MATTHEWS INTERNATIONAL FUNDS
655 Montgomery Street, Suite 1438
San Francisco, CA 94111
MATTHEWS JAPAN FUND
CLASS I SHARES
PROSPECTUS
December 31, 1998
As Revised April 15, 1999
Matthews International Funds (the "Company") is an open-end investment
management company which currently consists of five separate investment series
designed to offer investors a variety of investment opportunities. Each series
has distinct investment objectives and policies. This Prospectus pertains only
to Class I shares of Matthews Japan Fund (the "Fund").
The Company is organized as a Delaware business trust. Matthews International
Capital Management, LLC (the "Advisor") serves as the investment advisor to the
Fund and manages the investments of the Fund according to the investment
objective of the Fund.
Matthews Japan Fund seeks long-term capital appreciation through investment
primarily in equity securities of Japanese companies. Under normal
circumstances, the Fund will invest at least 65% of its total assets in equity
securities of Japanese companies. Equity securities include common stocks,
preferred stocks, warrants, securities convertible into common or preferred
stock and depositary receipts.
Class I shares of the Fund may be purchased directly from the Fund without any
sales charge although the Advisor and other institutions may charge their
customers a fee for services provided in connection with their investments.
A redemption fee of 2% will be imposed on redemptions made within ninety days of
purchase, the proceeds of which will be retained by the Fund.
The minimum initial investment for the Fund is $2,500. 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 $500. Subsequent
investment for any retirement plan is $50.
The Fund's principal Underwriter is First Data Distributors, Inc. ("FDDI"), 4400
Computer Drive, Westboro, Massachusetts 01581-5108.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. Investors should read and retain this
Prospectus for future reference. Additional Information about the Fund is
contained in the Statement of Additional Information dated December 31, 1998,
which has been filed with the Securities and Exchange Commission and is
available upon request without charge by contacting First Data Investor Services
Group, Inc. ("Investor Services Group"), at 3200 Horizon Drive, P.O. Box 61503,
King of Prussia, PA 19406-0903 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.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY............................................................
EXPENSE INFORMATION...........................................................
INVESTMENT OBJECTIVES
Matthews Japan Fund.................................................
INVESTMENT POLICIES AND RISKS
[Specific to] Matthews Japan Fund...................................
INVESTMENT STRATEGIES AND RISKS
[Specific to] Matthews Japan Fund....................................
MANAGEMENT OF THE FUND........................................................
ADMINISTRATION OF THE FUND....................................................
PURCHASE OF SHARES.............................................................
EXCHANGE OF SHARES...........................................................
REDEMPTION OF SHARES and REDEMPTION FEE......................................
SHAREHOLDER SERVICES.........................................................
NET ASSET VALUE...............................................................
DIVIDENDS AND TAXES............................................................
PERFORMANCE INFORMATION.......................................................
GENERAL INFORMATION............................................................
APPENDIX......................................................................
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 FUND 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.
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 five separate series of shares. Although this Prospectus
only pertains to Class I shares of Matthews Japan Fund, the Company also offers
shares of Matthews Pacific Tiger Fund, Matthews Asian Growth and Income Fund,
Matthews Korea Fund and Matthews Dragon Century China 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 Objective
Matthews Japan Fund seeks long-term capital appreciation through investment
primarily in equity securities of Japanese companies. Under normal
circumstances, the Fund will invest at least 65% of its total assets in equity
securities of Japanese companies. The Fund is designed primarily for long-term
investment, and investors should not consider it a short-term trading vehicle.
See "INVESTMENT OBJECTIVE," and "INVESTMENT POLICIES AND RISKS."
Risk Factors There is no assurance that the Fund will achieve its investment
objective. Investing outside of the United States involves special risks, in
addition to the risks which are inherent to all investments. See "INVESTMENT
POLICIES AND RISK FACTORS."
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 Fund. The
Advisor manages the investments of the Fund according to its investment
objective. As of December 31, 1998, the Advisor had approximately $200 million
under management or committed to management in various fiduciary or advisory
capacities, primarily from private and institutional accounts.
See "MANAGEMENT OF THE FUND." FDDI, 4400 Computer Drive, Westboro, Massachusetts
01581-5108 serves as the Fund's underwriter. The Bank of New York, 90 Washington
Street, New York, New York 10286 serves as the custodian of the Fund's assets.
Investor Services Group, 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA
19406-0903 serves as the Fund's administrator, transfer agent and fund
accounting agent.
Purchase of Shares
The minimum initial investment for the Fund is $2,500 and $250 for subsequent
investments (and lower for IRA's, 401(k), 403(b)(7) plans and other retirement
plans). Purchase of Class I shares do not impose any sales load nor bear any
fees pursuant to a Rule 12b-1 Plan. The public offering price for shares of the
Fund is the net asset value per share next determined after receipt 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 Fund 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 the Fund are redeemed within ninety days of the purchase
of those shares, the proceeds of that redemption will be subject to a redemption
fee of 2.00%, which will be retained by the Fund. Signature guarantees may be
required for certain redemption requests. See "Redemption Fee" under "REDEMPTION
OF SHARES."
Dividends
The 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 the Fund unless
the shareholder notifies the transfer agent in writing requesting payments in
cash. The Fund intends to declare and pay dividends annually. See "DIVIDENDS AND
TAXES."
EXPENSE INFORMATION
Shareholder Transaction Expenses for the Fund:
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)
.............................. 0.00%
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of
offering price).................... 0.00%
Contingent Deferred Sales Charge (as a percentage of original purchase price)
............................. 0.00%
Redemption Fee (as a percentage of amount redeemed).
...................................................... 2.00%*
* The Redemption Fee of 2.00% applies only to those shares redeemed within
ninety days of purchase. See "Redemption Fee" under the heading "REDEMPTION
OF SHARES."
If you want to redeem shares by wire transfer, the Fund's 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.
- -------------------------------------------------------------------------------
Estimated Annual Fund Operating Expenses as a Percentage of Average Net Assets
for the fiscal year ending August 31, 1999:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Other Expenses Net Expense Ratio
Management 12b-1 After Expense After Expense
Fund (1) Fees Expenses Reimbursement Reimbursement(2)
Matthews Japan Fund -Class I 1.00% None 1.00% 2.00%
(1) The ratios set forth above reflect the anticipated voluntary advisory fee waivers and/or expense reimbursements by the
Advisor.
(2) The net expense limitation for Class I shares of the Fund will be 2.00% for its first twelve months of operations.
</TABLE>
Absent fee waivers and/or expense reimbursements during the fiscal year ending
August 31, 1999, the Fund's advisory fee, estimated other expenses, and net
expense ratio would have been 1.00%, 6.80%, and 7.80%, respectively.
In subsequent years, overall operating expenses for the 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. The Fund
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.
Example
Based on the level of estimated 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.
Name of Fund 1 Year 3 Years
- ------------ ------ -------
Matthews Japan Fund -Class I $20 $63
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, the 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 Fund may be greater or less than those
shown.
INVESTMENT OBJECTIVE
The investment objective of the Fund is fundamental and may not be changed
without a vote of the holders of the majority of the voting securities of the
Fund. Unless otherwise stated in this Prospectus, the Fund's 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 Fund intends 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 Japan Fund seeks long-term capital appreciation through investment
primarily in equity securities of Japanese companies. Under normal
circumstances, the Fund will invest at least 65% of its total assets in equity
securities of Japanese companies. These include securities of companies which
(i) are organized under the laws of Japan, (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 Japan or (iii) have the primary trading market for their securities
in Japan.
