<PAGE>
- --------------------------------------------------------------------------------
A MESSAGE TO SHAREHOLDERS
- --------------------------------------------------------------------------------
Dear Fellow Shareholders,
The fiscal year ending August 31, 1998 will go down in history as one of the
most challenging periods faced by Asian investors in the last fifty years.
Currency devaluations, stalling economic growth, rising unemployment and
wholesale bankruptcies have contributed to an overall environment that has
proved extremely negative for financial markets. Towards the end of the fiscal
year, it became apparent that the issues that have now dominated many Asian
economies for over twelve months are being felt in other parts of the globe. The
leaders of the G7 and G22 countries are now discussing changes to the global
financial system to guard against either a repetition or extension of what has
been described as the Asian Financial Crisis. We believe that some Asian
economies offer hope that those countries that were amongst the "first in" will
be the "first out".
The two countries, Thailand and South Korea, that seem most likely to offer the
prospect of economic recovery in the near future are two of Asia's three
recipients of significant International Monetary Fund aid. While Indonesia
remains highly unstable, the economies and currencies of both South Korea and
Thailand are showing signs that the worst may be over, and there are tentative
forecasts of renewed growth as soon as the first half of 1999.
The underlying reason for optimism that the economic health of Asia may start to
show signs of improvement by the first half of 1999 lies in the favorable swing
towards overall trade and current account surpluses that have been experienced
by most of the region. While this has largely been achieved through a sharp
reduction in the level of imports, it has nevertheless reversed the trends which
preceded the crisis of July 1997.
Combined with obvious efforts in many Asian countries to adopt the reform
measures prescribed by the West, particularly in areas such as financial sector
re-structuring and increased access to overseas companies acquiring existing
Asian businesses, a number of countries (Thailand, South Korea, Singapore) have
seen their currencies stabilize and interest rates drop significantly. It
remains encouraging that the economy of Mainland China has so far weathered the
storm created by the instability of its neighbors and may prove to be Asia's
most stable economy in this difficult and volatile period.
If the first phase of Asia's crisis was led by the currency devaluations that
swept the region (July 1997), then it may be safe to assume that the first phase
is behind us and that the primary challenge now facing most of the region is a
restoration of confidence and renewal of growth. While evidence of recession is
dominant throughout the region, the pace of decline has slowed. In the immediate
<PAGE>
- --------------------------------------------------------------------------------
A MESSAGE TO SHAREHOLDERS
- --------------------------------------------------------------------------------
aftermath of the crisis, most Asian countries were compelled to tighten monetary
policy to stabilize their currencies which led to extremely high domestic
interest rates and tight lending. With currency markets exhibiting more
stability, interest rates are coming down which should help increase money
supply growth around the region in the coming quarters. Forecasting an end to
the current recessions that are afflicting many Asian economies is not an exact
science, but financial markets should provide the best indicator of any
incipient recovery in Asia's real economies.
In the current environment we plan to remain focused on identifying the most
attractive companies in Asia ex-Japan. Those that have the business franchise,
management experience, and balance sheet strength to both weather this recession
and participate in the recovery when it comes. There is no shortage of
candidates selling at historically attractive valuations. Our portfolios remain
essentially fully invested and we have great confidence in the future.
We would like to thank our shareholders for their recent approval of the items
presented in the proxy statement. We welcome Mr. William R. Hambrecht as a
significant new shareholder in the Investment Advisor.
Thank you for your continued support,
Sincerely,
/s/ G. PAUL MATTHEWS [PHOTO OF G. PAUL MATTHEWS APPEARS HERE]
G. PAUL MATTHEWS - PRESIDENT,
CHIEF INVESTMENT OFFICER
[PHOTO OF MARK W. HEADLEY APPEARS HERE] /s/ MARK W. HEADLEY
MARK W. HEADLEY - MANAGING DIRECTOR,
PORTFOLIO MANAGER
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S COMMENTS
- --------------------------------------------------------------------------------
MATTHEWS PACIFIC TIGER FUND
The Matthews Pacific Tiger Fund has weathered some of the most severe financial
turbulence of recent decades without changing its investment philosophy or
process. The Fund has maintained a well-diversified and fully invested stance
throughout the crisis. We refrained from building a large cash position due to
our strong belief that market timing is not a viable long-term investment
approach. Our focus throughout the year has been on researching and monitoring
attractive companies throughout the region.
The Fund began the fiscal year in September 1997 at the early stages of the
meltdown. There are significant signs that the end of the fiscal year has
signaled a calmer period in Asian financial markets. The Fund is well positioned
to take advantage of the many positive trends that have either remained intact
or evolved out of the financial crisis and accompanying recessionary
environment. Our investment focus has included the significant restructuring
process in both the Korean and Thai economies and the on-going shift to a free
market economy in China. The many unique and exciting companies that can be
found across the nine Asian Tiger markets continue to be, in our opinion, an
outstanding opportunity for diversification and long-term capital appreciation.
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
The Matthews Asian Convertible Securities Fund invests primarily in US Dollar
denominated convertible bonds issued by Asia ex-Japan corporations. The
portfolio is broadly diversified both by country of issue and by industry. Over
the past twelve months ending August 31, 1998, such issues declined in value as
the underlying equity markets fell and interest rates rose. The rise in local
interest rates in various Asian countries, together with a rise in the "premium"
that international investors expect from financial instruments issued by
companies domiciled in emerging Asia, caused an overall decline in the value of
such securities.
The extent of the decline was less, however, than that of the underlying equity
markets as the income component of convertible bonds provided a "floor" for
overall valuations. Many Asian countries are now in the grip of a severe
domestic economic recession, which has caused severe dislocation in the
financial markets. Most of these countries have introduced reforms and engaged
in significant restructuring of their financial systems to guard against a
repeat of the recent financial crisis. With economic growth slowing, interest
rates are starting to fall again in some Asian countries which, if continued,
should bode well for Asian bonds and convertibles.
We would like to acknowledge the change in the name of the Matthews Asian
Convertible Securities Fund to the Matthews Asian Growth and Income Fund. Its
investment objective, however, remains unchanged.
<PAGE>
- --------------------------------------------------------------------------------
PORTFOLIO MANAGER'S COMMENTS
- --------------------------------------------------------------------------------
MATTHEWS KOREA FUND
The Matthews Korea Fund invests in a broad range of Korean equities listed on
the domestic Korean stock exchange. The portfolio consists of approximately 50
Korean companies, including some of the largest capitalization blue chips and a
range of smaller companies. The portfolio is generally unhedged, and is
therefore exposed to both the potential movement of the Korean currency and to
fluctuations in the Korean Stock Market.
The second half of the fiscal year ended August 31, 1998 saw the Korean market
fall to new 12 year lows. The domestic recession, combined with increased
volatility in all emerging markets and their currencies, caused the Korean
equity market to give up its early year gains. While the local equity market
reached new lows, the Korean Won remained above the levels of earlier this year,
allowing the net asset value per share of the Matthews Korea Fund to hold above
the levels reached in December of 1997. The International Monetary Fund has
reported favorably on Korea's imposition of measures to further reform and
deregulate its economy, and many forecasters are suggesting that the South
Korean economy will be showing an improving trend in 1999.
The fund has maintained its exposure to Korean blue chips, with a particular
emphasis on electronics and petro-chemical companies, whose competitiveness has
been improved by the relative weakness in the Korean Won over the last twelve
months.
MATTHEWS DRAGON CENTURY CHINA FUND
Launched in February 1998, the Matthews Dragon Century China Fund has faced an
extremely challenging period in its first partial year. The Fund is highly
focused on companies that are either based in China or have their primary
interests in China but are based in Hong Kong. It does not generally invest in
the large Hong Kong property and finance companies typically found in
international portfolios. The Fund's severe down draft is indicative of the
destructive nature of the financial forces in Asia. Market concerns that China
would devalue its currency, combined with the general atmosphere of regional
panic, led to a massive sell-off in Chinese related equities.
The Fund invests in what we believe to be some of the highest quality companies
available in the Hong Kong and Chinese equity markets. Our many trips to China
over the last year continue to convince us that the move to a free market
economy is ongoing and dramatic. The Fund is invested across a range of
industries from telecommunications to manufacturing.
We would like to acknowledge the tireless efforts of our research analyst,
Richard Gao, who has provided many unique insights into the tremendous changes
occurring in China. We remain very optimistic about the long-term potential of
China and the companies operating in its economy.
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
- --------------------------------------------------------------------------------
The graph below compares the change in value of a $10,000 investment in
Matthews Pacific Tiger Fund Class I Shares and Matthews Asian Convertible
Securities Fund with the performance of the Morgan Stanley All Country Far East
ex Japan Index with gross dividends in U.S. dollars. The total returns of the
Matthews Pacific Tiger Fund Class I Shares, Matthews Asian Convertible
Securities Fund and the Morgan Stanley All Country Far East ex Japan Index for
one year was (63.43%), (35.27%) and (57.88%), respectively, and the average
annual total return since inception was (19.87%), (4.71%) and (23.24%),
respectively.
[LINE GRAPH APPEARS HERE]
PACIFIC TIGER/1/ & ASIAN CONV. SEC. FUNDS
(Assuming $10,000 invested at inception)
Matthews Pacific Tiger Morgan Stanley All Country Matthews Asian
Fund Class I Shares Far East ex Japan Index/2/ Conv. Sec. Fund
------------------- -------------------------- ---------------
9/12/94 10,000 10,000 10,000
Nov-94 9,720 9,329 9,930
Feb-95 9,241 8,879 9,722
May-95 9,723 9,447 10,284
Aug-95 9,793 8,873 10,089
Nov-95 9,432 8,784 10,191
Feb-96 10,965 9,563 11,124
May-96 11,186 10,185 11,228
Aug-96 10,835 9,658 11,122
Nov-96 11,908 10,174 11,978
Feb-97 12,439 10,326 12,095
May-97 12,920 10,118 12,268
Aug-97 11,349 9,017 12,754
Nov-97 8,075 6,298 9,758
Feb-98 7,693 6,839 9,873
May-98 6,046 5,141 9,411
Aug-98 4,151 3,837 8,256
Past performance is not indicative of future results.
