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MATTHEWS INTERNATIONAL FUNDS
655 MONTGOMERY STREET, SUITE 1438
SAN FRANCISCO, CA 94111
MATTHEWS PACIFIC TIGER FUND
MATTHEWS KOREA FUND
CLASS A SHARES
AUGUST 1, 1997
PROSPECTUS SUPPLEMENTED AS OF SEPTEMBER 10, 1997
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Matthews International Funds (the "Company") is an open-end investment
management company which currently consists of three separate investment series
(each a "Fund" and collectively, the "Funds") designed to offer investors a
variety of investment opportunities. Each series has distinct investment
objectives and policies. This Prospectus pertains only to Class A shares of
Matthews Pacific Tiger Fund and Matthews Korea Fund and is intended 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, LLC (the "Advisor") serves as the investment advisor to the
Funds and manages the investments of the Funds according to the investment
objectives of each Fund. Daewoo Capital Management Co., Ltd. (the "Korean
Advisor"), 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
securities 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 KOREA FUND seeks long-term capital appreciation through investment
primarily in equity securities of South Korean companies. Under normal
circumstances, the Fund will invest at least 65% of its total assets in equity
securities of South Korean companies. Equity securities include common stocks,
preferred stocks, warrants and securities convertible into common or preferred
stock.
Class A shares of either Fund may be purchased directly from the Funds, but
those in amounts less than $1,000,000 are subject to sales charges. In addition,
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 FROM ORIGINAL PURCHASES OF
$1,000,000 OR MORE WHICH ARE THEN REDEEMED 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. Subsequent
investments for any retirement plan is $50.
The Funds' principal Underwriter is FPS Broker Services, Inc., 3200 Horizon
Drive, P.O. Box 61503, King of Prussia, PA 19406-0903.
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 August
1, 1997, which has been filed with the Securities and Exchange Commission and is
available upon request without charge by contacting FPS Broker Services, Inc.,
at the address above or by calling (800) 892-0382. The Statement of Additional
Information is incorporated by reference into this Prospectus.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY........................................................................... 3
EXPENSE INFORMATION.......................................................................... 4
FINANCIAL HIGHLIGHTS......................................................................... 6
INVESTMENT OBJECTIVES
Matthews Pacific Tiger 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 Korea Fund......................................................... 10
INVESTMENT STRATEGIES AND RISKS
Common to all Funds..................................................................... 11
Specific to Matthews Korea Fund......................................................... 15
RISK FACTORS
Common to all Funds..................................................................... 15
Specific to Matthews Korea Fund......................................................... 17
MANAGEMENT OF THE FUNDS...................................................................... 19
ADMINISTRATION OF THE FUNDS.................................................................. 22
DISTRIBUTION PLAN............................................................................ 23
PURCHASE OF SHARES........................................................................... 23
EXCHANGE OF SHARES........................................................................... 26
REDEMPTION OF SHARES and REDEMPTION FEE...................................................... 26
SHAREHOLDER SERVICES......................................................................... 28
NET ASSET VALUE.............................................................................. 28
DIVIDENDS AND TAXES.......................................................................... 29
PERFORMANCE INFORMATION...................................................................... 31
GENERAL INFORMATION.......................................................................... 31
APPENDIX
DEBT RATINGS................................................................................. 33
</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 PERSON IS
AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS.
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PROSPECTUS SUMMARY
THE COMPANY
Matthews International Funds (the "Company") is an open-end investment
management company organized as a business trust under the laws of the state of
Delaware. The Company is organized to offer separate series of shares and is
currently comprised of three separate series of shares, although this Prospectus
pertains only to Class A shares of MATTHEWS PACIFIC TIGER FUND and MATTHEWS
KOREA FUND. Additional 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 investing,
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 Philippines,
Thailand and China. See "INVESTMENT 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
securities 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
FACTORS."
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, including
the potential for increasing militarization in North Korea. Relations between
North and South Korea, while improving, remain tense and the possibility 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 risk. 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, LLC (the "Advisor"), 655 Montgomery
Street, Suite 1438, San Francisco, California 94111, a limited liability company
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 9, 1996, the Advisor had approximately $70 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 Advisor is responsible for
the fees of the Korean Advisor under the terms of a separate agreement. See
"MANAGEMENT OF THE FUNDS." FPS Broker Services, Inc., 3200 Horizon Drive, P.O.
Box 61503, King of Prussia, PA 19406-0903 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. FPS Services, Inc., 3200 Horizon Drive, P.O. Box
61503, King of Prussia, PA 19406-
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0903 serves as the Funds' administrator, transfer agent and fund accounting
agent.
PURCHASE OF SHARES
The minimum initial investment for each Fund is $1,000 for all accounts.
Subsequent investments will be accepted in minimum amounts of $250 for all
accounts. Purchases of Class A Shares are subject to a maximum sales charge of
4.95% and are subject to annual 12b-1 Plan expenses. The public offering price
for shares of each Fund is the net asset value per share next determined,
subject to any applicable sales charge, after receipt and acceptance of a
purchase 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
determined 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 AN ORIGINAL
PURCHASE OF $1,000,000 (AND HENCE NO SALES CHARGE WAS APPLIED TO SUCH PURCHASE),
THE PROCEEDS OF THAT REDEMPTION WILL BE SUBJECT TO A REDEMPTION 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 certain 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 unless
the shareholder notifies the transfer agent in writing requesting payments in
cash. MATTHEWS PACIFIC TIGER FUND AND MATTHEWS KOREA FUND intend to declare and
pay dividends annually. See "DIVIDENDS AND TAXES."
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES FOR EACH FUND:
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Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)... 4.95%
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%*
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* The Redemption Fee of 1.00% applies only to those shares redeemed within
ninety days of purchase from an original purchase of $1,000,000 or more and on
which no sales charge was imposed. 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 redemptions may
also be made through broker-dealers and others who may charge a commission or
other transaction fee for their services.
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ANNUAL FUND OPERATING EXPENSES*
as a Percentage of Average Net Assets:
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OTHER
EXPENSES TOTAL FUND
AFTER OPERATING EXPENSES
MANAGEMENT 12b-1 EXPENSE AFTER
FUND(1) FEES EXPENSES REIMBURSEMENT REIMBURSEMENT(2)
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MATTHEWS PACIFIC TIGER FUND-CLASS A.... 1.00% .25% 1.00% 2.25%
MATTHEWS KOREA FUND-CLASS A............ 1.00% .25% 1.50% 2.75%
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(1) The ratios set forth above reflect Matthews International Capital
Management's voluntary advisory fee waivers and/or expense reimbursements,
which have been estimated based upon the net expense limitations that are
currently in effect.
(2) Absent fee waivers and/or expense reimbursements, MATTHEWS PACIFIC TIGER
FUND'S advisory fee, 12b-1 expenses, estimated other expenses, and net
expense ratio would be 1.00%, 0.25%, 3.35%, and 4.35%, respectively.
MATTHEWS KOREA FUND'S advisory fee, 12b-1 expenses estimated other expenses,
and net expense ratio would be 1.00%, 0.25%, 10.36%, and 11.36%,
respectively.
*Although not required to do so, Matthews International Capital Management, LLC
(the "Advisor") has agreed to limit the annual operating expenses of the
Matthews Pacific Tiger Fund to 2.25%, and the Matthews Korea Fund to 2.75% of
each Fund's respective net assets. In subsequent years, overall operating
expenses for each Fund may not fall below the applicable percentage limitation
until the Advisor has been fully reimbursed for fees foregone or expenses it
paid under the Advisory Agreement. Each will reimburse the Advisor in the three
following years if operating expenses (before reimbursement) are less than the
applicable percentage limitation charged to the Fund.
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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,
reinvestment of all dividends and distributions and redemption at the end of
each time period.
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NAME OF FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
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MATTHEWS PACIFIC TIGER FUND-CLASS A................... $80.95 $126.66 $174.92 $307.67
MATTHEWS KOREA FUND-CLASS A........................... $85.65 $140.76 $198.37 $354.14
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The purpose of this table is to assist the investor in understanding the various
costs and expenses that a shareholder will bear directly or indirectly. While
the example assumes a 5% annual return, each Fund's 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.
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FINANCIAL HIGHLIGHTS
MATTHEWS PACIFIC TIGER FUND
MATTHEWS KOREA FUND
Since the Class A shares of the Funds had not commenced operations as of the
date hereof, there were no financial statements.
