-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ARsJ693Ue/ElnkQ5jf5fIfmU6FJuuJ2Tz/Y/B/vJMaUi3ZJTW0JrBVNCCiMyx/+L L7PtUJ+WV5gFFrNZcTuezQ== 0000909226-03-000012.txt : 20030417 0000909226-03-000012.hdr.sgml : 20030417 20030417144907 ACCESSION NUMBER: 0000909226-03-000012 CONFORMED SUBMISSION TYPE: N-1A PUBLIC DOCUMENT COUNT: 22 FILED AS OF DATE: 20030417 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON CHINA WORLD FUND INC CENTRAL INDEX KEY: 0000909226 IRS NUMBER: 593192206 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-1A SEC ACT: 1933 Act SEC FILE NUMBER: 333-104602 FILM NUMBER: 03654115 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD SUITE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON CHINA WORLD FUND INC CENTRAL INDEX KEY: 0000909226 IRS NUMBER: 593192206 STATE OF INCORPORATION: MD FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-1A SEC ACT: 1940 Act SEC FILE NUMBER: 811-07876 FILM NUMBER: 03654116 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD SUITE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394 N-1A 1 tch-n1a.txt CHINA WORLD FUND INITIAL FILING File Nos.33-[] and 811-7876 As filed with the Securities and Exchange Commission on April 17, 2003 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. [ ] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 3 [X] ------ (Check appropriate box or boxes) TEMPLETON CHINA WORLD FUND -------------------------------------------------- (Exact Name of Registrant as Specified in Charter) 500 EAST BROWARD BLVD., FORT LAUDERDALE, FLORIDA 33394 -------------------------------------------------------- (Address of Principal Executive Offices) (Zip Code) (954) 527-7500 ----------------------------------------------------- (Registrant's Telephone Number, Including Area Code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and Address of Agent for Service of Process) Approximate Date of Proposed Public Offering: As soon as practicable following the effective date of this registration statement. The Registrant hereby amends this Registration Statement on such dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this Registration Statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine. PART A PROSPECTUS CLASS A, B, C & R SHARES [JUNE 20,] 2003 The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. PROSPECTUS CLASS A, B, C & R TEMPLETON CHINA WORLD FUND [Insert FRANKLIN(R)TEMPLETON(R)INVESTMENTS logo] CONTENTS THE FUND [Begin callout] INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING [End callout] [insert page #] Goal and Strategies [insert page #] Main Risks [insert page #] Performance [insert page #] Fees and Expenses [insert page #] Management [insert page #] Distributions and Taxes [insert page #] Financial Highlights YOUR ACCOUNT [Begin callout] INFORMATION ABOUT SALES CHARGES, ACCOUNT TRANSACTIONS AND SERVICES [End callout] [insert page #] Choosing a Share Class [insert page #] Buying Shares [insert page #] Investor Services [insert page #] Selling Shares [insert page #] Account Policies [insert page #] Questions FOR MORE INFORMATION [Begin callout] WHERE TO LEARN MORE ABOUT THE FUND [End callout] Back Cover THE FUND [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES ------------------- GOAL The Fund's investment goal is long-term capital appreciation. MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in securities of "China companies," as defined below. Shareholders will be given 60 days' advance notice of any change to this 80% policy. For purposes of the Fund's investments, China companies are those: o that are organized under the laws of, or with a principal office in, the People's Republic of China (China), Hong Kong or Taiwan; or o for which the principal trading market is in China, Hong Kong or Taiwan; or o that derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets, in China. [Begin callout] THE FUND INVESTS PRIMARILY IN THE EQUITY SECURITIES OF CHINA COMPANIES. CHINA COMPANIES MAY BE SMALLER, NEWLY ORGANIZED AND RELATIVELY UNSEASONED COMPANIES. [End callout] An equity security, or stock, represents a proportionate share of the ownership of a company. Its value is based on the success of the company's business, any income paid to stockholders, the value of the company's assets, and general market conditions. Common stocks, preferred stocks and convertible securities are examples of equity securities. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. The Fund also invests in American, Global and European depositary receipts, which are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic corporation. In addition to the Fund's main investments, the Fund may invest up to 20% of its net assets in securities that do not qualify as China company securities, but whose issuers, in the judgment of the manager, are expected to benefit from developments in the economy of China. The Fund may also invest up to 20% of its net assets in debt obligations of China companies, which may be lower-rated or unrated, when consistent with the Fund's investment goal. When choosing equity investments for this Fund, the manager applies a "bottom up," value-oriented, long-term approach, focusing on the market price of a company's securities relative to the manager's evaluation of the company's long-term earnings, asset value and cash flow potential. The manager also considers a company's price/earnings ratio, profit margins and liquidation value. The Fund should be thought of as a long-term investment for the aggressive portion of a well diversified portfolio. TEMPORARY INVESTMENTS When the manager believes market, economic, financial or political conditions make it advisable, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash or certain short-term and medium-term debt securities rated, at the time of investment, A or higher by Moody's Investors Service (Moody's) or Standard & Poor's Ratings Group (S&P(R)) or, if unrated, determined to be of comparable quality. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS ---------- [Begin callout] Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods. [End callout] FOREIGN SECURITIES Investing in foreign securities, including securities of foreign governments and depositary receipts, typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price. CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign currencies. As a result, their values may be affected by changes in exchange rates between foreign currencies and the U.S. dollar, as well as between currencies of countries other than the U.S. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth less in U.S. dollars. POLITICAL AND ECONOMIC DEVELOPMENTS. The growing interconnectivity of global economies and financial markets has increased the possibilities that conditions in one country or region might adversely impact the issuers of securities in a different country or region. In particular, the adoption or continuation of protectionist trade policies by one or more countries, or a slowdown in the U.S. economy, could lead to a decrease in demand for Chinese, Hong Kong and Taiwanese products and reduced flows of private capital to these economies. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. Investments in these countries may be subject to the risks of internal and external conflicts, currency devaluations, foreign ownership limitations and tax increases. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments. Diplomatic and political developments, including rapid and adverse political changes, social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Fund's investments, in non-U.S. countries. These factors are extremely difficult, if not impossible, to predict and take into account with respect to the Fund's investments. TRADING PRACTICES. Brokerage commissions and other fees generally are higher for foreign securities. Government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers may be less than in the U.S. The procedures and rules governing foreign transactions and custody (holding of the Fund's assets) also may involve delays in payment, delivery or recovery of money or investments. AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about foreign companies than about most U.S. companies. LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell) and more volatile than many U.S. securities. This means the Fund may at times be unable to sell foreign securities at favorable prices. EMERGING MARKETS. The economies of some of the countries in which the Fund invests may be considered emerging markets. The risks of foreign investments typically are greater in less developed countries, sometimes referred to as developing or emerging markets. For example, political and economic structures in these countries may be less established and may change rapidly. These countries also are more likely to experience high levels of inflation, deflation or currency devaluation, which can harm their economies and securities markets and increase volatility. In fact, short-term volatility in these markets, and declines of 50% or more, are not uncommon. GEOGRAPHIC CONCENTRATION There is a high correlation among the Chinese, Hong Kong and Taiwanese markets. Accordingly, because the Fund invests a significant amount of its assets in these markets, it is subject to much greater risks of adverse events that occur in that region and may experience greater volatility than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, including conflicts and currency devaluations, even in countries in which the Fund is not invested, may adversely affect security values in other countries in the region and thus the Fund's holdings. STOCKS Although this may not be the case in foreign markets, in the U.S., stocks historically have outperformed other types of investments over the long term. Individual stock prices, however, tend to go up and down more dramatically. These price movements may result from factors affecting individual companies or industries, or the securities market as a whole. A slower-growth or recessionary economic environment could have an adverse effect on the price of the various stocks held by the Fund. SMALLER COMPANIES While smaller companies may offer substantial opportunities for capital growth, they also involve substantial risks and should be considered speculative. Historically, smaller company securities have been more volatile in price than larger company securities, especially over the short term. Among the reasons for the greater price volatility are the less certain growth prospects of smaller companies, the lower degree of liquidity in the markets for such securities, and the