The graph below compares the change in value of a $10,000 investment in
Matthews Korea Fund Class I Shares with the performance of the Korea Stock
Price Index. The total return of the Matthews Korea Fund Class I Shares and the
Korea Stock Price Index for one year was (67.21%) and (70.51%), respectively,
and the average annual total return since inception was (35.16%) and (37.83%),
respectively.
[LINE GRAPH APPEARS HERE]
KOREA FUND/1/
(Assuming $10,000 invested at inception)
Matthews Korea Fund
Class I Shares Korea Stock Price Index/3/
-------------- --------------------------
1/2/95 10,000 10,000
Feb-95 9,000 8,626
8,960 8,855
Aug-95 9,130 9,008
9,230 9,237
Feb-96 8,404 8,397
8,636 8,779
Aug-96 7,294 7,328
6,820 6,794
Feb-97 5,892 6,031
6,416 6,412
Aug-97 6,245 5,954
3,047 2,748
Feb-98 3,047 2,595
2,280 1,832
Aug-98 2,048 1,756
Past performance is not indicative of future results.
/1/Class A shares are available on Matthews Pacific Tiger Fund and Matthews
Korea Fund. Total return will differ due to sales charges and 12b-1 fees.
/2/The MSCI All Country Far East ex Japan Index is an unmanaged capitalization-
weighted index of stock markets in the Pacific region excluding Japan.
/3/The Korea Stock Price Index is a capitalization-weighted index of all common
stocks listed on the Korea Stock Exchange.
<PAGE>
- --------------------------------------------------------------------------------
ILLUSTRATION OF AN ASSUMED INVESTMENT OF $10,000
- --------------------------------------------------------------------------------
The graph below compares the change in value of a $10,000 investment in
Matthews Dragon Century China Fund with the performance of the Credit Lyonnais
China World Index. The unannualized total return of the Matthews Dragon Century
China Fund and the Credit Lyonnais China World Index for the period February
19, 1998 (inception of Fund) to August 31, 1998 was (56.40%) and (59.69%).
[LINE GRAPH APPEARS HERE]
DRAGON CENTURY CHINA FUND
(Assuming $10,000 invested at inception)
Matthews Dragon Credit Lyonnais
Century China Fund China World Index/1/
------------------ -----------------
2/19/98 10,000 10,000
Feb-98 10,610 11,372
Mar-98 10,550 10,877
Apr-98 9,880 9,607
May-98 8,570 8,109
Jun-98 7,100 6,669
Jul-98 5,340 5,261
Aug-98 4,360 4,031
Past performance is not indicative of future results.
/1/The Credit Lyonnais China World Index is an unmanaged capitalization-
weighted index of Chinese equities which are listed on the Hong Kong,
Shanghai, and Shenzhen stock exchanges.
<PAGE>
- --------------------------------------------------------------------------------
GENERAL MARKET AND ECONOMIC INFORMATION
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
ASIA EX-JAPAN VS. US AND INTERNATIONAL STOCK MARKETS
DECEMBER 1987 - SEPTEMBER 1998
MSCI All Country Far East MSCI Europe Australia
(ex Japan) Index/1/ S&P 500 Index/2/ Far East Index/3/
---------------- ------------- --------------
0 0 0
11.88 4.04 6.96
18.56 8.39 14.41
Mar-88 21.83 4.78 17.35
33.42 5.77 19.57
39.65 6.1 16.49
47.03 10.69 20.58
63.59 10.09 24.17
70.7 5.84 18.7
Sep-88 79.54 10.05 22.63
66.08 12.91 24.66
76.67 10.77 28.47
66.65 12.4 31.99
83.77 20.39 39.08
93.01 16.91 37.27
Mar-89 102.81 19.34 39.89
112.54 25.32 41.36
127.93 29.13 42.89
115.13 28.7 40.1
121.61 40.07 50.09
129.87 42.24 50.52
Sep-89 138.06 41.31 52.01
132.43 37.75 47.68
125.13 40.03 54.4
133.5 43.03 58.4
160.02 33.19 51.58
153.72 34.32 43.37
Mar-90 139.08 37.58 32.93
114.15 33.88 31.59
109.81 46.19 42.77
89.86 44.9 39.4
96.35 44.14 35.59
59.28 30.55 20.24
Sep-90 36.58 23.87 1.31
52.9 23.04 11.96
58.71 30.41 6.51
63.33 33.65 9.32
59.97 39.2 10.19
82.81 48.56 23.49
Mar-91 87.53 51.86 24.83
94.96 51.91 25.19
92.4 57.77 27.01
91.72 50.22 19.98
96.13 56.96 23.66
85.38 60.04 20.61
Sep-91 87.8 56.98 22.86
83.9 58.84 24.25
84.66 51.86 16.6
89.16 68.81 16.78
109.41 65.44 17.02
106.85 67.03 15.21
Mar-92 101.53 63.38 9.25
104.85 67.94 9.46
112.5 68.1 12.65
116.06 65.19 4.01
106.31 71.69 0.29
100.63 67.57 2.87
Sep-92 99.34 69.1 2.13
116.06 69.45 3.05
112.59 74.58 6.59
105.8 76.34 7.43
109.37 77.59 7.57
126.86 79.45 9.92
Mar-93 131.55 82.8 16.02
146.1 78.16 22.84
155.18 82.2 23.58
147.09 82.34 23.21
146.34 81.37 28.48
157.29 87.62 34.14
Sep-93 166.65 85.74 30.61
205.87 89.34 37.04
212.21 86.9 25.95
291.08 88.79 36.62
276.6 94.92 45.84
255.11 89.06 41.86
Mar-94 221.53 80.41 33.96
238.98 82.5 37.85
251.21 84.76 38.46
241.44 79.81 34.86
263.29 85.47 36.98
288.62 92.45 39.72
Sep-94 293.38 87.27 33.06
292.54 91.17 34.27
262.55 83.62 31.23
262.13 85.88 31.93
223.16 90.39 25.37
245.04 97.26 22.88
Mar-95 250.32 102.65 21.15
241.78 108.32 24.55
267.13 115.88 24.12
261.36 120.48 21.22
263.93 127.48 29.85
244.83 127.41 33.35
Sep-95 255.15 136.53 34.24
249.49 135.35 31.96
241.37 145.01 36.76
255.52 149.28 42.13
272.22 157.41 47.17
271.64 159.2 45.42
Mar-96 278.2 161.25 49.19
306.11 164.76 54.12
295.81 170.81 52.08
293.3 171.42 53.36
265.74 159.01 45.65
275.32 163.88 46.65
Sep-96 284.32 178.18 53.23
276.59 185.44 51.17
295.29 206.39 57.02
290.96 199.8 55.64
297.6 218.18 57.78
301.27 220.07 61.35
Mar-97 283.39 206.43 61.87
277.77 224.32 66.45
293.17 243.32 71.08
307.24 258.24 80.1
310.89 286.23 89.2
250.38 264.04 75.17
Sep-97 239.93 283.39 83.88
157.16 270.17 66.31
142.24 286.68 68.97
130.99 292.76 74.1
116 296.75 82.13
163.05 324.7 92.24
Mar-98 156.72 345.91 101.8
131.85 349.96 100.12
97.73 341.48 101.71
78.2 358.9 103.72
75.19 353.57 106.66
47.59 287.44 78.52
Sep-98 61.98 311.61 66.46
ECONOMIC STATISTICS (as of 9/30/98)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997e 98e
98e Real 97 Real 97 Real GPD Prime Current
Population GDP GDP (US$ per capita 1998e 1997 Lending A/C(% of
Market (millions) Growth Growth billions) (US$) inflation inflation Rates GDP
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Japan 126.00 -2.2% 0.8% 5,088 40,347 0.5% 1.7% 1.5% 3.0%
- ------------------------------------------------------------------------------------------------------------------------------------
China 1,215.00 6.0% 8.8% 902 723 0.0% 2.8% 8.6% 2.4%
- ------------------------------------------------------------------------------------------------------------------------------------
Hong Kong 7.00 -5.5% 5.3% 171 26,476 3.0% 5.7% 9.8% -3.6%
- ------------------------------------------------------------------------------------------------------------------------------------
Indonesia 198.00 -17.2% 4.8% 209 983 80.0% 6.6% 30.0% 8.1%
- ------------------------------------------------------------------------------------------------------------------------------------
Malaysia 21.00 -5.7% 7.8% 97 4,591 7.0% 2.7% 12.2% 4.2%
- ------------------------------------------------------------------------------------------------------------------------------------
Philippines 69.00 -2.2% 5.1% 82 1,113 10.0% 5.1% 20.0% 0.8%
- ------------------------------------------------------------------------------------------------------------------------------------
Singapore 3.00 0.3% 7.8% 95 30,503 0.2% 2.0% 8.0% 14.9%
- ------------------------------------------------------------------------------------------------------------------------------------
South Korea 45.00 -8.0% 5.6% 434 9,493 8.9% 4.4% 18.0% 12.7%
- ------------------------------------------------------------------------------------------------------------------------------------
Taiwan 22.00 4.8% 6.7% 282 12,949 1.8% 0.9% 8.0% 1.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Thailand 61.00 -11.1% 3.7% 157 2,491 9.0% 5.6% 15.0% 13.7%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Source: Warburg Dillion Read
/1/The MSCI AC Far East ex Japan Index is an unmanaged capitalization-weighted
index of stock markets in the Pacific region excluding Japan.
/2/The S&P 500 Index is a capitalization-weighted index of 500 U.S. stocks.