The remaining 35% of the Fund's total assets may be invested in (i) equity and
other securities of issuers located outside of Japan, including the United
States, (ii)securities issued by governmental entities, agencies or
instrumentalities or other political subdivsions of Japan or (iii)
non-convertible bonds and other debt securities issued by foreign issuers and
foreign government entities.
The Fund's investment objective and policies reflect the opinion of the Advisor
that attractive investment opportunities result from Japan's role as an
international economic power. Japan has the second largest economy and third
largest stock market in the world and is recognized as a major producer of
electrical and electronic products and automobiles. Recently, however, political
and economic circumstances in Japan have led to difficult market conditions.
Japanese securities may display more volatile trading patterns or abrupt or
erratic price movements than U.S. stocks. Additionally, certain of the Fund's
investments may exhibit low market liquidity which may have an adverse impact on
the Fund's ability to sell those securities at favorable prices. Substantial
adverse market or economic conditions may present greater risk of volatility of
the Fund's net asset value.
Recently, the Japanese government has undertaken various regulatory initiatives
and liberalized policies, however, there can be no assurance that such
liberalization will continue or whether such policies will stimulate economic
recovery to a level where the Fund will benefit from such growth.
INVESTMENT POLICIES AND RISKS
SPECIFIC TO MATTHEWS JAPAN FUND
The Advisor uses a multi-factor research approach when selecting investments for
the Fund. 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 companies in person to derive firsthand information for further
evaluation. 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 factors.
Equity securities in which the Fund may invest include Japanese common stocks,
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common or preferred stocks, warrants and rights,
depositary receipts and equity interests in trusts, partnerships, joint ventures
or similar enterprises.
The Fund may invest in equity and other securities of issuers located outside of
Japan, including the United States, and in non-convertible bonds and other debt
securities issued by foreign issuers and foreign government entities. The Fund
may invest 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 Investor 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 yen-denominated debt securities issued by
the Japanese government or Japanese companies and obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities.
The Fund may invest up to 5% of its total assets in securities rated below
investment grade (securities rated Baa or higher by Moody's or BBB or higher by
S&P 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 "INVESTMENT
STRATEGIES AND RISK FACTORS."
The Fund may invest 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. 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 Fund 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 investment in securities of other investment companies by the Fund will be
subject to limitations under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund may invest up to 10% of its assets in other investment
companies. See "INVESTMENT STRATEGIES AND RISKS."
The Fund may write covered call options and purchase put and call options on
securities to reduce overall risk. The Fund may also purchase put and call
options on foreign currencies to hedge against movements in currency exchange
rates. For the same purpose, the Fund 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 Fund 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."
The Advisor intends to be as fully invested in the Japanese economy as is
practicable, in light of economic and market conditions and the Fund's cash
needs. When, in the opinion of the Advisor, a temporary defensive position is
warranted, the Fund is 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 Fund's
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 Fund 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 Fund may invest its assets in a broad spectrum of securities of Japanese
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 15% of its net 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
which are not readily marketable are more likely to be issued by start-up, small
or family business and therefore subject to greater economic, business and
market risks than the listed securities of more well-established companies.
Under normal circumstances, the Advisor expects that the portfolio of the fund
will be comprised of 25 to 50 individual stocks in the Japanese economy. When
purchasing portfolio securities for the Fund, the Advisor's philosophy is a buy
and hold strategy versus buying for short-term trading.
INVESTMENT STRATEGIES AND RISKS
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 Fund, nor can there be any assurance that the Fund's
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 Fund 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 Fund 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 Fund has 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 Fund has no
current intention to invest in unsponsored IDRs.
Borrowing
The 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 Fund's 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 the
Fund has an outstanding borrowing that exceeds 5% of the Fund's net assets.
Foreign Currency Transactions
The Fund may engage in foreign currency transactions in connection with its
investment in foreign securities but will not speculate in foreign currency
exchange. The Fund will conduct its 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 the 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, the 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
Fund may also hedge its 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 Fund's securities denominated in such foreign currency. In
this situation the Fund 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 Fund 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 Fund 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 Fund's total assets would be required to purchase
offsetting contracts.
Futures Contracts and Related Options
The Fund may invest in futures contracts and options on futures contracts,
including index contracts or foreign currencies for hedging purposes or to
maintain liquidity. The 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 Fund 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. The 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 Fund may purchase a futures
contract in anticipation of purchases of securities. In addition, the Fund may
utilize futures contracts in anticipation of changes in the composition of its
portfolio holdings.
The Fund may purchase and sell call and put options on futures contracts traded
on an exchange or board of trade. When the 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 the 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 Fund 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 Fund intend to
purchase. Similarly, if the market is expected to decline, the Fund might
purchase put options or sell call options on futures contracts rather than sell
futures contracts. In connection with the Fund's position in a futures contract
or option thereon, the Fund 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.
Options
The Fund 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. The Fund will only purchase
call options to the extent premiums paid on all outstanding call options do not
exceed 10% of the Fund's total assets. The Fund will only write call options on
a covered basis. The Fund will receive premium income from writing call options,
which may offset the cost of purchasing put options and may also contribute to
the Fund's total return. The Fund 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. The 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 Fund will, at all
times during which it holds a put option, own the security underlying such
option. The Fund will receive premium income from writing put options, although
it may be required, when the put is exercised, to purchase securities at higher
prices than the current market price.
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 Fund 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
The Fund will not invest more than 15% of the value of its 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 1933, as
amended, 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, as amended, for resales of certain
securities to qualified institutional buyers.
Concentration in Japanese Securities
The Fund concentrates its investments in equity securities of Japanese
companies. Consequently, the Fund's share value may be more volatile than that
of mutual funds not sharing this geographic concentration. The value of the
Fund's shares may vary in response to political and economic factors affecting
companies in Japan. The Fund should not be considered a complete investment
program, rather it may be used as a vehicle for diversification.
Securities in Japan are denominated and quoted in yen. Yen are fuly convertible
and transferable based on floating exchange rates into all readily convertible
currencies, without administrative or legal restrictions for both non-residents
and residents of Japan. In determining the net asset value of shares of the
Fund, assets or liabilities initially expressed in terms of Japanese yen will be
translated into U.S. dollars at the current selling rate of Japanese yen against
U.S. dollars. As a result, in the absence of a successful currency hedge, the
value of the Fund's assets as measured in U.S. dollars may be affected favorably
or unfavorably by fluctuations in the value of Japanese yen relative to the U.S.
dollar.
The decline in the Japanese securities markets since 1989 has contributed to a
weakness in the Japanese economy, and the impact of a further decline cannot be
ascertained. The common stocks of many Japanese companies continue to trade at
high price-earnings ratios in comparison with those in the United States, even
after the recent market decline. Differences in accounting methods make it
difficult to compare the earning of Japanese companies with those of companies
in other countries, especially the United States.
Japan is largely dependent on foreign economies for raw materials. International
trade is important to Japan's economy, as exports provide the means to pay for
many of the raw materials it must import. Because of the concentration of the
Japanese exports in highly visible products such as automobiles, machine tools
and semiconductors, and the large trade surpluses ensuing therefrom, Japan has
entered a difficult phase in its relations with its trading partners,
particularly with respect to the United States, with whom the trade imbalance is
the greatest.
Portfolio Turnover Rate
The Advisor buys and sells securities for the Fund 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 Fund 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 Fund and also may
result in a higher level of taxable gain for a shareholder.