greater sensitivity of smaller companies to changing economic conditions. In addition, smaller companies may lack depth of management, be unable to generate funds necessary for growth or development, or be developing or marketing new products or services for which markets are not yet established and may never become established. LIQUIDITY The Fund may invest up to 15% of its net assets in securities with a limited trading market. Reduced liquidity may have an adverse impact on market price and the Fund's ability to sell particular securities when necessary to meet the Fund's liquidity needs or in response to a specific economic event. DIVERSIFICATION The Fund is a non-diversified fund. It may invest a greater portion of its assets in the securities of one issuer than a diversified fund. The Fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities, which may result in greater fluctuation in the value of the Fund's shares. The Fund, however, intends to meet certain tax diversification requirements. In addition, as a matter of non-fundamental policy the Fund may not invest more than 10% of its total assets in the securities of any one issuer. INCOME Since the Fund can only distribute what it earns, the Fund's distributions to shareholders may decline when interest rates fall. CREDIT An issuer of securities may be unable to make interest payments and repay principal. Changes in an issuer's financial strength or in a security's credit rating may affect a security's value and, thus, impact Fund performance. INTEREST RATE When interest rates rise, debt security prices fall. The opposite is also true: debt security prices rise when interest rates fall. In general, securities with longer maturities are more sensitive to these price changes. Increases in interest rates may have a negative effect on the types of companies in which the Fund normally invests because these companies may find it more difficult to obtain credit to expand, or may have more difficulty meeting interest payments. Increased interest rates in the U.S. and Europe may also affect the economies of China, Hong Kong and Taiwan and thus their markets and issuers. VALUE INVESTING A value stock may not increase in price as anticipated by the manager if other investors fail to recognize the company's value and bid up the price, the markets favor faster-growing companies, or the factors that the manager believes will increase the price of the security do not occur. More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI). [Begin callout] Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Mutual fund shares involve investment risks, including the possible loss of principal. [End callout] [Insert graphic of a bull and a bear] PERFORMANCE ----------- On [June 20,] 2003, Templeton China World Fund, Inc. (Closed-End Fund) was converted to an open-end fund in a transaction whereby the Closed-End Fund transferred all of its assets, subject to its liabilities, to the Fund in exchange for Advisor Class shares. Shareholders of the Closed-End Fund received Advisor Class shares of the Fund in exchange for their shares of the Closed-End Fund. The total return information presented below is based upon the Closed-End Fund's performance, which has been restated to reflect all charges, fees and expenses currently applicable to the Fund and Class A, B, C and R. TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes the current, applicable maximum sales charges, Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvested dividends. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. Of course, past performance cannot predict or guarantee future results. [Insert Class A line graph] [Insert Class B line graph] [Insert Class C line graph] [Insert Class R line graph] This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 9 calendar years, and has been restated to reflect the effect of Class A's 12b-1 fee and all applicable charges, fees, and expenses as if such charges, fees and expenes had been in effect during that time period. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. CLASS A ANNUAL TOTAL RETURNS/1 [Insert bar graph] []% []% []% []% []% []% []% []% []% - -------------------------------------------------- 94 95 96 97 98 99 00 01 02 YEAR [Begin callout] BEST QUARTER: Q[] '[] []% WORST QUARTER: Q[] '[] []% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 2002 SINCE INCEPTION 1 YEAR 5 YEARS (9/9/93) - ------------------------------------------------------------------------------- Templeton China World Fund - Class A/2/ Return Before Taxes []% []% []% Return After Taxes on Distributions []% []% []% Return After Taxes on Distributions and Sale of Fund Shares []% []% []% [] Index/3 []% []% []% (([index reflects][indices reflect] no deduction for fees, expenses, or taxes) SINCE INCEPTION 1 YEAR 5 YEARS (9/9/93) - -------------------------------------------------------------------------------- Templeton China World Fund - Class B/2/ []% []% []% [] Index/3 []% []% []% SINCE INCEPTION 1 YEAR 5 YEARS (9/9/93) - -------------------------------------------------------------------------------- Templeton China World Fund - Class C/2/ []% []% []% [] Index/3 []% []% []% SINCE INCEPTION 1 YEAR 5 YEARS (9/9/93) - -------------------------------------------------------------------------------- Templeton China World Fund - Class R/2/ []% []% []% [] Index/3/ []% []% []% After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown. These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future. After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary. 1. Figures do not reflect sales charges. If they did, returns would be lower. As of March 31, 2003, the Fund's year-to-date return as restated for Class A was []%. 