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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'
investment 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 notify
shareholders before making any material change to an investment policy or
restriction. Fundamental objectives may not be changed without shareholder
approval. 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
securities of Pacific Tiger economies. The Pacific Tiger economies include the
following countries: Hong Kong, Singapore, South Korea, Taiwan, Indonesia,
Malaysia, 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.
To be eligible for inclusion in the Fund's portfolio, a company is considered to
be within a Tiger "country" if (i) it is organized under the laws of Hong Kong,
Singapore, South Korea, Taiwan, Indonesia, Malaysia, the Philippines, Thailand
or China, (ii) derive at least 50% of its revenues or profits from goods
produced or sold, investments made, or services performed or have at least 50%
of their assets located in one of these countries (iii) have the primary trading
markets for its securities in one of these countries or (iv) are one of the
governments or agencies or instrumentalities or political subdivisions or such
country.
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
potential growth of the South Korean economy and the evolving process of the
liberalization and reform of the securities markets in South Korea. The
emergence 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
significantly to the potential for accelerated growth in the Korean economy.
Continued liberalization of the securities markets along with an increase in the
number of Korean companies that are available for investment to foreign
investors would enable the Fund to participate in and benefit from such
potential economic growth.
In terms of Gross National Product, industrial standards and level of education,
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 driving
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
circumstances, the Fund will invest at least 65% of its total assets in equity
securities of South Korean companies. These include securities of companies
which (i) are organized under the laws of South Korea, (ii) regardless of where
organized, derive at least 50% of their revenues or profits 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 primary trading market for their
securities in South Korea or (iv) are the government, or its agencies or
instrumentalities or other political subdivisions, of South Korea. Securities
will be primarily common stocks.
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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
securities 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 potential
companies in which to invest, the Advisor considers the company's quality of
management, plans for long-term growth, competitive position in the industry,
future expansion plans and growth prospects, valuations compared with industry
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 evaluation of all
factors, the Advisor attempts to identify those companies in such countries and
industries that are best positioned and managed to take advantage 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
appreciation; 2) price of security relative to price of underlying stock, if a
convertible security; 3) yield of security relative to yield of other fixed
income securities; 4) interest or dividend income; 5) call and/or put features;
6) creditworthiness; 7) price of security relative to price of other comparable
securities; 8) size of issue; 9) currency of issue; and 10) impact of security
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 designed 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
anticipated changes in interest rates and prices. See "INVESTMENT STRATEGIES AND
RISKS".
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 market
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
foreign issuers or maintain a cash position. Such instruments include but are
not limited to the following: obligations 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 reconstruction or development; bank
obligations, including bankers' acceptances, 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 denominated may require the
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Funds to convert assets into foreign currencies or to convert assets and income
from foreign currencies to U.S. dollars. Normally, 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
currency futures contracts and write covered call options on such contracts.
Collectively, these securities may be referred to as "derivatives." Foreign
investments which are not U.S. dollar denominated may require the Funds to
convert assets into foreign currencies or to convert assets and income from
foreign currencies to U.S. dollars. Normally, exchange transactions will be
conducted 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, preferred
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 securities
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 securities
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 investor
has the right to initiate conversion into a specified quantity of the underlying
stock at a stated price, within a stipulated period of time. Convertible
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 anticipate
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 Advisor to
be in a relatively strong growth trend or whose assets are substantially
undervalued. Smaller companies often have limited product 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.
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.
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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 securities are
available for investment in South Korea.
The Fund may invest up to 35% of its total assets in non-convertible debt
securities 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 speculative
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 invest in debt securities
issued by Korean companies outside of Korea and denominated 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 securities
(such as warrants) that also offer equity participation. Convertible securities
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 comparable 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
industries 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 product 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 positioned 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 securities than
with respect to companies whose securities are traded on an exchange. Securities
not readily marketable are more likely to be issued by start-up, small or family
business and therefore subject to greater economic,
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business and 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 Korean
market conditions or other economic conditions in Korean political conditions
warrant, the Fund may reduce its position in equity securities and, subject 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 position. Such
instruments include but are not limited to the following: obligations 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
reconstruction or development; bank obligations, including bankers' acceptances,
certificates of deposit, time deposits, and demand deposits. The Fund's
investment objective may not be achieved at such times when a temporary
defensive 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
regulations. 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 securities
of any one issuer. The Fund is also subject to the Korean Securities and
Exchange Commission rule limiting total foreign investment to 23% of each class
of a company's outstanding shares, while a single foreign investor may only
invest up to 6% 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
investment in the Funds, nor can there be any assurance that the Funds'
investment objectives will be attained.
ADRS AND EDRS
For many foreign securities, there are United States dollar denominated American
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 correspondent bank. ADRs do
not eliminate all the risk inherent in investing in the securities of foreign
issuers. By investing in ADRs rather than directly in foreign 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 arrangement 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 Depositary
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 equity
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.
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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
repurchase 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 thereafter (not
including Sunday or holidays) or such longer period as the U.S. Securities 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
denominated 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 contract
in United States dollars for the purchase or sale of the amount of foreign
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 enter 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 currency 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 respect
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.
Government securities or other high-grade debt obligations at least equal in
value to commitments for when-issued securi-
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ties, forward commitments and delayed-delivery transactions. Securities
purchased or sold on a when-issued, delayed-delivery or forward commitment basis
involve a risk of loss if the value of the security to be purchased declines
prior to the settlement date. Although the Funds would generally purchase
securities on a when-issued, delayed-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; however,
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 composition 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 becomes obligated
to purchase or sell a futures contract if the option is exercised. In
anticipation of a market advance, the Funds may purchase call options on futures
contracts as a substitute for the purchase of futures contracts 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 account of liquid assets,
such as cash, U.S. Government securities or other liquid high grade debt
obligations, or will otherwise cover its position in accordance 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
correctly 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 will not knowingly invest more than 15% and MATTHEWS
KOREA FUND will not knowingly 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 establishing 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
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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 trading
market for securities otherwise subject to restriction on resale to the general
public by establishing a "safe harbor" from the registration requirements of the
Securities Act of 1933 for resales of certain securities to qualified
institutional buyers.
OPTIONS
The Funds may purchase and write put and call options on foreign or U.S.
securities 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 options to the extent premiums paid on all outstanding call options do not
exceed 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
contribute to the Funds' total return. The Funds may lose potential market
appreciation, however, if the Advisor's judgment is incorrect with respect to
interest 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 premiums on
all outstanding put options do not exceed 10% of the Fund's total assets. 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 underlying 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
correspondingly 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.
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. Repurchase
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 repurchase agreement should default on its obligation to
repurchase the underlying 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 liquidating 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
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KOREA FUND is not currently permitted to engage in repurchase transactions in
Korea under Korean laws and regulations.
SECURITIES LENDING
To increase return on portfolio securities, a Fund may lend its portfolio
securities on a short-term basis to banks, broker/dealers and other
institutional investors pursuant to agreements requiring that the loans be
continuously 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 securities
by MATTHEWS KOREA FUND is not currently permitted under Korean laws and
regulations.
SECURITIES OF OTHER INVESTMENT COMPANIES
MATTHEWS PACIFIC TIGER FUND may invest in securities issued by other investment
companies which invest in securities in which the Funds are permitted to invest.
MATTHEWS KOREA FUND may invest in securities issued by other investment
companies which invest a substantial 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 investment 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 another 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 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 market
value of that security. The Fund is authorized to make short sales of securities
or maintain a short position only for the purpose of deferring realization 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, and equal in amount to, the securities sold
short. To complete such a transaction, 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
securities 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
markets and individual corporate developments. Thus, periods of economic
uncertainty and change can be expected to result in increased
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<PAGE> 16
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
accurately 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 securities
are thinly traded or illiquid. During such periods, there may be less reliable
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
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. There may be less publicly available
information about a foreign company than about a domestic company. Foreign
companies generally are not subject to uniform accounting, auditing, and
financial reporting 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 result in higher brokerage fees. With respect to certain foreign countries,
there is a possibility of expropriation, nationalization, confiscatory taxation,
or diplomatic developments that could affect investments in those countries.
In addition, brokerage commissions, custodian services, withholding taxes, and
other costs relating to investment in foreign markets generally are more
expensive than in the United States.
RISKS ASSOCIATED WITH EMERGING MARKETS
Investing in securities of issuers in Asia and the Pacific Basin involves
special 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 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) certain
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 investment
or allowing for judicial redress for injury to private property.