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 volatility in the
prices and yields of lower rated securities and thus in the Fund's net asset
value.
Many lower-rated securities are not as liquid as higher grade securities of the
same maturity and amount outstanding. The 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 Fund 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 Fund. 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 Foreign Currency
The U.S. dollar market value of the Fund's investments and of dividends and
interest earned by the Fund may be significantly affected by changes in currency
exchange rates. The value of Fund 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 Fund may attempt to manage
currency exchange rate risks, there is no assurance that the Fund will do so at
an appropriate time or that they will be able to predict exchange rates
accurately. For example, if the Fund increases its exposure to a currency and
that currency's price subsequently falls, such currency management may result in
increased losses to the Fund. Similarly, if the Fund decreases its exposure to a
currency and the currency's price rises, the Fund 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 Fund. Foreign investments which are not U.S. dollar denominated may
require the Fund 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.
Securities Lending
To increase return on portfolio securities, the 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. The 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.
Securities of Other Investment Companies
The Fund may invest in securities issued by other investment companies which
invest in securities in which the Fund is permitted to invest. Under the 1940
Act, the 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, the 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 Fund
bears directly in connection with its own operations.
Short-Selling
The 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, 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.
Year 2000 Problem
The Fund and its service providers depend upon the smooth functioning of their
computer systems. Unfortunately, because of the way dates are encoded and
calculated, many computer systems in use today cannot recognize the year 2000,
but revert to 1900 or another incorrect date. Computer failures due to the year
2000 problem could negatively impact the handling of securities trades and
pricing and account services.
The Fund's software vendors and service providers have assured the Fund that
their systems will be adapted in sufficient time and avoid serious problems.
There can be no guarantee, however, that all of their computer systems will be
adapted in time. The Fund does not expect year 2000 conversion costs to be
substantial for the Fund because those costs are borne by the Fund's vendors and
service providers and not directly by the Fund.
Brokers and other intermediaries that hold shareholder accounts may still
experience incompatibility problems. It is also important to keep in mind that
year 2000 issues may negatively impact the companies in which the Fund invests
and, by extension, the value of those companies' shares held by the Fund.
MANAGEMENT OF THE FUND
The Board of Trustees
The Company has a Board of Trustees that establishes the Fund's policies and
supervises and reviews the management of the Fund. The day-to-day operations of
the Fund are administered by the officers of the Company and by the Advisor
pursuant to the terms of the Investment Advisory Agreement with the Fund. The
Fund's Trustees review the various services provided by the Advisor to ensure
that the Fund's general investment policies and programs are being properly
carried out and that administrative services are being provided to the Fund in a
satisfactory manner. Information pertaining to the Trustees and executive
officers of the Trust is set forth below and can also be found in the Statement
of Additional Information dated December 31, 1998.
Trustees and Officers
G. Paul Matthews
President
Mark W. Headley
Vice President
Brian Stableford
Treasurer
Richard K. Lyons
Trustee
Robert K. Connolly
Trustee
David FitzWilliam-Lay*
Trustee
Norman W. Berryessa
Trustee
John H. Dracott
Trustee Emeritus
* This Trustee is considered an "interested person" of the Funds as defined
under the Act.
The Investment Advisor The Advisor, which has its offices at 655 Montgomery
Street, Suite 1438, San Francisco, California 94111, serves as the Fund's
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 31, 1998 were $200
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.
In addition, the Hambrecht 1980 Revocable Trust ("Hambrecht") may be deemed to
be a control person of the Advisor on the basis of its ownership of stock of the
Advisor. Hambrecht is a revocable trust whose trustees and beneficiaries are
William and Sarah Hambrecht.
The Fund has retained the Advisor to invest the Fund's assets, manage the Fund's
business affairs and supervise its overall day-to-day operations. Pursuant to an
investment advisory agreement with the Fund, the Advisor provides advice on
buying and selling securities in accordance with the Fund's investment policies,
limitations and restrictions. The Advisor also furnishes the Fund with office
space and certain administrative and clerical services, and provides the
personnel needed by the Fund with respect to the Advisor's responsibilities
under the investment advisory agreement.
For providing investment advisory services, the Fund pays the Advisor a monthly
fee calculated daily by applying an annual rate of 1.00% to the Fund's assets.
While the advisory fee paid by the Fund 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.
Fee Waivers 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 Fund without further
notification of the commencement or termination of any such waiver or
absorption. Any such waiver or absorption will have the effect of lowering the
overall expense ratio for the Fund and increasing the Fund's overall return to
investors at the time any such amounts are waived and/or absorbed.
The Advisor has voluntarily undertaken to reimburse Class I shares of the Fund
for operating expenses in excess of 2.00%. Such fee reimbursement may be
terminated at the discretion of the Advisor.
When the Fund's net assets are not large enough to support all the various
expenses without exceeding the total expense limitations 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.
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.
Portfolio Management
Investment decisions for the Fund are made by a team of portfolio managers at
Matthews International Capital Management, LLC, consisting of Mark Headley and
James M. Bogin.
Mark Headley joined Matthews International in April 1995 as Managing Director
and as Senior Analyst on the investment team. He has 10 years of experience in
the Asian Tiger markets. He was a Vice President of Newport Pacific Management,
the parent company of the advsier to the first open-ended Asia ex-Japan fund,
the Tyndall Newport Tiger Fund (now the Colonial Newport Tiger Fund). 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.
Mr. Bogin joined Matthews International in December 1998 as a Portfolio Manager
and brings over 10 years of experience in international investing to the firm.
Prior to joining Matthews, Mr. Bogin served as Senior Portfolio Manager from
1993-97 at LGT Asset Management in San Francisco where he managed Global
Developing Markets portfolios. Mr. Bogin began his investment career in Tokyo
where he worked as an equity analyst from 1985-87. In 1987, he moved to Hong
Kong where he worked as a Portfolio Manager. Mr. Bogin moved back to Tokyo in
1989 as a Portfolio Manager for Nomura Investment Management Tokyo where he
managed mutual funds investing in Asian equities. He is fluent in Japanese.
Both Mr. Headley and Mr. Bogin travel extensively to Asia to conduct research
relating to those markets.
ADMINISTRATION OF THE FUNDS
The Underwriter First Data Distributors, Inc. ("FDDI"), 4400 Computer Drive,
Westboro, Massachusetts 01581-5108, has been engaged as the underwriter of the
shares of the Company pursuant to a written agreement. FDDI's duties include
assisting in the sale of shares.
The Administrator, Fund Accounting and Pricing Agent
First Data Investor Services Group, Inc. ("Investor Services Group"), 3200
Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903 serves as
administrator and provides fund accounting and pricing services to the Fund
pursuant to an Investment Company Services Agreement. The services Investor
Services Group provides to the Company include: the coordination and monitoring
of any third parties furnishing services to the Fund; providing the necessary
office space, equipment and personnel to perform administrative and clerical
functions for the Fund; preparing, filing and distributing proxy materials and
periodic reports to shareholders, registration statements and other documents;
and responding to shareholder inquiries and fund accounting and pricing services
(including the daily calculation of the Fund's net asset value). Pursuant to
this agreement, Investor Services Group receives a minimum fee of $40,000.
Expenses
Expenses attributable to the Fund and other series of the Company are allocated
to each Fund based on 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" including any
shareholder servicing agents; costs of obtaining quotations of portfolio
securities; and pricing of Fund shares.
Class-specific expenses will be borne solely by shareowners of such class or
classes. 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: distribution fee payments, 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 and/or shareholder servicing 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, as amended.