2. Figures reflect sales charges. All Fund performance assumes reinvestment of dividends and capital gains. The Closed-End Fund was offered without a sales charge and Rule 12b-1 fees. On [June 20,] 2003, the Fund began offering Class A, B, C and R shares. For periods prior to [June 20,] 2003, performance quotations are based upon the Closed-End Fund's performance restated to take into account all charges, fees and expenes applicable to the Fund and each class, including that class's applicable maximum sales charges and Rule 12b-1 fees. For periods after [June 20,] 2003, actual class performance will be used reflecting all charges, fees and expenses applicable to the Fund and each class. 3. [Source: Standard & Poor's Micropal [(INSERT APPROPRIATE INDEX HERE)].] The unmanaged [] Index []. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. [Insert graphic of percentage sign] FEES AND EXPENSES ----------------- This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS C CLASS R - ------------------------------------------------------------------------------- Maximum sales charge (load) as a percentage of offering price 5.75% 4.00% 1.99% 1.00% Load imposed on purchases 5.75% None 1.00% None Maximum deferred sales charge (load) None/1 4.00%/2 0.99%/3 1.00% Redemption fee/4 2.00% 2.00% 2.00% 2.00% Please see "Choosing a Share Class" on page [#] for an explanation of how and when these sales charges apply. ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)/5 CLASS A CLASS B CLASS C CLASS R - ------------------------------------------------------------------------------- Management fees 1.25% 1.25% 1.25% 1.25% Distribution and service (12b-1) fees 0.35% 1.00 1.00% 0.50% Other expenses (including administration fees) 0.72% 0.72% 0.72% 0.72% --------------------------------------- Total annual Fund operating expenses 2.32% 2.97% 2.97% 2.47% ======================================= 1. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page [#]) and purchases by certain retirement plans without an initial sales charge. 2. Declines to zero after six years. 3. This is equivalent to a charge of 1% based on net asset value. 4. This fee is only for Market Timers (see page [#]). 5. The Fund began offering Class A, B, C and R shares on [June 20,] 2003. Management fees are based on the management fees for the Closed-End Fund for the fiscal year ended August 31, 2002. The distribution and service (12b-1) fees shown are based on each class's maximum contractual amount. Other expenses are estimated and are based on an assumption that 50% of the Closed-End Fund's shares will be redeemed immediately following the conversion of the Closed-End Fund to an open-end fund. For more information about anticipated redemptions, please see "Redemptions in Kind" on page [#]. EXAMPLE This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes: o You invest $10,000 for the periods shown; o Your investment has a 5% return each year; and o The Fund's operating expenses remain the same. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ------------------------------------------------------------------------------- If you sell your shares at the end of the period: CLASS A $797/1 $1,258 $1,744 $3,078 CLASS B $700 $1,218 $1,762 $3,137/2 CLASS C $496 $1,009 $1,647 $3,357 CLASS R $350 $770 $1,316 $2,806 If you do not sell your shares: CLASS B $300 $918 $1,562 $3,137/2 CLASS C $397 $1,009 $1,647 $3,357 CLASS R $250 $770 $1,316 $2,806 1. Assumes a contingent deferred sales charge (CDSC) will not apply. 2. Assumes conversion of Class B shares to Class A shares after eight years, lowering your annual expenses from that time on. [Insert graphic of briefcase] MANAGEMENT Templeton Asset Management Ltd., whose principal office is 7 Temasek Blvd., Suntec Tower One, #38-03, Singapore 038987, is the Fund's investment manager. Templeton Asset Management Ltd. has a branch office in Hong Kong. Together, Templeton Asset Management Ltd. and its affiliates manage over $252 billion in assets. The Fund's lead portfolio manager is: MARK MOBIUS, PH.D, Managing Director of Templeton Asset Management LTD. Mr. Mobius has been a manager of the Fund since inception. He joined Franklin Templeton Investments in 1987. The following individual has secondary portfolio management responsibilities: ALLAN LAM, PORTFOLIO MANAGER OF TEMPLETON ASSET MANAGEMENT LTD. Mr. Lam has been a manager of the Fund since 19[]. He joined the Hong Kong office of Franklin Templeton Investments in 1987. The Fund pays Templeton Asset Management Ltd. a fee for managing the Fund's assets. For the fiscal year ended August 31, 2002, the Fund paid 1.25% of its average weekly net assets to the manager for its services. [Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES ----------------------- DISTRIBUTIONS AND TAXES The Fund intends to make a distribution at least annually from its net investment income and any net realized capital gains. The