For further information, see "SPECIAL CONSIDERATIONS AFFECTING THE PACIFIC
BASIN" 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
currency exchange rates. The value of Funds assets denominated in foreign
currencies 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
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<PAGE> 17
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 management 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 governmental 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 foreign 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 KOREA FUND
Because the Fund intends to invest primarily in equity securities of South
Korean companies, an investor in the Fund should be aware of certain risks
relating to South Korea, the Korean securities markets and international
investments generally which are not typically associated with U.S. domestic
investments. In addition, the Fund may be more volatile than a geographically
diverse 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. This limitation may
adversely affect the performance of the Fund. Under Korean Stock Exchange
regulations, total foreign investment is limited to 23% of each class of a
companies' shares listed on the Korean Stock Exchange (the "KSE"), in addition,
a single foreign investor may only purchase up to 6% of such shares. The 6% and
23% limitations are reduced to 1% and 18%, respectively, for certain
government-designated 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 premium 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
regulations or otherwise. Such securities will be valued at fair value as
determined 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
investment risks different from those of U.S. issuers, including possible
political, economic or social instability in Korea, and by changes in Korean law
or regulations. In addition, there is the possibility of the imposition of
currency exchange controls, foreign withholding tax on the interest income
payable on such instruments, foreign controls, seizure or nationalization of
foreign deposits or assets, or the adoption of other foreign government
restrictions that might adversely affect the Korean securities held by the Fund.
Political instability and/or military conflict involving North Korea may
adversely affect the value of the Fund's assets. Foreign securities may also be
subject to greater fluctuations in price than securities of domestic
corporations 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. Additionally, 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 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 diplomatic developments that could affect investments
in Korea.
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In addition, brokerage commissions, custodian services, withholding taxes, and
other costs relating to investment in foreign markets generally are more
expensive 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) substantial
government involvement in, and influence on, the economy and the private 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 equity 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 available 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 demilitarized
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 division 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
securities. Military action or the risk of military action or the economic
collapse of North Korea could have a material adverse effect on Korea, and
consequently, on the ability of the Fund to achieve its investment objective.
Lack of available information regarding North Korea may be the greatest risk
factor.
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
government from time to time has informally influenced the payment of dividends
and the prices of certain products, encouraged companies to invest or to
concentrate in particular industries, induced mergers between companies in
industries 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 assets in the securities of a single issuer than
a diversified fund. An investment in the Fund therefore will entail greater risk
than an investment in a diversified
18
<PAGE> 19
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 developments 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 however, 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 Advisor
pursuant to the terms of the Investment Advisory Agreement with the Funds. The
Funds' Trustees review the various services provided by the Advisor to ensure
that the Funds' general investment policies and programs are being properly
carried out and that administrative services are being provided to the Funds in
a satisfactory manner. Information pertaining to the Trustees and executive
officers of the Trust is set forth below.
G. PAUL MATTHEWS*, Chairman of the Board of Trustees and President; 655
Montgomery 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 directors from
1986 through 1989. Retained overall responsibility for all Asian investments 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
consultant since 1991; President, Tyndall Distributors from 1988 through 1990;
prior thereto Senior Vice President, Integrated Capital Services from 1983
through 1988.
RICHARD K. LYONS, Trustee; Haas School of Business, University of California,
Berkeley, CA; Assistant Professor (Step V), Haas School of Business, University
of California, Berkeley since Fall 1993; Associate Professor, Graduate School of
Business & School of International and Public Affairs, Columbia University, Fall
1991 to Fall 1993; Associate Professor, Graduate School of Business, Columbia
University, Fall 1987 to Fall 1991; Visiting Scholar, Foundation for Advanced
Information and Research (FAIR), Tokyo, Japan, Summer 1989.
ROBERT K. CONNOLLY, Trustee; P.O. Box 94, Sonoma, CA 95476; Retired; Most
recently 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
International 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 to foreign investors in 1992, he pioneered in
creating several investment vehicles 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 management
company; prior thereto, Chairman of G.T. Management PLC's principal subsidiary
companies
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<PAGE> 20
(United States, Japan and Hong Kong) and Group Chief Executive. Mr.
FitzWilliam-Lay joined the G.T. Management Group in 1978 and was involved 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 Securities Dealers,
Washington, DC between 1987 and 1990.
NORMAN BERRYESA, Trustee; 100 Bush Street, Suite 1000, San Francisco, CA 94109;
Independent Contractor, Emmett Larkin Co., Inc., since 1983; President & CEO of
Gallegoes Institutional Investors Inc. from 1990 to 1994.
*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 manager
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 specializes in
Asian-Pacific investments and manages assets in a U.S. domiciled partnership,
offshore funds and separate accounts. Total assets under management as of
December 9, 1996 were $70 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 recently reorganized its business structure from a corporation to a
limited liability company. In connection with this reorganization, Convergent
Capital Management, Inc., ("Convergent") made an equity investment in the
Advisor and obtained a right of first refusal and an option to purchase
additional interests, the exercise of which could result in a change in control
of the Advisor at some time in the future. Any such change in control would be
subject to the prior approval of the holders of at least a majority of the
outstanding shares of the respective Funds. 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.
Pursuant to an investment advisory agreement with the Funds, the Advisor
provides advice on buying and selling securities in accordance with the Funds'
investment 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
responsibilities 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.
The terms of the Funds' investment advisory agreement permit the Advisor, at its
own expense, to obtain statistical and other factual information and advice as
it deems necessary or desirable to fulfill its investment responsibilities under
the contract. 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.
FEE WAIVER AND EXPENSE REIMBURSEMENTS
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
notification of the commencement or termination of any such
20
<PAGE> 21
waiver or absorption. Any such waiver or absorption will have the effect of
lowering the overall expense ratio of the Funds and increasing the Funds'
overall return to investors at the time any such amounts are waived and/or
absorbed.
As of August 1, 1997 the Advisor has voluntarily undertaken to reimburse Class A
shares of MATTHEWS PACIFIC TIGER FUND and MATTHEWS KOREA FUND for operating
expenses in excess of 2.25% and 2.75%, respectively. Such fee reimbursements may
be terminated at the discretion of the Advisor.
When each Fund's net assets are not large enough to support all the various
expenses without exceeding the total expense limitation set forth in the
Prospectus, the Fund is considered to be in reimbursement mode for accounting
purposes. This is when the Advisor is waiving/reimbursing part or all of the
advisory fee and part or all of the operating expenses. Each Fund will reimburse
the Advisor in the following three years if operating expenses (before
reimbursement) are less than the applicable percentage limitation charged to the
Funds.
The Advisor may seek future reimbursement of any reduction made to its advisory
fee within the three-year period following such reduction, subject to the Fund's
ability to effect such reimbursement and remain in compliance with applicable
expense limitations. Any such reimbursement will be accounted for on the
financial statements of the Fund as a contingent liability of the Fund and will
appear as a footnote to the Fund's financial statement until such time as it
appears that the Fund will be able to effect such reimbursement. At such time as
it appears probable that the Fund is able to effect such reimbursement, the
amount of reimbursement that the Fund is able to effect will be accrued as an
expense of the Fund for that current period.
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
Advisor 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 affiliate of
Daewoo Research Institute. Total assets under management as of December 9, 1996
were in excess of $2 billion. 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. Orders for the purchase and sale of securities of
the Fund's portfolio may be placed with Daewoo Securities Co., Ltd., as well as
with other Korean brokers.
The Korean Advisor provides an investment program for MATTHEWS KOREA FUND
subject to the supervision of the Advisor in accordance with the objective and
policies of the Fund. The Korean Advisor provides such investment advice,
research 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 determined
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, LLC, including G. Paul Matthews and
Mark Headley. 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
21
<PAGE> 22
managed by Matthews International Capital Management, LLC.
Mark Headley joined Matthews International in April 1995 as Managing Director
and as Senior Analyst on the investment team. He has 8 years of experience in
the Asian Tiger markets. He was a member of the team which managed the first
open-ended Asia ex-Japan fund, the Tyndall Newport Tiger Fund (now the Colonial
Newport Tiger Fund) and was Vice President of Newport Pacific Management. In
1992, Headley moved to Hong Kong, where he served as a Director of Regent Fund
Management. He returned in 1993 to join Litman/Gregory & Co. as Director of
International Investments.
Both Mr. Headley and Mr. Matthews travel extensively to Asia to conduct research
relating to those markets.
