0000935069-01-500611.txt : 20011106 0000935069-01-500611.hdr.sgml : 20011106 ACCESSION NUMBER: 0000935069-01-500611 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010831 FILED AS OF DATE: 20011101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MATTHEWS INTERNATIONAL FUNDS CENTRAL INDEX KEY: 0000923184 STANDARD INDUSTRIAL CLASSIFICATION: [] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-08510 FILM NUMBER: 1772537 BUSINESS ADDRESS: STREET 1: C/O FIRST DATA INVESTOR SERVICE GROUP IN STREET 2: 3200 HORIZON DRIVE BOX 61503 CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 MAIL ADDRESS: STREET 1: FIRST DATA INVESTOR SERIVES GROUP INC STREET 2: 3200 HORIZON DRIVE CITY: KING OF PRUSSIA STATE: PA ZIP: 19406 N-30D 1 matthewsedgar.txt MATTHEWS ANNUAL REPORT, 08/01 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- BOARD OF TRUSTEES Richard K. Lyons, Chairman Robert K. Connolly David FitzWilliam-Lay Norman W. Berryessa John H. Dracott, Emeritus OFFICERS G. Paul Matthews Mark W. Headley James E. Walter Downey L. Hebble INVESTMENT ADVISOR Matthews International Capital Management, LLC 456 Montgomery Street, Suite 1200 San Francisco, CA 94104 800.789.ASIA [2742] UNDERWRITER PFPC Distributors, Inc. 3200 Horizon Drive King of Prussia, PA 19406 SHAREHOLDER SERVICES PFPC Inc. 211 South Gulph Road King of Prussia, PA 19406 800.892.0382 CUSTODIAN The Bank of New York 90 Washington Street New York, NY 10286 LEGAL COUNSEL Paul, Hastings, Janofsky & Walter LLP 345 California Street San Francisco, CA 94104 [DRAGON GRAPHIC OMITTED] FOR ADDITIONAL INFORMATION ABOUT MATTHEWS ASIAN FUNDS: -------------------------------------- WWW.MATTHEWSFUNDS.COM -------------------------------------- 800.789.ASIA [2742] -------------------------------------- 456 MONTGOMERY STREET, SUITE 1200 SAN FRANCISCO, CA 94104 Distributed by PFPC Distributors, Inc. ANNUAL REPORT AUGUST 31, 2001 [DRAGON GRAPHIC OMITTED] PACIFIC TIGER FUND ---------------------------- ASIAN GROWTH AND INCOME FUND ---------------------------- KOREA FUND ---------------------------- CHINA FUND ---------------------------- JAPAN FUND ---------------------------- ASIAN TECHNOLOGY FUND ---------------------------- [ASIAN LETTERS OMITTED] WWW.MATTHEWSFUNDS.COM WWW.MATTHEWSFUNDS.COM --------------------- MATTHEWS ASIAN FUNDS 800.789.ASIA [2742] -------------------------------------------------------------------------------- A MESSAGE TO SHAREHOLDERS Dear Fellow Shareholder, Since the end of our fiscal year ended August 31, 2001, the free world has been confronted with perhaps the greatest challenge it has faced since the end of World War II. The tragic events of September 11, 2001, are so recent that few forecasters can say with any great certainty what the long-term global economic impact will be from them. In the immediate aftermath of the crisis, the outpouring of support for the American people from the Asian countries that we invest in has encouraged us to believe that the world is more united in its defense of freedom than it has ever been. Chinese factories are working overtime to sew American flags, and we are confident that the free world will prevail. While it is a daunting task, we believe that it is imperative that all of us return to our normal lives and routines. In the spirit of this effort, we present our Message to Shareholders. In the many years that we have been following the developing economies of Asia, the pace of change has been relentless, and this last year has been no exception. Following their rapid recoveries from the economic crisis of 1997 and 1998, economic growth in Asia slowed again last year, affected by continued weakness in Japan and the anticipated downturn in the United States. In spite of slower growth overall, large segments of Asia's young and highly motivated population have continued to enjoy dramatic improvements in their living standards, most notably in China. While changes that have transformed China in the last 20 years have been incremental, the last 12 months have seen this vast country progress to the point that it is rapidly becoming the most important economy in the region, in some respects surpassing Japan in regional significance. In the post-crisis period, China's economy has proven to be one of the most resilient in Asia, and it is currently the fastest growing major economy in the world. The emergence of China as a major economic power has had an important impact on all of its neighbors, not all of them positive. In general, Asia's societies have continued to move closer to the open market, and with that has come increased freedom. In this respect, China and Taiwan's coming accession into the World Trade Organization marks another important step in Asia's transition from the closed economic model that prevailed in the immediate post-World War II period to the open model that now dominates the region. The performance of Asia's financial markets and our family of Asian funds in the last 12 months has been mixed. On one hand, Japan has continued to fall to new lows as its economy has again stalled, while on the other, China's financial markets have continued continues.... [PHOTO OF G. PAUL MATTHEWS AND MARK W. HEADLEY OMITTED] G. PAUL MATTHEWS, Chairman and Chief Investment Officer (left), and MARK W. HEADLEY, President and Portfolio Manager CONTENTS ------------------------------------- PORTFOLIO MANAGERS' COMMENTARIES AND SCHEDULES OF INVESTMENTS ------------------------------------- Pacific Tiger Fund 1 ------------------------------------- Asian Growth and Income Fund 4 ------------------------------------- Korea Fund 7 ------------------------------------- China Fund 10 ------------------------------------- Japan Fund 13 ------------------------------------- Asian Technology Fund 15 ------------------------------------- FINANCIAL STATEMENTS ------------------------------------- Assets and Liabilities 17 ------------------------------------- Operations 18 ------------------------------------- Changes in Net Assets 19 ------------------------------------- Financial Highlights 22 ------------------------------------- Notes 27 ------------------------------------- Report of Independent Auditors 32 ------------------------------------- MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- [DRAGON GRAPHIC OMITTED] WE ARE PARTICULARLY PLEASED THAT THE MATTHEWS CHINA FUND BECAME THE FIRST OF OUR ASIAN FUNDS TO EARN AN OVERALL MORNINGSTAR RATING OF 5 STARS (OUT OF 1,308 FUNDS IN THE INTERNATIONAL EQUITY FUNDS CATEGORY AS OF AUGUST 31, 2001). As of 8/31/01, the Matthews China Fund had a three-year Morningstar Rating of 5 Stars out of 1,308 funds in the International Equity Funds category. Morningstar, Inc. rates over 6,700 mutual funds by assigning each fund's historical total returns and risk relative to other mutual funds in its class-e.g. Domestic Equity, International Equity, Taxable Bond or Municipal Bond. Morningstar proprietary ratings reflect historical risk-adjusted performance as of 8/31/01. The ratings are subject to change every month. Morningstar ratings are calculated from a fund's three-, five-, and 10-year average annual returns (if applicable) in excess of 90-day Treasury bill returns with appropriate fee adjustments and a risk factor that reflects fund performance below 90-day T-bill returns. The top 10% of funds in each broad-asset class receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. The Overall Morningstar Rating for a fund is derived from a weighted average of the performance figures associated with its three-, five- and 10-year (if applicable) Morningstar Rating metrics. Morningstar does not rate funds or share classes that have less than three years of performance. A fund's rating may change at any time based on new data. Ratings are historical and do not represent future performance. --------------------------------- to develop at a rapid pace. We are very proud of our funds' performance relative to other Asian funds that are available to U.S. investors, but we are also aware that in absolute terms, few investors have earned significant returns from their Asian investments in the last 12 months. We are particularly pleased that the Matthews China Fund became the first of our Asian funds to earn an Overall Morningstar Rating of 5 stars (out of 1,308 funds in the International Equity Funds category as of August 31, 2001). During the last 12 months, Asia has faced a number of challenges, including the dramatic events surrounding the downing and capture of the U.S. "spy plane" in Southern China earlier this year. The successful resolution of that crisis, and the subsequent award of the 2008 Summer Olympics to China and its likely accession into the World Trade Organization next year, demonstrate how far China has come in recent years. In South Korea, the government has pressed ahead with difficult reforms, reducing the number of banks, forcing the closure of many financial institutions, encouraging investment from abroad, and selling large portions of domestic companies to overseas buyers. South Asia has suffered from the growing competition from newly competitive Chinese behemoths, and our investments in Thailand, Indonesia and the Philippines remain a small percentage of our portfolios. Japan's new leadership provides some optimism that the 18-year bear market in Japanese equities is nearing an end. We are confident that in the coming years, the region as a whole will enjoy growth rates that will match their historic performance, and we are particularly optimistic for the economy of China. In closing, for seven fascinating years we have been managing what we believe are the finest Asian funds available to U.S. investors. We thought it would be appropriate to take this anniversary to rename our fund family to MATTHEWS ASIAN FUNDS. While a small change, we want investors to know that our lives are dedicated to providing superior asset management in the most dynamic region of the world--Asia. All of us at Matthews Asian Funds are passionate in our conviction that Asia will remain at the forefront of world economic growth for many years and that economic freedom and openness will remain the dominant trends in Asia. Thank you for your continued support. /S/ G. PAUL MATTHEWS /S/ MARK W. HEADLEY G. Paul Matthews Mark W. Headley Chairman and Chief Investment Officer President and Portfolio Manager WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- LIPPER RANKINGS: PACIFIC EX-JAPAN FUND CATEGORY FOR THE PERIODS ENDED AUGUST 31, 2001 [LIPPER LOGO OMITTED] LIPPER A REUTERS Company
MATTHEWS ASIAN FUNDS RANKING/ TOTAL NUMBER OF FUNDS IN CATEGORY One Three Five Since Inception year years years inception date ------------------------------------------------------------------------------------------------------------------ Matthews Asian Growth and Income Fund (MACSX) 2 of 72 10 of 63 1 of 53 1 of 25 9/12/94 ------------------------------------------------------------------------------------------------------------------ Matthews Pacific Tiger Fund (MAPTX) 12 of 72 3 of 63 9 of 53 3 of 25 9/12/94 ------------------------------------------------------------------------------------------------------------------ Matthews Korea Fund (MAKOX) 4 of 72 2 of 63 23 of 53 27 of 29 1/3/95 ------------------------------------------------------------------------------------------------------------------
MATTHEWS ASIAN FUNDS QUARTILE RANKINGS One Three Five Since year years years inception ------------------------------------------------------------------------------------------------------------ Matthews Asian Growth and Income Fund (MACSX) 1st 1st 1st 1st ------------------------------------------------------------------------------------------------------------ Matthews Pacific Tiger Fund (MAPTX) 1st 1st 1st 1st ------------------------------------------------------------------------------------------------------------ Matthews Korea Fund (MAKOX) 1st 1st 2nd 4th ------------------------------------------------------------------------------------------------------------
The three remaining Matthews Asian Funds belong in the following Lipper fund categories: Matthews China Fund: China Region fund category Matthews Japan Fund: Japanese fund category Matthews Asian Technology Fund: Science & Technology fund category PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE OF MUTUAL FUNDS WILL VARY WITH MARKET CONDITIONS, SO THAT SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST. INVESTING IN FOREIGN SECURITIES MAY INVOLVE CERTAIN ADDITIONAL RISKS, INCLUDING EXCHANGE RATE FLUCTUATIONS, REDUCED LIQUIDITY, GREATER VOLATILITY AND LESS REGULATION. As of 6/30/01, the MATTHEWS PACIFIC TIGER FUND had a one-year return of -21.79%, a three-year average annual total return of 25.72%, a five-year average annual total return of -1.42%, and a since inception (9/12/94) average annual total return of 0.49%; the MATTHEWS ASIAN GROWTH AND INCOME FUND had a one-year return of 7.18%, a three-year average annual total return of 20.76%, a five-year average annual total return of 7.04%, and a since inception (9/12/94) average annual total return of 6.84%; and the MATTHEWS KOREA FUND had a one-year return of -19.74%, a three-year average annual total return of 37.51%, a five-year average annual total return of -7.19%, and a since inception (1/3/95) average annual total return of -9.45%. Lipper and the Lipper corporate marks are proprietary trademarks of Lipper, a Reuters company. Lipper Analytical Services, Inc. rankings and fund performance are based on total return, including reinvestment of dividends and capital gains for the stated periods and do not reflect sales charges. (COPYRIGHT) 2001 Reuters. All rights reserved. Any copying, republication or redistribution of Lipper content is expressly prohibited without the prior written consent of Lipper. ----------------------------------------- HIGHLIGHTS ----------------------------------------- The Matthews Asian Growth and Income Fund is the top-performing fund in the Pacific ex-Japan fund category for five years and since inception as of August 31, 2001. ----------------------------------------- The Matthews Pacific Tiger Fund and Matthews Asian Growth and Income Fund have been first-quartile performers in the Pacific ex-Japan fund category for every Lipper time period since their inception as of August 31, 2001. ----------------------------------------- WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- PORTFOLIO MANAGERS' COMMENTS -------------------------------------------------------------------------------- MATTHEWS PACIFIC TIGER FUND Co-Portfolio Managers: G. Paul Matthews and Mark W. Headley The Matthews Pacific Tiger Fund suffered a loss of -27.46% for the fiscal year ended August 31, 2001. While such losses were extreme, they compared favorably to both of the Fund's benchmarks, the MSCI All Country Far East ex-Japan Index, down -31.94% and MSCI All Country Far East Free ex-Japan Index, down -31.02%, as well as its peer group of diversified Asia ex-Japan funds. The Fund remained fully invested and well diversified throughout the time period. Portfolio turnover was an acceptable 63.59%, driven largely by investor subscriptions and redemptions. Asia ex-Japan had only partially recovered from the trials of the 1997-98 financial crisis when the recent global slowdown began. Extensive structural reform has occurred in most countries, however many banking systems continue to grapple with bad debt. China has remained the most impressive reform story and has weathered both the past crisis and the current challenges admirably. China's stable and growing economy has shrugged off deflation and achieved a level of consumer confidence the rest of the region lacks. Korea has also shown significant progress in corporate restructuring. Singapore and Hong Kong remain the leading headquarters for many outstanding regional companies. While the global outlook remains cloudy, the reform and restructuring engendered by the recent past will serve corporate Asia well going forward. While many remain critical of China, we believe an increasingly China-centric Asia will be more stable and well rounded. The Matthews Pacific Tiger Fund focuses on a selection of growth companies that can be accumulated at reasonable valuations. One of our bedrock principles is that the fund remains fully invested at all times. While we constantly examine the portfolio positions, we