The Custodian and Transfer Agent
The Bank of New York, 90 Washington Street, New York, New York 10286 is the
custodian for the cash and securities of the Fund. Investor Services Group
serves as the Fund's 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 Fund's shares, acts as
dividend and distribution disbursing agent and performs other shareholder
service functions.
PURCHASE OF SHARES
In General
Shares of the Fund may be purchased directly from the Fund at the net asset
value next determined after receipt of the order in proper form by an agent of
the Fund. There is no sales load or charge in connection with the purchase of
Class I shares. The Fund's shares are offered for sale by FDDI, the Fund's
underwriter, 211 S. Gulph Road, P.O. Box 61503, King of Prussia, PA 19406-0903,
(800) 892-0382.
The minimum initial investment for the Fund is $2,500. Subsequent investments
for the 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 $500.
Subsequent investments for any retirement plan is $50.
The Fund reserves the right to reject any purchase order and to suspend the
offering of shares of the Fund. The Fund also reserves 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.
Purchase orders for shares of the Fund that are received by Investor Services
Group or another designated agent in proper form by the close of regular trading
on the New York Stock Exchange ("NYSE") (currently 4:00 p.m. Eastern time), on
any day that the NYSE is open for trading, will be purchased at the Fund's next
determined net asset value. Orders received after 4:00 p.m. Eastern time will be
purchased at the next-determined net asset value determined the business day
following receipt of the order.
Shares of the Fund may be purchased by mail, by wire and through broker/dealers.
Purchases by Mail
Shares of the 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 Fund, c/o 3200 Horizon Drive, P.O. Box 61503, King of
Prussia, PA 19406-0903.
Subsequent investments in an existing account in the Fund may be made at any
time by sending a check payable to the Fund c/o First Data Investor Services
Group, Inc., 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA 19406-0903.
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, Investor
Services Group. The Fund 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 the 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 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: FIRST DATA INVESTOR SERVICES GROUP, INC.
A/C 98-7037-071-9
FBO "Matthews Japan Fund - Class I 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 Fund 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 Investor
Services Group 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 Investor Services Group 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 Fund may accept telephone orders from brokers, financial institutions or
service organizations which have been previously approved by the Fund. It is the
responsibility of such brokers, financial institutions or service organizations
to promptly forward purchase orders and payments for the same to the Fund.
Shares of the 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. In some cases the Advisor may make supplemental payments to such
financial intermediaries to reduce these fees. Such payment will be made out of
the Advisor's monies and will not be expenses of the Fund. Such fees would not
otherwise be charged if the shares were purchased directly from the Fund. In
addition, the Advisor may make payments out of its own resources to dealers and
other persons who distribute shares of the Fund.
Wire orders for shares of the Fund received by financial intermediaries prior to
4:00 p.m., Eastern time, are confirmed at that day's public offering price.
Orders received by financial intermediaries after 4:00 p.m., Eastern time, are
confirmed at the public offering price on the following business day.
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 the 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 Fund and mailed
to the Fund c/o First Data Investor Services Group, Inc., 3200 Horizon Drive,
P.O. Box 61503, King of Prussia, PA 19406-0903. Orders to purchase shares are
effective on the day Investor Services Group receives your check or money order.
All investments must be made in U.S. dollars, and, to avoid fees and delays,
checks must be drawn only on banks located in the U.S. A charge (minimum of $20)
will be imposed if any check used for the purchase of shares is returned. The
Fund and Investor Services Group each reserve the right to reject any purchase
order in whole or in part.
EXCHANGE OF SHARES
In General
Class I shares of the Fund may be exchanged for Class I shares of any of the
other funds within the Company, provided such other shares may be sold legally
in the state of the investor's residence.
Exchanges are subject to the minimum initial investment requirement for the
Fund. Requests for telephone exchanges must be received by Investor Services
Group 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 Fund and Investor
Services Group 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 AND REDEMPTION FEE
In General
Shareholders may redeem their shares of the Fund 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 Fund normally sends 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 a
designated agent prior to the close of regular trading hours on the NYSE on any
business day that the Fund calculates 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 individual shareholder redemption will be processed until the
transfer agent has received a completed application with respect to the account.
Shareholders who hold shares through a financial intermediary such as a broker
should contact that financial intermediary.
The Fund 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 Fund to sell assets under
disadvantageous conditions or to the detriment of the remaining shareholders of
the Fund.
The Fund 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 Fund not reasonably practicable.
Redemption by Mail
Shares may be redeemed by submitting a written request for redemption to
Investor Services Group, 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 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 Fund reserves 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 Fund 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 Fund.
Redemption Fee
With certain exceptions, the Fund may impose a redemption fee of 2.00% on shares
that are redeemed within ninety days of purchase. The charge will be assessed on
an amount equal to the net asset value of the shares at the time of redemption.
If imposed, the redemption fee is deducted from the redemption proceeds
otherwise payable to the shareholder. The redemption fee is returned to the
assets of the Fund.
Minimum Balances
Due to the relatively high cost of maintaining smaller accounts, the Fund
reserves 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 $2,500 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 $2,500 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 Fund 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 Fund and its transfer agent require personal identification
information before accepting a telephone redemption. To the extent that the Fund
or its transfer agent fail to use reasonable procedures to verify the
genuineness of telephone instructions, the Fund 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 Fund.
Automatic Investing
The Fund offers 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 $2,500 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 Fund is 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 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 Fund is computed as of the close of regular
trading on the NYSE, currently 4:00 p.m. Eastern time on each business day.
Currently, the NYSE is closed on the following holidays or days on which the
following holidays are observed: New Year's Day, Martin Luther King 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 Fund's 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 Fund net asset value on that day. If events that materially
affect the value of the Fund's 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 Fund may be traded on days and at times
when the NYSE is closed. Accordingly, the net asset value of the Fund may be
significantly affected on days when shareholders have no access to the Fund.
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
The 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 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.
Taxes
For its initial fiscal year, the Fund intends to elect and to qualify to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986. Such qualification relieves the Fund of liability for
Federal income taxes to the extent the Fund's earnings are distributed in
accordance with the Code. To so qualify, among other requirements, the Fund 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 Fund's 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 Fund 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 Fund's 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 Fund, or if to the Fund's
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 Fund 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 Fund 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.
PERFORMANCE INFORMATION
In General
Performance information such as yield or total return for the Fund may be quoted
in advertisements or in communications to shareholders. Such performance
information may be useful in reviewing the performance of the Fund and for
providing a basis for comparison with other investment alternatives. Since net
investment return of the Fund changes in response to fluctuations in market
conditions, interest rates and the Fund's expenses, however, any given
performance quotation should not be considered representative of the Fund's
performance for any future period. The value of an investment in the Fund's will
fluctuate and an investor's shares, when redeemed, may be worth more or less
than their original cost.
Total Return
The Fund's total return is the change in value of an investment in the Fund 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
Fund. 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 Fund 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 Fund by calling the
Fund at (800) 789-ASIA.
GENERAL INFORMATION
Organization
The 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 amended, 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 Fund. 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 Fund.
Description of Shares
Each Fund is authorized to issue an unlimited number of shares of beneficial
interest, each with a $0.001 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.
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 the Fund participate equally
in dividends, distributions, and liquidations with respect to the Fund.
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 Fund. 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 Fund. In addition, subject to certain
conditions, shareholders of the Fund may apply to the Fund 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 Fund will not be personally liable
for the obligations of the Fund; a shareholder is entitled to the same
limitation of personal liability extended to shareholders of corporations.