ADMINISTRATION OF THE FUNDS
THE UNDERWRITER
FPS Broker Services, Inc. (the "Underwriter"), 3200 Horizon Drive, P.O. Box
61503, King of Prussia, PA 19406-0903, 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.
THE ADMINISTRATOR
FPS Services, Inc. ("FPS"), 3200 Horizon Drive, P.O. Box 61503, King of Prussia,
PA 19406-0903 serves as administrator to the Company pursuant to an
Administrative Services Agreement. The services FPS 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, registration statements and other documents; and responding to
shareholder inquiries. Pursuant to this agreement, FPS 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.
EXPENSES
Expenses attributable to the Fund, but not to a particular Class, will be
allocated to each Fund thereof on the basis of relative net assets. Similarly,
expenses attributable to a particular Fund, but not to a particular class, will
be allocated to each class thereof on the basis of relative net assets. General
Company expenses may include but are not limited to: insurance premiums; Trustee
fees; expenses of maintaining the Company's legal existence; and fees of
industry organizations. General Fund expenses may include but are not limited
to: audit fees; brokerage commissions; registration of Fund shares with the SEC
and notification fees to the various state securities commissions; fees of the
Fund's Custodian, Administrator and Transfer Agent or other "service providers";
costs of obtaining quotations of portfolio securities; and pricing of Fund
shares.
Class-specific expenses relating to distribution fee payments associated with a
Rule 12b-1 plan for a particular class of shares and any other costs relating to
implementing or amending such plan (including obtaining shareowner approval of
such plan or any amendment thereto), will be borne solely by shareowners of such
class or classes. Other expense allocations which may differ among classes, or
which are determined by the Trustees to be class-specific, may include but are
not limited to: printing and postage expenses related to preparing and
distributing required documents such as shareowner reports, prospectuses, and
proxy statements to current shareowners of a specific class; SEC registration
fees and state "blue sky" fees incurred by a specific class; litigation or other
legal expenses relating to a specific class; Trustee fees or expenses incurred
as a result of issues relating to a specific class; and different transfer
agency fees attributable to a specific class.
Notwithstanding the foregoing, the Investment Advisor or other service provider
may waive or reimburse the expenses of a specific class or classes to the extent
permitted under Rule 18f-3 under the 1940 Act.
22
<PAGE> 23
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. FPS 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 functions.
As fund accounting agent, FPS performs certain accounting and pricing services
for the Funds, including the daily calculation of the Funds' net asset value.
THE DISTRIBUTION PLAN
The Board of Trustees of the Fund has adopted a distribution plan for the shares
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the
"Plan"). As provided in the Plan, the Fund will pay an annual fee up to 0.25% of
the average daily net assets to the Underwriter. From this amount, the
Underwriter may make payments to financial institutions and intermediaries such
as banks, savings and loan associations, insurance companies, investment
counselors, and broker-dealers who assist in the distribution of the shares of
the Fund or provide services with respect to Class A shares of the Fund,
pursuant to service agreements with the Fund. The Plan is characterized as a
compensation plan because the distribution fee will be paid to the Underwriter
without regard to the distribution or shareholder service expenses incurred by
the Underwriter or the amount of payments made to financial institutions and
intermediaries. The Fund intends to operate the Plan in accordance with its
terms and within NASD rules concerning sales charges.
The fees paid to the Underwriter under the Plan are subject to the review and
approval by the Trust's unaffiliated trustees who may reduce the fees or
terminate the Plan at any time. All such payments made pursuant to the Plan
shall be made for the purpose of selling shares issued by each respective class
of shares. The distribution fee of one class will not be used to subsidize the
sale of the other class of shares.
PURCHASE OF SHARES
IN GENERAL
The Fund offers these shares to the general public on a continuous basis through
the Underwriter by mail, wire, telephone and broker-dealer subject to annual
distribution expenses pursuant to Rule 12b-1. See "The Distribution Plan."
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 requirement
for any investor.
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)
will be imposed if any check used for the purchase of shares is returned. The
Funds and FPS each reserve the right to reject any purchase order in whole or in
part.
MATTHEWS PACIFIC TIGER FUND and MATTHEWS KOREA FUND offer two classes of shares.
Only the Class A shares are offered under this Prospectus.
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 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, PA 19406-0903.
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 FPS Services, Inc.,
P.O. Box 412797, Kansas City, MO 64141-2797.
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<PAGE> 24
Please enclose the stub of your account statement and indicate the amount of the
investment.
Checks will be accepted if drawn in U.S. currency on a domestic bank. Checks
drawn against a non-U.S. bank may be subject to collection delays and will be
accepted only upon actual receipt of the funds by the transfer agent, FPS. The
Funds will not accept a check endorsed over by a third-party. A charge (minimum
of $20) will be imposed if any check used for the purchase of Fund shares is
returned unpaid. Investors who purchase Fund shares by check or money order may
not receive redemption proceeds until there is reasonable belief that the check
has cleared, which may take up to fifteen calendar days after payment has been
received.
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. Following
notification to the transfer agent, federal funds and registration instructions
should be wired through the Federal Reserve System to:
UMB BANK KC NA
ABA # 10-10-00695
FOR: FPS SERVICES, INC.
A/C 98-7037-071-9
FBO "MATTHEWS PACIFIC TIGER FUND -- CLASS A SHARES"
OR
"MATTHEWS KOREA FUND -- CLASS A SHARES"
"SHAREHOLDER NAME AND ACCOUNT NUMBER"
For initial purchases, the shareholder should complete and mail the application
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 FPS 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 FPS 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
organizations to promptly forward purchase orders and payments for the same to
the respective Fund. Shares of each Fund may be purchased through brokers,
financial 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 FPS before 5:00 p.m., Eastern time, on the same
day are confirmed at that day'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 FPS 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
investments for all retirement accounts is $50. When making additional
investments by mail, simply return the remittance portion of a previous
confirmation with your investment in the envelope provided with each
confirmation statement. Your check should be made payable to the respective Fund
and mailed to the respective Fund c/o FPS
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<PAGE> 25
Services, Inc., P.O. Box 412797, Kansas City, MO 64141-2797.
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)
will be imposed if any check used for the purchase of shares is returned. The
Funds and FPS each reserve the right to reject any purchase order in whole or in
part.
SALES CHARGES
Class A Shares of the Fund are offered at the public offering price which is the
current net asset value per share next determined after receipt of a purchase
order in proper form by the transfer agent, plus any applicable sales charge.
The sales charge is a variable percentage of the offering price, depending upon
the amount of the sale. No sales charge will be assessed on the reinvestment of
distributions. See "Reduced Sales Charges." Shares may also be bought and sold
through any securities dealer having a dealer agreement with FPBS, the Fund's
principal underwriter.
The following table shows the regular sales charge on Class A Shares of the Fund
together with the reallowance paid to dealers and the agency commission paid to
brokers, collectively the "commission":
<TABLE>
<CAPTION>
REALLOWANCE
SALES OF BROKERAGE
SALES CHARGE AS COMMISSION
CHARGE AS PERCENTAGE AS
PERCENTAGE OF NET PERCENTAGE
CLASS A SHARES AMOUNT OF OFFERING AMOUNT OF OFFERING
TO PURCHASE PRICE INVESTED PRICE
- ----------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Less than $50,000...... 4.95% 5.21% 4.50%
$50,000 or more but
less than $100,000... 4.25% 4.44% 3.85%
$100,000 or more but
less than $250,000... 3.25% 3.36% 2.90%
$250,000 or more but
less than $500,000... 2.50% 2.56% 2.15%
$500,000 or more but
less than
$1,000,000........... 2.00% 2.04% 1.80%
$1,000,000 and over.... 0.00% 0.00% 0.00%
</TABLE>
The commissions shown in the table apply to sales through financial institutions
and intermediaries. Under certain circumstances, the Distributor or a sub-
distributor may use its own funds to compensate financial institutions and
intermediaries in amounts that are in addition to the commissions shown above.
The Distributor or a subdistributor may, from time to time and at its own
expense, provide promotional incentive, in the form of cash or other
compensation, to certain financial institutions and intermediaries whose
registered representatives have sold or are expected to sell significant amounts
of shares of the Fund. Such other compensation may take the form of payments for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives to places within or outside of the United
States. Under certain circumstances, commissions up to the amount on the entire
sales charge may be reallowed to certain financial institutions and
intermediaries, who might then be deemed to be "underwriters" under the
Securities Act of 1933, as amended.