do not believe market timing with cash positions serves the interests of long-term investors. The Fund's exceptional long-term performance relative to similar funds is a testament to the principle of being fully invested. This strategy may increase the day-to-day volatility of the Fund, but we believe volatility should be a secondary consideration for long-term investors. The Matthews Asian Growth and Income Fund was launched for those who wish to avoid volatility. We search across the region for exceptional companies that range from small domestic groups to some of the world's largest companies. We strive to balance the portfolio between companies that focus on domestic economies and those that compete globally. We invest in niche providers of specialty services as well as large highly diversified conglomerates. Our focus is on the long-term creation of shareholder value by motivated and professional corporate management. Through extensive on-the-ground research, we study company strategies and industry developments. Hundreds of meetings each year with senior corporate executives from across Asia form the backbone of our analytical process. We analyze financial ratios and compare companies within industries across the region. The primary focus of the portfolio continues to be exposure to the financial, consumer/retail, telecommunications and technology sectors. Today, Asia is embracing more open markets, better regulated financial systems and drastically improved corporate governance. While there are major exceptions in each of these areas across the region, the trend is unmistakable. As portfolio managers, we strive to provide direct participation in the best corporate Asia ex-Japan has to offer. The long term potential is starting to become apparent as the economies slowly begin to work in closer unison. We believe the integration of Asian economies into a highly efficient whole is just beginning to take shape. We believe such trends make innovative, professionally managed companies exceptional long-term opportunities as the region gains a larger share of the global economic market. FUND PERFORMANCE -------------------------------------------------------------------------------- ANNUALIZED PERFORMANCE INFORMATION (AS OF AUGUST 31, 2001) -------------------------------------------------------------------------------- MATTHEWS PACIFIC TIGER FUND One Year .......................................... (27.46%) Three Years ....................................... 31.10% Five Years ........................................ (2.89%) Since inception (9/12/94) ......................... (0.95%) -------------------------------------------------------------------------------- MSCI ALL COUNTRY FAR EAST FREE EX-JAPAN INDEX(1) One Year .......................................... (31.02%) Three Years ....................................... 12.56% Five Years ........................................ (12.52%) Since 9/12/94 ..................................... (8.98%) -------------------------------------------------------------------------------- MSCI ALL COUNTRY FAR EAST EX-JAPAN INDEX(2) One Year .......................................... (31.94%) Three Years ....................................... 13.77% Five Years ........................................ (10.34%) Since 9/12/94 ..................................... (7.99%) -------------------------------------------------------------------------------- [GRAPHIC OMITTED] GROWTH OF A $10,000 INVESTMENT [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
Matthews Pacific MSCI AC Far East MSCI AC Far East Lipper Pacific ex-Japan Tiger Fund Free ex-Japan Index(1) ex-Japan Index(2) Funds Average(3) 9/12/94 10,000 10,000 10,000 10,000 11/30/94 9,720 9,074.96 9,329.22 9,104.79 2/28/95 9,241.42 8,700.08 8,878.63 8,392 5/31/95 9,722.53 9,714.12 9,447.07 9,174.17 8/31/95 9,792.7 9,256.69 8,873.17 8,918.42 11/30/95 9,431.86 9,176.84 8,783.99 8,546.68 2/29/96 10,965.4 10,480.3 9,563.05 9,694.15 5/31/96 11,185.9 10,754.6 10,185 9,845.31 8/31/96 10,835.1 10,131.8 9,657.71 9,293.71 11/30/96 11,907.6 10,774.9 10,172.9 9,644.63 2/28/97 12,438.8 10,902.3 10,325.4 9,856.72 5/31/97 12,920 10,553.4 10,117.1 9,885.97 8/31/97 11,349.4 8,883.53 9,015.88 8,987.76 11/30/97 8,075.15 6,241.93 6,233.33 6,677.74 2/28/98 7,693.49 6,713.26 6,768.71 6,748.45 5/31/98 6,046.32 4,965.1 5,087.9 5,606.47 8/31/98 4,150.87 3,637.16 3,797.75 4,425.53 11/30/98 6,455.77 5,596.41 5,614.14 5,825.08 2/28/99 6,516.97 5,372 5,502 5,784.9 5/31/99 9,127.83 7,051.83 7,205 7,264.02 8/31/99 10,637.7 8,077 8,421 8,508.58 11/30/99 11,915 8,573 8,778 9,440.3 2/29/00 13,129.1 8,506 9,280 10,729.8 5/31/00 11,958.2 7,541 8,368 8,837.03 8/31/00 12,901.3 7,522 8,221 8,980.13 11/30/00 9,892.71 5,828 6,301 7,017.45 2/28/01 10,814.1 6,276 6,794 7,336.89 5/31/01 10,636.6 5,599 6,050 6,636.18 8/31/01 9,358.83 5,189 5,595 6,007.64
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. BEFORE TAXES ON DISTRIBUTIONS OR REDEMPTION OF FUND SHARES. 1 The MSCI All Country Far East Free ex-Japan Index is an unmanaged capitalization-weighted index of stock markets of Hong Kong, Taiwan, Singapore, Korea, Indonesia, Malaysia, Philippines, Thailand and China that excludes securities not available to foreign investors. Taiwan is only represented at 50% of its total market cap. 2 The MSCI All Country Far East ex-Japan Index is an unmanaged capitalization-weighted index of stock markets of Hong Kong, Taiwan, Malaysia, Singapore, Korea, Indonesia, Philippines, Thailand and China. 3 The Lipper Pacific ex-Japan Funds Average consisted of 23 funds as of 8/31/94. 1 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS PACIFIC TIGER FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- SHARES VALUE ---------- ---------- EQUITIES - 96.63%*** CHINA/HONG KONG - 44.55% Asia Satellite Telecommunications Holdings, Ltd. 1,287,600 $1,873,724 AsiaInfo Holdings, Inc.** 91,200 1,299,600 China Hong Kong Photo Products Holdings, Ltd. 16,886,000 1,363,943 China Mobile HK, Ltd.** 298,217 931,022 China Mobile HK, Ltd. ADR** 165,850 2,602,186 China.com Corp. A Shares** 353,900 810,431 Dah Sing Financial Group 351,600 1,735,555 Giordano International Ltd. 7,223,000 3,495,935 HSBC Holdings Plc. ADR 19,400 1,153,136 Huaneng Power International, Inc. ADR 136,800 2,990,448 i-CABLE Communications** 5,019,000 2,509,635 Legend Holdings, Ltd. 8,350,000 3,961,111 Li & Fung Ltd. 1,186,000 1,512,992 New World China Land, Ltd.** 5,009,600 1,814,472 Quality Healthcare Asia, Ltd.** 12,808,500 418,762 Shangri-La Asia, Ltd. 3,949,400 3,190,072 Vitasoy International Holdings, Ltd. 17,128,750 2,415,723 ------------ TOTAL CHINA/HONG KONG 34,078,747 ------------ PHILIPPINES - 1.01% Benpres Holdings Corp.** 24,639,000 773,015 ------------ SINGAPORE - 9.67% CSE Systems & Engineering, Ltd.** 3,941,000 746,804 Datacraft Asia, Ltd. 305,000 1,091,900 DBS Group Holdings Ltd. 171,000 1,345,251 Singapore Telecommunications Ltd. 1,581,000 1,833,875 Venture Manufacturing, Ltd. 356,800 2,376,672 ------------ TOTAL SINGAPORE 7,394,502 ------------ SOUTH KOREA - 29.51% Hana Bank 652,919 4,957,755 Hite Brewery Co., Ltd. 74,627 2,678,486 Internet Auction Co., Ltd.** 49,600 912,439 S1 Corp. 102,450 1,090,699 Samsung Electronics 23,418 3,483,032 Samsung Fire & Marine Insurance 81,741 2,405,924 Samsung Securities Co., Ltd.** 94,244 2,375,547 SK Telecom Co., Ltd. 8,395 1,478,622 SK Telecom Co., Ltd., ADR 31,400 602,252 SHARES VALUE ---------- ---------- Swire Pacific Ltd. A Shares 533,500 $2,592,402 ------------ TOTAL SOUTH KOREA 22,577,158 ------------ TAIWAN - 7.22% Bank Sinopac** 2,754,800 1,192,749 Taiwan Semiconductor Manufacturing Co., Ltd.** 1,334,200 2,472,970 VIA Technologies, Inc.** 382,120 1,859,204 ------------ TOTAL TAIWAN 5,524,923 ------------ THAILAND - 4.67% Advanced Info Service Public Co., Ltd. 203,100 2,395,727 Shinawatra Satellite Public Co., Ltd.** 1,565,500 1,180,780 ------------ TOTAL THAILAND 3,576,507 ------------ TOTAL EQUITIES (Cost $83,415,138) 73,924,852 ------------ FACE AMOUNT ------ INTERNATIONAL DOLLAR BONDS - 2.34%*** SINGAPORE - 2.34% Finlayson Global Corp. (DBS Holdings)** 0.000%, 02/19/04 $1,320,000 1,791,900 ------------ (Cost $2,273,625) TOTAL INVESTMENTS - 98.97%*** (Cost $85,688,763*) 75,716,752 CASH AND OTHER ASSETS, LESS LIABILITIES - 1.03% 786,357 ----------- NET ASSETS - 100.00% $76,503,109 =========== * Cost for Federal income tax purposes is $86,863,446 and net unrealized depreciation consists of: Gross unrealized appreciation $ 5,396,557 Gross unrealized depreciation (16,543,251) ------------ Net unrealized depreciation $(11,146,694) ============ ** Non-income producing security *** As a percentage of net assets as of August 31, 2001 ADR American Depositary Receipt See accompanying notes to financial statements. 2 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- MATTHEWS PACIFIC TIGER FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- MARKET SECTOR DIVERSIFICATION AS A PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES CONSUMER DISCRETIONARY.................... 19.61% Distributors............................ 1.80 Hotels Restaurants & Leisure............ 4.19 Internet & Catalog Retail............... 1.20 Media................................... 5.79 Specialty Retail........................ 4.62 Textiles & Apparel...................... 2.00 CONSUMER STAPLES.......................... 6.73 Beverages............................... 3.54 Food Products........................... 3.19 FINANCIALS................................ 28.16 Banks................................... 14.56 Diversified Financials.................. 8.08 Insurance............................... 3.18 Real Estate............................. 2.35 HEALTH CARE............................... 0.55 Health Care Providers & Services........ 0.55 INDUSTRIALS............................... 2.46 Commercial Services & Supplies.......... 1.44 Industrial Conglomerates................ 1.02 INFORMATION TECHNOLOGY.................... 23.95 Communications Equipment................ 1.44 Computers & Peripherals................. 5.24 Electronic Equipment & Instruments...... 3.14 Internet Software & Services............ 1.05 IT Consulting & Services................ 2.75 Semiconductor Equipment & Products...... 10.32 TELECOMMUNICATION SERVICES................ 14.56 Diversified Telecommunication Services.. 3.99 Wireless Telecommunication Services..... 10.58 UTILITIES................................. 3.98 Electric Utilities...................... 3.98 ----- TOTAL INVESTMENTS ........................ 100.00% ====== 3 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- PORTFOLIO MANAGER'S COMMENTS -------------------------------------------------------------------------------- MATTHEWS ASIAN GROWTH AND INCOME FUND Portfolio Manager: G. Paul Matthews The Matthews Asian Growth and Income Fund produced a positive return in the twelve months ended August 31, 2001, gaining 1.15% during the period. The fund easily outperformed its indices. Over the same period, the MSCI All Country Far East ex-Japan Index was down -31.94% and MSCI All Country Far East Free ex-Japan Index was down -31.02%. The strong relative performance of this fund over the last year can be attributed to its focus on income producing investments, which consist of both high dividend paying equities and dollar-denominated convertible bonds. During the year, the fund shifted its emphasis somewhat, increasing its exposure to dividend paying stocks, and reducing its exposure to convertible bonds. Falling interest rates throughout Asia have reduced the yield available to convertible bond investors and the average yield on the fund's equity holdings is now significantly higher than the current yield on its bond portfolio. The economic environment has been mixed in the last twelve months, with most Asian countries seeing growth rates drop. The major exception to this trend has been the economy of China, which has continued to show substantial growth. Generally speaking, countries and sectors, which have been historically dependent on exports, have seen their growth impacted more than others. The strong relative performance of the fund can be explained in part by the fact that most listed companies in Asia that have historically paid above-average dividends have been focused in domestic industries. During the year, the fund received positive contributions from its holdings in consumer and financial stocks in both South Korea and China. South Korean consumers, having lived through far more difficult times in 1997 and 1998, have so far proved more resilient during the current downturn, as have their counterparts in China. The growth of credit cards throughout the region has undoubtedly contributed to the relative strength of consumer spending. Electric utilities, which in some parts of Asia are still enjoying strong absolute growth rates, also performed well in the period. During the year, the fund also saw two of its electric utility holdings merge, part of a broader trend of increased M & A activity that has emerged in recent years. Financial stocks in Asia also produced positive returns in the recent period as the post-crisis financial restructuring that is underway in many Asian markets continued in earnest. We fully expect additional mergers between banks in individual countries in Asia as well as between banks in different Asian countries. While the export sector will undoubtedly recover in the coming year, there are many well positioned domestic companies in stable growth industries which still offer dividend yields in excess of 4% per annum, and we consider their risk return characteristics to be attractive. By country, the fund has had its highest exposure in Hong Kong, China and South Korea. Hong Kong's overall economy remains weak, but several domestic industries and sectors continue to perform relatively well. The fund held positions in the food industry, hotels, publishing, and non-bank financial services, all of which are somewhat insulated from the volatility of international trade. FUND PERFORMANCE -------------------------------------------------------------------------------- ANNUALIZED PERFORMANCE INFORMATION (AS OF AUGUST 31, 2001) -------------------------------------------------------------------------------- MATTHEWS ASIAN GROWTH AND INCOME FUND One Year .................................................... 1.15% Three Years ................................................. 22.35% Five Years .................................................. 6.34% Since inception (9/12/94) ................................... 6.12% -------------------------------------------------------------------------------- MSCI ALL COUNTRY FAR EAST FREE EX-JAPAN INDEX(1) One Year .................................................... (31.02%) Three Years ................................................. 12.56% Five Years .................................................. (12.52%) Since 9/12/94 ............................................... (8.98%) -------------------------------------------------------------------------------- MSCI ALL COUNTRY FAR EAST EX-JAPAN INDEX(2) One Year .................................................... (31.94%) Three Years ................................................. 13.77% Five Years .................................................. (10.34%) Since 9/12/94 ............................................... (7.99%) GROWTH OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC]
Matthews Asian Growth MSCI AC Far East MSCI AC Far East Lipper Pacific and Income Fund ex-Japan Index Free(1) ex Japan Index(2) Ex-Japan Funds Average(3) 9/12/94 10,000 10,000 10,000 10,000 11/30/94 9,930 9,074.96 9,329.22 9,104.79 2/28/95 9,721.7 8,700.08 8,878.63 8,392 5/31/95 10,284.1 9,714.12 9,447.07 9,174.17 8/31/95 10,088.9 9,256.69 8,873.17 8,918.42 11/30/95 10,191 9,176.84 8,783.99 8,546.68 2/29/96 11,124.1 10,480.3 9,563.05 9,694.15 5/31/96 11,228.2 10,754.6 10,185 9,845.31 8/31/96 11,122.4 10,131.8 9,657.71 9,293.71 11/30/96 11,978 10,774.9 10,172.9 9,644.63 2/28/97 12,094.9 10,902.3 10,325.4 9,856.72 5/31/97 12,268.1 10,553.4 10,117.1 9,885.97 8/31/97 12,753.6 8,883.53 9,015.88 8,987.76 11/30/97 9,758.49 6,241.93 6,233.33 6,677.74 2/28/98 9,872.76 6,713.26 6,768.71 6,748.45 5/31/98 9,410.88 4,965.1 5,087.9 5,606.47 8/31/98 8,255.87 3,637.16 3,797.75 4,425.53 11/30/98 9,227.89 5,596.41 5,614.14 5,825.08 2/28/99 9,117.03 5,392.58 5,520.3 5,784.9 5/31/99 10,833.8 7,051.83 7,203.09 7,264.02 8/31/99 12,602.6 8,077 8,421 8,508.58 11/30/99 13,261.7 8,573 8,778 9,440.3 2/29/00 13,871.5 8,506 9,280 10,729.8 5/31/00 13,982.6 7,541 8,368 8,837.03 8/31/00 14,957.3 7,522 8,221 8,980.13 11/30/00 13,945.9 5,828 6,301 7,017.45 2/28/01 15,125.6 6,276 6,794 7,336.89 5/31/01 15,741 5,599 6,050 6,636.18 8/31/01 15,130 5,189 5,595 6,007.64
PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. BEFORE TAXES ON DISTRIBUTIONS OR REDEMPTION OF FUND SHARES. 1 The MSCI All Country Far East Free ex-Japan Index is an unmanaged capitalization-weighted index of stock markets of Hong Kong, Taiwan, Singapore, Korea, Indonesia, Malaysia, Philippines, Thailand and China that excludes securities not available to foreign investors. Taiwan is only represented at 50% of its total market cap. 2 The MSCI All Country Far East ex-Japan Index is an unmanaged capitalization-weighted index of stock markets of Hong Kong, Taiwan, Malaysia, Singapore, Korea, Indonesia, Philippines, Thailand and China. 3 The Lipper Pacific ex-Japan Funds Average consisted of 23 funds as of 8/31/94. 4 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- MATTHEWS ASIAN GROWTH AND INCOME FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- SHARES VALUE ------------ ----------- EQUITIES - 56.90%**** CHINA/HONG KONG - 40.88% Bank of East Asia, Ltd. 260,200 $ 595,490 Cafe De Coral Holdings, Ltd. 1,458,000 766,426 Cheung Kong Infrastructure Holdings, Ltd. 297,500 493,953 China Hong Kong Photo Products Holdings, Ltd. 4,420,003 357,020 CLP Holdings, Ltd. 137,600 557,486 CNOOC Ltd.** 46,000 45,413 CNOOC Ltd., ADR** 13,500 267,840 Dickson Concepts International, Ltd. 862,000 213,301 H & CB ADR 47,150 513,935 Hang Seng Bank, Ltd. 55,800 627,784 Hong Kong Electric Holdings, Ltd. 159,000 604,436 Hong Kong Land Holdings, Ltd. 426,000 694,380 Huaneng Power International, Inc. ADR** 20,000 437,200 Petrochina Co. Ltd. ADR 39,300 803,685 PT Indosat (Persero) ADR 37,200 374,976 Shangri-La Asia, Ltd. 883,600 713,715 South China Morning Post Holdings, Ltd. 884,000 510,027 Television Broadcasts, Ltd. 137,000 469,865 The Wharf Holdings, Ltd. 158,000 318,043 Vitasoy International Holdings, Ltd. 4,450,000 627,598 ---------- TOTAL CHINA/HONG KONG 9,992,573 ---------- SINGAPORE - 2.47% DBS Group Holdings Ltd. 76,800 604,183 ---------- SOUTH KOREA - 10.85% Hana Bank 90,850 689,844 Hyundai Department Store Co., Ltd. 42,850 511,534 Hyundai Motor Co., Ltd., Pfd. 159,850 1,001,052 Sindo Ricoh Co.** 14,970 449,994 ---------- TOTAL SOUTH KOREA 2,652,424 ---------- UNITED KINGDOM - 2.70% HSBC Holdings PLC ADR 11,100 659,784 ---------- TOTAL EQUITIES (Cost $13,595,795) 13,908,964 ---------- FACE AMOUNT ---------- INTERNATIONAL DOLLAR BONDS - 38.85%**** CHINA/HONG KONG - 24.82% Amoy Properties, Ltd. 5.500%, 12/29/49 $ 850,000 733,125 FACE AMOUNT VALUE ----------- ------ China Mobile HK Ltd., Cnv 2.250%, 11/03/05 $1,300,000 $1,179,750 First Pacific Capital, Ltd. 2.000%, 03/27/02 550,000 688,875 Huaneng Power International Public Co., Ltd. 1.750%, 05/21/04 500,000 631,250 Korea Deposit Insurance Cnv 2.250%, 10/11/05 920,000 1,010,850 New World Cap Finl, Cnv (New World Development) 3.000%, 06/09/04 600,000 660,000 New World Infrastructure Cnv 1.000%, 04/15/03 400,000 505,000 PCCW Capital Ltd., Cnv 3.500%, 12/05/05 700,000 661,500 ---------- TOTAL CHINA/HONG KONG 6,070,350 ---------- SINGAPORE - 5.20% Finlayson Global Corp. (DBS Holdings)*** 0.000%, 02/19/04 250,000 339,375 Finlayson Global Corp. (DBS Holdings) 0.000%, 02/19/04 100,000 135,750 Fullerton Global Corp. (Singapore Telecom) 0.000%, 04/02/03 700,000 796,250 ---------- TOTAL SINGAPORE 1,271,375 ---------- SOUTH KOREA - 3.84% Samsung Electronics Co. 2.000%, 07/30/02 200,000 228,000 Samsung Electronics Co. 0.000%, 12/31/07 500,000 711,250 ---------- TOTAL SOUTH KOREA 939,250 ---------- TAIWAN - 1.28% Mosel Vitelic, Inc.*** 1.000%, 02/02/05 200,000 202,000 Walsin Lihwa Corp. 3.250%, 06/16/04 120,000 109,800 ---------- TOTAL TAIWAN 311,800 ---------- THAILAND - 3.71% Bangkok Bank Public Co. 4.589%, 03/03/04 1,625,000 901,875 Robinson Department Store Public Co., Ltd. 4.250%, 04/07/04 50,000 5,000 ---------- TOTAL THAILAND 906,875 ---------- TOTAL INTERNATIONAL DOLLAR BONDS (Cost $9,398,216) 9,499,650 ---------- 5 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS ASIAN GROWTH AND INCOME FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- VALUE ---------- TOTAL INVESTMENTS - 95.75%**** (Cost $22,994,011*) $23,408,614 CASH AND OTHER ASSETS, LESS LIABILITIES - 4.25% 1,037,931 ----------- NET ASSETS - 100.00% $24,446,545 =========== * Cost for Federal income tax purposes is $23,001,980 and net unrealized appreciation consists of: Gross unrealized appreciation $ 1,769,309 Gross unrealized depreciation (1,362,675) ----------- Net unrealized appreciation $ 406,634 =========== ** Non-income producing security *** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration, normally to qualified institutional buyers **** As a percentage of net assets as of August 31, 2001 ADR American Depositary Receipt Pfd. Preferred Cnv. Convertible See accompanying notes to financial statements. MARKET SECTOR DIVERSIFICATION AS A PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES CONSUMER DISCRETIONARY.................... 19.27% Automobiles............................. 4.28 Distributors............................ 1.53 Hotels, Restaurants & Leisure........... 6.15 Media................................... 4.19 Multiline Retail........................ 2.21 Textile & Apparel....................... 0.91 CONSUMER STAPLES.......................... 2.69 Food Products........................... 2.69 ENERGY.................................... 4.75 Oil & Gas............................... 4.75 FINANCIALS................................ 34.95 Banks................................... 18.90 Diversified Financials.................. 7.11 Real Estate............................. 8.94 INDUSTRIALS............................... 4.74 Electrical Equipment.................... 0.47 Industrial Conglomerates................ 2.11 Transportation Infrastructure........... 2.16 INFORMATION TECHNOLOGY.................... 6.81 Office Electronics...................... 1.92 Semiconductor Equipment & Products...... 4.89 TELECOMMUNICATION SERVICES................ 12.90 Diversified Telecommunication Services . 7.85 Wireless Telecommunication Services..... 5.05 UTILITIES................................. 13.89 Electric Utilities...................... 13.89 ------ TOTAL INVESTMENTS ........................ 100.00% ====== 6 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- PORTFOLIO MANAGERS' COMMENTS -------------------------------------------------------------------------------- MATTHEWS KOREA FUND Co-Portfolio Managers: G. Paul Matthews and Mark W. Headley The Matthews Korea Fund fell -13.09% for the fiscal year ended August 31, 2001, while the KOSPI Index fell -31.41%. The KOSPI Index is heavily weighted to a small number of individual stocks such as Samsung Electronics, Korea Electric Power, SK Telecom and Korea Telecom, amongst others. The Matthews Korea Fund has invested in all four of the companies mentioned, but in much smaller percentages than the index itself, preferring to overweight less well known companies that we believed were better positioned in the current environment to achieve their growth objectives. Examples of companies in which the fund has invested that are not large components of the KOSPI Index would include: Pacific Corporation, Korea's largest manufacturer and distributor of cosmetics; Good Morning Securities, the former Ssangyong Securities that is now majority owned by international investors; Hite Brewery, one of Korea's largest brewers with a major stake owned by Carlsberg; and Internet Auction, a Korean version of eBay, which is now controlled by eBay. We believe that by including a broader range of Korean-listed companies, which are themselves established companies in a Korean context, we have been able to provide consistently higher returns than the broad index over time. While there will be periods when the largest capitalization issues lead the market, we believe that a more diversified portfolio of Korean companies is appropriate for those seeking to participate in Korea's long-term economic prospects. While there have been moments in the last twelve months when we have been frustrated by the apparent lack of progress in Korea's restructuring efforts, overall the Korean government has made more progress than almost any other in Asia. Examples of Korea's success include: the early repayment of all IMF loans, the successful closure of large numbers of financial sector companies, a commensurate reduction in numbers of employees, a substantial write-down of bad debt in the banking system, the sale of key stakes in both financial entities and industrial companies to highly credible international partners, the emergence of the domestic technology market and in particular the penetration rates of cellular and broadband, and finally, the progress towards a peaceful reconciliation with North Korea. Against these positive developments, Korea has remained highly dependent on semiconductors at a time when global demand has collapsed and the government has continued to support companies that perhaps would be better allowed to go out of business. We are very encouraged by Korea's overall acceptance of market principles in recent years, and the substantial improvements that have been made in both corporate governance and transparency. The acceptance and introduction of class action suits that will allow shareholders, however small, to exercise their rights, is the next step that Korea may have to undertake before investors will apply higher valuations to Korean equities. Generally, we believe that after a difficult final few months in calendar year 2001, the fiscal year to August 31, 2002 will show a marked improvement for the Korean economy overall. FUND PERFORMANCE -------------------------------------------------------------------------------- ANNUALIZED PERFORMANCE INFORMATION (AS OF AUGUST 31, 2001) -------------------------------------------------------------------------------- MATTHEWS KOREA FUND One Year ............................................ (13.09%) Three Years ......................................... 35.17% Five Years .......................................... (7.04%) Since inception (1/3/95) ............................ (9.71%) -------------------------------------------------------------------------------- KOSPI(1) (SOUTH KOREAN STOCK PRICE INDEX) One Year ............................................ (31.41%) Three Years ......................................... 23.85% Five Years .......................................... (14.24%) Since 1/3/95 ........................................ (15.27%) GROWTH OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC] Matthews South Korea Lipper Pacific ex-Japan Korea Fund Stock Price Index(1) Funds Average(2) 12/31/94 10,000 10,000 10,000 2/28/95 9,000 8,768.39 9,492.26 5/31/95 8,960 9,009.59 10,337.2 8/31/95 9,130 9,152.66 10,077.2 11/30/95 9,230 9,416.78 9,716.27 2/29/96 8,403.7 8,500.6 10,961.8 5/31/96 8,635.74 8,918.8 11,162 8/31/96 7,293.97 7,423.01 10,524.1 11/30/96 6,819.81 6,820.47 10,929.4 2/28/97 5,891.67 6,093.21 11,151.6 5/31/97 6,416.27 6,603.12 11,202.8 8/31/97 6,244.77 5,974.91 10,182.9 11/30/97 3,046.72 2,736.63 7,481.67 2/28/98 3,046.72 2,653.17 7,553.92 5/31/98 2,280 1,828.7 6,297.94 8/31/98 2,047.96 1,781.01 4,987.13 11/30/98 3,107.25 2,810.91 6,567.75 2/28/99 3,763 3,296.06 6,542.16 5/31/99 6,012.73 4,809.27 8,274.24 8/31/99 7,556.27 6,157.41 9,726.68 11/30/99 8,222.11 6,663.65 10,806.6 2/29/00 7,103.27 5,675.93 12,164.7 5/31/00 5,723.01 5,022.04 10,140.3 8/31/00 5,824.01 4,794.6 10,330.3 11/30/00 4,309.09 3,247.45 8,093.81 2/28/01 4,921.56 3,571.19 8,509.16 5/31/01 5,269.49 3,707 7,822.59 8/31/01 5,061.74 3,302 7,091.08 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. BEFORE TAXES ON DISTRIBUTIONS OR REDEMPTION OF FUND SHARES. 1 KOSPI: The South Korea Stock Price Index is a capitalization-weighted index of all common stocks listed on the Korean Stock Exchange. 2 The Lipper Pacific ex-Japan Funds Average consisted of 28 funds as of 12/31/94. 7 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS KOREA FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- SHARES VALUE ---------- ---------- EQUITIES - SOUTH KOREA - 99.90%*** CONSUMER DISCRETIONARY - 8.54% AUTO COMPONENTS - 0.53% Global & Yuasa Battery Co., Ltd. 224,800 $ 622,071 ---------- AUTOMOBILES - 4.27% Hyundai Motor Co., Ltd. 300,301 5,007,148 ---------- INTERNET & CATALOG RETAIL - 0.00% Hansol CSN Co., Ltd.** 3,215 4,354 ---------- RETAIL - 3.74% Hyundai Department Store Co., Ltd. 84,200 1,005,162 LG Home Shopping, Inc. 61,083 2,106,300 Shinsegae Department Stores Co. - Pfd. 27,504 1,270,287 ---------- 4,381,749 ---------- TOTAL CONSUMER DISCRETIONARY 10,015,322 ---------- CONSUMER STAPLES - 19.48% BEVERAGES - 8.61% Hite Brewery Co., Ltd. 146,911 5,272,878 Lotte Chilsung Beverage Co. 29,820 4,808,714 ---------- 10,081,592 ---------- FOOD PRODUCTS - 6.36% Lotte Confectionery Co., Ltd. 20,990 3,335,512 Nong Shim Co., Ltd. 101,048 4,113,250 ---------- 7,448,762 ---------- PERSONAL PRODUCTS - 4.51% Pacific Corp. 82,320 5,284,127 ---------- TOTAL CONSUMER STAPLES 22,814,481 ---------- FINANCIALS - 28.31% BANKS - 14.74% Hana Bank 880,350 6,684,688 Housing & Commercial Bank ADR** 176,300 1,921,670 Kookmin Bank 427,945 5,761,963 Shinhan Bank 295,702 2,893,466 ---------- 17,261,787 ---------- DIVERSIFIED FINANCIALS - 7.63% Good Morning Securities Co., Ltd.** 1,074,200 3,489,694 Samsung Securities Co., Ltd.** 179,315 4,519,876 Seoul Securities Co., Ltd. 336,380 924,254 ---------- 8,933,824 ---------- INSURANCE - 5.94% Samsung Fire & Marine Insurance 220,182 6,480,726 SHARES VALUE ---------- ---------- Samsung Fire & Marine Insurance - Pfd. 45,000 $ 482,600 ---------- 6,963,326 ---------- TOTAL FINANCIALS 33,158,937 ---------- HEALTH CARE - 1.08% HEALTH CARE EQUIPMENT & SUPPLIES - 0.61% Shinhung Co., Ltd. 342,700 720,299 ---------- PHARMACEUTICALS - 0.47% Yuhan Corp. 11,280 544,814 ---------- TOTAL HEALTH CARE 1,265,113 ---------- INDUSTRIALS - 2.78% COMMERCIAL SERVICES & SUPPLIES - 2.73% S1 Corp. 300,405 3,198,160 ---------- MACHINERY - 0.05% Hanjin Heavy Industries Co., Ltd. 26,139 52,791 ---------- TOTAL INDUSTRIALS 3,250,951 ---------- INFORMATION TECHNOLOGY - 18.29% ELECTRONICS EQUIPMENT & INSTRUMENTS - 2.49% Dae Duck GDS Co., Ltd. 256,296 1,966,174 Hankuk Electric Glass Co., Ltd. 20,180 952,560 ---------- 2,918,734 ---------- INTERNET SOFTWARE & SERVICES - 5.12% Internet Auction Co., Ltd.** 148,417 2,730,270 NCSoft Corp. 40,387 3,272,171 ---------- 6,002,441 ---------- IT CONSULTING & SERVICES - 0.45% Posdata Co., Ltd.** 41,060 523,915 ---------- OFFICE ELECTRONICS - 0.91% Sindo Ricoh Co.** 35,356 1,062,792 ---------- SEMICONDUCTOR EQUIPMENT & PRODUCTS - 9.32% Samsung Electronics Co. 63,354 9,422,838 Samsung Electronics Co. - Pfd. 23,840 1,492,967 ---------- 10,915,805 ---------- TOTAL INFORMATION TECHNOLOGY 21,423,687 ---------- TELECOMMUNICATION SERVICES - 16.82% TELECOMMUNICATION SERVICES - 8.41% Cheil Communications, Inc. 23,970 1,833,229 Humax Co., Ltd. 107,630 1,592,389 Korea Telecom Corp. 120,570 4,813,528 Korea Telecom Corp. ADR** 77,317 1,607,420 ---------- 9,846,566 ---------- 8 www.matthewsfunds.com --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- MATTHEWS KOREA FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- SHARES VALUE ---------- ---------- WIRELESS TELECOMMUNICATION SERVICES - 8.41% Korea Telecom Freetel** 207,034 $5,348,225 SK Telecom Co., Ltd. 15,635 2,753,813 SK Telecom Co., Ltd., ADR** 91,300 1,751,134 ----------- 9,853,172 ----------- TOTAL TELECOMMUNICATIONS SERVICES 19,699,738 ----------- UTILITIES - 4.60% Daehan City Gas Co., Ltd. 57,492 585,066 Korea Electric Power Corp. 270,850 4,802,320 ----------- TOTAL UTILITIES 5,387,386 ----------- TOTAL EQUITIES (Cost $105,347,168) 117,015,615 ----------- FACE AMOUNT --------- INTERNATIONAL DOLLAR BONDS - SOUTH KOREA - 0.19%*** FINANCIALS - 0.19% INSURANCE - 0.19% Korea Deposit Insurance Cnv. 2.250%, 10/11/03 $ 200,000 219,750 ------------ (Cost $213,611) TOTAL INVESTMENTS - 100.09%*** (Cost $105,560,779*) 117,235,365 LIABILITIES, LESS CASH AND OTHER ASSETS - (0.09%) (103,073) ------------ NET ASSETS - 100.00% $117,132,292 ============ * Cost for Federal income tax purposes is $112,509,848 and net unrealized appreciation consists of: Gross unrealized appreciation $ 15,115,637 Gross unrealized depreciation (10,390,120) ------------ Net unrealized appreciation $ 4,725,517 ============ ** Non-income producing security *** As a percentage of net assets as of August 31, 2001 ADR American Depositary Receipt Cnv. Convertible Pfd. Preferred See accompanying notes to financial statements. 