Shareholder Servicing Agents
The Fund may enter into Shareholder Servicing Agreements with one or more
unaffiliated Shareholder Servicing Agents. The Shareholder Servicing Agent may,
as agent for its customer, 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 Fund, proxy statements, annual reports, updated prospectuses and other
communications to shareholders of the Fund; receive, tabulate and transmit to
the Fund proxies executed by shareholders with respect to meetings of
shareholders of the Fund; and provide such other related services as the Fund or
a shareholder may request. For these services, a 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 Fund
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
Fund's 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.
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.
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.
BOARD OF TRUSTEES
Richard K. Lyons
Robert K. Connolly
David FitzWilliam-Lay
Norman W. Berryessa
John H. Dracott,Trustee Emeritus
OFFICERS
G. Paul Matthews - President
Mark W. Headley - Vice President
Brian Stableford - Treasurer
INVESTMENT ADVISOR
Matthews International Capital Management, LLC
655 Montgomery Street, Suite 1438
San Francisco, CA 94111
(800) 789-ASIA
UNDERWRITER
First Data Distributors, Inc.
4400 Computer Drive
Westboro, MA 01581-5108
SHAREHOLDER SERVICES
First Data Investor Services Group, 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
For Additional Information about the Matthews International Funds call:
(800) 789-ASIA
New Account Application
This application is for opening a non-retirement account only. If you wish
to open an IRA account, please call (800) 789-2742.
Matthews International Funds Class I
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 First Data Investor Services Group, Inc., P.O. Box
61503, 3200 Horizon Drive, King of Prussia, PA 19406-0903.
- ------- --------------------------------------------------------------------
1 CHOOSE YOUR INVESTMENTS
- ------- --------------------------------------------------------------------
There is an initial investment of $2,500.00, $500.00 for a Retirement Plan
account.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
|_| Matthews Japan Fund - $ Class Make check payable to the Matthews Japan Fund. If you
----------------
I have an account in another Matthews Fund registered under
Total Investment $ the same name and tax identification number and would like
----------------
to use the same account number below, please indicate the
following:
FUND NAME ACCOUNT#
- ------- -----------------------------------------------------------------------------------------------------------------
2 INVESTMENT METHOD
- ------- -----------------------------------------------------------------------------------------------------------------
|_| BY WIRE: Federal Funds were wired on
|_| BY CHECK: I have enclosed a check for $________ _____ /_____ /_____ for Acct. # ________________
MO. DAY YR.
- ------- -----------------------------------------------------------------------------------------------------------------
3 ACCOUNT REGISTRATION
- ------- -----------------------------------------------------------------------------------------------------------------
</TABLE>
|_| 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 |_| 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/Transfers to Minors Act - -
STATE TAXPAYER ID NUMBER
- - /
------------------------------------ ----------
/
MINOR'S SOCIAL DATE OF BIRTH
SECURITY NO.
4 ADDRESS 5 DIVIDEND OPTIONS
|_| Reinvest all dividends and capital gains.
STREET OR P.O. BOX
|_| Pay all dividends and capital gains to me by check.
CITY, STATE, ZIP |_| Pay all dividends by check and reinvest
capital gains.
( ) ( ) All distributions will be reinvested unless otherwise
------------ ----------------------
DAY PHONE EVENING PHONE indicated.
CITIZEN OF:
|_| U.S. |_| OTHER
PLEASE SPECIFY
- ------- ----------------------------------------------------------------
6 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 complete below.
TELEPHONE REDEMPTION |_| Yes |_| No
NAME OF BANK
I (we) authorize First Data Investor Services Group, Inc. to
honor telephone instructions for my (our) account. Neither
the Fund nor First Data Investor Services Group, Inc. will be CITY STATE
liable for properly acting upon telephone instructions
believed to be genuine. Please attach a voided check on the
Transfer account and BANK EXCHANGE ACCOUNT |_|CHECKING |_| SAVINGS
NUMBER NUMBER
- ------- ------------------------------------------------------------------
7 SIGNATURE CERTIFICATION
- ------- -----------------------------------------------------------------
The following is required by Federal tax law to avoid 31% backup withholding:
"By signing below, I certify under the penalties of perjury that the social
security or taxpayer identification 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
- ------- ------------------------------------------------------------------
8 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 First Data Investor Services
Group, 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
Matthews International Funds Automatic Investment Plan Class I
Please complete this application and mail to: Matthews International Funds, C/O
First Data Investor Services Group, 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.
[ ] I am in the process of establishing a new Account.
[ ] Matthews Japan Fund - Class I
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 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, First Data Investor
Services Group, Inc. 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, First Data
Investor Services Group, 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 First
Data Investor Services Group, Inc. upon 30 days written notice or at any
time by the investor by written notice to First Data Investor Services
Group, Inc. which is received no later than 5 business days prior to the
above designated investment date.
MATTHEWS INTERNATIONAL FUNDS
- -----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Matthews Japan Fund
- ----------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- ------------------------------------------------------------------------------
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1998,
As Revised April 15, 1999
This Statement of Additional Information provides supplementary information
pertaining to shares representing interest in one investment portfolio of
Matthews International Funds -- Matthews Japan Fund. Matthews Japan Fund offers
a single class of shares, Class I shares for institutional investors. This
Statement of Additional Information dated December 31, 1998, as revised April
15, 1999, is not a prospectus and should be read in conjunction with the
Prospectus for Class I shares dated December 31, 1998, as revised April 15,
1999. No investment in shares should be made without first reading the
Prospectus. A copy of the Prospectus may be obtained without charge from the
Company at the addresses and telephone numbers below.
Underwriter: Advisor:
First Data Distributors, Inc. ("FDDI") Matthews International Capital
Management, LLC (the "Advisor")
4400 Computer Drive 655 Montgomery Street, Suite 1438
Westboro, MA 01581-5108 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.
TABLE OF CONTENTS
Page
THE FUND.....................................................................
INVESTMENT POLICIES AND TECHNIQUES.........................................
RISKS RELATED TO LOWER RATED DEBT SECURITIES...............................
INVESTMENT RESTRICTIONS.....................................................
TRUSTEES AND OFFICERS.......................................................
INVESTMENT ADVISORY AND OTHER SERVICES......................................
Investment Advisory Agreement...........................................
The Administrator.......................................................
The Underwriter.........................................................
PORTFOLIO TRANSACTIONS AND BROKERAGE.........................................
PORTFOLIO TURNOVER...........................................................
DETERMINATION OF NET ASSET VALUE............................................
TAXES........................................................................
PERFORMANCE INFORMATION......................................................
OTHER INFORMATION.............................................................
THE FUND
Matthews International Funds, 655 Montgomery Street, Suite 1438, San Francisco,
California 94111, is an open-end investment company which currently offers five
separate investment series designed to offer investors a variety of investment
opportunities. Each series involves distinct investment objectives and policies.
Matthews Japan Fund (the "Fund") is further described in this Statement of
Additional Information.
INVESTMENT POLICIES AND TECHNIQUES
The following supplements the information contained in the Prospectus concerning
the investment policies of the Fund. Except as otherwise stated below or in the
Prospectus, the Fund 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 Fund.