REDUCED SALES CHARGES
The sales charge for purchases of Class A Shares of the Fund may be reduced
through Rights of Accumulation or Letter of Intent. To qualify for a reduced
sales charge, an investor must so notify his or her distributor at the time of
each purchase of shares which qualifies for the reduction.
RIGHTS OF ACCUMULATION
A shareholder may qualify for a reduced sales charge by aggregating the net
asset values of shares requiring the payment of an initial sales charge,
previously purchased and currently owned, with the dollar amount of shares to be
purchased.
LETTER OF INTENT
An investor of Class A Shares may qualify for a reduced sales charge immediately
by signing a non-binding Letter of Intent stating the investor's intention to
invest during the next 13 months a specified amount which, if made at one time,
would qualify for a reduced sales charge. The first investment cannot be made
more than 90 days prior to the date of the Letter of Intent. Any redemptions
made during the 13-month period will be subtracted from the amount of purchases
in determining whether the Letter of Intent has been completed. During the term
of the Letter of Intent, the transfer agent will hold shares representing 4.95%
of the indicated amount in escrow for payment of a higher sales load if the full
amount indicated in the
25
<PAGE> 26
Letter of Intent is not purchased. The escrowed shares will be released when the
full amount indicated has been purchased. If the full amount indicated is not
purchased within the 13-month period, a shareholder's escrowed shares will be
redeemed in an amount equal to the difference in the dollar amount of sales
charge actually paid and the amount of sales charge the shareholder would have
had to pay on his or her aggregate purchases if the total of such purchases had
been made at a single time. It is the shareholder's responsibility to notify the
transfer agent at the time the Letter of Intent is submitted that there are
prior purchases that may apply.
The term "single purchaser" refers to (i) an individual, (ii) an individual and
spouse purchasing shares of the Fund for their own account or for trust or
custodial accounts of their minor children, or (iii) a fiduciary purchasing for
any one trust, estate or fiduciary account, including employee benefit plans
created under Sections 401 and 457 of the Internal Revenue Code of 1986, as
amended, including related plans of the same employer.
EXCHANGE OF SHARES
IN GENERAL
Class A shares of either Fund may be exchanged for Class A shares of the other
Fund, provided such other shares may be sold legally in the state of the
investor's residence.
Exchanges are subject to the minimum initial investment requirement for the
respective Fund. Requests for telephone exchanges must be received by FPS 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 authorization 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
investment 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
accepted 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 FPS
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
impose 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.
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<PAGE> 27
The Funds will satisfy redemption requests in cash to the fullest extent
feasible, 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
disadvantageous 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 exist 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 received 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 redemption in-kind,
the Funds will not recognize gain or loss for federal tax purposes, on the
securities used to complete the redemption but the shareholder 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
restricted 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 determination of
the value of the net assets of the Funds not reasonably practicable.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request for redemption to FPS,
3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903.
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 signature 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 Securities Exchange Act of
1934. Eligible guarantor institutions include banks, brokers, dealers, credit
unions, national securities exchanges, registered securities associations,
clearing agencies and savings associations. Broker-dealers 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
participates in a signature guarantee program. A notarized signature will not be
sufficient for the request to be in proper form. The transfer agent may require
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
27
<PAGE> 28
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. Procedures 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
institutions or service organizations, 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, from original purchases of $1,000,000 or more, 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.
MINIMUM BALANCES
Due to the relatively high cost of maintaining smaller accounts, the Funds
reserve 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
shareholder) 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
minimum 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
telephone 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
identification 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
minimum subsequent investment pursuant to this plan is $100 per month. The
initial account must be opened first with the $1,000 minimum prior to
participating in this plan. Please complete the appropriate section on the New
Account Application enclosed with this Prospectus indicating the amount of the
automatic investment and bank account information.
RETIREMENT PLANS
The Funds are available for investment by pension and profit sharing plans
including Individual Retirement Accounts, 401(k) plans, and 403(b)(7) Retirement
Plans through which investors may purchase Fund
28
<PAGE> 29
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 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, Labor Day, Thanksgiving Day and Christmas Day.
The net asset value per share is computed by adding the value of all securities
and other assets in the portfolio, deducting any liabilities, and dividing 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.
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.
Short-term investments having a maturity of 60 days or less are valued at
amortized 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 purchased,
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 established 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 materially
affect the value of the Funds' foreign investments or the foreign currency
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 access to the Funds.
For valuation purposes, quotations of foreign portfolio securities, other assets
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. 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 dividends and capital gain distributions are reinvested
automatically in additional 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
delivered by the Post Office or which remains uncashed for a period of more than
one
29
<PAGE> 30
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 on that date. Dividends and
distributions are treated the same for tax purposes whether received in cash or
reinvested in additional shares. Please note that shares purchased shortly
before the record date for a dividend or distribution may have the effect of
returning capital although such dividends and distributions are subject to
taxes.
Dividends paid by the Fund with respect to Class A shares are calculated in the
same manner and at the same time. Both Class A and Class I shares of the Fund
will share proportionately in the investment income and expenses of the Fund,
except that the per share dividends of Class I shares will differ from the per
share dividends of Class A shares as a result of additional distribution
expenses applicable to Class A shares.
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
qualification relieves the Funds of liability for Federal income taxes to the
extent 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 securities 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 shareholder
has held the Funds' shares. The tax treatment of distributions of ordinary
income or capital gains will be the same whether the shareholder reinvests 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 taxpayer
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
distributions for federal income tax purposes. Information accompanying a
shareholder'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 Information. 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 securities
may give rise to withholding and other taxes imposed by foreign countries. 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 Korea-U.S. Tax
Treaty. Therefore, MATTHEWS KOREA
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<PAGE> 31
FUND generally will not be subject to any Korean income taxes other than Korean
withholding taxes. Exemptions 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 performance
information may be useful in reviewing the performance of the Funds and for
providing a basis for comparison with other investment alternatives. Since net
investment return of the Funds changes in response to fluctuations in market
conditions, 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 reinvested.
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 reflects
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 asset
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 management
investment company, commonly known as a mutual fund. The Trustees of the Company
may establish additional series or classes of shares without the approval of
shareholders. The assets of each series will belong only to that series, 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 compensation
from the Funds.
DESCRIPTION OF SHARES
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest with no par value. Shares of the Fund represent equal proportionate
interests in the assets of the Fund only, and have identical voting, 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 and no conversion rights.
MULTIPLE CLASSES OF SHARES
Currently, MATTHEWS PACIFIC TIGER FUND and MATTHEWS KOREA FUND offer two classes
of shares: Class A shares which are offered by this Prospectus, and Class I
shares. The classes offered have different sales charges and other expenses
which may affect performance. Class A shares are offered by this Prospectus and
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<PAGE> 32
information about Class I shares, which are offered to institutional investors,
may be obtained by calling (800) 789-ASIA. The validity of shares of beneficial
interest offered by this prospectus will be passed on by Paul, Hastings,
Janofsky & Walker LLP, 345 California Street, San Francisco, CA 94104-2635.
Partners and employees of Paul, Hastings, Janofsky & Walker LLP may own shares
of the Funds from time to time. All accounts will be maintained in book entry
form and no share certificates will be issued.
VOTING RIGHTS
A shareholder is entitled to one vote for each full share held (and fractional
vote for each fractional share held). All shares of each Fund participate
equally in dividends, distributions, and liquidations with respect to the Funds,
except that Class I shares do not have voting rights with respect to the
Distribution Plan. 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
shareholders 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 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 liable
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
unaffiliated Shareholder Servicing Agents. The Shareholder Servicing Agent may,
as agent for its customers, among other things: answer customer inquiries
regarding account history and purchase and redemption procedures; assist
shareholders in designating and changing dividend options, account designations
and addresses; provide necessary personnel and facilities to establish and
maintain shareholder accounts and records; assist in processing purchase and
redemption 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
shareholders 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 Francisco,
CA 94111, (800) 789-ASIA.
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APPENDIX
BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S") describes classifications of
corporate 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
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
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
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in
the future.
Baa Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
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
interest 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
investments. 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
default 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
shortcomings.
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.
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<PAGE> 34
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
interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal 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
although 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
parameters, 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
speculative grade debt. However, it faces major ongoing uncertainties or
exposure 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
business, 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
interest 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
particular type of obligation as a matter of policy.
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MATTHEWS INTERNATIONAL FUNDS CLASS A
It only takes a few moments to fill out this step by step application. If you
have any questions, call us at (800) 789-ASIA, from 8:30 A.M. to 5:30 P.M.