9 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- PORTFOLIO MANAGERS' COMMENTS -------------------------------------------------------------------------------- MATTHEWS CHINA FUND Co-Portfolio Managers: G. Paul Matthews, Mark W. Headley and Richard H. Gao The Matthews China Fund fell -2.23% for the fiscal year ended August 31, 2001. The Fund significantly outperformed its benchmark indices, the Credit Lyonnais China World Index and the MSCI China Free Index, which fell -28.13% and -49.50%, respectively, over the same time period. The Fund's relative under-weighting in telecom and technology stocks such as China Mobile and Legend Holdings helped resist a sharp downward correction in the technology sector. Meanwhile, our bottom-up stock picking approach has helped us discover small cap niche companies such as Guangzhou Pharmaceutical and Texwinca Holdings, which more than doubled during the period. Our investment in the B share market also had positive results. We kept around 10% of our fund in the B shares for most of the period, as we believed that B shares were undervalued and that B share prices would gradually catch up to their A share counterparts. This decision turned out to be the right one, as China opened its B share market to domestic investors in February 2001 and B share prices rose significantly to catch up to their A share counterparts. China continued to show strong economic growth: GDP growth grew at 8.0% in 2000 and 7.9% during the first half of 2001. Strong domestic consumer demand is the most significant factor behind the growth. China's housing sector reform has created a whole new area of consumer demand, as individuals are now able to buy their own apartments and houses. The government has also taken other measures to boost the domestic economy. These measures include opening up mortgage and consumer loans for the first time, increasing salaries for public servants, and extending vacation days for company employees. Fixed asset investments were another driver of China's economic growth. During the first seven months of this year, fixed asset investments increased by 20% compared with the same time period last year. China continued to strengthen its reform process. Corporate restructuring, foreign partnerships, and layoffs were seen everywhere in the banking and state-owned-enterprises (SOE) sectors. With reform continuing, we are starting to see some positive results: last year, two-thirds of China's largest money-losing SOEs reported net profits. In a broader range, 190,100 SOEs last year reported combined profits of approximately U.S. $34 billion, a net increase of 147% compared to the previous year. In the banking sector, China continued to clean up its bad debt, establishing asset management companies to repackage and sell problem loans of state-owned banks. At the same time, China is also looking for foreign partnerships for its major state banks. Foreign banks like Citicorp are expected to take strategic stakes in certain Chinese banks. Looking forward, we remain positive on China's economic outlook and believe that China will be a bright spot among the slowing global economy. We expect that China can keep a high growth rate of above 7% for 2001. Export activities, which account for 20% of total GDP and was once the primary driver for economic growth, will slow down and may even see a negative growth rate in the second half due to a very weak global economy. However, domestic demand still has room to grow. Meanwhile, China's entry into the World Trade Organization will bring in more foreign direct investment and will further strengthen China's competitiveness in the manufacturing sector. The Matthews China Fund remains well diversified among various sectors. We adhere to our Growth At a Reasonable Price approach and try to find companies that are leaders in their industries with large growth potential and selling at relatively cheap valuations. Frequent company visits are also an integral part of our investment approach. FUND PERFORMANCE -------------------------------------------------------------------------------- ANNUALIZED PERFORMANCE INFORMATION (AS OF AUGUST 31, 2001) -------------------------------------------------------------------------------- MATTHEWS CHINA FUND One Year ......................................... (2.23%) Three Years ...................................... 31.82% Since inception (2/19/98) ........................ (0.01%) -------------------------------------------------------------------------------- CREDIT LYONNAIS CHINA WORLD INDEX(1) One Year ......................................... (28.13%) Three Years ...................................... 21.32% Since 2/19/98 .................................... (8.85%) -------------------------------------------------------------------------------- MSCI CHINA FREE INDEX(2) One Year ......................................... (49.50%) Three Years ...................................... (6.77%) Since 2/19/98 .................................... (28.23%) GROWTH OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC] Matthews CL China MSCI China Lipper China Region China Fund World Index(1) Free Index(2) Funds Average(3) 02/19/98 10,000 10,000 10,000 10,000 05/98 8,570 8,097 7,592 7,810 08/98 4,360 4,024 3,827 5,364.01 11/98 6,650 6,576 6,218 8,018.56 02/99 5,150 5,174 4,448 7,038.55 05/99 6,734 7,026 6,336 8,771.49 08/99 8,624 9,056 8,077 10,225.1 11/99 8,746 8,550 6,992 11,711 02/00 8,586 9,045 5,049 13,345.5 05/00 8,472 8,397 5,752 11,684.6 08/00 10,223 10,002 6,137 12,940.8 11/00 8,164 7,493 4,455 10,507.6 02/01 9,886 8,628 4,673 11,388.8 05/01 12,371.6 9,380 4,431 11,356.5 08/01 9,994.92 7,189 3,100 9,297.75 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. BEFORE TAXES ON DISTRIBUTIONS OR REDEMPTION OF FUND SHARES. 1 The Credit Lyonnais China World Index is an unmanaged capitalization-weighted index of Chinese equities which are listed on the Hong Kong, Shanghai and Shenzhen stock exchanges. 2 The MSCI China Free Index is an unmanaged capitalization-weighted index of Chinese equities that includes Red Chips and H shares listed on the Hong Kong exchange, and B shares listed on the Shanghai and Shenzhen exchanges. Red Chips are Chinese companies that are incorporated in Hong Kong but have at least 35% of their shares held by Chinese state-owned organizations. 3 The Lipper China Region Funds Average consisted of 17 funds as of 2/28/98. 10 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- MATTHEWS CHINA FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- SHARES VALUE ---------- ---------- EQUITIES - CHINA/HONG KONG - 99.94%*** CONSUMER DISCRETIONARY - 19.38% AUTOMOBILES & COMPONENTS - 5.30% Denway Motors Ltd.** 2,536,600 $ 682,968 Qingling Motors Co., Ltd. H Shares 2,745,000 369,539 ---------- 1,052,507 ---------- CONSUMER DURABLE & APPAREL - 7.49% China Hong Kong Photo Products Holdings, Ltd. 876,000 70,758 Li & Fung Ltd. 332,000 423,535 TCL International Holdings, Ltd. 424,000 51,644 Texwinca Holdings, Ltd. 2,644,000 940,704 ---------- 1,486,641 ---------- HOTELS, RESTAURANTS & LEISURE - 4.22% Shangri-La Asia, Ltd. 1,037,000 837,622 ---------- MEDIA - 2.37% Television Broadcasts, Ltd. 137,000 469,865 ---------- TOTAL CONSUMER DISCRETIONARY 3,846,635 ---------- CONSUMER STAPLES - 0.01% FOOD & DRUG RETAILING - 0.01% Want Want Holdings Warrants 3,500 1,767 ---------- TOTAL CONSUMER STAPLES 1,767 ---------- ENERGY - 11.16% CNOOC Ltd.** 617,000 609,123 Petrochina Co., Ltd. H Shares 6,378,000 1,300,201 Sinopec Zhenhai Refining & Chemical Co., Ltd. 2,040,000 306,016 ---------- TOTAL ENERGY 2,215,340 ---------- FINANCIALS - 7.33% DIVERSIFIED FINANCIALS - 1.50% China Everbright, Ltd. 510,000 297,516 ---------- REAL ESTATE - 5.83% China Vanke Co., Ltd. B Shares 504,912 567,085 New World China Land, Ltd.** 1,628,800 589,950 ---------- 1,157,035 ---------- TOTAL FINANCIALS 1,454,551 ---------- HEALTH CARE - 1.18% PHARMACEUTICALS & BIOTECHNOLOGY - 1.18% China Pharmaceutical Enterprise & Investment Corp., Ltd. 2,642,000 233,728 ---------- TOTAL HEALTH CARE 233,728 ---------- INDUSTRIALS - 28.30% CAPITAL GOODS - 12.98% Beijing Enterprises Holdings, Ltd. 420,000 433,485 SHARES VALUE ---------- ---------- Cheung Kong Infrastructure Holdings, Ltd. 344,500 $ 571,989 China Resources Enterprises, Ltd. 336,000 392,021 Citic Pacific, Ltd. 114,000 252,860 Shanghai Industrial Holdings, Ltd. 194,000 300,965 Swire Pacific Ltd. A Shares 128,500 624,412 ---------- 2,575,732 ---------- TRANSPORTATION - 15.32% China Merchants Holdings International Co., Ltd. 592,000 375,713 China Southern Airlines Co. Ltd., Class H** 1,810,000 481,532 China Southern Airlines Co., Ltd. ADR** 14,800 192,400 Cosco Pacific, Ltd. 806,000 428,856 New World Infrastructure, Ltd.** 908,400 477,518 Shanghai Zhenhua Port Machinery Co., Ltd. B Shares 316,500 305,423 Zhejiang Expressway Co., Ltd. H Shares 3,840,000 777,888 ---------- 3,039,330 ---------- TOTAL INDUSTRIALS 5,615,062 ---------- INFORMATION TECHNOLOGY - 12.89% SOFTWARE & SERVICES - 5.88% Asiainfo Holdings, Inc.** 51,250 730,312 Travelsky Technology Ltd.** 518,000 435,011 ---------- 1,165,323 ---------- TECHNOLOGY HARDWARE & EQUIPMENT - 7.01% Legend Holdings, Ltd. 2,934,000 1,391,844 ---------- TOTAL INFORMATION TECHNOLOGY 2,557,167 ---------- TELECOMMUNICATIONS SERVICES - 8.66% China Mobile (Hong Kong), Ltd.** 234,083 730,798 China Mobile (Hong Kong), Ltd. ADR** 12,600 197,694 China Unicom, Ltd.** 468,000 585,032 China Unicom, Ltd. ADR** 16,200 204,606 ---------- TOTAL TELECOMMUNICATIONS SERVICES 1,718,130 ---------- UTILITIES - 11.03% CLP Holdings, Ltd. 142,100 575,718 Guangdong Electric Power Development Co., Ltd. B Shares 370,792 233,422 Huaneng Power International, Inc. ADR** 39,400 861,284 Shandong International Power Development Co., Ltd. H Shares 2,558,000 518,187 ---------- TOTAL UTILITIES 2,188,611 ---------- 11 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS CHINA FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- VALUE -------- TOTAL INVESTMENTS - 99.94%*** (Cost $21,939,324*) $19,830,991 CASH AND OTHER ASSETS, LESS LIABILITIES - 0.06% 12,067 ----------- NET ASSETS - 100.00% $19,843,058 =========== * Cost for Federal income tax purposes is $22,243,209 and net unrealized depreciation consists of: Gross unrealized appreciation $ 1,480,026 Gross unrealized depreciation (3,892,244) ----------- Net unrealized depreciation $(2,412,218) ============ ** Non-income producing security *** As a percentage of net assets as of August 31, 2001 ADR American Depositary Receipt See accompanying notes to financial statements. 12 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- PORTFOLIO MANAGER'S COMMENTS -------------------------------------------------------------------------------- MATTHEWS JAPAN FUND Portfolio Manager: Mark W. Headley For the fiscal year ended August 31, 2001, the Matthews Japan Fund fell -40.92%. This return was worse than the MSCI Japan Index, which fell -33.17% and the TOPIX index which fell -33.18% over the same time period. However, according to Lipper Analytical Services, the fund was about average for the Japanese funds category that fell -40.42% over the same time period. The year was a very difficult one in almost every respect. Japan's high quality exporters of consumer goods and technology have been sold off brutally in line with other global markets. At the same time, a new economic recession and intensified deflation has made domestic earnings very difficult. Looking at Japan's ongoing attempts to restructure and reform its economy, one must examine the country's leadership. For the first half of the period, the country was saddled with one of the least successful prime ministers in Japanese history. Prime Minister Yoshiro Mori was a general disaster. He managed to insult Japan's neighbors and failed to introduce any sense of urgency in the areas of the economy that needed help. His successor in April, Prime Minister Junichiro Koizumi, has been far more articulate about reform, but the markets remain very skeptical without concrete action to assess. Still, we believe that Koizumi is a huge improvement and his strong statements and wide popularity bode well for reform efforts moving forward. Throughout the year, the portfolio has combined large global companies with smaller domestically oriented companies. The more successful investment area has been on the small domestic side. Even here, the daily liquidity or share turnover has been an area of concern and several positions were removed as trading fell below what we consider to be an acceptable level. Generally, the domestic companies offer a more defensive environment for earnings but with significantly less long-term potential. The larger export oriented companies continue to restructure their operations, but the deterioration of the global economy has generally out-paced efforts to reduce costs and eliminate less profitable divisions. We expect a day will come in the not too distant future where an improved business outlook will combine with far more efficient operations to produce a period of superior earnings. Companies such as NEC and Sony are examples of organizations that are substantially improving their operations yet are being sold down due to the current difficult environment. Generally, valuations have been pared down to levels not seen in many years in Japan. This has been partially hidden by the lack of earnings due to the current domestic and global environment. We have learned from past periods of crisis in Asia that some measures such as price to earnings ratios are almost meaningless at the bottom of a bear market. The "E" in a PE simply is not there. As earnings begin to recover, the ongoing work to achieve greater levels of efficiency will become very apparent. Whether this happens on a company-by-company basis or across a broadly recovering economy remains to be seen. Certainly some companies in Japan are acting far more rationally than they have in the past and major strides have been made. These are the companies we continue to invest in across the portfolio. If the government is now able to deliver a more supportive environment through mass deregulation and financial restructuring, an exciting period should lay ahead for long-term investors in Japan. FUND PERFORMANCE -------------------------------------------------------------------------------- ANNUALIZED PERFORMANCE INFORMATION (AS OF AUGUST 31, 2001) -------------------------------------------------------------------------------- MATTHEWS JAPAN FUND One Year ..................................................... (40.92%) Since inception (12/31/98) ................................... 9.03% -------------------------------------------------------------------------------- TOPIX(1) (TOKYO PRICE INDEX) One Year ..................................................... (33.88%) Since 12/31/98 ............................................... (0.07%) -------------------------------------------------------------------------------- MSCI DEVELOPED MARKET JAPAN INDEX(2) One Year ..................................................... (33.17%) Since 12/31/98 ............................................... (1.35%) GROWTH OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC] Matthews Topix Index Lipper Japanese Japan Fund (Tokyo)(1) Funds Average(3) 12/31/98 10,000 10,000 10,000 02/99 11,310 9,943 10,146.4 05/99 15,370 11,260 11,932.2 08/99 21,700 14,085 16,380.9 11/99 22,840 17,077 20,461.9 02/00 23,323 16,526 21,615 05/00 21,238 14,929 17,593.3 08/00 21,320 14,983 17,791.2 11/00 16,935 13,017 14,312.8 02/01 14,319 11,185 12,026.7 05/01 16,063.8 11,664 12,650.6 08/01 12,595.1 9,822 10,237 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. BEFORE TAXES ON DISTRIBUTIONS OR REDEMPTION OF FUND SHARES. 1 TOPIX: The Tokyo Price Index is a capitalization-weighted index of all companies listed on the First Section of the Tokyo Stock Exchange. 