/3/The MSCI Europe, Australia, Far East Index is an unmanaged capitalization-
weighted index of stock markets in Europe, Australia and the Far East.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Value of Investment in Securities as of August 31,
1998
<TABLE>
<CAPTION>
MATTHEWS MATTHEWS
MATTHEWS ASIAN DRAGON
PACIFIC CONVERTIBLE MATTHEWS CENTURY
TIGER SECURITIES KOREA CHINA
FUND FUND FUND FUND
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
EQUITIES
Automotive............................ 1.09 % 0.00 % 3.76 % 7.00 %
Banking and Finance................... 4.84 0.00 6.38 0.00
Commercial & Industrial............... 0.00 0.00 1.57 0.00
Communications........................ 0.00 0.00 2.37 0.00
Conglomerate.......................... 4.51 1.23 0.00 14.69
Construction.......................... 0.00 0.00 0.59 0.00
Consumer.............................. 4.68 0.26 2.41 13.84
Electronics........................... 12.95 0.00 26.76 0.00
Financial............................. 2.20 0.00 0.00 0.00
Food & Beverages...................... 5.50 0.00 6.66 0.00
Gaming................................ 0.90 0.00 0.00 0.00
Health Care........................... 0.05 0.00 0.00 0.00
Hotels................................ 0.97 0.00 0.00 0.00
Hotels/Tourism........................ 0.00 0.00 0.00 4.04
Household............................. 0.00 0.00 1.98 0.00
Industrial............................ 0.23 0.74 0.00 2.98
Infrastructure........................ 1.83 0.00 0.00 8.87
Insurance............................. 3.97 0.00 7.05 0.00
Machinery & Equipment................. 0.89 0.00 0.00 0.00
Manufacturing......................... 1.20 0.00 0.00 0.00
Media................................. 3.81 0.80 0.00 0.00
Paper Products........................ 0.00 0.00 0.98 0.00
Petro-Chemical........................ 0.00 0.00 14.43 0.00
Pharmaceutical........................ 1.52 0.00 4.28 8.69
Property.............................. 0.00 0.00 0.00 6.45
Retail................................ 0.92 0.00 0.00 0.00
Security Service...................... 3.42 0.00 3.11 0.00
Shipping & Steel...................... 0.00 0.00 7.64 0.00
Software.............................. 1.54 0.00 0.00 0.00
Technology............................ 8.40 0.00 0.00 8.46
Telecommunications.................... 8.82 0.00 0.21 9.32
Trading............................... 3.97 0.00 0.00 0.00
Transportation........................ 4.34 0.00 1.24 2.00
Utility............................... 17.45 0.92 8.33 13.66
------ ---- ----- ------
Total Equities...................... 100.00 % 3.95 % 99.75 % 100.00 %
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
MARKET SECTOR DIVERSIFICATION (CONTINUED)
As a Percentage of Total Value of Investment in Securities as of August 31,
1998
<TABLE>
<CAPTION>
MATTHEWS MATTHEWS
MATTHEWS ASIAN DRAGON
PACIFIC CONVERTIBLE MATTHEWS CENTURY
TIGER SECURITIES KOREA CHINA
FUND FUND FUND FUND
-------- ----------- -------- --------
<S> <C> <C> <C> <C>
BONDS
Automotive........................... 0.00 % 2.17 % 0.00 % 0.00 %
Conglomerate......................... 0.00 9.32 0.00 0.00
Consumer............................. 0.00 3.82 0.00 0.00
Electrical........................... 0.00 9.74 0.00 0.00
Electrical Appliance................. 0.00 2.22 0.00 0.00
Electronics.......................... 0.00 15.62 0.25 0.00
Government Bond...................... 0.00 7.79 0.00 0.00
Hotels............................... 0.00 7.96 0.00 0.00
Industrial........................... 0.00 8.21 0.00 0.00
Infrastructure....................... 0.00 5.72 0.00 0.00
Petro-Chemical....................... 0.00 5.78 0.00 0.00
Property............................. 0.00 7.74 0.00 0.00
Transportation....................... 0.00 3.04 0.00 0.00
Utility.............................. 0.00 6.92 0.00 0.00
------ ------ ------ ------
Total Bonds........................ 0.00 96.05 0.25 0.00
------ ------ ------ ------
TOTAL INVESTMENTS..................... 100.00 % 100.00 % 100.00 % 100.00 %
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS PACIFIC TIGER FUND SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
EQUITIES - 98.15%***
HONG KONG - 48.74%
Asia Satellite Telecommunications Holdings, Ltd. ADR 54,800 $ 585,675
ASM Pacific Technology, Ltd. 1,030,000 244,568
Cathay Pacific Airways 1,399,000 1,020,024
China Telecom (Hong Kong), Ltd.** 546,800 719,736
Cheung Kong Infrastructure Holdings 325,000 566,189
Citic Pacific, Ltd. 465,000 594,063
Dickson Concepts International, Ltd. 305,000 184,003
Giordano International Ltd. 966,000 99,727
Founder Hong Kong, Ltd. 2,765,599 474,663
Guangdong Electric Power Development Co., Ltd. B Shares 2,412,084 675,455
Guangdong Kelon Electrical Holdings Co., Ltd. 2,161,000 1,087,586
Guangzhou Pharmaceutical Co., Ltd.** 5,782,000 470,070
Hong Kong Telecommunications, Ltd. 602,279 1,064,787
HSBC Holdings PLC 31,959 678,427
Huaneng Power International, Inc. ADR** 48,000 312,000
Hutchison Whampoa, Ltd. 184,000 797,814
Legend Holdings, Ltd. 3,676,000 659,378
Li & Fung, Ltd. 1,044,000 1,225,988
Nanjing Posts & Telecommunications Equipment Co., Ltd. B
Shares 1,500,000 222,604
National Mutual Asia, Ltd. 1,624,000 628,712
Peregrine Investments Holdings, Ltd. 1,097,000 0
Qingling Motors Co. 2,764,000 335,282
Shanghai Dazhong Taxi Co. B Shares** 850,000 321,300
Shanghai New Asia Group Co., Ltd. B Shares** 2,340,000 299,520
Vitasoy International Holdings, Ltd. 5,262,500 1,697,760
Wuxi Little Swan Co., Ltd. B Shares 902,400 371,479
-----------
TOTAL HONG KONG 15,336,810
-----------
INDONESIA - 0.75%
PT Hero Supermarket** 2,521,000 219,461
PT Tempo Scan Pacific** 885,000 15,804
-----------
TOTAL INDONESIA 235,265
-----------
MALAYSIA - 3.12%
Berjaya Sports Toto Berhad 426,000 276,854
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
Public Bank Berhad 3 $ 1
Star Publications (Malaysia) 821,000 706,184
-----------
TOTAL MALAYSIA 983,039
-----------
PHILIPPINES - 6.52%
Benpres Holdings Corp.** 5,718,000 469,972
Music Corp.** 1,426,000 55,347
Philippine Long Distance Telephone Co. 55,990 926,774
RFM Corp. 4,950,000 598,972
-----------
TOTAL PHILIPPINES 2,051,065
-----------
SINGAPORE - 10.10%
Avimo Group, Ltd. 960,000 1,026,997
Dairy Farm International Holdings, Ltd. 480,000 456,000
Electronic Resources, Ltd. 1,025,000 349,159
Sunright, Ltd. 1,579,000 280,051
Venture Manufacturing (Singapore), Ltd. 420,000 1,064,157
-----------
TOTAL SINGAPORE 3,176,364
-----------
SOUTH KOREA - 22.25%
Dae Duck Electronics Co. 19,490 981,355
Hana Bank 231,974 713,700
Korea Electric Power Corp. 102,740 1,323,713
Mirae Co. 425,465 606,457
S1 Corp. 9,500 1,055,164
Samsung Electronics Co. 39,872 1,325,622
Samsung Fire & Marine Insurance 3,230 597,926
SK Telecom Co., Ltd. 1,215 397,333
-----------
TOTAL SOUTH KOREA 7,001,270
-----------
THAILAND - 6.67%
Advanced Info Service Public Co., Ltd. 197,000 799,283
Bangkok Bank Public Co., Ltd. 766,000 539,308
Bank of Ayudhya Public Co., Ltd.** 642,000 68,950
Srithai Superware Public Co., Ltd.** 1,503,000 172,181
Thai Engine Manufacturing Public Co., Ltd.** 595,800 71,098
Thai Farmers Bank Public Co., Ltd.** 403,000 173,126
Tipco Asphalt Public Co., Ltd.** 500,000 274,463
Tipco Asphalt Public Co., Ltd. Warrants** 30,600 73
-----------
TOTAL THAILAND 2,098,482
-----------
TOTAL EQUITIES
(Cost $59,432,558) 30,882,295
-----------
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS PACIFIC TIGER FUND SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
TOTAL INVESTMENTS - 98.15%
(Cost $59,432,558*) $30,882,295
-----------
CASH AND OTHER ASSETS, LESS LIABILITIES - 1.85% 582,184
-----------
NET ASSETS - 100% $31,464,479
===========
</TABLE>
* Cost for Federal income tax purposes is $59,432,558 and net unrealized
depreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation......................... $ 89,664
Gross unrealized depreciation......................... (28,639,927)
------------
Net unrealized depreciation......................... $(28,550,263)
============
</TABLE>
** Non-income producing security
*** As a percentage of net assets as of August 31, 1998.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
----------- ----------
<S> <C> <C>
EQUITIES - 3.83%****
HONG KONG - 2.85%
Peregrine Investments Holdings, Ltd. 64,000 $ 0
Shandong Huaneng Power Co., Ltd. ADR 10,000 36,250
South China Morning Post (Holdings), Ltd. 96,000 31,590
Wharf (Holdings), Ltd. 50,000 47,747
----------
TOTAL HONG KONG 115,587
----------
MALAYSIA - 0.06%
Renong Berhad Warrants** 40,000 765
United Engineers (Malaysia) Berhad** 8,624 1,813
----------
TOTAL MALAYSIA 2,578
----------
THAILAND - 0.25%
Srithai Superware Public Co., Ltd.** 88,000 10,081
Tipco Asphalt Co., Ltd. Warrants** 3,500 9
----------
TOTAL THAILAND 10,090
----------
TAIWAN - 0.67%
Ton Yi Industrial Corp.** 59,183 27,338
----------
TOTAL EQUITIES
(Cost $874,844) 155,593
----------
<CAPTION>
FACE AMOUNT
-----------
<S> <C> <C>
INTERNATIONAL DOLLAR BONDS - 93.09%
HONG KONG - 34.55%
Goldlion Capital (B.V.I.)