Loans of Portfolio Securities
The Fund 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 Fund 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 Fund 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
The Fund may enter into repurchase agreements to earn income although there is
no current intention to do so in the foreseeable future. The Fund may only enter
into repurchase agreements with financial institutions that are deemed to be
creditworthy by the Advisor, pursuant to guidelines established by the Fund's
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 Fund to the
seller secured by the securities transferred to the Fund. Repurchase agreements
under the 1940 Act will be fully collateralized by securities in which the Fund
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 Fund 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. The Fund will not invest more than 15% of its net
assets in illiquid securities, including repurchase agreements maturing in more
than seven days. The Fund must treat each repurchase agreement as a security for
tax diversification purposes and not as cash, a cash equivalent or receivable.
The repurchase price under the repurchase agreements generally equals the price
paid by the 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). The financial institutions with whom the Fund 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 Fund 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 Fund 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 Fund, and foreign repurchase agreements
generally involve greater risks than a repurchase agreement in the United
States.
Reverse Repurchase Agreements
The Fund may enter into reverse repurchase agreements but it does not currently
have the intention of doing so in the foreseeable future. Reverse repurchase
agreements involve the sale of securities held by the Fund pursuant to the
Fund's 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 Fund 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 Fund may
decline below the price of the securities the Fund is obligated to repurchase
such securities.
Securities of Other Investment Companies
The Fund may invest in the securities of other investment companies and
currently intends to limit its 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 Fund's 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 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 the
Fund and report periodically on such decisions to the Board of Trustees.
Rule 144A Securities
The Fund may invest in securities that are exempt under 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 a Fund's limitation on illiquid investment.
Investing in securities under Rule 144A could have the effect of increasing the
levels of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a time, uninterested in purchasing these securities. The Fund
will limit its 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 Fund's Board of Trustees.
Convertible Securities
The Fund may invest in convertible securities of Japan 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
security will tend to fluctuate directly with the price of the underlying equity
security.
Fixed-Income Securities
All fixed-income securities are subject to two types of risks: the credit risk
and the interest rate risk. The credit risk relates to the ability of the issuer
to meet interest or principal payments or both as they come due. The interest
rate risk refers to the fluctuations in the net asset value of any portfolio of
fixed-income securities resulting from the inverse relationship between price
and yield of fixed-income securities; that is, when the general level of
interest rates rises, the prices of outstanding fixed-income securities decline,
and when interest rates fall, prices rise.
In addition, if the currency in which a security is denominated appreciates
against the U.S. dollar, the dollar value of the security will increase.
Conversely, a rise in interest rates or a decline in the exchange rate of the
currency would adversely affect the value of the security expressed in dollars.
Fixed-income securities denominated in currencies other than the U.S. dollar or
in multinational currency units are evaluated on the strength of the particular
currency against the U.S. dollar as well as on the current and expected levels
of interest rates in the country or countries.
Forward Commitments, When-Issued Securities and Delayed-Delivery Transactions
Although the Fund 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 Fund does not have the current intention of doing so
in the foreseeable future. The Fund will normally realize a capital gain or loss
in connection with these transactions. For purposes of determining the Fund's
average dollar-weighted maturity, the maturity of when-issued or forward
commitment securities will be calculated from the commitment date.
When the Fund purchases securities on a when-issued, delayed-delivery or forward
commitment basis, the Fund's 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 Fund's
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 Fund will maintain sufficient assets at all times to
cover its obligations under when-issued purchases, forward commitments and
delayed-delivery transactions.
Short-Selling
The 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 the Fund to invest in securities other than those listed here
and in the Prospectus, provided that such investment would be consistent with
the Fund's investment objective and that it would not violate any fundamental
investment policies or restrictions applicable to the Fund.
HEDGING AND DERIVATIVES
Futures Transactions
Although the Fund may engage in futures transactions for the purchase or sale
for future delivery of securities, the Fund does not have the current intention
of doing so in the foreseeable future. While futures contracts provide for the
delivery of securities, deliveries usually do not occur. Contracts are generally
terminated by entering into offsetting transactions.
The Fund 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 Fund 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 Fund is temporarily not
fully invested, it 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 Fund 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 Fund 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 Fund may enter into futures contracts provided that such obligations
represent no more than 20% of a Fund's net assets. Under the Commodity Exchange
Act, the Fund 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 a Fund's net assets. To the extent required by law, the Fund 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 Fund 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 Fund's securities are denominated, the Fund does not
currently intend to use such hedging strategies in the foreseeable future. Such
currency hedges can protect against price movements in a security the Fund owns
or intends to acquire that are attributable to changes in 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.
The Fund 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 Fund 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 Fund 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 Fund 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 Fund would increase its exposure to foreign currencies that the
Advisor believes might rise in value relative to the U.S. dollar, or the Fund
would shift its exposure to foreign currency fluctuations from one country to
another.
The cost to the 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 Fund
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 Fund might be unable to close out a forward currency contract at any
time prior to maturity. In either event, the Fund 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 Fund 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 Fund 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 Fund to deliver an amount of foreign currency in excess of the value of its
portfolio securities or other assets denominated in that currency, or (2) the
Fund maintains 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 Fund 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 Fund 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
the Fund maintains with its custodian a diversified stock portfolio, or liquid
assets equal to the contract value. A call option is also covered if the 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 Fund will write put options only if they are
"secured" by liquid assets maintained in a segregated account by the Fund's
custodian in an amount not less than the exercise price of the option at all
times during the option period.
Purchasing Call Options
The Fund may purchase call options to the extent that premiums paid by the Fund
do not aggregate more than 10% of the Fund's total assets. When the Fund
purchases 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 Fund 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 Fund 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 Fund 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 Fund 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 Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through the exercise of such options. Further,
unless the price of the underlying security changes sufficiently, a call option
purchased by the Fund may expire without any value to the Fund, in which event
the Fund 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 Fund may write covered call options from time to time on such
portions of their portfolios, the Fund does not have the current intention of
doing so in the foreseeable future. The Fund may write covered call options,
without limit, as the Advisor determines is appropriate in pursuing the Fund's
investment objective. The advantage to the Fund of writing covered calls is that
the Fund receives a premium which is additional income. However, if the security
rises in value, the Fund may not fully participate in the market appreciation.
The Fund's 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, the 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 Fund 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 Fund 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 the Fund may invest up to 10% of its total assets in the purchase of
put options, the Fund does not have the current intention of doing so in the
foreseeable future. The 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, the 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 the Fund gives it the right to sell one of its
securities for an agreed price up to an agreed date. The 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 Fund may sell a put option which it has
previously purchased prior to the sale of the securities underlying such option.
Such sale will result in a net gain or loss depending on whether the amount
received on the sale is more or less than the premium and other transaction
costs paid on the put option which is sold.
The Fund may sell a put option purchased on individual portfolio securities.
Additionally, the Fund may enter into closing sale transactions. A closing sale
transaction is one in which the Fund, when it is the holder of an outstanding
option, liquidates its position by selling an option of the same series as the
option previously purchased.
Writing Put Options
Although the Fund may also write put options on a secured basis, the Fund does
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 Fund.
Secured put options will generally be written in circumstances where the Advisor
wishes to purchase the underlying security for a Fund's 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 Fund values its assets daily in U.S. dollars, it is not required to
convert its holdings of foreign currencies to U.S. dollars on a daily basis. The
Fund's 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 Fund could suffer a loss of some or all
of the amounts deposited. The Fund 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 Investors Service, Inc.
("Moody's") or BBB by Standard & Poor's Corporation ("S&P") (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 Fund 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 the 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, the 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 Fund, especially in a
thinly traded market.