amount of any distribution will vary, and there is no guarantee the Fund will pay either an income dividend or a capital gain distribution. AVOID "BUYING A DIVIDEND" If you invest in the Fund shortly before it makes a distribution, you may receive some of your investment back in the form of a taxable distribution. TAX CONSIDERATIONS In general, if you are a taxable investor, Fund distributions are taxable to you as either ordinary income or capital gains. This is true whether you reinvest your distributions in additional Fund shares or receive them in cash. Any capital gains the Fund distributes are taxable as long-term capital gains no matter how long you have owned your shares. Every January, you will receive a statement that shows the tax status of distributions you received for the previous year. BACKUP WITHHOLDING By law, the Fund must withhold a portion of your taxable distributions and sales proceeds unless you: o provide your correct social security or taxpayer identification number, o certify that this number is correct, o certify that you are not subject to backup withholding, and o certify that you are a U.S. person (including a U.S. resident alien). The Fund also must withhold if the IRS instructs it to do so. When withholding is required, the amount will be 30% of any distributions or proceeds paid in calendar year 2003, and 29% of any amounts paid in calendar years 2004 and 2005. When you sell or redeem your shares in the Fund, whether you receive cash, securities or other assets of the Fund, you may realize a capital gain or loss. For tax purposes, an exchange of your Fund shares for shares of a different Franklin Templeton fund is the same as a sale. Fund distributions and gains from the sale of your Fund shares generally are subject to state and local taxes. Any foreign taxes the Fund pays on its investments may be passed through to you as a foreign tax credit. Non-U.S. investors may be subject to U.S. withholding or estate tax, and are subject to special U.S. tax certification requirements. You should consult your tax advisor about the federal, state, local or foreign tax consequences of your investment in the Fund. [Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS -------------------- This table presents the financial performance for the Closed-End Fund for the past five years. On [June 20,] 2003, the Closed-End Fund was converted to an open-end fund in a transaction whereby the Closed-End Fund transferred all of its assets, subject to its liabilities, to the Fund, in exchange for Advisor Class shares. Shareholders of the Closed-End Fund received Advisor Class shares of the Fund in exchange for their shares of the Closed-End Fund. Certain information reflects financial results for a single Closed-End Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Closed-End (assuming reinvestment of dividends and capital gains). The information for the four years ended August 31, 2002 has been audited by PricewaterhouseCoopers LLP, whose report, along with the Closed-End Fund's financial statements, are included in the Closed-End Fund's annual report, which is available upon request. The information for the fiscal year ended 1998 was audited by other auditors. Financial statements and financial highlights for Class A, B, C and R will be included in the Fund's annual report when Class A, B, C and R have completed their first annual period. Class A, B, C and R have higher total expenses than the Closed-End Fund.
CLOSED-END FUND YEAR ENDED AUGUST 31, - ------------------------------------------------------------------------------------------ 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------ PER SHARE DATA ($)/1 Net asset value, beginning of period 9.52 11.33 9.83 6.30 17.32 ------------------------------------------------- Net investment income (loss) .21 .18 .23 .10 .30 Net realized and unrealized gains (losses) .98 (1.98) 1.42 3.65 (10.45) ------------------------------------------------- Total from investment operations 1.19 (1.80) 1.65 3.75 (10.15) ------------------------------------------------- Capital share repurchases .11 .09 .07 - .08 ------------------------------------------------- Distributions from net investment income (.18) (.10) (.22) (.21) (.26) Distributions from net realized capital gains - - - (.01) (.69) ------------------------------------------------- Total distributions (.18) (.10) (.22) (.22) (.95) ------------------------------------------------- Net asset value, end of period 10.64 9.52 11.33 9.83 6.30 ================================================= Market value, end of period/2 9.100 7.730 8.000 7.625 4.313 ================================================= Total return (%) (based on market value per share) 20.27 (2.14) 7.86 82.81 (61.83) RATIOS/SUPPLEMENTAL DATA Net assets, end of period ($ x 1,000) 173,204 172,209 213,953 189,994 121,697 Ratios to average net assets: (%) Expenses 1.66 1.66 1.68 1.69 1.68 Net investment income 2.01 1.70 2.21 1.20 2.88 Portfolio turnover rate (%) 44.62 83.85 142.49 83.88 34.75
1. Based on average weighted shares outstanding effective year ended August 31, 1999. 2. Based on the last sale on the New York Stock Exchange. YOUR ACCOUNT [Insert graphic of pencil marking an "X"] CHOOSING A SHARE CLASS ---------------------- Each class has its own sales charge and expense structure, allowing you to choose the class that best meets your situation. Your investment representative can help you decide.