4.875%, 02/01/99 $ 150,000 141,750
Shangri-La Asia Capital, Ltd.
2.875%, 12/16/00 180,000 131,850
Hong Kong & Shanghai Hotels Overseas Finance, Ltd.
5.000%, 01/06/01 150,000 131,250
Paul Y. - ITC Construction Holdings, Ltd.
5.000%, 02/03/01 140,000 65,800
Hong Kong Land Co.
4.000%, 02/23/01 150,000 132,750
New World Infrastructure, Ltd.
5.000%, 07/15/01 150,000 96,375
Qingling Motors, Ltd.***
3.500%, 01/22/02 300,000 85,500
First Pacific Capital, Ltd.
2.000%, 03/27/02 250,000 208,125
Guangdong Investment, Ltd.***
3.250%, 04/07/03 70,000 37,800
Zhenhai Refining & Chemical Co., Ltd.
3.000%, 12/19/03 200,000 181,000
</TABLE>
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
----------- ----------
<S> <C> <C>
Huaneng Power International Public Co., Ltd.
1.750%, 05/21/04 $ 200,000 $ 141,000
Regal Hotels International Holdings, Ltd.
5.250%, 12/13/08 95,000 50,350
----------
TOTAL HONG KONG 1,403,550
----------
INDONESIA - 5.45%
Asia Pulp & Paper Global Finance V, Ltd.
2.000%, 07/25/00 150,000 93,000
PT Indocement
2.00%, 02/27/06 260,000 128,700
----------
TOTAL INDONESIA 221,700
----------
PHILIPPINES - 9.94%
Metro Pacific Capital, Ltd.
2.500%, 04/11/03 60,000 46,500
JG Summit (Cayman), Ltd.
3.500%, 12/23/03 80,000 39,800
International Container Terminal Services, Inc.
1.750%, 03/13/04 150,000 119,625
FDC Capital Cayman
2.500%, 05/15/06 90,000 66,375
Philippine Long Distance Telephone Co.
3.500%, 12/31/49 290,000 131,587
----------
TOTAL PHILIPPINES 403,887
----------
SOUTH KOREA - 16.44%
SK Corp.
3.000%, 12/31/01 34,000 46,750
Republic of Korea
8.750%, 04/15/03 200,000 163,260
Samsung Display Devices Co.
0.250%, 03/12/06 100,000 82,500
Samsung Electronics Co.
0.250%, 12/31/06 160,000 137,200
Daewoo Corp.**
0.000%, 12/31/07 100,000 74,500
LG Electronics, Inc.
0.250%, 12/31/07 250,000 163,750
----------
TOTAL SOUTH KOREA 667,960
----------
TAIWAN - 19.42%
Nan Ya Plastics Corp.
1.750%, 07/19/01 80,000 86,200
Yageo Corp.
1.250%, 07/24/03 80,000 96,000
Compal Electronics, Inc.***
1.000%, 11/21/03 100,000 247,500
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE AMOUNT VALUE
----------- -----------
<S> <C> <C>
Walsin Lihwa Corp.
3.250%, 06/16/04 $ 120,000 $ 87,600
Ritek Corp.
0.250%, 03/27/05 200,000 181,500
Acer Peripherals, Inc.
1.250%, 11/27/06 80,000 90,000
-----------
TOTAL TAIWAN 788,800
-----------
THAILAND - 7.29%
Robinson Department Store Public Co., Ltd.
4.250%, 04/07/04 50,000 8,750
Tipco Asphalt, Co.
2.750%, 09/19/06 200,000 144,000
Kingdom of Thailand
7.750%, 04/15/07 210,000 143,493
-----------
TOTAL THAILAND 296,243
-----------
TOTAL INTERNATIONAL DOLLAR BONDS (Cost $4,698,259) 3,782,140
-----------
TOTAL INVESTMENTS - 96.92%
(Cost $5,573,103*) 3,937,733
-----------
CASH AND OTHER ASSETS, LESS LIABILITIES - 3.08% 124,964
-----------
NET ASSETS - 100% $ 4,062,697
===========
</TABLE>
* Cost for Federal income tax purposes is $5,573,103 and net unrealized
depreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation............................... $ 126,484
Gross unrealized depreciation............................... (1,761,854)
-----------
Net unrealized depreciation............................... $(1,635,370)
===========
</TABLE>
** Non-income producing security
*** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration, normally to qualified institutional buyers. At August 31,
1998, the value of these securities amounted to $370,800 or 9.13% of net
assets.
**** As a percentage of net assets as of August 31, 1998.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS KOREA FUND SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
-------- ------------
<S> <C> <C>
EQUITIES - SOUTH KOREA - 101.38%***
Dae Duck Electronics Co. 45,050 $ 2,268,344
Dae Duck Industries 40,000 1,629,025
Daehan City Gas Co. 31,460 510,162
Dongwon Securities Co. 173,880 641,186
Global & Yuasa Battery Co. 35,060 1,056,602
Han Kuk Carbon Co., Ltd. 45,916 1,030,173
Han Kuk Paper Manufacturing Co. 90,180 704,479
Hanjin Heavy Industries 700,910 2,600,190
Hankook Synthetics, Inc.** 21,000 368,530
Hankook Tire Manufacturing Co. 400,900 733,227
Hanmi Pharmaceutical Industrial Co. 30,024 552,459
Honam Petrochemical Corp. 145,200 887,004
Housing & Commercial Bank, Korea 350,087 933,219
Hyundai Heavy Industries 87,004 1,497,847
Hyundai Merchant Marine 100,800 742,658
Hyundai Motor Co., Ltd. 90,380 910,157
Keum Kang, Ltd. 48,150 427,841
Kolon Chemical Co. 66,020 840,832
Kookmin Bank** 500,333 1,378,184
Korea Electric Power Corp. 397,100 5,116,280
Korea Electric Terminal Co. 24,000 657,534
Korea Fine Chemical Co. 17,520 377,513
Korean Air** 300,775 893,082
LG Cable & Machinery 420,170 1,129,372
LG Chemical, Ltd. 450,640 2,669,469
LG Electronics, Inc. 365,950 2,926,514
LG Information & Communication, Ltd. 100,295 1,700,670
LG Insurance Co., Ltd. 37,000 808,219
Lotte Chilsung Beverage Co. 35,290 972,075
Lotte Confectionery Co. 34,010 1,636,911
Medison Co., Ltd. 216,270 1,745,533
Mirae Co. 700,227 998,102
Nong Shim Co., Ltd. 42,470 1,663,578
Oriental Fire & Marine Insurance 176,640 553,921
Ottogi Corp. 44,000 518,030
Pacific Corp. 157,710 1,424,703
Pohang Iron & Steel Co., Ltd. 19,690 648,800
Pusan City Gas Co., Ltd. 110,000 1,629,025
S1 Corp. 20,099 2,232,416
Saehan Precision Co. 64,000 706,108
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
----------- ------------
<S> <C> <C>
Samsung Display Devices Co. 120,782 $ 3,130,224
Samsung Electronics Co. 150,059 4,989,001
Samsung Fire & Marine Insurance 20,002 3,702,701
Samsung Securities Co., Ltd. 300,081 1,633,169
Seoul City Gas Co., Ltd. 60,160 873,110
Shinhung Co. 45,270 362,026
Shinsegae Department Store Co. 145,260 1,328,367
Sindo Ricoh Co. 84,440 1,932,021
SK Corp. 280,550 1,717,991
SK Telecom Co., Ltd. 464 151,525
Suheung Capsule 35,050 417,849
Youngone Corp. 14,650 401,370
Yukong, Ltd.** 250,000 343,750
------------
TOTAL EQUITIES
(Cost $85,474,060) 71,703,078
------------
<CAPTION>
FACE AMOUNT
-----------
<S> <C> <C>
INTERNATIONAL DOLLAR BONDS
(NOTE 1-A) - 0.25%
Samsung Electronics Co.