2 The MSCI Developed Market Japan Index is an unmanaged, capitalization- weighted index of all Japanese equities. 3 The Lipper Japanese Funds Average consisted of 41 funds as of 12/31/98. 13 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS JAPAN FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- SHARES VALUE ---------- ---------- EQUITIES - JAPAN - 100.23%*** CONSUMER DISCRETIONARY - 38.47% AUTOMOBILES - 5.78% Honda Motor Co., Ltd. ADR 3,300 $ 240,900 Toyota Motor Corp. ADR 3,400 207,740 ---------- 448,640 ---------- INTERNET & CATALOG RETAIL - 5.09% Belluna Co., Ltd. 12,040 394,585 ---------- LEISURE EQUIPMENT & PRODUCTS - 4.35% Konami Corp. 3,800 119,747 Nintendo Co., Ltd. 1,365 217,366 ---------- 337,113 ---------- MEDIA - 4.61% Fuji Television Network, Inc. 70 357,644 ---------- RETAIL - 18.64% Arc Land Sakamoto Co., Ltd.** 21,000 321,174 Don Quijote Co., Ltd. 4,800 263,797 Fast Retailing Company, Ltd. 2,400 302,519 Kyoto Kimono Yuzen Co., Ltd. 64 290,418 USS Co., Ltd.** 7,600 268,233 ---------- 1,446,141 ---------- TOTAL CONSUMER DISCRETIONARY 2,984,123 ---------- FINANCIALS - 24.77% DIVERSIFIED FINANCIALS - 20.37% Ichiyoshi Securities Co., Ltd. 75,000 274,158 Japan Securities Finance Co., Ltd. 79,000 293,427 Mizuho Holdings, Inc.** 85 351,426 The Nikko Securities Co., Ltd. 55,000 364,199 Tsubasa Securities Co., Ltd. 106,000 297,510 ---------- 1,580,720 ---------- INSURANCE - 4.40% AFLAC, Inc. 12,400 341,248 ---------- TOTAL FINANCIALS 1,921,968 ---------- HEALTH CARE - 6.24% PHARMACEUTICALS - 6.24% Banyu Pharmaceutical Co., Ltd. 7,000 117,646 Chugai Pharmaceutical Co., Ltd. 9,000 144,982 Kissei Pharmaceutical Co., Ltd. 8,000 117,109 Nippon Shinyaku Co., Ltd. 17,000 104,285 ---------- TOTAL HEALTH CARE 484,022 ---------- INDUSTRIALS - 2.83% MACHINERY - 2.83% Nitto Kohki Co., Ltd. 14,600 219,611 ---------- TOTAL INDUSTRIALS 219,611 ---------- SHARES VALUE ---------- ---------- INFORMATION TECHNOLOGY - 24.16% COMPUTERS & PERIPHERALS - 8.44% NEC Corp. 30,000 $ 365,795 Obic Business Consultants Ltd. 6,030 288,830 ---------- 654,625 ------------ ELECTRONIC EQUIPMENT & INSTRUMENTS - 15.72% Canon, Inc. 8,500 255,712 Kyocera Corp. 4,200 283,410 Rohm Co. Ltd. 1,700 187,284 Sony Corp. 5,500 244,494 Sony Corp. ADR 3,400 152,660 Tokyo Denpa Co., Ltd. 6,900 96,194 ---------- 1,219,754 ------------ TOTAL INFORMATION TECHNOLOGY 1,874,379 ------------ TELECOMMUNICATION SERVICES - 3.76% DIVERSIFIED TELECOMMUNICATION SERVICES - 3.76% Nippon Telegraph & Telephone Corp. ADR 12,900 291,411 ---------- TOTAL TELECOMMUNICATION SERVICES 291,411 ------------ TOTAL INVESTMENTS - 100.23%*** (Cost $10,963,511*) 7,775,514 LIABILITIES, LESS CASH AND OTHER ASSETS - (0.23%) (17,510) ----------- NET ASSETS - 100.00% $ 7,758,004 =========== * Cost for Federal income tax purposes is $11,251,774 and net unrealized depreciation consists of: Gross unrealized appreciation $260,753 Gross unrealized depreciation (3,737,013) ----------- Net unrealized depreciation $(3,476,260) =========== ** Non-income producing security *** As a percentage of net assets as of August 31, 2001 ADR American Depositary Receipt See accompanying notes to financial statements. 14 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- PORTFOLIO MANAGERS' COMMENTS -------------------------------------------------------------------------------- MATTHEWS ASIAN TECHNOLOGY FUND Co-Portfolio Managers: G. Paul Matthews and Mark W. Headley The Matthews Asian Technology Fund suffered a horrific fall of -51.54% in the fiscal year ended August 31, 2001. This performance was somewhat better than the MSCI/Matthews Asian Technology Index that fell -54.81% over the same time period. Despite this abysmal period, we believe that the case for an Asian technology fund is very strong. As we look back at the last year, there is no doubt that too much money was thrown at the technology sector too quickly. Too much production came on line just as a slowing global economy led to a very steep fall off in demand. Such cycles have been common in the past but never with such intensity. The purging of many weak companies across the globe should set the stage for a new cycle where supply and demand will be in a much healthier balance. Two primary trends are continuing across much of the region. First, Asia is becoming increasingly dominant in the global supply chain for almost all technology-related manufacturing. Companies that once manufactured unsophisticated electronics are now providing essential design elements in the process of manufacturing some of the world's most advanced technology. The trend to rely on Asian manufacturers has only increased in a difficult global environment as companies seek to make their operations more efficient. Secondly, the adoption of technology within Asia on both a consumer and corporate level continues at a rapid pace. Korea now has the highest percentage of broadband access in the world. Japan continues to push ahead with the world's most sophisticated mobile phone services. The world's first third generation (3G) network was introduced in Tokyo in October 2001. Also, China has added millions of new PC, Internet and mobile phone users and is now the world's largest market for mobile phones with over 120 million users. China is rapidly becoming the defacto workshop for the world's technology giants. The vast Taiwanese technology manufacturing base is being moved to China at a rapid pace. Even multi-billion dollar semiconductor chip fabrication plants are being built in China due to significant cost savings in infrastructure and human resources. The Matthews Asian Technology Fund is invested in a number of companies benefiting from all of these events. The Fund holds both the primary Chinese mobile company and leading Taiwanese technology manufacturers. We are investing in those Japanese companies that are restructuring their businesses most effectively and have the most exciting product lines. Combined with a number of smaller domestic and regional companies that offer various services to either corporations or individuals, the Fund is broadly diversified in a sophisticated array of technology corporations. Valuations in the Asian technology sector have fallen to levels that make as little sense to us as some of the extreme over-valuations during the period of the Nasdaq bubble. The current slowdown in technology spending has led to a few terrible quarters, but unless humanity is going back to sticks and stones for our tools, the future will see a rapid recovery as a new era of incredibly powerful digital products arrives. From mobile phones that will offer direct video links to cars that will literally tell you exactly where to go, a new generation of technology is about to arrive that will change our lives as much as the use of electricity changed the lives of our great grandparents. We continue to search Asia for the companies that we believe are inventing, manufacturing and delivering in this new era. FUND PERFORMANCE -------------------------------------------------------------------------------- ANNUALIZED PERFORMANCE INFORMATION (AS OF AUGUST 31, 2001) -------------------------------------------------------------------------------- MATTHEWS ASIAN TECHNOLOGY FUND One Year ..................................................... (51.54%) Since inception (12/27/99) ................................... (44.79%) -------------------------------------------------------------------------------- MSCI/MATTHEWS ASIAN TECHNOLOGY INDEX(1) One Year ..................................................... (54.81%) Since 12/31/99 ............................................... (47.81%) GROWTH OF A $10,000 INVESTMENT -------------------------------------------------------------------------------- [GRAPHIC OMITTED] [EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC] Lipper Science & Matthews Asian MSCI/Matthews Technology Technology Fund Asian Technology Index(1) Funds Average(2) 12/27/99 10,000 10,000 10,000 2/28/00 11,370 9,488 12,501.2 5/31/00 7,900 7,717 9,125.94 8/31/00 7,610 7,449 11,614.9 11/30/00 4,870 5,112 6,816.21 2/28/01 4,743 4,413 5,346.37 5/31/01 4,533.73 4,278 5,135.96 8/31/01 3,687.58 3,355 4,068.5 PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. BEFORE TAXES ON DISTRIBUTIONS OR REDEMPTION OF FUND SHARES. 1 The MSCI/Matthews Asian Technology Index is an unmanaged capitalization- weighted index of Asian equities tracking a broad range of technology stocks including: semiconductor equipment and products, communications equipment, computers and peripherals, electronic equipment and instruments, office electronics, software, IT consulting and services, Internet software and services, diversified telecommunications services, and wireless telecommunications services. 2 The Lipper Science and Technology Funds Average consisted of 175 funds as of 12/31/99. 15 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS ASIAN TECHNOLOGY FUND SCHEDULE OF INVESTMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- SHARES VALUE ---------- ---------- EQUITIES - 99.89%*** CHINA/HONG KONG - 23.64% Asia Satellite Telecommunications Holdings, Ltd. 205,400 $ 298,899 AsiaInfo Holdings, Inc.** 25,700 366,225 China Mobile HK, Ltd.** 89,000 277,855 China Mobile HK, Ltd. ADR** 5,000 78,450 Chinadotcom Corp. A Shares** 113,500 259,915 i-CABLE Communications Ltd.** 791,000 395,521 i-CABLE Communications Ltd., ADR** 2,800 27,720 Legend Holdings, Ltd. 1,195,000 566,890 ---------- TOTAL CHINA/HONG KONG 2,271,475 ---------- INDIA - 1.37% Infosys Technologies Ltd. ADR** 2,500 131,250 ---------- JAPAN - 22.17% Advantest Corp. 3,500 198,234 Canon, Inc. 8,500 255,712 NEC Corp. 32,000 390,182 Nintendo Co., Ltd. 1,935 308,134 Obic Business Consultants Ltd. 3,870 185,368 Rohm Co., Ltd. 1,600 176,268 Sony Corp. 6,700 297,838 Sony Corp. ADR 4,000 179,600 Tokyo Denpa Co., Ltd. 6,200 86,435 YOZAN, Inc.** 6 52,437 ---------- TOTAL JAPAN 2,130,208 ---------- SINGAPORE - 10.51% CSE Systems & Engineering, Ltd.** 529,000 100,243 Datacraft Asia, Ltd. 94,720 339,098 Singapore Telecommunications, Ltd. 239,000 277,227 Venture Manufacturing, Ltd. 44,000 293,087 ---------- TOTAL SINGAPORE 1,009,655 ---------- SOUTH KOREA - 21.75% Humax Co., Ltd. 14,270 211,125 Internet Auction Co., Ltd.** 14,902 274,136 Korea Telecom Corp. 6,010 239,938 Korea Telecom Corp. ADR** 1,600 33,264 Korea Telecom Freetel** 11,231 290,126 NCSoft Corp. 3,783 306,500 Samsung Electronics 2,890 429,839 SK Telecom Co., Ltd. 1,729 304,531 ---------- TOTAL SOUTH KOREA 2,089,459 ---------- TAIWAN - 15.44% Asustek Computer, Inc.** 42,000 153,263 Hon Hai Precision Industry Co., Ltd. 38,600 149,240 Realtek Semiconductor Corp.** 67,500 213,083 SHARES VALUE ---------- ---------- Sunplus Technology Co., Ltd 70,000 $ 167,252 Taiwan Semiconductor Manufacturing Co., Ltd.** 257,536 477,349 VIA Technologies, Inc.** 63,200 307,499 Zyxel Communications Corp.** 13,804 15,871 ---------- TOTAL TAIWAN 1,483,557 ---------- THAILAND - 5.01% Advanced Info Service Public Co., Ltd. 34,800 410,494 Shinawatra Satellite Public Co., Ltd.** 93,800 70,749 ---------- TOTAL THAILAND 481,243 ---------- TOTAL INVESTMENTS - 99.89%*** (Cost $12,611,894*) 9,596,847 CASH AND OTHER ASSETS, LESS LIABILITIES - 0.11% 10,241 ---------- NET ASSETS - 100.00% $9,607,088 ========== * Cost for Federal income tax purposes is $15,124,137 and net unrealized depreciation consists of: Gross unrealized appreciation $241,667 Gross unrealized depreciation (5,768,957) ----------- Net unrealized depreciation $(5,527,290) =========== ** Non-income producing security *** As a percentage of net assets as of August 31, 2001 ADR American Depositary Receipt See accompanying notes to financial statements. MARKET SECTOR DIVERSIFICATION AS A PERCENTAGE OF TOTAL VALUE OF INVESTMENT IN SECURITIES CONSUMER DISCRETIONARY.................... 19.29% Household Durables...................... 4.97 Internet & Catalog Retail............... 2.85 Leisure Equipment & Products............ 3.21 Media................................... 8.26 INFORMATION TECHNOLOGY.................... 60.81 Communications Equipment................ 6.44 Computers & Peripherals ................ 15.52 Electronic Equipment & Instruments...... 5.51 Internet Software & Services............ 5.84 IT Consulting & Services................ 6.38 Office Electronics...................... 2.66 Semiconductor Equipment & Products...... 16.53 Software................................ 1.93 TELECOMMUNICATION SERVICES................ 19.90 Diversified Telecommunication Services.. 5.70 Wireless Telecommunication Services..... 14.20 ------ TOTAL INVESTMENTS ........................ 100.00% ====== 16 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- STATEMENTS OF ASSETS AND LIABILITIES AUGUST 31, 2001 --------------------------------------------------------------------------------
MATTHEWS MATTHEWS MATTHEWS PACIFIC ASIAN GROWTH MATTHEWS MATTHEWS MATTHEWS ASIAN TIGER AND INCOME KOREA CHINA JAPAN TECHNOLOGY FUND FUND FUND FUND FUND FUND ----------- ----------- ------------ ----------- ---------- ----------- ASSETS: Investments, at value (Cost $85,688,763, $22,994,011, $105,560,779, $21,939,324, $10,963,511, and $12,611,894, respectively)................. $75,716,752 $23,408,614 $117,235,365 $19,830,991 $7,775,514 $ 9,596,847 Cash............................ 1,234,735 141,530 -- -- 35,865 25,744 Foreign currency, at value (Cost $20,654, $327, $0, $9,674, $0, and $0, respectively)......... 20,626 324 -- 9,674 -- -- Dividends and interest receivable 316,470 225,169 2,508 67,477 3,157 2,624 Receivable for securities sold.. -- -- 298,519 1,179,075 -- -- Receivable for capital shares sold 83,165 755,478 61,319 44,189 15,720 100 Due from Advisor (Note 2)....... -- 7,688 -- 9,813 -- -- Deferred organization costs (Note 1-F) -- -- -- 4,540 -- -- Other assets.................... 5,818 8,268 25,983 49,466 720 26,018 ----------- ----------- ------------ ----------- ---------- ----------- Total assets.................. 77,377,566 24,547,071 117,623,694 21,195,225 7,830,976 9,651,333 ----------- ----------- ------------ ----------- ---------- ----------- LIABILITIES: Payable for securities purchased 439,034 42,886 -- -- -- -- Payable for capital shares redeemed 182,709 33,291 254,984 821,677 39,769 5,551 Cash overdraft.................. -- -- 3,444 516,762 -- 150 Due to Advisor (Note 2)......... 149,989 -- 102,657 -- 18,944 9,217 Accrued expenses................ 95,212 24,349 130,317 13,728 14,259 29,327 Other liabilities............... 7,513 -- -- -- -- -- ----------- ----------- ------------ ----------- ---------- ----------- Total liabilities............. 874,457 100,526 491,402 1,352,167 72,972 44,245 ----------- ----------- ------------ ----------- ---------- ----------- NET ASSETS:........................ $76,503,109 $24,446,545 $117,132,292 $19,843,058 $7,758,004 $ 9,607,088 =========== =========== ============ =========== ========== =========== SHARES OUTSTANDING: (shares of beneficial interest issued and outstanding, respectively, unlimited number of shares authorized with a $0.001 par value) 9,675,096 2,691,014 43,703,280 2,155,532 691,527 2,724,606 =========== =========== ============ =========== =========== =========== Net asset value, offering price and redemption price.......... $7.91 $9.08 $2.68 $9.21 $11.22 $3.53 =========== =========== ============ =========== =========== =========== NET ASSETS CONSIST OF: Capital paid-in................. $88,497,923 $24,700,012 $118,757,829 $22,697,931 $15,077,358 $28,167,132 Accumulated undistributed net investment income ............ 42,401 280,057 121,474 358,736 62,709 78,879 Accumulated net realized gain (loss) on investments......... (2,065,180) (948,124) (13,421,597) (1,105,276) (4,194,096) (15,623,882) Net unrealized appreciation (depreciation) on investments and foreign currency related transactions (9,972,035) 414,600 11,674,586 (2,108,333) (3,187,967) (3,015,041) ----------- ----------- ------------ ----------- ---------- ----------- $76,503,109 $24,446,545 $117,132,292 $19,843,058 $7,758,004 $ 9,607,088 =========== =========== ============ =========== ========== ===========
See accompanying notes to financial statements. 17 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- STATEMENTS OF OPERATIONS FOR THE YEAR ENDED AUGUST 31, 2001 --------------------------------------------------------------------------------
