V. Desc. Invstmnt # Shares Value Div/Sh Total $ Cuml $ Sh Reinv Cuml Sh Value Sh
- ---------------------------- ----------------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
09/12/94 $10.00 $10,000 1,000.000 $10,000.00 $0.00 0.000 $0.00
09/30/94 $10.01 $0 1,000.000 $10,010.00 $0.00 0.000 $0.00
10/31/94 $10.41 $0 1,000.000 $10,410.00 $0.00 0.000 $0.00
11/30/94 $9.93 $0 1,000.000 $9,930.00 $0.00 0.000 $0.00
12/28/94 $9.75 Div. $0 1,000.000 $9,750.00 0.042 $42.00 $42.00 4.308 4.308 $42.00
12/31/94 $9.73 $0 1,000.000 $9,730.00 $42.00 4.308 $41.91
01/31/95 $9.34 $0 1,000.000 $9,340.00 $42.00 4.308 $40.23
02/28/95 $9.68 $0 1,000.000 $9,680.00 $42.00 4.308 $41.70
03/31/95 $9.65 $0 1,000.000 $9,650.00 $42.00 4.308 $41.57
04/30/95 $9.61 $0 1,000.000 $9,610.00 $42.00 4.308 $41.40
05/31/95 $10.24 $0 1,000.000 $10,240.00 $42.00 4.308 $44.11
06/28/95 $10.02 Div. $0 1,000.000 $10,020.00 0.168 $168.72 $210.72 16.839 21.146 $211.89
06/30/95 $10.01 $0 1,000.000 $10,010.00 $210.72 21.146 $211.68
07/31/95 $10.02 $0 1,000.000 $10,020.00 $210.72 21.146 $211.89
08/31/95 $9.88 $0 1,000.000 $9,880.00 $210.72 21.146 $208.93
<CAPTION>
- --------- --------------------------------------------------------- -----------------------
CAPITAL GAINS TOTALS
--------------------------------------------------------- -----------------------
Date CG/Sh Total $ Cuml $ Sh Reinv Cuml Sh Value Sh Shares Value
- --------- --------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
09/12/94 $0.00 0.000 $0.00 1,000.000 $10,000.00
09/30/94 $0.00 0.000 $0.00 1,000.000 $10,010.00
10/31/94 $0.00 0.000 $0.00 1,000.000 $10,410.00
11/30/94 $0.00 0.000 $0.00 1,000.000 $9,930.00
12/28/94 0.000 $0.00 $0.00 0.000 0.000 $0.00 1,004.308 $9,792.00
12/31/94 $0.00 0.000 $0.00 1,004.308 $9,771.91
01/31/95 $0.00 0.000 $0.00 1,004.308 $9,380.23
02/28/95 $0.00 0.000 $0.00 1,004.308 $9,721.70
03/31/95 $0.00 0.000 $0.00 1,004.308 $9,691.57
04/30/95 $0.00 0.000 $0.00 1,004.308 $9,651.40
05/31/95 $0.00 0.000 $0.00 1,004.308 $10,284.11
06/28/95 0.000 $0.00 $0.00 0.000 0.000 $0.00 1,021.146 $10,231.89
06/30/95 $0.00 0.000 $0.00 1,021.146 $10,221.68
07/31/95 $0.00 0.000 $0.00 1,021.146 $10,231.89
08/31/95 $0.00 0.000 $0.00 1,021.146 $10,088.93
</TABLE>
<PAGE>
THE MATTHEWS INTERNATIONAL FUNDS
KOREA FUND
TOTAL RETURN PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
Aggregate Total Return Average
------------------------------------------------------ Annual
Previous Calendar One Since ----------
Date Monthly 3 Months YTD Year 01/03/95 One Year
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
01/31/95 -5.10% -- -5.10% -- -5.10% -50.72%
02/28/95 -5.16% -- -10.00% -- -10.00% -50.30%
03/31/95 4.78% -- -5.70% -- -5.70% -22.05%
04/30/95 -4.03% -4.64% -9.50% -- -9.50% -26.95%
05/31/95 -0.99% -0.44% -10.40% -- -10.40% -23.87%
06/30/95 1.45% -3.61% -9.10% -- -9.10% -17.77%
07/31/95 4.40% 4.86% -5.10% -- -5.10% -8.74%
08/31/95 -3.79% 1.90% -8.70% -- -8.70% -12.93%
</TABLE>
<PAGE>
THE MATTHEWS INTERNATIONAL FUNDS
KOREA FUND
TOTAL RETURN PERFORMANCE STATISTICS
<TABLE>
<CAPTION>
- ----------------------------- ----------------------------------- ---------------------------------------------------------
PRINCIPAL DIVIDENDS
----------------------------------- ---------------------------------------------------------
Date N.A.V. Desc. Invstmnt # Shares Value Div/Sh Total $ Cuml $ Sh Reinv Cuml Sh Value Sh
- ----------------------------- ----------------------------------- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
01/03/95 $10.00 $10,000 1,000.000 $10,000.00 $0.00 0.000 $0.00
01/31/95 $9.49 $0 1,000.000 $9,490.00 $0.00 0.000 $0.00
02/28/95 $9.00 $0 1,000.000 $9,000.00 $0.00 0.000 $0.00
03/31/95 $9.43 $0 1,000.000 $9,430.00 $0.00 0.000 $0.00
04/30/95 $9.05 $0 1,000.000 $9,050.00 $0.00 0.000 $0.00
05/31/95 $8.96 $0 1,000.000 $8,960.00 $0.00 0.000 $0.00
06/30/95 $9.09 $0 1,000.000 $9,090.00 $0.00 0.000 $0.00
07/31/95 $9.49 $0 1,000.000 $9,490.00 $0.00 0.000 $0.00
08/31/95 $9.13 $0 1,000.000 $9,130.00 $0.00 0.000 $0.00
<CAPTION>
- ---------- --------------------------------------------------------- -----------------------
CAPITAL GAINS TOTALS
--------------------------------------------------------- -----------------------
Date CG/Sh Total $ Cuml $ Sh Reinv Cuml Sh Value Sh Shares Value
- ---------- --------------------------------------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
01/03/95 $0.00 0.000 $0.00 1,000.000 $10,000.00
01/31/95 $0.00 0.000 $0.00 1,000.000 $9,490.00
02/28/95 $0.00 0.000 $0.00 1,000.000 $9,000.00
03/31/95 $0.00 0.000 $0.00 1,000.000 $9,430.00
04/30/95 $0.00 0.000 $0.00 1,000.000 $9,050.00
05/31/95 $0.00 0.000 $0.00 1,000.000 $8,960.00
06/30/95 $0.00 0.000 $0.00 1,000.000 $9,090.00
07/31/95 $0.00 0.000 $0.00 1,000.000 $9,490.00
08/31/95 $0.00 0.000 $0.00 1,000.000 $9,130.00
</TABLE>