Pacific Coast Time or at (800) 892-0382 from 9:00 A.M. to 5:00 P.M. Eastern
Time. Please print your information and send your signed application to Matthews
International Funds, C/O FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive,
King of Prussia, PA 19406-0903.
- --------------------------------------------------------------------------------
1 CHOOSE YOUR INVESTMENTS
- --------------------------------------------------------------------------------
There is an initial investment of $1,000.00, $250.00 for a Retirement Plan
account.
<TABLE>
<S> <C> <C>
$ Make check payable to the appropriate Fund. If you
[ ] Matthews Pacific Tiger ---------------------------- have an account in another Matthews Fund registered
Class A under the same name and tax identification number
$ and would like to use the same account number below,
[ ] Matthews Korea ---------------------------- please indicate the following:
Class A
Total Investment $
---------------------------- -------------------------- ------------------------
First Name Account #
</TABLE>
- --------------------------------------------------------------------------------
2 INVESTMENT METHOD
- --------------------------------------------------------------------------------
[ ] BY CHECK: I have enclosed a check for $___________________
[ ] BY WIRE: Federal Funds were wired on ____/____/____ for Acct.#___________
MO. DAY YR.
- --------------------------------------------------------------------------------
3 REDUCED SALES CHARGES (CLASS A ONLY)
- --------------------------------------------------------------------------------
[ ] RIGHT OF ACCUMULATION Please link the accounts listed below for Right of
Accumulation privileges so that this purchase will receive any allowable
discount.
If you, your spouse or minor children own shares in other Matthews
International Funds, you may be eligible for a reduced sales charge. List
any existing accounts to be considered and, if eligible, complete the Rights
of Accumulation of the Letter of Intent sections below.
____________________________________________________________________________
Fund Account Number Fund Account Number
____________________________________________________________________________
Fund Account Number Fund Account Number
[ ] LETTER OF INTENT I agree to the terms of the Letter of Intent set forth in
the prospectus (including escrowing of shares). Although I am not obligated
to do so, it is my intention to invest the following amount over a 13-month
period in one or more Matthews International Funds in an aggregate amount at
least equal to:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $1,000,000
If the full amount indicated is not purchased within 13 months, I understand an
additional sales charge must be paid from my account.
- --------------------------------------------------------------------------------
4 ACCOUNT REGISTRATION
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
[ ] INDIVIDUAL OR JOINT ACCOUNT [ ] TRUST
_________________________________________ _____________________________________ as trustee(s) of
OWNER'S NAME TRUSTEE(S) NAME
_ _
_________________________________________ ____________________________________ for the benefit of
OWNER'S SOCIAL SECURITY NO. NAME OF TRUST AGREEMENT
_________________________________________ _____________________________________________________
JOINT OWNER'S NAME BENEFICIARY'S NAME
_ _ _ _
_________________________________________ _______________________________ ______/_____/__________
JOINT OWNER'S SOCIAL SECURITY NO. TAXPAYER ID NUMBER DATE OF TRUST AGREEMENT
GIFT OR TRANSFER TO A MINOR
[ ] GIFT OR TRANSFER TO A MINOR [ ] CORPORATION, PARTNERSHIP OR OTHER ENTITY
_________________________ as custodian for _______________________________________________________
CUSTODIAN NAME NAME OF CORPORATION OR OTHER ENTITY
________________________________ under the _______________________________________________________
MINOR'S NAME TITLE OF ENTITY
_ _
_____________Uniform Gifts/Transfer to Minor Act _______________________________________________________
STATE TAXPAYER ID NUMBER
_ _
______________________________ _____/_____/____
MINOR'S SOCIAL SECURITY NO. DATE OF BIRTH
</TABLE>
<PAGE> 36
CLASS A
- --------------------------------------------------------------------------------
5 ADDRESS
- --------------------------------------------------------------------------------
__________________________________________________
STREET OR P.O. BOX
__________________________________________________
CITY, STATE, ZIP
( ) ( )
_________________________ _______________________
DAY PHONE EVENING PHONE
CITIZEN OF:
[ ] U.S. [ ] OTHER
_____________________
PLEASE SPECIFY
- --------------------------------------------------------------------------------
6 DIVIDEND OPTIONS
- --------------------------------------------------------------------------------
[ ] Reinvest all dividends and capital gains.
[ ] Pay all dividends and capital gains to me by check.
[ ] Pay all dividends by check and reinvest capital gains.
All distributions will be reinvested unless otherwise indicated.
- --------------------------------------------------------------------------------
7 TELEPHONE OPTIONS
- --------------------------------------------------------------------------------
You automatically have the ability to exchange, redeem and purchase shares by
telephone unless you check the boxes below. Proceeds of telephone redemption
requests are paid by check and mailed to the address of record or wired to your
bank account. Exchanges must be between identically registered accounts. See the
prospectus for details.
TELEPHONE EXCHANGE [ ] Yes [ ] No
TELEPHONE PURCHASE [ ] Yes [ ] No
TELEPHONE REDEMPTION [ ] Yes [ ] No
I (we) authorize FPS Services to honor telephone instructions for my (our)
account. Neither the Fund nor FPS Services will be liable for properly acting
upon telephone instructions believed to be genuine. Please attach a voided
check on the Transfer account and complete below.
____________________________________________________________________
Name of Bank
____________________________________________________________________
City State
____________________________________________________________________
Bank Exchange Number Account Number [ ]Checking [ ]Savings
- --------------------------------------------------------------------------------
8 SIGNATURE CERTIFICATION
- --------------------------------------------------------------------------------
The following is required by Federal tax law to avoid 20% backup withholding:
"By signing below, I certify under penalties of perjury that the social
security number entered above is correct (or I am waiting for a number to be
issued to me), and that I have not been notified by the IRS that I am subject
to backup withholding unless I have checked the box." If you have been notified
by the IRS that you are subject to backup withholding, check box [ ]. "The
Internal Revenue Service does not require your consent to any provision of this
document other than the certifications required to avoid backup withholding."
Receipt of current prospectus is hereby acknowledged.
________________________________________________________________________________
Signature [ ]Owner [ ]Custodian [ ]Trustee Date
________________________________________________________________________________
Signature of Joint Owner (if applicable) Date
- --------------------------------------------------------------------------------
9 DEALER INFORMATION
- --------------------------------------------------------------------------------
The undersigned ("Dealer") agrees to all applicable provisions in this
application and guarantees the genuineness of the signature on the application.
If the shareholder does not sign this application, the Dealer warrants that this
Application is completed in accordance with the shareholder's instructions and
agrees to indemnify the Fund, the Distributor and FPS Services, Inc. for any
loss or liability from acting or relying upon such instructions.
______________________________________ _______________________________________
DEALER NO. BRANCH NO.
______________________________________ _______________________________________
REP. NO. FIRM NAME
____________________________________________________________
REP'S NAME
________________________________________________________________________________
FIRM ADDRESS
_____________________________________ _______________________________________
AUTHORIZED SIGNATURE OF DEALER REP'S SIGNATURE
<PAGE> 37
MATTHEWS INTERNATIONAL FUNDS AUTOMATIC INVESTMENT PLAN CLASS A
Please complete this application and mail to: Matthews International Funds, C/O
FPS Services, Inc., P.O. Box 61503, 3200 Horizon Drive, King of Prussia, PA
19406-0903.
Shareholder Services:
This letter serves as your authorization to set up an Automatic Investment Plan
for my Matthews International Funds account.
Please start an automatic investment plan. I would like to invest $ __________
($100 Min.) each month. The money should be debited from my bank account on the
[ ] 10th [ ] 15th [ ] 20th of each month and should be invested in the
following account.
<TABLE>
<S> <C>
[ ] I am in the process of establishing a new Account. [ ] Matthews Pacific Tiger Fund -- Class A
[ ] Matthews Korea Fund -- Class A Account Number #
-------------------------
- ------------------------------------------------------ -----------------------------------------------
Bank Account # Registration of account to be debited
- ------------------------------------------------------ -----------------------------------------------
Name of Bank Street Address
- --------------------------------- --------------------------------- ---------------------------------
City State Zip Code
Bank's ABA Number (9 digits)
--------------------------------------------------------------------------
Signature of Bank
account owner(s)
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
PLEASE ATTACH A VOIDED CHECK OR DEPOSIT SLIP
I (we) understand that my (our) ACH debit will be dated on the day of each month
indicated above. If that day falls on a day in which the NYSE is not open for
business, the debit will occur on the next available business day. I (we) agree
that if such debit is not honored, FPS Services reserves the right to
discontinue this service and any share purchase made upon such deposit will be
cancelled. I (we) further agree that if the net asset value of shares purchased
is less when said purchase is cancelled than when the purchase was made, FPS
Services, Inc. shall be authorized to liquidate other assets or fractions
thereof held in my (our) account to make up the deficiency. This Automatic
Investment Plan may be discontinued by FPS Services, Inc. upon 30 days written
notice or at any time by the investor by written notice to FPS Services, Inc.
which is received no later than 5 business days prior to the above designated
investment date.