MATTHEWS MATTHEWS MATTHEWS PACIFIC ASIAN GROWTH MATTHEWS MATTHEWS MATTHEWS ASIAN TIGER AND INCOME KOREA CHINA JAPAN TECHNOLOGY FUND FUND FUND FUND FUND FUND ----------- ----------- ------------ ----------- ---------- ----------- INVESTMENT INCOME: Dividends (net of foreign tax withheld of $87,297, $12,055, $262,770, $5,546, $11,871 and $0, respectively)........... $ 1,535,346 $ 407,107 $ 1,312,478 $ 481,089 $ 68,956 $ 63,997 Interest........................ 110,988 1,152,098 15,820 12,444 -- 4,758 Other income.................... 562,008 22,075 1,455,637 170,617 78,555 441,968 ----------- ----------- ----------- ----------- ---------- ----------- Total investment income....... 2,208,342 1,581,280 2,783,935 664,150 147,511 510,723 ----------- ----------- ----------- ----------- ---------- ----------- EXPENSES: Investment advisory fees (Note 2) 859,562 164,505 1,100,527 143,738 125,198 133,330 Recovery of reimbursed expenses (Note 2) 87,437 2,329 -- 2,740 -- -- Distribution expenses........... 1,057 -- 7,566 -- -- -- Transfer agent fees............. 223,418 45,787 284,706 33,922 35,209 40,737 Administration fees............. 133,523 26,633 167,204 20,648 17,642 21,388 Accounting fees................. 87,600 18,000 110,115 14,700 12,720 14,100 Professional fees............... 35,980 4,340 23,893 3,811 7,099 9,489 Custodian fees.................. 130,042 23,692 182,528 34,446 25,413 74,172 Directors fees (Note 2)......... 9,233 1,974 12,500 2,304 1,323 1,855 Insurance expense............... 11,586 1,452 14,764 991 2,438 1,330 Amortization of organization costs (Note 1-F).............. -- -- -- 3,088 -- 24,685 Printing expense................ 14,361 4,128 8,606 3,800 4,600 5,013 Registration expenses........... 30,724 17,919 30,220 21,165 26,510 27,147 Other expenses.................. 9,491 1,800 10,903 2,123 2,689 5,055 ----------- ----------- ------------ ----------- ---------- ----------- Total expenses................ 1,634,014 312,559 1,953,532 287,476 260,841 358,301 Expenses reimbursed and waived (Note 2) -- -- -- -- (10,446) (91,642) ----------- ----------- ------------ ----------- ---------- ----------- Net expenses.................. 1,634,014 312,559 1,953,532 287,476 250,395 266,659 ----------- ----------- ------------ ----------- ---------- ----------- INVESTMENT INCOME (LOSS)........... 574,328 1,268,721 830,403 376,674 (102,884) 244,064 ----------- ----------- ------------ ----------- ---------- ----------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCY RELATED TRANSACTIONS: Net realized loss on investments (1,934,434) (820,021) (13,167,603) (985,052) (4,058,791) (12,801,142) Net realized gain (loss) on foreign currency related transactions ................. (102,624) (5,242) (561,939) 3,915 612,627 (67,085) Net change in unrealized depreciation on investments and foreign currency related transactions ................. (27,835,776) (240,759) (1,209,908) (2,331,876) (4,135,528) 2,014,453 ----------- ----------- ------------ ----------- ---------- ----------- Net realized and unrealized loss on investments and foreign currency related transactions (29,872,834) (1,066,022) (14,939,450) (3,313,013) (7,581,692) (10,853,774) ----------- ----------- ------------ ----------- ---------- ----------- NET INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS................. $29,298,506) $ 202,699 ($14,109,047) ($2,936,339) ($7,684,576) ($10,609,710) =========== ========== ============ =========== =========== ============
See accompanying notes to financial statements. 18 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
MATTHEWS PACIFIC MATTHEWS ASIAN TIGER FUND GROWTH AND INCOME FUND ---------------------------- ---------------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 2001 2000 ------------ ------------ ------------- ------------ OPERATIONS: Net investment income ................................. $ 574,328 $ 1,924,495 $ 1,268,721 $ 712,430 Net realized gain (loss) on investments and foreign currency related transactions ............... (2,037,058) 20,346,121 (825,263) 1,422,306 Net change in unrealized depreciation on investments and foreign currency related transactions ............... (27,835,776) (1,074,283) (240,759) (151,186) ------------ ------------ ------------ ------------ Net increase (decrease) in net assets from operations (29,298,506) 21,196,333 202,699 1,983,550 ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income: Class I ............................................. (2,614,945) (2,508,804) (1,065,963) (672,202) Class A ............................................. (34,982) (36,563) N/A N/A Realized gains on investments: Class I ............................................. (7,093,168) -- (1,037,531) -- Class A ............................................. (107,171) -- N/A N/A ------------ ------------ ------------ ------------ Net decrease in net assets resulting from distributions .................................. (9,850,266) (2,545,367) (2,103,494) (672,202) ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS (NET): Class I ............................................. 3,667,083 (16,792,146) 14,878,373 (486,162) Class A ............................................. (1,187,737) 156,788 N/A N/A ------------ ------------ ------------ ------------ Increase (decrease) in net assets derived from capital share transactions .......................... 2,479,346 (16,635,358) 14,878,373 (486,162) ------------ ------------ ------------ ------------ Total increase (decrease) in net assets ............... (36,669,426) 2,015,608 12,977,578 825,186 NET ASSETS: Beginning of year ..................................... 113,172,535 111,156,927 11,468,967 10,643,781 ------------ ------------ ------------ ------------ End of year (including undistributed net investment income of $42,401, $988,574, $280,057 and $229,562, respectively) ........................... $ 76,503,109 $113,172,535 $ 24,446,545 $ 11,468,967 ============ ============ ============ ============ N/A Not Applicable
See accompanying notes to financial statements. 19 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
MATTHEWS KOREA MATTHEWS CHINA FUND FUND ---------------------------- ---------------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 2001 2000 ------------ ------------ ------------- ------------- OPERATIONS: Net investment income .................................. $ 830,403 $ 702,437 $ 376,674 $ 130,543 Net realized gain (loss) on investments and foreign currency related transactions ................ (13,729,542) 77,344,916 (981,137) 909,591 Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions ................ (1,209,908) (116,843,995) (2,331,876) 81,652 ------------ ------------ ------------ ------------ Net increase (decrease) in net assets from operations ........................... (14,109,047) (38,796,642) (2,936,339) 1,121,786 ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income: Class I .............................................. -- -- (135,340) (100,689) Class A .............................................. -- -- N/A N/A Realized gains on investments: Class I .............................................. (29,963,931) (22,901,449) (259,637) -- Class A .............................................. (12,702,421) (1,790,122) N/A N/A ------------ ------------ ------------ ------------ Net decrease in net assets resulting from distributions (42,666,352) (24,691,571) (394,977) (100,689) ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS (NET): Class I .............................................. 52,883,977 (57,694,292) 13,942,021 1,965,983 Class A .............................................. (5,884,513) 1,963,559 N/A N/A ------------ ------------ ------------ ------------ Increase (decrease) in net assets derived from capital share transactions ........................... 46,999,464 (55,730,733) 13,942,021 1,965,983 ------------ ------------ ------------ ------------ Total increase (decrease) in net assets ................ (9,775,935) (119,218,946) 10,610,705 2,987,080 NET ASSETS: Beginning of year ...................................... 126,908,227 246,127,173 9,232,353 6,245,273 ------------ ------------ ------------ ------------ End of year (including undistributed net investment income of $121,474, $0, $358,736 and $118,380, respectively) ............. $117,132,292 $126,908,227 $ 19,843,058 $ 9,232,353 ============ ============ ============ ============ N/A Not Applicable
See accompanying notes to financial statements. 20 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- STATEMENTS OF CHANGES IN NET ASSETS --------------------------------------------------------------------------------
MATTHEWS JAPAN MATTHEWS ASIAN FUND TECHNOLOGY FUND ---------------------------- ---------------------------- YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 2001 2000 ------------ ------------ ------------ ------------- OPERATIONS: Net investment income (loss) ........................... ($102,884) ($125,935) $ 244,064 $ 524,171 Net realized gain (loss) on investments and foreign currency related transactions ................ (3,446,164) 1,149,155 (12,868,227) (2,831,523) Net change in unrealized appreciation (depreciation) on investments and foreign currency related transactions ........................ (4,135,528) (2,902,438) 2,014,453 (5,029,494) ------------ ------------ ------------ ------------ Net decrease in net assets from operations ........................... (7,684,576) (1,879,218) (10,609,710) (7,336,846) ------------ ------------ ------------ ------------ DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income: Class I .............................................. (360,020) -- (615,326) -- Class A .............................................. -- -- N/A N/A Realized gains on investments: Class I .............................................. (910,401) (601,550) -- -- Class A .............................................. N/A N/A N/A N/A ------------ ------------ ------------ ------------ Net decrease in net assets resulting from distributions ................................... (1,270,421) (601,550) (615,326) -- ------------ ------------ ------------ ------------ CAPITAL SHARE TRANSACTIONS (NET): Class I .............................................. (7,155,774) 1,863,670 (3,737,856) 31,906,826 Class A .............................................. N/A N/A N/A N/A ------------ ------------ ------------ ------------ Increase (decrease) in net assets derived from capital share transactions ........................... (7,155,774) 1,863,670 (3,737,856) 31,906,826 ------------ ------------ ------------ ------------ Total increase (decrease) in net assets ................ (16,110,771) (617,098) (14,962,892) 24,569,980 NET ASSETS: Beginning of period .................................... 23,868,775 24,485,873 24,569,980 -- ------------ ------------ ------------ ------------ End of period (including undistributed net investment income of $62,709, $742,093, $78,879 and $515,388, respectively) ........ $ 7,758,004 $ 23,868,775 $ 9,607,088 $ 24,569,980 ============ ============ ============ ============ *The Asian Technology Fund commenced operations on December 27, 1999. N/A Not Applicable
See accompanying notes to financial statements. 21 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The table below sets forth financial data for a share of beneficial interest outstanding throughout each year presented.
MATTHEWS PACIFIC TIGER FUND ----------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 1999 1998 1997 ------- -------- -------- ------- ------- Net Asset Value, beginning of year .......................... $ 12.35 $ 10.41 $ 4.07 $ 11.30 $ 10.81 -------- -------- -------- ------- ------- INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income ..................................... 0.08 0.20 0.21 0.02 0.02 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency ...... (3.37) 2.01 6.15 (7.18) 0.50 ------- -------- -------- ------- ------- Total from investment operations ........................ (3.29) 2.21 6.36 (7.16) 0.52 ------- -------- -------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income ..................................... (0.31) (0.27) (0.02) (0.01) (0.01) Net realized gains on investments ......................... (0.84) -- -- (0.06) (0.02) ------- -------- -------- ------- ------- Total distributions ..................................... (1.15) (0.27) (0.02) (0.07) (0.03) ------- -------- -------- ------- ------- Net Asset Value, end of year ................................ $ 7.91 $ 12.35 $10.41 $ 4.07 $ 11.30 ======= ======== ======== ======= ======= TOTAL RETURN ................................................ (27.46%) 21.28% 156.28% (63.43%) 4.75% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in 000's) .......................... $76,503 $111,502 $109,936 $31,319 $43,647 Ratio of expenses to average net assets before reimbursement and waiver of expenses by Advisor and Administrator ..... 1.90% 1.88% 1.90% 2.06% 1.97% Ratio of expenses to average net assets after reimbursement and waiver of expenses by Advisor and Administrator (Note 2) ................................................ 1.90% 1.81% 1.90% 1.90% 1.90% Ratio of net investment income to average net assets before reimbursement and waiver of expenses by Advisor and Administrator ....................................... 0.67% 1.49% 3.35% 0.14% 0.20% Ratio of net investment income to average net assets after reimbursement and waiver of expenses by Advisor and Administrator ....................................... 0.67% 1.56% 3.35% 0.30% 0.27% Portfolio turnover ........................................ 63.59% 52.11% 98.74% 73.09% 70.73% See accompanying notes to financial statements.
22 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] ------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS ------------------------------------------------------------------------------- The table below sets forth financial data for a share of beneficial interest outstanding throughout each year presented.
MATTHEWS ASIAN GROWTH AND INCOME FUND --------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 1999 1998 1997 ------- -------- -------- ------- ------- Net Asset Value, beginning of year................... $ 10.50 $ 9.37 $ 6.54 $ 11.71 $ 10.53 ------- -------- -------- ------- ------- INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income ............................ 0.55 0.63 0.59 0.13 0.10 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency................ (0.49) 1.09 2.75 (4.15) 1.42 ------- -------- -------- ------- ------- Total from investment operations................ 0.06 1.72 3.34 (4.02) 1.52 ------- -------- -------- ------- ------- LESS DISTRIBUTIONS FROM: Net investment income............................. (0.60) (0.59) (0.51) (0.10) (0.10) Net realized gains on investments................. (0.88) -- -- (1.05) (0.24) ------- -------- -------- ------- ------- Total distributions............................. (1.48) (0.59) (0.51) (1.15) (0.34) ------- -------- -------- ------- ------- Net Asset Value, end of year......................... $ 9.08 $ 10.50 $ 9.37 $ 6.54 $ 11.71 ======= ======= ======== ======= ======= TOTAL RETURN ........................................ 1.15% 18.68% 52.65% (35.27%) 14.67% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in 000's)................... $24,447 $11,469 $ 10,644 $ 4,063 $ 6,166 Ratio of expenses to average net assets before reimbursement and waiver of expenses by Advisor and Administrator 1.90% 1.97% 2.05% 3.76% 4.45% Ratio of expenses to average net assets after reimbursement and waiver of expenses by Advisor and Administrator (Note 2) ....................................... 1.90% 1.90% 1.90% 1.90% 1.90% Ratio of net investment income to average net assets before reimbursement and waiver of expenses by Advisor and Administrator............................... 7.71% 6.17% 7.98% (0.36%) (1.55%) Ratio of net investment income to average net assets after reimbursement and waiver of expenses by Advisor and Administrator............................... 7.71% 6.24% 8.13% 1.50% 1.00% Portfolio turnover................................ 33.94% 62.23% 34.82% 54.67% 50.20%
See accompanying notes to financial statements. 23 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The table below sets forth financial data for a share of beneficial interest outstanding throughout each year presented.