0.25%, 12/31/06 $210,000 180,075
------------
TOTAL INTERNATIONAL DOLLAR BONDS
(Cost $198,892) 180,075
------------
TOTAL INVESTMENTS - 101.63%
(Cost $85,672,952*) 71,883,153
------------
LIABILITIES, LESS CASH AND OTHER ASSETS - (1.63%) (1,152,494)
------------
NET ASSETS - 100% $ 70,730,659
============
</TABLE>
* Cost for Federal income tax purposes is $85,672,952 and net unrealized
depreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation.................................. $ 2,410,832
Gross unrealized depreciation.................................. (16,200,631)
------------
Net unrealized depreciation.................................. $(13,789,799)
============
</TABLE>
** Non-income producing security
*** As a percentage of net assets as of August 31, 1998.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS DRAGON CENTURY CHINA FUND SCHEDULE OF INVESTMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
EQUITIES - HONG KONG - 97.19%***
Beijing Datang Power Generation Co., Ltd. 302,000 $ 47,546
Beijing Enterprises Holdings, Ltd. 40,000 32,778
Beijing North Star Co., Ltd. 212,000 25,716
CATIC Shenzhen Holdings, Ltd. 958,000 46,978
Cheung Kong Infrastructure Holdings 50,000 87,106
China Pharmaceutical Enterprise and Investment Corp.,
Ltd. 834,000 51,660
China Resources Enterprises, Ltd. 70,000 50,586
China Telecom (Hong Kong), Ltd.** 56,000 73,711
China Vanke Co., Ltd. B Shares 257,373 73,068
Citic Pacific, Ltd. 36,000 45,992
Eastern Communications Co., Ltd. B Shares 68,000 24,888
First Tractor Co., Ltd. 247,000 43,987
Founder Hong Kong, Ltd. 139,542 23,950
Guangdong Electric Power Development Co., Ltd. B Shares 305,396 85,520
Guangdong Kelon Electric Holdings Co., Ltd. 171,000 86,061
Guangzhou Pharmaceutical Co., Ltd.** 1,000,000 81,299
Huaneng Power International, Inc. ADR** 4,700 30,550
Huangshan Tourism Development Co., Ltd. B Shares 84,000 18,648
Legend Holdings, Ltd. 338,000 60,628
Nanjing Posts & Telecommunications Equipment Co., Ltd. B
Shares 296,000 43,927
New World Infrastructure, Ltd.** 85,000 48,537
</TABLE>
<TABLE>
<CAPTION>
SHARES VALUE
--------- -----------
<S> <C> <C>
Ng Fung Hong, Ltd. 102,000 $ 55,612
Qingling Motors Co. 520,000 63,078
Shanghai Industrial Holdings, Ltd. 37,000 49,657
Shanghai New Asia Group Co., Ltd. B Shares** 337,480 43,197
Shenzhen Chiwan Wharf Holdings, Ltd. B Shares 226,000 30,623
Stone Electronic Technology 710,000 44,895
Tianjin Development Holdings, Ltd.** 106,000 45,824
Wuxi Little Swan Co., Ltd. B Shares 170,400 70,146
Zhejiang Southeast Electric Power Co., Ltd. B Shares 281,000 45,522
-----------
TOTAL EQUITIES
(Cost $3,418,238) 1,531,690
-----------
TOTAL INVESTMENTS - 97.19%
(Cost $3,418,238*) 1,531,690
-----------
CASH AND OTHER ASSETS, LESS LIABILITIES - 2.81% 44,304
-----------
NET ASSETS - 100% $ 1,575,994
===========
</TABLE>
* Cost for Federal income tax purposes is $3,418,238 and net unrealized
depreciation consists of:
<TABLE>
<S> <C>
Gross unrealized appreciation................................... $ 0
Gross unrealized depreciation................................... (1,886,548)
-----------
Net unrealized depreciation................................... $(1,886,548)
===========
</TABLE>
** Non-income producing security
*** As a percentage of net assets as of August 31, 1998.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF ASSETS AND LIABILITIES AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATTHEWS MATTHEWS
MATTHEWS ASIAN DRAGON
PACIFIC CONVERTIBLE MATTHEWS CENTURY
TIGER SECURITIES KOREA CHINA
FUND FUND FUND FUND
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments, at value
(Cost $59,432,558,
$5,573,103, $85,672,952
and $3,418,238,
respectively).......... $ 30,882,295 $ 3,937,733 $ 71,883,153 $ 1,531,690
Cash.................... 253,240 129,835 2,475,618 78,723
Dividends and interest
receivable............. 132,014 59,473 10,093 3,190
Receivable for
securities sold........ 1,365,880 0 0 0
Receivable for capital
shares sold............ 108,380 500 357,600 0
Deferred organization
costs (Note 1-E)....... 6,957 6,957 4,517 13,812
Due from Advisor (Note
2)..................... 25,349 8,400 0 0
Other assets............ 2,845 400 25,039 0
------------ ----------- ------------ -----------
Total assets............ 32,776,960 4,143,298 74,756,020 1,627,415
------------ ----------- ------------ -----------
LIABILITIES:
Payable for securities
purchased.............. 185,563 0 952,579 0
Payable for capital
shares redeemed........ 1,089,470 68,125 2,934,577 6,696
Due to Advisor (Note
2)..................... 0 0 72,488 29,819
Accrued expenses........ 37,414 12,476 64,755 14,906
Accrued distribution
expense................ 34 0 962 0
------------ ----------- ------------ -----------
Total liabilities....... 1,312,481 80,601 4,025,361 51,421
------------ ----------- ------------ -----------
NET ASSETS............... $ 31,464,479 $ 4,062,697 $ 70,730,659 $ 1,575,994
============ =========== ============ ===========
CLASS I SHARES:
Net assets (Applicable
to 7,689,150, 621,136,
32,886,364 and 361,577
shares of beneficial
interest issued and
outstanding,
respectively, unlimited
number of shares
authorized with a
$0.001 par value)...... $ 31,318,715 $ 4,062,697 $ 66,607,277 $ 1,575,994
============ =========== ============ ===========
Net asset value,
offering price and
redemption price per
Class I share.......... $ 4.07 $ 6.54 $ 2.03 $ 4.36
============ =========== ============ ===========
CLASS A SHARES:*
Net assets (Applicable
to 35,793, 0, 2,046,589
and 0 shares of
beneficial interest
issued and outstanding,
respectively, unlimited
number of shares
authorized with a
$0.001 par value)...... $ 145,764 N/A $ 4,123,382 $ 0
============ =========== ============ ===========
Net asset value and
redemption price per
Class A share.......... $ 4.07 N/A $ 2.01 N/A
============ =========== ============ ===========
Offering price per Class
A share (Net asset
value / 0.9505)........ $ 4.28 N/A $ 2.11 N/A
============ =========== ============ ===========
NET ASSETS CONSIST OF:
Capital paid-in.......... $ 70,648,632 $ 6,487,385 $ 98,314,082 $ 3,686,805
Accumulated undistributed
net investment income... 75,013 14,166 0 37,836
Accumulated net realized
loss on investments..... (10,708,903) (803,484) (13,793,624) (262,099)
Net unrealized
depreciation on
investments and foreign
currency related
transactions............ (28,550,263) (1,635,370) (13,789,799) (1,886,548)
------------ ----------- ------------ -----------
$ 31,464,479 $ 4,062,697 $ 70,730,659 $ 1,575,994
============ =========== ============ ===========
</TABLE>
* At August 31, 1998, the Matthews Asian Convertible Securities Fund did not
offer Class A shares.
N/A -- Not Applicable
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS for the year ended AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATTHEWS MATTHEWS
MATTHEWS ASIAN DRAGON
PACIFIC CONVERTIBLE MATTHEWS CENTURY
TIGER SECURITIES KOREA CHINA
FUND FUND FUND FUND*
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
INVESTMENT INCOME:
Dividends (net of
foreign tax withheld
of $47,559, $1,658,
$94,038 and $0,
respectively).......... $ 922,436 $ 60,218 $ 477,155 $ 63,016
Interest................ 72,641 103,455 95,884 6,606
------------ ----------- ------------ -----------
Total investment
income............... 995,077 163,673 573,039 69,622
------------ ----------- ------------ -----------
EXPENSES:
Investment advisory
fees (Note 2).......... 451,119 48,161 640,716 15,893
Recovery of reimbursed
expenses (Note 2)...... 56,770 0 237,854 0
Distribution expenses... 352 0 8,665 0
Transfer agent fees..... 60,286 27,476 70,119 16,683
Administration fees..... 34,566 30,649 39,772 22,432
Accounting fees......... 46,585 30,833 32,796 21,354
Professional fees....... 26,502 2,745 48,594 1,700
Custodian fees.......... 170,327 10,781 157,594 11,460
Directors fees (Note
2)..................... 4,375 4,375 4,375 1,880
Insurance expense....... 10,018 1,312 3,044 0
Amortization of
organization costs
(Note 1-E)............. 6,734 6,734 3,124 1,397
Printing expense........ 15,535 1,432 19,358 1,499
Registration expenses... 61,501 15,927 64,003 29,976
Other expenses.......... 1,500 400 1,000 250
------------ ----------- ------------ -----------
Total expenses........ 946,170 180,825 1,331,014 124,524
Expenses reimbursed and
waived (Note 2)........ (89,019) (89,320) (14,689) (92,738)
------------ ----------- ------------ -----------
Net expenses.......... 857,151 91,505 1,316,325 31,786
------------ ----------- ------------ -----------
NET INVESTMENT INCOME
(LOSS).................. 137,926 72,168 (743,286) 37,836
------------ ----------- ------------ -----------
REALIZED AND UNREALIZED
LOSS ON INVESTMENTS AND
FOREIGN CURRENCY RELATED
TRANSACTIONS:
Net realized loss on
investments............ (10,221,266) (547,729) (12,068,659) (261,226)
Net realized loss on
foreign currency
related transactions... (434,661) (1,001) (1,143,690) (873)
Net change in
unrealized
depreciation on
investments and
foreign currency
related transactions... (27,390,703) (1,847,576) (13,075,569) (1,886,548)
------------ ----------- ------------ -----------
Net realized and
unrealized loss on
investments and
foreign currency
related transactions... (38,046,630) (2,396,306) (26,287,918) (2,148,647)
------------ ----------- ------------ -----------
NET DECREASE IN NET
ASSETS FROM OPERATIONS.. $(37,908,704) $(2,324,138) $(27,031,204) $(2,110,811)
============ =========== ============ ===========
</TABLE>
* The Fund commenced operations on February 19, 1998.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATTHEWS ASIAN
MATTHEWS PACIFIC CONVERTIBLE
TIGER FUND SECURITIES FUND
------------------------- -----------------------
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1998 1997
------------ ----------- ----------- ----------
<S> <C> <C> <C> <C>
OPERATIONS:
Net investment income..... $ 137,926 $ 109,773 $ 72,168 $ 44,739
Net realized gain (loss)
on investments and
foreign currency related
transactions............. (10,655,927) 376,659 (548,730) 308,176
Net change in unrealized
appreciation
(depreciation) on
investments and foreign
currency related
transactions............. (27,390,703) (1,348,057) (1,847,576) 221,863
------------ ----------- ----------- ----------
Net increase (decrease) in
net assets from
operations............... (37,908,704) (861,625) (2,324,138) 574,778
------------ ----------- ----------- ----------
DIVIDENDS AND DISTRIBUTIONS
TO SHAREHOLDERS FROM:
Net investment income:
Class I................... (109,051) (19,824) (56,200) (44,739)
Class A................... (508) N/A N/A N/A
Realized gains on
investments:
Class I................... (490,577) (69,727) (560,367) (86,133)
Class A................... (2,286) N/A N/A N/A
------------ ----------- ----------- ----------
Net decrease in net assets
resulting from
distributions............ (602,422) (89,551) (616,567) (130,872)
------------ ----------- ----------- ----------
CAPITAL SHARE TRANSACTIONS
(NET):
Class I................... 26,084,128 27,450,272 837,410 2,449,726
Class A................... 244,324 N/A N/A N/A
------------ ----------- ----------- ----------
Increase in net assets
derived from capital
share transactions....... 26,328,452 27,450,272 837,410 2,449,726
------------ ----------- ----------- ----------
Total increase (decrease)
in net assets............ (12,182,674) 26,499,096 (2,103,295) 2,893,632
NET ASSETS:
Beginning of period....... 43,647,153 17,148,057 6,165,992 3,272,360
------------ ----------- ----------- ----------
End of period (including
undistributed net
investment income of
$75,013, $109,395,
$14,166 and $0,
respectively)............ $ 31,464,479 $43,647,153 $ 4,062,697 $6,165,992
============ =========== =========== ==========
</TABLE>
N/A -- Not Applicable
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
STATEMENTS OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATTHEWS
MATTHEWS KOREA DRAGON CENTURY
FUND CHINA FUND
------------------------- --------------
YEAR YEAR PERIOD
ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1998 *
------------ ----------- --------------
<S> <C> <C> <C>
OPERATIONS:
Net investment income (loss)........ $ (743,286) $ (106,541) $ 37,836
Net realized loss on investments and
foreign currency related
transactions....................... (13,212,349) (449,242) (262,099)
Net change in unrealized
depreciation on investments and
foreign currency related
transactions....................... (13,075,569) (175,375) (1,886,548)
------------ ----------- -----------
Net decrease in net assets from
operations......................... (27,031,204) (731,158) (2,110,811)
------------ ----------- -----------
DIVIDENDS AND DISTRIBUTIONS TO
SHAREHOLDERS FROM:
Net investment income:
Class I............................. 0 0 0
Class A............................. 0 N/A 0
Realized gains on investments:
Class I............................. 0 0 0
Class A............................. 0 N/A 0
------------ ----------- -----------
Net decrease in net assets resulting
from distributions................. 0 0 0
------------ ----------- -----------
CAPITAL SHARE TRANSACTIONS (NET):
Class I............................. 73,040,728 17,365,849 3,686,805
Class A............................. 5,365,114 N/A 0
------------ ----------- -----------
Increase in net assets derived from
capital share transactions......... 78,405,842 17,365,849 3,686,805
------------ ----------- -----------
Total increase in net assets........ 51,374,638 16,634,691 1,575,994
NET ASSETS:
Beginning of period................. 19,356,021 2,721,330 0
------------ ----------- -----------
End of period (including
undistributed net investment income
of $0, $0 and $37,836,
respectively)...................... $ 70,730,659 $19,356,021 $ 1,575,994
============ =========== ===========
</TABLE>
* The Fund commenced operations on February 19, 1998.