<PAGE> 38
BOARD OF TRUSTEES
G. Paul Matthews
John H. Dracott
Richard K. Lyons
Robert K. Connolly
Dong Wook Park
David FitzWilliam-Lay
Norman J. Berryessa
OFFICERS
G. Paul Matthews
John H. Dracott
Brian Stableford
INVESTMENT ADVISOR
Matthews International Capital Management, LLC
655 Montgomery Street, Suite 1438
San Francisco, CA 94111
(800) 789-ASIA
KOREAN ADVISOR
Daewoo Capital Management Co., Ltd.
34-3, Yoido-dong, Yungdungpo-gu
Seoul, 150-010 Korea
UNDERWRITER
FPS Broker Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(800) 892-0382
SHAREHOLDER SERVICES
FPS Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(800) 892-0382
CUSTODIAN
The Bank of New York
90 Washington Street
New York, NY 10286
LEGAL COUNSEL
Paul, Hastings, Janofsky & Walker LLP
345 California Street
San Francisco, CA 94104-2635
AUDITORS
Ernst & Young LLP
555 California Street, Suite 1700
San Francisco, CA 94104
For Additional Information about the
Matthews International Funds call:
(800) 789-ASIA
Logo
MATTHEWS PACIFIC
TIGER FUND
MATTHEWS KOREA FUND
CLASS A SHARES
PROSPECTUS
August 1, 1997
Supplemented as of
September 10, 1997
---------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS
---------------------------------------------------------
<PAGE> 39
MATTHEWS INTERNATIONAL FUNDS
MATTHEWS KOREA FUND
MATTHEWS PACIFIC TIGER FUND
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997
- --------------------------------------------------------------------------------
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. Matthews Pacific Tiger Fund
and Matthews Korea Fund offer Class A shares for retail investors and Class I
shares for institutional investors. This Statement of Additional Information
dated August 1, 1997 is not a prospectus and should be read in conjunction with
the Prospectus for Class A shares or Class I shares, as applicable, each dated
August 1, 1997. 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:
FPS Services, Inc. Matthews International Capital Management, LLC
3200 Horizon Drive 655 Montgomery Street, Suite 1438
King of Prussia, PA 19406-0903 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> 40
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE FUNDS.................................................................................... 3
INVESTMENT POLICIES AND TECHNIQUES........................................................... 3
RISKS RELATED TO LOWER RATED DEBT SECURITIES................................................. 10
SPECIAL CONSIDERATIONS AFFECTING THE PACIFIC BASIN........................................... 11
INVESTMENT RESTRICTIONS...................................................................... 11
TRUSTEES AND OFFICERS........................................................................ 13
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES.......................................... 15
INVESTMENT ADVISORY AND OTHER SERVICES....................................................... 17
Investment Advisory Agreement........................................................... 17
Korean Research and Advisory Agreement.................................................. 18
The Administrator....................................................................... 18
The Underwriter......................................................................... 19
PORTFOLIO TRANSACTIONS AND BROKERAGE......................................................... 19
PORTFOLIO TURNOVER........................................................................... 20
DETERMINATION OF NET ASSET VALUE............................................................. 20
TAXES........................................................................................ 21
PERFORMANCE INFORMATION...................................................................... 23
OTHER INFORMATION............................................................................ 26
FINANCIAL STATEMENTS......................................................................... 26
</TABLE>
2
<PAGE> 41
THE FUNDS
Matthews International Funds, 655 Montgomery Street, Suite 1438, San Francisco,
California 94111, is an 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"). MATTHEWS PACIFIC TIGER FUND and
MATTHEWS KOREA FUND offer two classes of shares: the Retail Class (Class A) and
the Institutional Class (Class I). Shareholders of the Retail Class shares are
subject to a sales charge and annual 12b-1 expenses.
INVESTMENT POLICIES AND TECHNIQUES
The following supplements the information contained in the Prospectuses
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, 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.
3
<PAGE> 42
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, LLC,
pursuant to guidelines reviewed by the Board of Trustees. Matthews International
Capital Management, LLC, 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. 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
4
<PAGE> 43
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.
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
5
<PAGE> 44
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.
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.
6
<PAGE> 45
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 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
7
<PAGE> 46
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 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
8
<PAGE> 47
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 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
9
<PAGE> 48
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.
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.
10
<PAGE> 49
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. 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
11
<PAGE> 50
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;
(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
<PAGE> 51
(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 TOTAL
COMPENSATION COMPENSATION
PRINCIPAL FROM TRUST FOR FROM TRUST AND
POSITION(S) OCCUPATION FISCAL YEAR FUND COMPLEX
NAME, ADDRESS HELD WITH DURING PAST FIVE ENDED PAID TO
AND AGE REGISTRANT YEARS AUG. 31, 1996 TRUSTEES
- ----------------------------- ----------- --------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
G. Paul Matthews* 40 Chairman Chief Investment N/A N/A
655 Montgomery Street of the Officer of Matthews
Suite 1438 Board and International Cap.
San Francisco, CA 94111 President Mgmt. since 1991.
President GT Cap.
Holdings
John H. Dracott* 68 Trustee Vice-President, N/A N/A
655 Montgomery Street Secretary and
Suite 1438 Trustee,
San Francisco, CA 94111 International
mutual fund
consultant since
1991. President,
Tyndall Distributors.
Richard K. Lyons 35 Trustee Professor Haas $5,000 $5,000
University of California School of Business
350 Barrows Hill since 1995, Assistant
Berkeley, CA 94720 Professor 1993-1995.
Associate Professor,
Grad School of
Business & School of
Int'l & Public
Affairs, Columbia
Univ Assistant
Professor
</TABLE>
13
<PAGE> 52
<TABLE>
<CAPTION>
AGGREGATE TOTAL
COMPENSATION COMPENSATION
PRINCIPAL FROM TRUST FOR FROM TRUST AND
POSITION(S) OCCUPATION FISCAL YEAR FUND COMPLEX
NAME, ADDRESS HELD WITH DURING PAST FIVE ENDED PAID TO
AND AGE REGISTRANT YEARS AUG. 31, 1996 TRUSTEES
- ----------------------------- ----------- --------------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
Robert K. Connolly 64 Trustee Retired; Until Aug. $5,000 $5,000
P.O. Box 94 1990, Institutional
Sonoma, CA 95476 Sales Manager and
Securities Analyst
for Barrington Research
Associates.
Dong Wook Park* 49 Trustee Director, Portfolio N/A N/A
Daewoo Capital Mgmt Co. Ltd. Mgr. & head of the
Daewoo Securities Building, International Dept.
34-3 Yoido-dong, of Daewoo.
Yungdungpo-go,
Seoul, Korea
David FitzWilliam-Lay 65 Trustee Director, USDC In- $1,250 $1,250
26 Chalfont House, vestment Trust PLC
19 Chesham Street & Berry Starquest
London SWIX 8NG PLC. Retired in
United Kingdom 1993 after 3 1/2 yrs.
as Chairman of GT
Mgmt, PLC.
Norman Berryesa 68 Trustee Independent $3,000 $3,000
100 Bush Street Contractor, Emmett
Suite 1000 Larkin Co., Inc.,
San Francisco, CA 94109 since 1983; President
& CEO of Gallegoes
Institutional
Investors
Inc. from 1990 to
1994.
</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,
LLC 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.
14
<PAGE> 53
Set forth below are the total fees which were paid to each of the Trustees who
are not "interested persons" during the fiscal period ended October 31, 1996.
<TABLE>
<CAPTION>
TRUSTEES AGGREGATE FEES PAID BY THE TRUST
- ------------------------------------- -------------------------------------
<S> <C>
Robert K. Connolly................... $5,000
Richard K. Lyons..................... $5,000
David Fitz-William Lay............... $1,250
Norman Berryessa..................... $2,500
</TABLE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
As of May 1, 1997, the Trustees and officers as a group owned less than 1% of
the outstanding shares of the Company.