The credit ratings of S&P and Moody's are evaluations of the safety of principal
and interest payments, not market value risk, of lower-rated securities. These
ratings are available as an Appendix to the Fund's 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 Fund. The Advisor's analysis of issuers may
include, among other things, historic and current financial condition and
current and anticipated cash flows.
INVESTMENT RESTRICTIONS
The investment restrictions set forth below are fundamental policies and may not
be changed as to the 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 Fund 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 OBJECTIVE AND POLICIES" and "INVESTMENT
STRATEGIES" in the Prospectus, the Fund may not:
(1) As to 75% of the total assets of the Fund purchase the securities
of any one issuer (other than securities issued by the U.S.
Government or its agencies or instrumentalities) if immediately
after such purchase more than 5% of the value of the Fund's total
assets would be invested in securities of such issuer;
(2) Purchase or sell real estate (but this restriction shall not
prevent the Fund 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;
(3) Purchase or sell commodities or commodity contracts, except that
the 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;
(4) [Make investments in securities for the purpose of exercising
control;]
(5) Purchase the securities of any one issuer if, immediately after
such purchase, the Fund would own more than 10% of the outstanding
voting securities of such issuer;
(6) 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 the 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, the 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);
(7) Make loans, except that this restriction shall not prohibit (a) the
purchase and holding of debt instruments in accordance with the
Fund's investment objective and policies, (b) the lending of
portfolio securities, or (c) entry into repurchase agreements with
banks or broker-dealers;
(8) 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 borrowing will be done from
a bank and asset coverage of at least 300% is required. The Fund
will not purchase securities when borrowings exceed 5% of the
Fund's total assets;
(9) 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
the Fund's investments in such industry would exceed 25% of the
value of the total assets of the Fund;
(10) Act as an underwriter of securities, except that, in connection
with the disposition of a security, the Fund may be deemed to be
an "underwriter" as that term is defined in the Securities Act of
1933;
(11) Invest in puts, calls, straddles or combinations thereof except
to the extent disclosed in the prospectuses; and
(12) 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.
TRUSTEES AND OFFICERS
Information pertaining to the Trustees and executive officers of the Company is
set forth below and further detailed in the Prospectuses.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Aggregate Total
Compensation Compensation
Principal From Trust From Trust and
Position(s) Occupation for Fiscal Fund Complex
Name, Address Held with During Past Five Year Ended Paid to
and Age Registrant Years Aug. 31, 1998 Trustees
Richard K. Lyons 38 Trustee Professor, Haas School $5,000 $5,000
University of California of Business since
350 Barrows Hill 1995; Assistant
Berkeley, CA 94720 Professor 1993-1995.
Robert K. Connolly 66 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.
David FitzWilliam-Lay* 68 Trustee Director, USDC $0 $0
26 Chalfont House, Investment Trust PLC &
19 Chesham Street Berry Starquest PLC.
London SWIX 8NG Retired in 1993 after
United Kingdom 3 2 yrs. as Chairman
of GT Mgmt, PLC.
Norman W. Berryessa 70 Trustee Independent $5,000 $5,000
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.
G. Paul Matthews* 43 President Chief Investment N/A N/A
655 Montgomery Street Officer of Matthews
Suite 1438 International Capital
San Francisco, CA 94111 Management since 1991.
Mark W Headley 40 Vice- Managing Director and N/A N/A
655 Montgomery Street President Senior Analyst of
Suite 1438 Matthews International
San Francisco, CA 94111 Capital Management since
1995; Director of International
Investments at Litman/Gregory
& Co. from 1993 to 1995
John H. Dracott* 71 Trustee International mutual N/A
N/A
655 Montgomery Street Emeritus fund consultant since
Suite 1438 1991.
San Francisco, CA
Aggregate Total
Compensation Compensation
Principal From Trust From Trust
and
Position(s) Occupation for Fiscal Fund Complex
Name, Address Held with During Past Five Year Ended Paid to
and Age Registrant Years Aug. 31, 1998 Trustees
- ------------------------- -------------- ------------------------
Brian Stableford* 36 Treasurer Vice-President, N/A N/A
655 Montgomery Street Matthews
Suite 1438 International Capital
San Francisco, CA 94111 Management, since
1994;
prior
thereto,
Mitubishi
Global
Custody.
* These Trustees and officers are considered "interested persons" of the Fund as
defined under the Act.
</TABLE>
The Trustees of the Fund 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.
INVESTMENT ADVISORY AND OTHER SERVICES
Investment Advisory Agreement
The advisory services provided by the Advisor and the fees received by it for
such services are described in the Prospectus. As stated in the Prospectus, the
Advisor may from time to time voluntarily waive its advisory fees with respect
to the Fund. In addition, if the total expenses borne by the 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 the Fund for any fiscal year which
exceeds the permissible limits applicable to the Fund in any state in which its
shares are then qualified for sale. 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 Funds ability to effect such reimbursement and
remain in compliance with applicable expense limitations.
Under the Investment Advisory Agreement, the Advisor is not liable for any error
of judgment or mistake of law or for any loss suffered by the Company or the
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 the terms, the Advisory Agreement 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 Fund or by the Trustees of the Fund. The Advisory Agreement is
terminable with respect to the 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 the Fund on 60 days'
written notice to the Company. The Advisory Agreement terminates automatically
in the event of an assignment.
Under the Advisory Agreement, the Fund pays the following expenses: (1) the fees
and expenses of the Company's disinterested Trustees; (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 Fund's portfolio securities and of
pricing the Fund's 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 the 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 the 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 shared by the Funds in the
Company will be allocated among the Funds in the Company 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 or Class, such as certain
registration fees, brokerage commissions and other portfolio expenses, will be
borne directly by that Fund.
The Administrator
First Data Investor Services Group, 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 Investment Company
Services Agreement (the "Services Agreement"). The administrator receives a
minimum fee of $40,000.
Under the Services Agreement, the Administrator: (1) coordinates with the
Custodian and Transfer Agent and monitors the services they provide to the Fund;
(2) coordinates with and monitors any other third parties furnishing services to
the Fund; (3) provides the Fund 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 Fund 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 Fund
required by applicable law; (6) prepares and files and arranges for the
distribution of proxy materials and periodic reports to shareholders of the Fund
as required by applicable law; (7) prepares and 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 Fund's expenses and instructs the Custodian to issue
checks in payment thereof; and (9) takes such other action with respect to the
Company or the Fund as may be necessary in the opinion of the Administrator to
perform its duties under the agreement.
As compensation for services performed under the Services 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.
The Underwriter
FDDI acts as an underwriter of the Fund's shares and assists in the continuous
offering of shares pursuant to an underwriting agreement (the "Underwriting
Agreement") approved by the Company's Trustees.
In this regard, FDDI 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 FDDI as states in which it wishes to offer
its shares for sale, in order that state registrations may be maintained for the
Fund.
FDDI is a broker-dealer registered with the SEC and a member in good standing of
the National Association of Securities Dealers, Inc.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisor is responsible for decisions to buy and sell securities for the Fund
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 Fund invests 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 Fund. The primary consideration in
all portfolio transactions will be prompt execution of orders in an efficient
manner at the most favorable price. In selecting and monitoring broker-dealers
and negotiating commissions, the Advisor may consider a number of factors,
including, for example, net price, reputation, financial strength and stability,
efficiency of execution and error resolution, block trading and block
positioning capabilities, willingness to execute related or unrelated difficult
transactions in the future, order of call, offering to the Advisor on-line
access to computerized data regarding the Fund's 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 Advisor 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
Fund and other accounts whenever concurrent decisions are made to purchase or
sell securities by the Fund and other accounts. In making such allocations
between the Fund 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 Fund 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.