N/A -- Not Applicable
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table below sets forth financial data for a share of beneficial interest
outstanding throughout each period presented.
<TABLE>
<CAPTION>
MATTHEWS PACIFIC
TIGER FUND
---------------------------------------------------------------
PERIOD YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998/5/ 1998 1997 1996 1995/4/
CLASS A CLASS I CLASS I CLASS I CLASS I
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period.... $ 10.84 $ 11.30 $ 10.81 $ 9.77 $ 10.00
------- ------- ------- ------- -------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income.. 0.03/6/ 0.02/6/ 0.02 0.01 0.02
Net realized gain
(loss) and unrealized
appreciation
(depreciation) on
investments and
foreign currency...... (6.73) (7.18) 0.50 1.03 (0.23)
------- ------- ------- ------- -------
Total from investment
operations.......... (6.70) (7.16) 0.52 1.04 (0.21)
------- ------- ------- ------- -------
LESS DISTRIBUTIONS
FROM:
Net investment income.. (0.01) (0.01) (0.01) 0.00 (0.02)
Net realized gains on
investments........... (0.06) (0.06) (0.02) 0.00 0.00
------- ------- ------- ------- -------
Total distributions.. (0.07) (0.07) (0.03) 0.00 (0.02)
------- ------- ------- ------- -------
Net Asset Value, end of
period................. $ 4.07 $ 4.07 $ 11.30 $ 10.81 $ 9.77
======= ======= ======= ======= =======
TOTAL RETURN............ (61.87%)/2/,/3/ (63.43%) 4.75% 10.64% (2.07%)/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's)..... $ 146 $31,319 $43,647 $17,148 $ 1,082
Ratio of expenses to
average net assets
before reimbursement
and waiver of expenses
by Advisor and
Administrator......... 11.99%/1/ 2.06% 1.97% 4.35% 25.95%/1/
Ratio of expenses to
average net assets
after reimbursement
and waiver of expenses
by Advisor and
Administrator (Note
2).................... 1.91%/1/ 1.90% 1.90% 1.90% 2.17%/1/
Ratio of net investment
income (loss) to
average net assets
before reimbursement
and waiver of expenses
by Advisor and
Administrator......... (9.61%)/1/ 0.14% 0.20% (2.13%) (23.41%)/1/
Ratio of net investment
income (loss) to
average net assets
after reimbursement
and waiver of expenses
by Advisor and
Administrator......... 0.47%/1/ 0.30% 0.27% 0.32% 0.36%/1/
Portfolio turnover..... 73.09% 73.09% 70.73% 124.69% 92.53%/2/
</TABLE>
/1/Annualized
/2/Not annualized
/3/Total return calculation does not reflect sales load.
/4/Class I commenced operations on September 13, 1994.
/5/Class A commenced operations on October 9, 1997.
/6/Calculated using the average shares method.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table below sets forth financial data for a share of beneficial interest
outstanding throughout each period presented.
<TABLE>
<CAPTION>
MATTHEWS ASIAN CONVERTIBLE
SECURITIES FUND
--------------------------------------------
YEAR YEAR YEAR PERIOD
ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998 1997 1996 1995/3/
---------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
Net Asset Value, beginning of
period.......................... $ 11.71 $10.53 $ 9.88 $ 10.00
------- ------ ------ -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income........... 0.13 0.10 0.25 0.23
Net realized gain (loss) and
unrealized appreciation
(depreciation) on investments
and foreign currency........... (4.15) 1.42 0.75 (0.14)
------- ------ ------ -----------
Total from investment
operations................... (4.02) 1.52 1.00 0.09
------- ------ ------ -----------
LESS DISTRIBUTIONS FROM:
Net investment income........... (0.10) (0.10) (0.26) (0.21)
Net realized gains on
investments.................... (1.05) (0.24) (0.09) 0.00
------- ------ ------ -----------
Total distributions........... (1.15) (0.34) (0.35) (0.21)
------- ------ ------ -----------
Net Asset Value, end of period... $ 6.54 $11.71 $10.53 $ 9.88
======= ====== ====== ===========
TOTAL RETURN..................... (35.27%) 14.67% 10.24% 0.89%/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (in
000's)......................... $ 4,063 $6,166 $3,272 $ 863
Ratio of expenses to average net
assets before reimbursement and
waiver of expenses by Advisor
and Administrator.............. 3.76% 4.45% 8.73% 23.11%/1/
Ratio of expenses to average net
assets after reimbursement and
waiver of expenses by Advisor
and Administrator (Note 2)..... 1.90% 1.90% 1.85% 2.26%/1/
Ratio of net investment loss to
average net assets before
reimbursement and waiver of
expenses by Advisor and
Administrator.................. (0.36%) (1.55%) (4.13%) (18.68%)/1/
Ratio of net investment income
(loss) to average net assets
after reimbursement and waiver
of expenses by Advisor and
Administrator.................. 1.50% 1.00% 2.75% 2.17%/1/
Portfolio turnover.............. 54.67% 50.20% 88.16% 121.63%/2/
</TABLE>
/1/Annualized
/2/Not annualized
/3/The Fund commenced operations on September 13, 1994.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
The table below sets forth financial data for a share of beneficial interest
outstanding throughout each period presented.
<TABLE>
<CAPTION>
MATTHEWS DRAGON
MATTHEWS KOREA CENTURY CHINA
FUND FUND
---------------------------------------------------------------- ---------------
PERIOD YEAR YEAR YEAR PERIOD PERIOD
ENDED ENDED ENDED ENDED ENDED ENDED
AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31,
1998/6/ 1998 1997 1996 1995/5/ 1998/7/
---------- ---------- ---------- ---------- ---------- ----------
CLASS A CLASS I CLASS I CLASS I CLASS I CLASS I
---------- ---------- ---------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
beginning of period.... $ 5.32 $ 6.19 $ 7.23 $ 9.13 $ 10.00 $ 10.00
-------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income
(loss)................ (0.04) (0.03) (0.04)/4/ (0.07) 0.08 0.10
Net realized gain
(loss) and unrealized
appreciation
(depreciation) on
investments and
foreign currency...... (3.27) (4.13) (1.00)/4/ (1.75) (0.95) (5.74)
-------- -------- -------- -------- -------- --------
Total from investment
operations.......... (3.31) (4.16) (1.04) (1.82) (0.87) (5.64)
-------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS
FROM:
Net investment income.. 0.00 0.00 0.00 0.00 0.00 0.00
Net realized gains on
investments........... 0.00 0.00 0.00 (0.08) 0.00 0.00
-------- -------- -------- -------- -------- --------
Total distributions.. 0.00 0.00 0.00 (0.08) 0.00 0.00
-------- -------- -------- -------- -------- --------
Net Asset Value, end of
period................. $ 2.01 $ 2.03 $ 6.19 $ 7.23 $ 9.13 $ 4.36
======== ======== ======== ======== ======== ========
TOTAL RETURN............ (62.03%)/2/,/3/ (67.21%) (14.38%) (20.11%) (8.70%)/2/ (56.40%)/2/
RATIOS/SUPPLEMENTAL DATA
Net assets, end of
period (in 000's)..... $ 4,123 $ 66,607 $ 19,356 $ 2,721 $ 504 $ 1,576
Ratio of expenses to
average net assets
before reimbursement
and waiver of expenses
by Advisor and
Administrator......... 2.97% /1/ 2.07% 2.90% 11.36% 42.87% /1/ 7.84% /1/
Ratio of expenses to
average net assets
after reimbursement
and waiver of expenses
by Advisor and
Administrator (Note
2).................... 2.68% /1/ 2.06% 2.50% 2.23% 0.24% /1/ 2.00% /1/
Ratio of net investment
loss to average net
assets before
reimbursement and
waiver of expenses by
Advisor and
Administrator......... (2.03%)/1/ (1.13%) (1.81%) (10.44%) (41.79%)/1/ (3.45%)/1/
Ratio of net investment
income (loss) to
average net assets
after reimbursement
and waiver of expenses
by Advisor and
Administrator......... (1.74%)/1/ (1.12%) (1.41%) (1.31%) 0.84% /1/ 2.38% /1/
Portfolio turnover..... 94.01% 94.01% 112.68% 139.71% 42.16% /2/ 11.84% /2/
</TABLE>
/1/Annualized
/2/Not annualized
/3/Total return calculation does not reflect sales load.