As of May 1, 1997, the following persons owned of record or beneficially more
than 5% of the outstanding voting shares of the:
<TABLE>
<CAPTION>
NAME & ADDRESS OF BENEFICIAL OWNERS NUMBER OF SHARES PERCENTAGE
- ----------------------------------------------------------- ---------------- ----------
<S> <C> <C>
MATTHEWS PACIFIC TIGER FUND
Charles Schwab & Co., Inc. 2,340,998.714 69.73
FBO Special Custody Acct for Exclusive
Benefit of Customers
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Alan Moore 197,664.960 8.98
P.O. Box 740725
Dallas, TX 75374
</TABLE>
<TABLE>
<CAPTION>
NAME & ADDRESS OF BENEFICIAL OWNERS NUMBER OF SHARES PERCENTAGE
- ----------------------------------------------------------- ---------------- ----------
<S> <C> <C>
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
Charles Schwab & Co., Inc. 174,050.668 48.71
FBO Special Custody Acct for Exclusive
Benefit of Customers
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94101
Charles Schwab & Co., Inc. 25,655.110 7.18
FBO Special Custody Acct for Exclusive
Benefit of Customers
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94101
</TABLE>
15
<PAGE> 54
<TABLE>
<CAPTION>
NAME & ADDRESS OF BENEFICIAL OWNERS NUMBER OF SHARES PERCENTAGE
- ----------------------------------------------------------- ---------------- ----------
<S> <C> <C>
Cupertino National Bank & Trust Co. 18,686.232 5.23
DBA Greater Bay Trst Co.
ATTN: TRST Dept
P.O. Box 1740
Palo Alto, CA 94302
</TABLE>
<TABLE>
<CAPTION>
NAME & ADDRESS OF BENEFICIAL OWNERS NUMBER OF SHARES PERCENTAGE
- ----------------------------------------------------------- ---------------- ----------
<S> <C> <C>
MATTHEWS KOREA FUND
Charles Schwab & Co., Inc. 976,184.354 46.09
FBO Special Custody Acct for Exclusive
Benefit of Customers
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
National Financial Services Corp. 368,458.735 17.39
FBO Exclusive Benefit of our Customers
FBO Sal Vella
ATTN: Mutual Funds
200 Liberty Street, 5th floor
New York, NY 10281
Charles Schwab & Co., Inc. 306,296.729 14.46
FBO Special Custody Acct for Exclusive
Benefit of Customers
ATTN: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
16
<PAGE> 55
INVESTMENT ADVISORY AND
OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
The advisory services provided by Matthews International Capital Management, LLC
(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.
17
<PAGE> 56
The investment advisory fees with respect to the applicable funds are set forth
below:
<TABLE>
<CAPTION>
GROSS ADVISORY GROSS ADVISORY
FEES EARNED FEES EARNED
DURING FYE DURING FYE
FUND AUGUST 31, 1995 AUGUST 31, 1996
- ------------------------------------------- ---------------
<S> <C> <C>
MATTHEWS PACIFIC TIGER
FUND...................... $ 6,524 $80,273
MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND........... $ 6,697 $21,475
MATTHEWS KOREA FUND......... $ 2,648 $15,406
</TABLE>
KOREAN RESEARCH AND ADVISORY AGREEMENT
Pursuant to a Research and Advisory Agreement ("Research Agreement") between
Matthews International Capital Management, LLC 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
FPS Services, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA
19406-0903 (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.
18
<PAGE> 57
As compensation for services performed under the Administration Agreement, the
Administrator receives a fee payable monthly at an annual rate (as described in
the Prospectus) multiplied by the average daily net assets of the Company.
During the fiscal years ended August 31, 1995 and 1996, the aggregate
administrative fees paid by the Company on behalf of the Funds totaled $62,568
and $85,838, respectively, all of which was paid to FPS Services, Inc.
The administrative fees earned and paid with respect to each Fund are set forth
below:
<TABLE>
<CAPTION>
ADMINISTRATIVE ADMINISTRATIVE
FEES PAID FEES PAID
DURING FYE DURING FYE
FUND AUGUST 31, 1995 AUGUST 31, 1996
- ------------------------------------------- ---------------
<S> <C> <C>
MATTHEWS PACIFIC TIGER
FUND...................... $23,558 $29,671
MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND........... $23,306 $28,154
MATTHEWS KOREA FUND......... $15,704 $27,558
</TABLE>
THE UNDERWRITER
FPS Broker Services, Inc. ("FPSB"), 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903, 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, FPSB 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 FPSB as states in which it wishes to offer
its shares for sale, in order that state registrations may be maintained for the
Funds.
FPSB is a broker-dealer registered with the SEC and a member in good standing of
the National Association of Securities Dealers, Inc.
Pursuant to its Underwriter Compensation Agreement with the Company, FPSB is
paid an annual underwriter fee of $15,000 for each Class A Shares Fund and
certain other registration and transaction fees.
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.
DISTRIBUTION PLAN
The Board of Trustees of the company has adopted Plan of Distribution (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act which permits the Class A
shares of each Fund (except Matthews Asian Convertible Securities Fund) to pay
certain expenses associated with the distribution of its shares. Under the Plan,
each Fund may pay actual expenses not exceeding, on an annual basis, 0.25% of a
Fund's average daily net assets. To the Company's knowledge, no interested
person of the Company, nor any of its Trustees who are not "interested persons",
has a direct or indirect financial interest in the operation of the Plan. The
Company anticipates that each Fund will benefit from additional shareholders and
assets as a result of implementation of the Plan. The terms of such Plans are
more fully described in the Prospectus under "THE DISTRIBUTION PLAN".
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
19
<PAGE> 58
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 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 years ended August 31, 1995 and 1996, the aggregate brokerage
commissions paid by the Company on behalf of the Funds amounted to $16,851.65
and $238,614.56 respectively. The total brokerage commissions attributable to
each Fund are set forth below.
<TABLE>
<CAPTION>
BROKERAGE BROKERAGE
COMMISSIONS COMMISSIONS
PAID PAID
DURING FYE DURING FYE
FUND AUGUST 31, 1995 AUGUST 31, 1996
- ------------------------------------------- ---------------
<S> <C> <C>
MATTHEWS PACIFIC TIGER
FUND...................... $ 12,222.14 $204,164.35
MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND........... $ 909.12 $ 2,686.68
MATTHEWS KOREA FUND......... $ 3,720.39 $ 31,763.53
</TABLE>
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 Funds for the most recent fiscal years may
be found under "Financial Highlights" in the Prospectus. 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
20
<PAGE> 59
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.
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.
21
<PAGE> 60
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.
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
appreci-
22
<PAGE> 61
ation 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 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:
23
<PAGE> 62
ERV = P(1 + T) to the n power
<TABLE>
<S> <C> <C>
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.
</TABLE>
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
<TABLE>
<S> <C> <C>
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.
</TABLE>
The average annual total returns for the Funds which quote such performance were
as follows for the periods shown:
<TABLE>
<CAPTION>
9/13/94 9/1/95
THROUGH THROUGH
SERIES 8/31/96 8/31/96
- --------------------------------- ------- -------
<S> <C> <C>
MATTHEWS PACIFIC TIGER FUND...... 4.27% 10.64%
MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND................ 5.70% 10.24%
</TABLE>
<TABLE>
<CAPTION>
1/3/94 9/1/95
THROUGH THROUGH
SERIES 8/31/96 8/31/96
- --------------------------------- ------- -------
<S> <C> <C>
MATTHEWS KOREA FUND.............. (18.08% ) (20.11% )
</TABLE>
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:
to the 6th power
YIELD = 2[ (a - b + 1) - 1 ]
-----
cd
<TABLE>
<S> <C> <C>
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.
</TABLE>
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
24
<PAGE> 63
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 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.
25
<PAGE> 64
OTHER INFORMATION
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 AUDITORS
Ernst & Young LLP, 555 California Street, Suite 1700, San Francisco, CA 94101
have been selected as the independent auditors for the Company. Ernst & Young
LLP 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 Ernst & Young LLP.
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.
FINANCIAL STATEMENTS
The financial statements for Class I shares, including the notes thereto, as of
August 31, 1996, are incorporated by reference from the Funds' 1996 Annual
Report to Shareholders, as filed with the Securities and Exchange Commission on
form N-30D.
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