MATTHEWS KOREA FUND --------------------------------------------------------------- YEAR YEAR YEAR YEAR YEAR ENDED ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 1999 1998 1997 ------- -------- -------- ------- ------- Net Asset Value, beginning of year ........................... $ 5.19 $ 7.49 $ 2.03 $ 6.19 $ 7.23 -------- -------- -------- ------- ------- INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income (loss) ............................... 0.02 0.03 0.03 (0.03) (0.04) Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency ....... (0.90) (1.45) 5.43 (4.13) (1.00) -------- -------- -------- ------- ------- Total from investment operations ......................... (0.88) (1.42) 5.46 (4.16) (1.04) -------- -------- -------- ------- ------- LESS DISTRIBUTIONS FROM: Net realized gains on investments .......................... (1.63) (0.88) -- -- -- -------- -------- -------- ------- ------- Net Asset Value, end of year ................................. $ 2.68 $ 5.19 $ 7.49 $ 2.03 $ 6.19 ======== ======== ======== ======= ======= TOTAL RETURN ................................................. (13.09%) (22.92%) 268.97% (67.21%) (14.38%) RATIOS/SUPPLEMENTAL DATA Net assets, end of year (in 000's) ........................... $117,132 $115,158 $230,846 $66,607 $19,356 Ratio of expenses to average net assets before reimbursement and waiver of expenses by Advisor and Administrator ...... 1.78% 1.75% 1.77% 2.07% 2.90% Ratio of expenses to average net assets after reimbursement and waiver of expenses by Advisor and Administrator (Note 2) ................................................. 1.78% 1.75% 1.77% 2.06% 2.50% Ratio of net investment income (loss) to average net assets before reimbursement and waiver of expenses by Advisor and Administrator ........................................ 0.75% 0.42% (0.37%) (1.13%) (1.81%) Ratio of net investment income (loss) to average net assets after reimbursement and waiver of expenses by Advisor and Administrator ........................................ 0.75% 0.42% (0.37%) (1.12%) (1.41%) Portfolio turnover ......................................... 81.96% 47.80% 57.06% 94.01% 112.68%
See accompanying notes to financial statements. 24 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
MATTHEWS CHINA FUND ------------------------------------------------------------ YEAR YEAR YEAR PERIOD ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 1999 1998(3) ------- ------ ------- ------ Net Asset Value, beginning of period ..................... $ 9.93 $ 8.48 $ 4.36 $10.00 ------- ------ ------- ------ INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income .................................. 0.32 0.12 0.12 0.10 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency ... (0.61) 1.44 4.11 (5.74) ------- ------ ------- ------ Total from investment operations ....................... (0.29) 1.56 4.23 (5.64) ------- ------ ------- ------ LESS DISTRIBUTIONS FROM: Net investment income .................................. (0.15) (0.11) (0.11) -- Net realized gains on investments ...................... (0.28) -- -- -- ------- ------ ------- ------ Total distributions .................................. (0.43) (0.11) (0.11) -- ------- ------ ------- ------ Net Asset Value, end of period ........................... $ 9.21 $ 9.93 $ 8.48 $ 4.36 ======= ====== ======= ====== TOTAL RETURN ............................................. (2.23%) 18.54% 97.79% (56.40%)(2) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) ................... $19,843 $9,232 $ 6,245 $1,576 Ratio of expenses to average net assets before reimbursement and waiver of expenses by Advisor and Administrator .. 2.00% 2.15% 2.09% 7.84%(1) Ratio of expenses to average net assets after reimbursement and waiver of expenses by Advisor and Administrator (Note 2) ............................................. 2.00% 2.00% 2.00% 2.00%(1) Ratio of net investment income (loss) to average net assets before reimbursement and waiver of expenses by Advisor and Administrator .................................... 2.62% 1.54% 2.93% (3.45%)(1) Ratio of net investment income (loss) to average net assets after reimbursement and waiver of expenses by Advisor and Administrator .................................... 2.62% 1.69% 3.02% 2.38%(1) Portfolio turnover ..................................... 61.07% 80.90% 40.27% 11.84%(2) (1) Annualized (2) Not annualized (3) The China Fund commenced operations on February 19, 1998.
See accompanying notes to financial statements. 25 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- FINANCIAL HIGHLIGHTS -------------------------------------------------------------------------------- The table below sets forth financial data for a share of beneficial interest outstanding throughout each period presented.
MATTHEWS MATTHEWS ASIAN JAPAN FUND TECHNOLOGY FUND -------------------------------------- ------------------------ YEAR YEAR PERIOD YEAR PERIOD ENDED ENDED ENDED ENDED ENDED AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, AUGUST 31, 2001 2000 1999(3) 2001 2000(4) ---- ---- ------ ---- ------ Net Asset Value, beginning of period .................. $20.76 $ 21.70 $ 10.00 $ 7.61 $ 10.00 ------ ------- ------- ------ ------- INCOME (LOSS) FROM INVESTMENT OPERATIONS Net investment income (loss) ........................ (0.15) (0.11) (0.04) 0.11 0.26 Net realized gain (loss) and unrealized appreciation (depreciation) on investments and foreign currency .................. (7.99) (0.29) 11.74 (3.97) (2.65) ------ ------- ------- ------ ------- Total from investment operations .................. (8.14) (0.40) 11.70 (3.86) (2.39) ------ ------- ------- ------ ------- LESS DISTRIBUTIONS FROM: Net investment income ............................... (0.37) -- -- (0.22) -- Net realized gains on investments ................... (1.03) (0.54) -- -- -- ------ ------- ------- ------ ------- Total distributions ............................... (1.40) (0.54) -- (0.22) -- ------ ------- ------- ------ ------- Net Asset Value, end of period ...................... $11.22 $ 20.76 $ 21.70 $ 3.53 $ 7.61 ====== ======= ======= ====== ======= TOTAL RETURN ........................................ (40.92%) (1.75%) 117.00%(2) (51.54%) (23.90%)(2) RATIOS/SUPPLEMENTAL DATA Net assets, end of period (in 000's) ................ $7,758 $23,869 $24,486 $9,607 $24,570 Ratio of expenses to average net assets before reimbursement and waiver of expenses by Advisor and Administrator ............................... 2.08% 1.88% 3.45%(1) 2.69% 2.66%(1) Ratio of expenses to average net assets after reimbursement and waiver of expenses by Advisor and Administrator (Note 2) .......................... 2.00% 2.00% 2.00%(1) 2.00% 2.00%(1) Ratio of net investment income (loss) to average net assets before reimbursement and waiver of expenses by Advisor and Administrator ............................... (0.90%) (0.36%) (2.54%)(1) 1.14% 3.75%(1) Ratio of net investment income (loss) to average net assets after reimbursement and waiver of expenses by Advisor and Administrator ............................... (0.82%) (0.48%) (1.09%)(1) 1.83% 4.41%(1) Portfolio turnover ................................ 71.09% 23.00% 28.92%(2) 181.24% 50.35%(2) (1) Annualized (2) Not annualized (3) The Japan Fund commenced operations on December 31, 1998. (4) The Asian Technology Fund commenced operations on December 27, 1999.
See accompanying notes to financial statements. 26 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] ------------------------------------------------------------------------------- MATTHEWS ASIAN FUNDS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES Matthews Asian Funds (formerly, Matthews International Funds) (the "Company") is an open-end investment management company registered under the Investment Company Act of 1940, as amended (the "Act"). The Company currently issues six separate series of shares (each a "Fund" and collectively, the "Funds"): Matthews Pacific Tiger Fund, Matthews Asian Growth and Income Fund (formerly, Matthews Asian Convertible Securities Fund), Matthews Korea Fund, Matthews China Fund (formerly, Matthews Dragon Century China Fund), Matthews Japan Fund and Matthews Asian Technology Fund. Matthews Pacific Tiger Fund, Matthews Korea Fund and Matthews China Fund are authorized to offer two classes of shares: Class I shares and Class A shares. Matthews Pacific Tiger Fund, Matthews Korea Fund, Matthews China Fund, Matthews Japan Fund and Matthews Asian Technology Fund seek to maximize capital appreciation by investing, under normal circumstances, at least 65% of their total assets in equity securities of Pacific Tiger economies, South Korean companies, Chinese companies and Japanese companies, respectively. Pacific Tiger economies include Hong Kong, Singapore, South Korea, Taiwan, Indonesia, Malaysia, Philippines, Thailand and China. Matthews Asian Growth and Income Fund seeks capital appreciation and current income by investing, under normal circumstances, at least 65% of its total assets in the convertible securities of Asian economies. Asian economies include Hong Kong, Japan, Singapore, South Korea, Taiwan, Indonesia, Malaysia, Philippines, Thailand, China and India. The following is a summary of significant accounting policies consistently followed by the Funds in the preparation of their financial statements. A. SECURITY VALUATION: Securities listed on any national securities exchange are valued at their last sale price on the exchange where the securities are principally traded or, if there has been no sale on that date, at the mean between the last reported bid and asked prices. Securities traded over-the-counter are priced at the mean of the last bid and asked prices. All other securities are valued through valuations obtained from a commercial pricing service or at the most recent mean of the bid and asked prices provided by investment dealers in accordance with procedures established by the Board of Trustees. The books and records of the Funds are maintained in U.S. dollars. Transactions denominated in foreign currencies are recorded at the current prevailing exchange rates. All assets and liabilities denominated in foreign currencies are translated into U.S. dollars at the current exchange rate. Translation gains or losses resulting from changes in the exchange rate during the reporting period and realized gains and losses on the settlement of foreign currency transactions are reported in the results of operations for the current period. The Funds do not isolate that portion of gains and losses on investments in equity securities which is due to changes in the foreign exchange rate from that which is due to changes in market prices of equity securities. International dollar bonds are issued offshore, pay interest and principal in U.S. dollars, and are denominated in U.S. dollars. Portfolio securities traded on a foreign exchange are generally valued at the respective current prevailing exchange rates. The securities' values are translated into U.S. dollars using these rates. If subsequent to the time a rate has been established and it has been determined to have materially changed, the fair value of those securities, (considering the changing conditions) will be determined by (or under the direction of) the Funds' Board of Trustees. B. FORWARD FOREIGN EXCHANGE CONTRACTS: The Funds may engage in forward foreign exchange contracts for hedging a specific transaction in which the currency is denominated as deemed appropriate by Matthews International Capital Management, LLC (the "Advisor"). Forward foreign exchange contracts are valued at the forward rate and are marked-to-market daily. The change in market value is recorded by the Funds as an unrealized gain or loss. When the contract is closed, the Funds record a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. The use of forward foreign exchange contracts does not eliminate fluctuations in the underlying prices of the Funds' portfolio securities, but it does establish a rate of exchange that can be achieved in the future. Although forward foreign exchange contracts limit the risk of loss due to a decline in the value of the hedged currency, they also limit any potential gain that might result should the value of the currency increase. In addition, the Funds could be exposed to risks if the counterparties to the contracts are unable to meet the terms of their contracts. C. RISKS ASSOCIATED WITH FOREIGN SECURITIES: Investments by the Funds in the securities of foreign issuers may involve investment risks different from those of U.S. issuers including possible political or economic instability of the country of the issuer, the difficulty of predicting international trade patterns, the possibility of currency exchange controls, the possible imposition of foreign withholding tax on the interest income payable on such instruments, the possible establishment of foreign controls, the possible seizure or nationalization of foreign deposits or assets, or the adoption of other foreign government restrictions that might adversely affect the foreign securities held by the Funds. Foreign securities may also be subject to greater fluctuations in price than securities of domestic corporations or the U.S. Government. D. FEDERAL INCOME TAXES: It is the policy of the Funds to comply with all requirements of the Internal Revenue Code (the "Code") applicable to regulated investment companies and to distribute substantially all of their taxable income to their shareholders. The Funds have met the requirements of the Code applicable to regulated investment companies for the year ended August 31, 2001. Therefore, no federal income tax provision is required. Income and capital gains of the Funds are determined in accordance with both tax regulations and accounting principles generally accepted in the United States of America. Such may result in temporary and permanent differences between tax basis earnings and earnings reported for financial statement purposes. These reclassifications, which have no impact on the net asset value of the Funds, are primarily attributable to certain 27 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS ASIAN FUNDS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- differences in computation of distributable income and capital gains under federal tax rules versus accounting principles generally accepted in the United States of America and the use of the tax accounting practice known as equalization. E. DETERMINATION OF GAINS OR LOSSES ON SALES OF SECURITIES: Gains or losses on the sale of securities are determined on the identified cost basis. F. ORGANIZATION COSTS: Organization costs are being amortized on a straight-line basis over five years from each Fund's respective commencement of operations with the exception of the Matthews Japan Fund and Matthews Asian Technology Fund which were amortized on a straight-line basis over one year from the Fund's commencement of operations. In the event that any of the initial shares are redeemed during the period of amortization of the Funds' organization costs, the redemption proceeds will be reduced by any such unamortized organization costs in the same proportion as the number of initial shares being redeemed bears to the number of those shares outstanding at the time of redemption. G. DISTRIBUTIONS TO SHAREHOLDERS: It is the policy of Matthews Asian Growth and Income Fund to distribute net investment income on a semi-annual basis and capital gains, if any, annually. Matthews Pacific Tiger Fund, Matthews Korea Fund, Matthews China Fund, Matthews Japan Fund, and Matthews Asian Technology Fund distribute net investment income and capital gains, if any, annually. Distributions to shareholders are recorded on the ex-dividend date. Income and capital gain distributions are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. Net investment losses may not be utilized to offset net investment income in future periods for tax purposes. H. FUND AND CLASS ALLOCATIONS: The Funds account separately for the assets, liabilities and operations of each Fund. Direct expenses of each Fund are charged to the Fund while general expenses are allocated pro-rata among the Funds based on net asset value. Through December 15, 2001, income, expenses (other than class specific expenses), and realized and unrealized gains (losses) are calculated at the Fund level and allocated daily to each class of shares based on the relative proportion of net assets of each class. On December 15, 2000 Class A Shares were completely redeemed out of the Funds. I. USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results may differ from those estimates. J. OTHER: Securities transactions are accounted for on the date the securities are purchased or sold. Interest income is recorded on the accrual basis and dividend income on the ex-dividend date. Adoption of new accounting principle -- In order to comply with new accounting standards mandated by the latest AICPA Audit and Accounting Guide for Audits of Investment Companies (dated 12/1/00), premiums and discounts on debt securities will be amortized using the interest method for the next fiscal year beginning September 1, 2001. The effect of initially applying changes required by the Guide will have no effect on the net assets of the Funds. K. CAPITAL SHARE TRANSACTIONS: Each Fund is authorized to issue an unlimited number of shares of beneficial interest with a par value of $0.001 per share. Class A shares were sold with a front-end sales charge of 4.95% On December 15, 2000 Class A shares were completely redeemed out of the Funds. Transactions in shares of beneficial interest were as follows:
MATTHEWS PACIFIC TIGER FUND ----------------------------------------------------------------------------------------------------- CLASS I CLASS A -------------------------------------------------- -------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 AUGUST 31, 2001* AUGUST 31, 2000 ---------------------- ---------------------- ------------------------ ---------------------- SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT --------- ----------- --------- ----------- --------- ----------- --------- ---------- Shares sold............. 9,483,405 $84,833,523 6,708,677 $ 82,110,584 64,314 $ 623,933 104,297 $ 1,247,215 Shares issued through reinvestment of dividends ........... 1,053,742 9,155,114 197,956 2,392,082 15,913 138,734 2,903 35,066 Shares redeemed......... (9,891,330) (90,321,554) (8,441,468) (101,294,812) (215,664) (1,950,404) (89,013) (1,125,493) ---------- ----------- ---------- ------------ -------- ---------- ------- ----------- Net increase (decrease). 645,817 $ 3,667,083 (1,534,83) ($ 16,792,146) (135,437) ($ 1,187,737) 18,187 $ 156,788 ========== =========== ========== ============== ========= ============ ======= =========== *As of December 15, 2000 Class A shares of Pacific Tiger Fund were closed and exchanged for Class I shares. 155,798 shares were exchanged.