PORTFOLIO TURNOVER
The portfolio turnover rate for the Fund 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 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 Fund's determination of net asset value is
contained in the Fund's Prospectus. Generally, the net asset value of the Fund
will be determined at least once per week; provided, however, that the net asset
value shall be computed as of the close of regular trading on each business day
the New York Stock Exchange is open for business and the Fund shall have
received one or more orders for the purchase or sale of shares of the Fund. The
Fund does 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, Martin Luther King 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 Japanese securities exchanges and over-the-counter
markets is normally completed well before the close of the business day in New
York. In addition, Japanese 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 net
asset value is not calculated.
The calculation of the Fund's net asset values may not take place
contemporaneously with the determination of the prices of portfolio securities
held by the Fund. 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 Fund's 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 Fund's 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 the Fund which are traded on the Japanese exchanges
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 bids and asked quotations,
the most recent bid quotation is used. All other securities are valued at fair
value as determined in good faith by the Board of Trustees.]
TAXES
In General
The Fund intends to elect and to qualify as soon as possible, 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) distribute
at least 90% of its dividend, interest and certain other taxable income each
year; and (iii) 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
U.S. Government or other regulated investment companies) of any one issuer or of
two or more issuers which the fund controls and which are engaged in the same,
similar or related trades and businesses.
To the extent the Fund qualifies for treatment as a regulated investment
company, it 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 will be imposed on the excess, if any, of the Fund's "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 Fund
intends 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 Fund during October, November or
December to shareholders of record during such months and paid by January 3 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 Fund whether received in cash or additional shares of the Fund.
Distributions of net investment income and net capital gains, if any, will be
taxable to shareholders without regard to how long a shareholder has held shares
of the Fund. Dividends paid by the Fund may qualify in part for the dividends
received deduction for corporations.
The Fund 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 corporate
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 Fund intends 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 the Fund's total assets are invested in
securities of foreign issuers.
Options, Futures and Foreign Currency Transactions
When the Fund writes a call, or purchases a put option, an amount equal to the
premium received or paid by them is included in the Fund's accounts as an asset
and as an equivalent liability. In writing a call, the amount of the liability
is subsequently "marked-to-market" to reflect the current market value of the
option written. The current market value of a written option is the last sale
price on the principal exchange on which such option is traded or, in the
absence of a sale, the mean between the last bid and asked prices. If an option
which a Fund has written expires on its stipulated expiration date, the Fund
recognizes a short-term capital gain. If the Fund enters into a closing purchase
transaction with respect to an option which the Fund has written, the Fund
realizes a short-term gain (or loss if the cost of the closing transaction
exceeds the premium received when the option was sold) without regard to any
unrealized gain or loss on the underlying security, and the liability related to
such option is extinguished. If a call option which the Fund has written is
exercised, the Fund realizes a capital gain or loss from the sale of the
underlying security and the proceeds from such sale are increased by the premium
originally received.
The premium paid by the Fund for the purchase of a put option is recorded in the
Fund's assets and liabilities as an investment and subsequently adjusted daily
to the current market value of the option. For example, if the current market
value of the option exceeds the premium paid, the excess would be unrealized
appreciation and, conversely, if the premium exceeds the current market value,
such excess would be unrealized depreciation. The current market value of a
purchased option is the last sale price on the principal exchange on which such
option is traded or, in the absence of a sale, the mean between the last bid and
asked prices. If an option which the Fund has purchased expires on the
stipulated expiration date, the Fund realizes a short-term or long-term capital
loss for Federal income tax purposes in the amount of the cost of the option. If
the Fund exercises a put option, it realizes a capital gain or loss (long-term
or short-term, depending on the holding period of the underlying security) from
the sale which will be decreased by the premium originally paid.
Accounting for options on certain stock indices will be in accordance with
generally accepted accounting principles. The amount of any realized gain or
loss on closing out such a position will result in a realized gain or loss for
tax purposes. Such options held by the 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 Fund. 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 Fund, 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 the Fund.
From time to time, the yield and total return of the Fund may be quoted in
advertisements, shareholder reports or other communications to shareholders.
Total Return Calculation
The Fund computes its average annual total return by determining the average
annual compounded rate of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment.
This is done by dividing the ending redeemable value of a hypothetical $1,000
initial payment by $1,000 and raising the quotient to a power equal to one
divided by the number of years (or fractional portion thereof) covered by the
computation and subtracting one from the result. This calculation can be
expressed as follows:
ERV = P(1 + T)(n)
Where: ERV = ending redeemable value at the end of the period covered by
the computation of a hypothetical $1,000 payment made at
the beginning of the period.
...........................P = hypothetical initial payment of
$1,000.
...........................n = period covered by the computation,
expressed in terms of years.
...........................T = average annual total return.
The Fund computes its aggregate total return by determining the aggregate
compounded rate of return during specified period that likewise equate the
initial amount invested to the ending redeemable value of such investment. The
formula for calculating aggregate total return is as follows:
Aggregate Total Return = [ ERV - 1 ]
P
Where: ERV = ending redeemable value at the end of the period covered
by the computation of a hypothetical $1,000 payment made at
the beginning of the period.
P = hypothetical initial payment of $1,000.
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 Fund should not be
used to compare an investment in the Fund's 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 the 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 Fund's net investment income per share earned during the period is
based on the average daily number of shares outstanding during the period
entitled to receive dividends and includes dividends and interest earned during
the period minus expenses accrued for the period, net of reimbursements. This
calculation can be expressed as follows:
6
YIELD = 2 [ (a - b + 1) - 1 ]
-----
cd
Where: a = dividends and interest earned during the period.
.........................b = expenses accrued for the period
(net of reimbursements).
c = the average daily number of shares outstanding
during the period that were entitled to receive
dividends.
.........................d = maximum offering price per share
on the last day of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by the
Fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the Fund. Except as noted below, interest
earned on any debt obligations held by a Fund is calculated by computing the
yield to maturity of each obligation held by the Fund based on the market value
of the obligation (including actual accrued interest) at the close of business
on the last 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 the 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 the 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 Fund's
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 Fund will be compared to Lipper's appropriate fund
category, that is, by fund objective and portfolio holdings. The Fund's
performance may also be compared to the average performance of its Lipper
category.
The Fund's 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 Fund may compare its performance to a wide variety of indices including the
Tokyo Stock Price Index (TOPIX), a market capitalization weighted index of over
1100 stocks traded in the Japanese market.
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 Fund, 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 Fund's 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 Fund's investment performance. Historical information
regarding the value of the dollar versus foreign currencies may be used from
time to time in advertisements concerning the Fund. Marketing materials may cite
country and economic statistics and historical stock market performance for any
of the countries in which the Fund invests. Sources for such statistics may
include official publications of various foreign governments, exchanges, or
investment research firms.
OTHER INFORMATION
Statements contained in the Prospectus 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
form 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 the Fund (ii) holds and transfers portfolio securities
on account of the Fund, (iii) accepts receipts and makes disbursements of money
on behalf of the Fund, (iv) collects and receives all income and other payments
and distributions on account of the 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
has been selected as the independent auditor for the Company. Ernst & Young LLP
provide audit services and assistance and consultation with respect to
regulatory filings with the SEC.
The books of the 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 Fund's
investment operations and annual financial statements audited by independent
certified public accountants. Inquiries regarding the Fund may be directed to
the Advisor at (800) 789-ASIA.