/4/Calculated using the average shares method.
/5/The Korea Fund Class I commenced operations on January 3, 1995.
/6/The Korea Fund Class A commenced operations on October 9, 1997.
/7/The Dragon Century China Fund Class I commenced operations on February 19,
1998.
See accompanying notes to financial statements.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS--NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Matthews International Funds (the "Company") is an open-end investment
management company registered under the Investment Company Act of 1940, as
amended, as a series company. The Company currently consists of four separate
investment series (each a "Fund" and collectively, the "Funds"): Matthews
Pacific Tiger Fund, Matthews Asian Convertible Securities Fund, Matthews Korea
Fund and Matthews Dragon Century China Fund. The Matthews Pacific Tiger Fund,
Matthews Korea Fund and Matthews Dragon Century China Fund currently offer two
classes of shares: Class I shares and Class A shares. Effective September 1,
1998, the Matthews Dragon Century China Fund will not offer Class A shares to
investors at this time. The classes offered have different sales charges and
other expenses which may affect performance. At August 31, 1998, the Matthews
Dragon Century China Fund Class A shares had no assets. The Matthews Pacific
Tiger Fund, Matthews Korea Fund and Matthews Dragon Century China Fund seek to
maximize capital appreciation by investing, under normal circumstances, at
least 65% of their total assets in equity securities of Pacific Tiger
economies, South Korean companies and Chinese companies, respectively. Pacific
Tiger economies include Hong Kong, Singapore, South Korea, Taiwan, Indonesia,
Malaysia, the Philippines, Thailand and China. The Matthews Asian Convertible
Securities Fund seeks capital appreciation and current income by investing,
under normal circumstances, at least 65% of its total assets in convertible
securities of Asian economies. Asian economies include Hong Kong, Japan,
Singapore, South Korea, Taiwan, Indonesia, Malaysia, the Philippines, Thailand,
China and India. The following is a summary of significant accounting policies
consistently followed by the Funds in the preparation of their financial
statements.
A. SECURITY VALUATION: Securities listed on any national securities exchange
are valued at their last sale price on the exchange where the securities are
principally traded or, if there has been no sale on that date, at the mean
between the last reported bid and asked prices. Securities traded over-the-
counter are priced at the mean of the last bid and asked prices. All other
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.
The books and records of the Funds are maintained in U.S. dollars.
Transactions denominated in foreign currencies are recorded at the current
prevailing exchange rates. All assets and liabilities denominated in foreign
currencies are translated into U.S. dollars at the current exchange rate.
Translation gains or losses resulting from changes in the exchange rate
during the reporting period and realized gains and losses on the settlement
of foreign currency transactions are reported in the results of operations
for the current period. The Funds do not isolate that portion of gains and
losses on investments in equity securities which is due to changes in the
foreign exchange rate from that which is due to changes in market prices of
equity securities. International dollar bonds are issued offshore, pay
interest and principal in U.S. dollars, and are denominated in U.S. dollars.
Portfolio securities traded on a foreign exchange are generally valued at the
respective current prevailing exchange rates. The securities' values are
translated into U.S. dollars using these rates. If subsequent to the time a
rate has been established and it has been determined to have materially
changed, the fair value of those securities, (considering the changing
conditions) will be determined by (or under the direction of) the Funds'
Board of Trustees.
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS--NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
Discounts and premiums on securities purchased are accreted and amortized
over the life of the respective securities.
B. RISKS ASSOCIATED WITH FOREIGN SECURITIES: Investments by the Funds in the
securities of foreign issuers may involve investment risks different from
those of U.S. issuers including possible political or economic instability of
the country of the issuer, the difficulty of predicting international trade
patterns, the possibility of currency exchange controls, the possible
imposition of foreign withholding tax on the interest income payable on such
instruments, the possible establishment of foreign controls, the possible
seizure or nationalization of foreign deposits or assets, or the adoption of
other foreign government restrictions that might adversely affect the foreign
securities held by the Funds. Foreign securities may also be subject to
greater fluctuations in price than securities of domestic corporations or the
U.S. Government.
C. FEDERAL INCOME TAXES: It is the policy of the Funds to comply with all
requirements of the Internal Revenue Code (the "Code") applicable to
regulated investment companies and to distribute substantially all of its
taxable income to its shareholders. The Funds have met the requirements of
the Code applicable to regulated investment companies for the year ended
August 31, 1998. Therefore, no Federal income tax provision is required.
D. DETERMINATION OF GAINS OR LOSSES ON SALES OF SECURITIES: Gains or losses
on the sale of securities are determined on the identified cost basis.
E. ORGANIZATION COSTS: Organization costs are being amortized on a straight-
line basis over five years from each Fund's respective commencement of
operations. In the event that any of the initial shares are redeemed during
the period of amortization of the Funds' organization costs, the redemption
proceeds will be reduced by any such unamortized organization costs in the
same proportion as the number of initial shares being redeemed bears to the
number of those shares outstanding at the time of redemption.
F. DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of Matthews Asian
Convertible Securities Fund to distribute net investment income on a semi-
annual basis and capital gains, if any, annually. Matthews Pacific Tiger
Fund, Matthews Korea Fund and Matthews Dragon Century China Fund distribute
net investment income and capital gains, if any, annually. Distributions to
shareholders are recorded on the ex-dividend date. Income and capital gain
distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. Net investment
losses may not be utilized to offset net investment income in future periods
for tax purposes. On August 31, 1998 the Matthews Pacific Tiger Fund
reclassified $62,749 from accumulated net investment income to accumulated
net realized loss, the Matthews Asian Convertible Securities Fund
reclassified $1,802 from accumulated net investment income to accumulated net
realized loss, and the Matthews Korea Fund reclassified $743,286 from
accumulated net investment loss, and $64,077 from accumulated net realized
loss, to paid-in capital. These reclassifications had no effect on net
assets.
G. FUND AND CLASS ALLOCATIONS: The Fund accounts separately for the assets,
liabilities and operations of each Fund. Direct expenses of each Fund are
charged to the Fund while general expenses are allocated pro-rata among the
Funds based on net asset value. Income, expenses (other
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS--NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
than class specific expenses), and realized and unrealized gains (losses) are
calculated at the Fund level and allocated daily to each class of shares
based on the relative proportion of net assets of each class.
H. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results may differ from those
estimates.
I. OTHER: Securities transactions are accounted for on the date the
securities are purchased or sold. Interest income is recorded on the accrual
basis and dividend income on the ex-dividend date.
J. CAPITAL SHARE TRANSACTIONS: Each Fund is authorized to issue an unlimited
number of shares of beneficial interest with a par value of $0.001 per share.
Class A Shares are sold with a front-end sales charge of 4.95%. Transactions
in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
MATTHEWS
PACIFIC TIGER FUND
-----------------------------------------------------------------------------
CLASS I CLASS A
---------------------------------------------------- -----------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1998
-------------------------- ------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold............. 11,658,573 $ 81,328,869 3,849,789 $ 46,641,829 40,296 $ 274,792
Shares issued through
reinvestment of
dividends.............. 109,556 563,118 6,471 82,965 544 2,794
Shares redeemed......... (7,939,984) (55,807,859) (1,581,884) (19,274,522) (5,047) (33,262)
----------- ------------- ---------- ------------ ---------- -----------
Net increase............ 3,828,145 $ 26,084,128 2,274,376 $ 27,450,272 35,793 $ 244,324
=========== ============= ========== ============ ========== ===========
<CAPTION>
MATTHEWS
ASIAN CONVERTIBLE
SECURITIES FUND
----------------------------------------------------
CLASS I
----------------------------------------------------
YEAR ENDED YEAR ENDED
AUGUST 31, 1998 AUGUST 31, 1997
-------------------------- ------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------
<S> <C> <C> <C> <C>
Shares sold............. 547,648 $ 4,710,652 348,345 $ 3,949,981
Shares issued through
reinvestment of
dividends.............. 66,761 498,935 8,922 99,805
Shares redeemed......... (519,724) (4,372,177) (141,726) (1,600,060)
----------- ------------- ---------- ------------
Net increase............ 94,685 $ 837,410 215,541 $ 2,449,726
=========== ============= ========== ============
<CAPTION>
MATTHEWS
KOREA FUND
-----------------------------------------------------------------------------
CLASS I CLASS A
---------------------------------------------------- -----------------------
YEAR ENDED YEAR ENDED PERIOD ENDED
AUGUST 31, 1998 AUGUST 31, 1997 AUGUST 31, 1998
-------------------------- ------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Shares sold............. 77,651,372 $ 199,169,372 4,805,699 $ 30,420,501 3,061,063 $ 8,324,379
Shares issued through
reinvestment of
dividends.............. 0 0 0 0 0 0
Shares redeemed......... (47,890,663) (126,128,644) (2,056,201) (13,054,652) (1,014,474) (2,959,265)
----------- ------------- ---------- ------------ ---------- -----------
Net increase............ 29,760,709 $ 73,040,728 2,749,498 $ 17,365,849 2,046,589 $ 5,365,114
=========== ============= ========== ============ ========== ===========
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS--NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MATTHEWS
DRAGON CENTURY
CHINA FUND
--------------------
CLASS I
--------------------
PERIOD ENDED
AUGUST 31,1998
--------------------
SHARES AMOUNT
-------- ----------
<S> <C> <C>
Shares sold............................................... 474,122 $4,516,710
Shares issued through reinvestment of dividends........... 0 0
Shares redeemed........................................... (112,545) (829,905)
-------- ----------
Net increase.............................................. 361,577 $3,686,805
======== ==========
</TABLE>
2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Matthews International Capital Management (the "Advisor"), a registered
investment advisor, provides the Funds with investment management services. As
compensation for these services, the Advisor charges the Funds a monthly fee of
1/12 of 1% on each Fund's respective average daily net assets. The Funds pay
the Advisor a service fee at an annual rate of up to 0.25% of the Funds'
average daily net assets to the extent that shareholder service-related
expenses are incurred by the Advisor. Certain officers and trustees of the
Funds are also officers and directors of the Advisor. All officers serve
without direct compensation from the Funds. Investment advisory fees and other
transactions with affiliates, for the year ended August 31, 1998, are as
follows:
<TABLE>
<CAPTION>
SHAREHOLDER
EXPENSES SERVICE-RELATED
INVESTMENT VOLUNTARY WAIVED AND EXPENSES DUE FROM
ADVISORY EXPENSE ADVISORY REIMBURSED REIMBURSED (TO) DAEWOO DAEYU
FEE RATE LIMITATION* FEES BY ADVISOR TO ADVISOR ADVISOR SECURITIES SECURITIES CO.