28 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] ------------------------------------------------------------------------------- MATTHEWS ASIAN FUNDS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2001 --------------------------------------------------------------------------------
MATTHEWS ASIAN GROWTH AND INCOME FUND -------------------------------------------------- YEAR ENDED YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 ---------------------- -------------------------- SHARES AMOUNT SHARES AMOUNT --------- ----------- --------- ------------ Shares sold ............ 2,216,555 $20,619,255 704,212 $7,052,878 Shares issued through reinvestment of dividends ........... 231,759 2,084,304 65,587 663,908 Shares redeemed ........ (849,169) (7,825,186) (814,085) (8,202,948) --------- ----------- --------- ----------- Net increase (decrease) 1,599,145 $14,878,373 (44,286) ($ 486,162) ========= =========== ========= =========== MATTHEWS KOREA FUND -------------------------------------------------------------------------------------------------------- CLASS I CLASS A ----------------------------------------------------- ------------------------------------------------- YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED AUGUST 31, 2001 AUGUST 31, 2000 AUGUST 31, 2001* AUGUST 31, 2000 -------------------------- ------------------------- ------------------------ ------------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------ ---------- ----------- --------- ----------- Shares sold............. 46,719,161 $ 139,361,838 22,234,328 $143,560,898 436,242 $ 1,828,679 1,087,775 $ 6,675,877 Shares issued through reinvestment of dividends 14,125,165 35,370,865 2,867,052 22,391,670 1,380,958 3,341,918 221,542 1,714,731 Shares redeemed......... (39,309,187) (121,848,726) (33,747,464) (223,646,860) (4,107,637) (11,055,110)(1,072,224) (6,427,049) ----------- ------------ ----------- ------------ ---------- ------------ ---------- ----------- Net increase (decrease). 21,535,139 $ 52,883,977 (8,646,084)($ 57,694,292) (2,290,437) ($ 5,884,513) 237,093 $ 1,963,559 =========== ============= =========== ============ ========== ============ ========== =========== MATTHEWS MATTHEWS CHINA FUND JAPAN FUND --------------------------------------------------- ------------------------------------------------- YEAR ENDED PERIOD ENDED YEAR ENDED PERIOD ENDED AUGUST 31, 2001 AUGUST 31, 2000 AUGUST 31, 2001 AUGUST 31, 2000 -------------------------- ------------------------- ------------------------ ------------------------ SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ------------ ---------- ----------- --------- ----------- Shares sold............. 3,045,164 $ 32,057,967 922,748 $ 8,321,445 639,752 $9,296,535 2,158,789 $47,157,104 Shares issued through reinvestment of dividends 49,078 392,130 11,236 100,022 79,959 1,232,922 28,758 573,444 Shares redeemed......... (1,868,802) (18,508,076) (740,130) (6,455,484) (1,177,987) (17,685,231)(2,166,167) (45,866,878) ----------- ------------ ----------- ------------ ---------- ------------ ---------- ----------- Net increase (decrease). 1,225,440 $ 13,942,021 193,854 $ 1,965,983 (458,276) ($7,155,774) 21,380 $1,863,670 =========== ============= =========== ============ ========== ============ ========== =========== MATTHEWS ASIAN TECHNOLOGY FUND -------------------------------------------------- YEAR ENDED PERIOD ENDED AUGUST 31, 2001 AUGUST 31, 2000 -------------------------- ------------------------ SHARES AMOUNT SHARES AMOUNT ----------- ------------- ----------- ----------- Shares sold............. 6,956,729 $ 34,380,863 5,216,329 $49,292,911 Shares issued through reinvestment of dividends 125,864 610,441 -- -- Shares redeemed......... (7,584,635) (38,729,160) (1,989,681) (17,386,085) ----------- ------------ ----------- ----------- Net increase (decrease). (502,042) ($ 3,737,856) 3,226,648 $31,906,826 =========== ============= =========== =========== *As of December 15, 2000 Class A shares of Korea Fund were closed and exchanged for Class I shares. 1,092,968 shares were exchanged.
The Funds impose a redemption fee of 2.00% on shares that are redeemed within ninety days of purchase. The charge is assessed on an amount equal to the net asset value of the shares at the time of redemption. The redemption fee is deducted from the proceeds otherwise payable to the shareholder. The redemption fees were returned to the assets of the Pacific Tiger Fund, Asian Growth and Income Fund, Korea Fund, China Fund, Japan Fund and Asian Technology Fund in the amounts of $562,008, $22,074, $1,455,637, $170,617, $78,555 and $441,968, respectively. 29 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MATTHEWS ASIAN FUNDS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- 2. INVESTMENT ADVISORY FEES AND OTHER TRANSACTIONS WITH AFFILIATES The Advisor, a registered investment advisor, provides the Funds with investment management services. As compensation for these services, the Advisor charges the Funds a monthly fee of 1/12 of 1% on each Fund's respective average daily net assets. The Funds reimburse the Advisor any service fees paid by it to the extent that shareholder service related expenses are incurred by the Advisor. Certain officers and Trustees of the Funds are also officers and directors of the Advisor. All officers serve without direct compensation from the Funds. Investment advisory fees and other transactions with affiliates, for the year ended August 31, 2001, are as follows:
EXPENSES INVESTMENT VOLUNTARY WAIVED AND ADVISORY EXPENSE ADVISORY REIMBURSED FEE RATE LIMITATION FEES BY ADVISOR ---------- ----------- ---------- ----------- Matthews Pacific Tiger Fund ................ 1.00% 1.90% $ 859,562 $ -- Matthews Asian Growth and Income Fund ...... 1.00 1.90 164,505 -- Matthews Korea Fund ........................ 1.00 2.50 1,100,527 -- Matthews China Fund ........................ 1.00 2.00 143,738 -- Matthews Japan Fund ........................ 1.00 2.00 125,198 10,446 Matthews Asian Technology Fund.............. 1.00 2.00 133,330 91,642
The investment advisory agreements provide that any reductions made by the Advisor in its fees are subject to reimbursement by the Funds within the following three years provided that Funds are able to effect such reimbursement and remain in compliance with applicable expense limitations. During the year ended August 31, 2001, the Matthews Pacific Tiger Fund, Matthews Asian Growth and Income Fund and Matthews China Fund reimbursed expenses to the Advisor totaling $87,437, $2,329 and $2,740. As of August 31, 2001, the total expenses waived and reimbursed by the Advisor that are subject to reimbursement by the Matthews Pacific Tiger Fund, Matthews Asian Growth and Income Fund, Matthews Korea Fund, Matthews China Fund, Matthews Japan Fund and Matthews Asian Technology Fund totaled $85,156, $17,499, $0, $14,721, $71,360 and $170,186, respectively. PFPC Inc. ("PFPC"), an indirect wholly-owned subsidiary of PNC Bank, serves as the Trust's Administrator and, in that capacity, performs various administrative and accounting services for each Fund. PFPC also serves as the Trust's Transfer Agent, dividend disbursing agent and registrar. An officer of PFPC serves as Asst. Treasurer to the Trust. Total fees received by PFPC for the year ended August 31, 2001 were $469,192 for administrative and accounting services and $220,056 for transfer agent services. 3. DISTRIBUTOR FEES AND CLASS SPECIFIC EXPENSES Effective January 2, 2001, PFPC Distributors, Inc. (the "Distributor") serves as the Funds' Distributor pursuant to an Underwriting Agreement. Prior to January 2, 2001, Provident Distributors, Inc. served as the Funds' distributor. Pursuant to Rule 12b-1 adopted by the Securities and Exchange Commission under the Act, the Pacific Tiger Fund Class A and the Korea Fund Class A, have adopted a Plan of Distribution (the "Plan"). The Plan permits the participating Funds to pay certain expenses associated with the distribution of their shares. Under the Plan, each Fund offering Class A shares may pay actual expenses not exceeding, on an annual basis, 0.25% of each participating Fund's Class A average daily net assets. The Class I shares of the Funds do not have a distribution plan. The Funds bear a portion of the fees paid to certain services providers (exclusive of the Funds' transfer agent) which provide transfer agency and shareholder servicing to certain shareholders. Fees paid to such service providers for the year ended August 31, 2001 are reflected in the statement of operations as follows:
TRANSFER AGENT ADMINISTRATION TOTAL -------------- -------------- --------- Matthews Pacific Tiger Fund.......................... $ 101,497 $47,531 $149,028 Matthews Asian Growth and Income Fund ............... 16,176 8,106 24,282 Matthews Korea Fund.................................. 110,257 55,264 165,521 Matthews China Fund.................................. 13,394 6,712 20,106 Matthews Japan Fund.................................. 14,456 7,262 21,718 Matthews Asian Technology Fund....................... 16,471 8,273 24,744
30 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] ------------------------------------------------------------------------------- MATTHEWS ASIAN FUNDS NOTES TO FINANCIAL STATEMENTS AUGUST 31, 2001 -------------------------------------------------------------------------------- 4. INVESTMENT TRANSACTIONS Investment transactions for the year ended August 31, 2001, excluding temporary short-term investments, were as follows: PROCEEDS PURCHASES FROM SALES ----------- ------------ Matthews Pacific Tiger Fund............ $55,054,008 $62,384,411 Matthews Asian Growth and Income Fund.. 17,978,210 5,459,060 Matthews Korea Fund.................... 96,353,955 90,508,536 Matthews China Fund.................... 22,631,491 8,460,520 Matthews Japan Fund.................... 8,941,313 16,683,129 Matthews Asian Technology Fund......... 24,404,534 28,671,392 The Funds invest excess cash in interest bearing deposits at The Bank of New York. 5. CAPITAL LOSS CARRYOVER At August 31, 2001, the Funds had capital loss carryovers expiring through 2009 as follows: FUND EXPIRING ON: ------ ---------------------- 2008 2009 ---- ---- Matthews Japan Fund.................... $2,390,436 $3,877,447 Matthews Asia Technology Fund.......... -- 35,094 These amounts are available to offset possible future capital gains of the Fund. 6. POST OCTOBER LOSS Under the current tax law, capital losses realized after October 31 and prior to the Fund's fiscal year end may be deferred as occuring on the first day of the following year. For the fiscal year ended August 31, 2001, the Funds elected to defer capital losses as follows: LOSSES DEFERRED ------------------------------ FUND SECURITIES FOREIGN CURRENCY ------ ----------- ---------------- Matthews Pacific Tiger................. $ 1,264,587 $ 98,857 Matthews Asia Growth & Income.......... 940,157 5,242 Matthews Korea......................... 11,180,368 519,336 Matthews China......................... 801,391 -- Matthews Japan ........................ 3,870,740 119,711 Matthews Asia Technology .............. 6,843,754 63,015 31 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS -------------------------------------------------------------------------------- To the Shareholders and Board of Trustees of Matthews Asian Funds: We have audited the accompanying statements of assets and liabilities of Matthews Asian Funds, formerly Matthews International Funds (comprised of the Matthews Pacific Tiger Fund, Matthews Asian Growth and Income Fund, Matthews Korea Fund, Matthews China Fund, formerly Matthews Dragon Century China Fund, Matthews Japan Fund and Matthews Asian Technology Fund, collectively referred to as the "Funds") including the schedules of Investments as of August 31, 2001, and the related statements of operations for the year then ended, statements of changes in net assets for each of the two years in the period then ended and financial highlights for the periods subsequent to August 31, 1998 indicated thereon. These financial statements and financial highlights are the responsibility of the Funds' management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. The financial highlights of the Funds for the periods prior to September 1, 1998 were audited by other auditors whose report dated October 9, 1998 expressed an unqualified opinion on the financial highlights. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of August 31, 2001, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Matthews Asian Funds as of August 31, 2001, the results of their operations for the year then ended, changes in their net assets for each of the two years in the period then ended and the financial highlights for each of the periods subsequent to August 31, 1998 indicated thereon, in conformity with accounting principles generally accepted in the United States of America. TAIT, WELLER & BAKER Philadelphia, Pennsylvania October 5, 2001 32 MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- MORNINGSTAR ANALYSIS by William Samuel Rocco [MORNINGSTAR LOGO OMITTED] MORNINGSTAR (REGISTRATION MARK] MATTHEWS PACIFIC TIGER FUND: Matthews Pacific Tiger continues to crush the competition in its chaotic category. This fund has outpaced the vast majority of its rivals so far this year. Korea and China have been among the region's best markets in 2001, and the fund has been heavily weighted in both all year. Indeed, managers Paul Matthews and Mark Headley have held on to their sizable stakes in Korea's Hana Bank and Samsung Electronics, and they initiated positions in S1 Corporation and Internet Auction in May. They've also stuck with Huaneng Power and most of their other stocks in China, while adding a few new names such as New World China Land. What's more, the fund got a boost from its tech exposure earlier in the year and its financials exposure more recently. As a result, the fund is up 6% for the year to date through June 26, 200, whereas the average offering in its group is down 5%. The fund has also fared better than its typical peer over the long term, as Matthews and Headley's growth-oriented stock selection has usually been right on the mark. For example, the fund gained 83% in 1999's growth surge--while its average peer returned 75%--thanks largely to Legend Holdings and several of their other tech and telecom picks. Moreover, the fund has earned its returns without suffering too much more volatility than most other entries in the turbulent Pacific/Asia ex-Japan group. Though Matthews and Headley are growth-oriented investors, they pay a lot of attention to issue diversification, and the fund has a broader country range than many in the category (which includes several greater-China offerings). Thus, we think that this fund remains a first-rate option for investors who are confident about emerging Asia's long-term future and are comforable with the many risks that come with investing in any regional emerging-markets offering. -- JUNE 27, 2001 ------------------------- MATTHEWS ASIAN GROWTH AND INCOME FUND: This fund continues to be a great way to play emerging Asia while moderating the risks that come with investing in that region. Matthews Asian Growth & Income fund is the least risky option in the perilous Pacific/Asia ex-Japan category. Thanks to its emphasis on convertible bonds, it has handily outpaced its rivals during the region's many downturns. In fact, besides losing 10 percentage points less than its average peer in the crash of 1997, the fund gained 1% in the stormy conditions of 1998--while its typical rival lost 9%--buoyed by the fixed-income features and dollar denominations of its converts. While he favors converts, manager Paul Matthews also has routinely purchased stocks that have high dividends. And as the yields on emerging Asia's bonds have come down over the past year, Matthews had paid increased attention to high-yielding stocks. He sold or trimmed the fund's stakes in Zenhai Refining and some other converts earlier this year, for example, while adding to his positions in the stocks of Petro China, Huaneng Power, and others. And he recently initiated positions in the stocks of Korea's Hyundai Department Stores and the Hong Kong fast-food chain Cafe de Coral, partly because he's optimistic about domestic oonsumption in those markets. Overall, the fund's equity weighting is now roughly 50% of assets, up from less than 20% few years ago. This increased equity exposure has paid off thus far in 2001. Petro China and Huaneng Power are up about 36% and 29%, respectively, this year, and several of the fund's other stocks have posted solid gains. Many of its converts have also helped performance. For example, the converts of Hyundai Motors and China's Qingling Motors have provided a boost in recent weeks. -- JUNE 27, 2001 WWW.MATTHEWSFUNDS.COM --------------------- 800.789.ASIA [2742] -------------------------------------------------------------------------------- OUR VIEWS OF ASIA [PHOTO OF MARK HEADLEY'S VISIT TO SMIC OMITTED] Mark Headley, President of Matthews International Capital Management, visits SMIC's new $1.6 billion semiconductor fabrication plant in Shanghai. SMIC is a consortium of major technology companies from Taiwan and the United States. SEPTEMBER 2001 [PHOTO OF RICHARD GAO'S VISIT TO YANJING BEER GROUP OMITTED] Richard Gao, co-portfolio manager of the Matthews China Fund, visits Yanjing Beer Group in Beijing, one of the largest high-tech breweries in the world. OCTOBER 2000 [DRAGON GRAPHIC OMITED] MATTHEWS ASIAN FUNDS -------------------------------------------------------------------------------- [PHOTO OF GIORDANO'S GUANGZHOU BRANCH OMITTED] Giordano's Guangzhou branch, one of the retailer's 400 retail clothing stores in China. There are a total of 800 Giordano stores throughout Asia. MAY 2001 [PHOTO OF OLD SHANGHAI OMITTED] A view of old Shanghai from new Shanghai. MAY 2001 [PHOTO OF STARBUCKS OMITTED] Starbucks is taking Tokyo by storm with clean, smoke-free shops. A good jolt of caffeine is just what Japan needs. SEPTEMBER 2001 [PHOTO OMITTED] Japan has the world's most sophisticated mobile phone service. The world's first 3G (third-generation) system is being introduced in Japan in October 2001. SEPTEMBER 2001 [DRAGON GRAPHIC OMITTED]