---------- ----------- -------- ---------- --------------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Matthews Pacific Tiger
Fund................... 1.00% 1.90% $451,119 $89,019 $0 $25,349 -- --
Matthews Asian
Convertible Securities
Fund................... 1.00 1.90 48,161 89,320 0 8,400 -- --
Matthews Korea Fund..... 1.00 2.50 640,716 14,689 0 (72,488) $134,128+ $21,290+
Matthews Dragon Century
China Fund............. 1.00 2.00 15,893 92,738 0 (29,819) -- --
</TABLE>
+ Daewoo Securities and Daeyu Securities Co. are affiliated brokers for the
Fund. These amounts are the affiliated brokerage commissions paid.
* For Funds offering Class A shares, the voluntary expense limitation would
include an additional 0.25% for Class A Distributor fees.
The investment advisory agreements provide that any reductions made by the
Advisor in its fees are subject to reimbursement by the Funds within the
following three years provided that Funds are able to effect such reimbursement
and remain in compliance with applicable expense limitations. During the year
ended August 31, 1998, the Matthews Pacific Tiger Fund and the Matthews Korea
Fund reimbursed expenses to the Advisor totaling $56,770 and $237,854,
respectively. As of August 31, 1998, the total expenses waived and reimbursed
by the Advisor that are subject to reimbursement by
<PAGE>
- --------------------------------------------------------------------------------
MATTHEWS INTERNATIONAL FUNDS--NOTES TO FINANCIAL STATEMENTS AUGUST 31, 1998
- --------------------------------------------------------------------------------
the Matthews Pacific Tiger Fund, Matthews Asian Convertible Securities Fund,
Matthews Korea Fund and Matthews Dragon Century China Fund totaled $292,149,
$285,250, $0, $92,738, respectively.
3. DISTRIBUTOR FEES AND CLASS SPECIFIC EXPENSES
FPS Broker Services, Inc. (the "Distributor") serves as the Funds' Distributor
pursuant to an Underwriting Agreement. Pursuant to Rule 12b-1 adopted by the
Securities and Exchange Commission under the Act, the Pacific Tiger Fund Class
A and the Korea Fund Class A and the Dragon Century China Fund Class A, have
adopted a Plan of Distribution (the "Plan"). The Plan permits the participating
Funds to pay certain expenses associated with the distribution of their shares.
Under the Plan, each Fund offering Class A shares may pay actual expenses not
exceeding, on an annual basis, 0.25% of each participating Fund's Class A
average daily net assets. The Pacific Tiger Fund Class I, the Asian Convertible
Securities Fund, the Korea Fund Class I and the Dragon Century China Fund Class
I do not have a distribution plan.
For the year ended August 31, 1998, the class specific expenses were as
follows:
<TABLE>
<CAPTION>
MATTHEWS
MATTHEWS DRAGON
PACIFIC MATTHEWS CENTURY
TIGER FUND KOREA FUND CHINA FUND
--------------- --------------- ---------------
CLASS I CLASS A CLASS I CLASS A CLASS I CLASS A
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Transfer Agent fees............. $51,348 $8,938 $60,631 $9,488 $16,683 $ 0
Registration expenses........... N/A N/A 48,757 15,246 N/A N/A
Printing expenses............... 10,630 4,905 9,774 9,584 1,499 0
</TABLE>
4. INVESTMENT TRANSACTIONS
Investment transactions for the year ended August 31, 1998, excluding temporary
short-term investments, were as follows:
<TABLE>
<CAPTION>
PURCHASES PROCEEDS FROM SALES
------------ -------------------
<S> <C> <C>
Matthews Pacific Tiger Fund................... $ 59,140,061 $31,444,167
Matthews Asian Convertible Securities Fund.... 2,619,368 2,487,082
Matthews Korea Fund........................... 135,501,630 57,725,141
Matthews Dragon Century China Fund............ 4,007,723 328,261
</TABLE>
The Funds invest excess cash in interest bearing deposits at The Bank of New
York.
5. CAPITAL LOSS CARRYOVER
At August 31, 1998, the Funds had capital loss carryovers expiring through 2006
as follows:
<TABLE>
<CAPTION>
EXPIRING ON:
-----------------------
2004 2005 2006
------- ---- ----------
<S> <C> <C> <C>
Matthews Pacific Tiger Fund............................. -- -- $1,475,377
Matthews Asian Convertible Securities Fund.............. -- -- 51,948
Matthews Korea Fund..................................... $13,794 -- 1,071,846
Matthews Dragon Century China Fund...................... -- -- --
</TABLE>
These amounts are available to offset possible future capital gains of the
Fund.
<PAGE>
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT AUDITORS
- --------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of Matthews International Funds:
We have audited the accompanying statements of assets and liabilities,
including the schedules of investments, of Matthews International Funds
(comprised of the Matthews Pacific Tiger Fund, Matthews Asian Convertible
Securities Fund, Matthews Korea Fund and Matthews Dragon Century China Fund,
collectively referred to as the "Funds") as of August 31, 1998, and the related
statements of operations for the year then ended, statements of changes in net
assets for each of the two years in the period then ended and financial
highlights for each of the three years in the period then ended of the Matthews
Pacific Tiger Fund, Matthews Asian Convertible Securities Fund and Matthews
Korea Fund, and the related statements of operations, changes in net assets and
financial highlights for the period from February 19, 1998 (commencement of
operations) to August 31, 1998 of Matthews Dragon Century China Fund. These
financial statements and financial highlights are the responsibility of the
Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits. The
financial highlights of the Funds for the period ended August 31, 1995 were
audited by other auditors whose report dated September 29, 1995 expressed an
unqualified opinion on those financial highlights.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. Our procedures included confirmation of securities
owned as of August 31, 1998, by correspondence with the custodian and brokers.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Matthews International Funds as of August 31, 1998, the results of their
operations, changes in their net assets and the financial highlights for each
of the periods indicated above, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Francisco, California
October 9, 1998
<PAGE>
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DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
BOARD OF TRUSTEES
Richard K. Lyons
Robert K. Connolly
David FitzWilliam-Lay
Norman W. Berryessa
OFFICERS
G. Paul Matthews
John H. Dracott
Brian B. Stableford
INVESTMENT ADVISOR*
Matthews International Capital Management, LLC
655 Montgomery Street, Suite 1438
San Francisco, CA 94111
(800) 789-ASIA
UNDERWRITER
FPS Broker Services, Inc.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406
(800) 892-0382
* Matthews International Capital Management, LLC serves as Investment Advisor to
the funds. Daewoo Capital Management Co. Ltd. acts as Research Advisor to the
Matthews Korea Fund.
SHAREHOLDER SERVICES
First Data Investor Services Group, Inc.
3200 Horizon Drive
King of Prussia, PA 19406
(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, 29th Floor
San Francisco, CA 94104
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
This report is submitted for general information of the shareholders of the
Funds. It is not authorized for distribution to prospective investors in the
Funds unless preceded or accompanied by an effective Prospectus which includes
details regarding the Fund's objectives, policies, expenses, and other
information.
<PAGE>
INVESTING IN THE DRAGON CENTURY...
MATTHEWS PACIFIC TIGER FUND
Seeking long-term growth through a diversified portfolio of Asian Tiger
companies. With an emphasis on research intensive, "bottom-up" stock selection,
the portfolio focuses on quality companies with superior earnings growth and
below-average market valuations.
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
Introducing a new asset class, the Fund seeks to participate in the Tiger
equity markets with the reduced volatility historically found in convertible
bonds.
MATTHEWS KOREA FUND
A unique, open-ended, single-country fund allowing focused participation in the
world's 11th largest economy.
MATTHEWS DRAGON CENTURY CHINA FUND
This single country fund allows investors to participate in one of the fastest
growing economies in the world. The fund seeks to identify quality companies
that are well-positioned to participate in China's emergence into the global
marketplace.
[LOGO OF MATTHEWS INTERNATIONAL FUNDS APPEARS HERE]
655 Montgomery Street, Suite 1438
San Francisco, CA 94111
1.800.789.ASIA (2742)
www.matthewsfunds.com
Distributed by FPSBroker Services, Inc.,
3200 Horizon Drive, King of Prussia, Pennsylvania 19406
------------
MATTHEWS
------------
INTERNATIONAL FUNDS
MATTHEWS PACIFIC TIGER FUND
MATTHEWS ASIAN CONVERTIBLE SECURITIES FUND
MATTHEWS DRAGON CENTURY CHINA FUND
MATTHEWS KOREA FUND
[GRAPHIC OF DRAGON APPEARS HERE]
--------------------------------
AUGUST 31, 1998
ANNUAL REPORT
--------------------------------