CLASS A CLASS B CLASS C CLASS R - ------------------------------------------------------------------------------------------------------------- o Initial sales charge o No initial sales o Initial sales o No initial sales of 5.75% or less charge charge of 1% charge o Deferred sales o Deferred sales o Deferred sales o Except for certain charge of 1% on charge of 4% on charge of 1% on Employer Sponsored purchases of $1 million shares you sell shares you sell Retirement Plans, or more sold within 18 within the first within 18 months deferred sales charge months year, declining to 1% of 1% on shares you within six years and sell within 18 months eliminated after that (charged at plan level based on initial investment) o Lower annual o Higher annual o Higher annual o Higher annual expenses than Class B, expenses than Class A expenses than Class expenses than Class A C or R due to lower due to higher A due to higher due to higher distribution fees distribution fees. distribution fees. No distribution fees Automatic conversion conversion to Class (lower than Class B and to Class A shares A shares, so annual Class C). No conversion after eight years, expenses do not to Class A shares, so reducing future decrease. annual expenses do not annual expenses. decrease.
THE FUND BEGAN OFFERING CLASS A, B, C AND R SHARES ON [JUNE 20,] 2003. SALES CHARGES - CLASS A THE SALES CHARGE MAKES UP WHICH EQUALS THIS THIS % OF THE % OF YOUR NET WHEN YOU INVEST THIS AMOUNT OFFERING PRICE INVESTMENT - ------------------------------------------------------------------------------- Under $50,000 5.75 6.10 $50,000 but under $100,000 4.50 4.71 $100,000 but under $250,000 3.50 3.63 $250,000 but under $500,000 2.50 2.56 $500,000 but under $1 million 2.00 2.04 INVESTMENTS OF $1 MILLION OR MORE If you invest $1 million or more, either as a lump sum or through our cumulative quantity discount or letter of intent programs (see page [#]), you can buy Class A shares without an initial sales charge. However, there is a 1% contingent deferred sales charge (CDSC) on any shares you sell within 18 months of purchase. The way we calculate the CDSC is the same for each class (please see page [#]). DISTRIBUTION AND SERVICE (12B-1) FEES Class A has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution fees of up to 0.35% per year to those who sell and distribute Class A shares and provide other services to shareholders. Because these fees are paid out of Class A's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. SALES CHARGES - CLASS B IF YOU SELL YOUR SHARES WITHIN THIS MANY YEARS THIS % IS DEDUCTED FROM YOUR AFTER BUYING THEM PROCEEDS AS A CDSC - ----------------------------------------------------------------------------- 1 Year 4 2 Years 4 3 Years 3 4 Years 3 5 Years 2 6 Years 1 7 Years 0 With Class B shares, there is no initial sales charge. However, there is a CDSC if you sell your shares within six years, as described in the table above. The way we calculate the CDSC is the same for each class (please see page [#]). After eight years, your Class B shares automatically convert to Class A shares, lowering your annual expenses from that time on. MAXIMUM PURCHASE AMOUNT The maximum amount you may invest in Class B shares at one time is $249,999. We place any investment of $250,000 or more in Class A shares, since a reduced initial sales charge is available and Class A's annual expenses are lower. RETIREMENT PLANS Class B shares are available to retirement plans for which Franklin Templeton Bank & Trust serves as trustee or custodian, excepting DCS Plans (as defined on page [#]). DISTRIBUTION AND SERVICE (12B-1) FEES Class B has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other fees of up to 1% per year for the sale of Class B shares and for services provided to shareholders. Because these fees are paid out of Class B's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. SALES CHARGES - CLASS C THE SALES CHARGE MAKES UP WHICH EQUALS THIS THIS % OF THE % OF YOUR NET WHEN YOU INVEST THIS AMOUNT OFFERING PRICE INVESTMENT - ------------------------------------------------------------------------------- Under $1 million 1.00 1.01 WE PLACE ANY INVESTMENT OF $1 MILLION OR MORE IN CLASS A SHARES, SINCE THERE IS NO INITIAL SALES CHARGE AND CLASS A'S ANNUAL EXPENSES ARE LOWER. CDSC There is a 1% contingent deferred sales charge (CDSC) on any Class C shares you sell within 18 months of purchase. The way we calculate the CDSC is the same for each class (please see [below]). DISTRIBUTION AND SERVICE (12B-1) FEES Class C has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other fees of up to 1% per year for the sale of Class C shares and for services provided to shareholders. Because these fees are paid out of Class C's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. SALES CHARGES - CLASS R With Class R shares, there is no initial sales charge. RETIREMENT PLANS Class R shares are available to the following investors: o Employer Sponsored Retirement Plans that are not DCS Plans o DCS Plans with assets less than $10 million o Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code of 1986, as amended; and o Investors who open a Franklin Templeton IRA Rollover with less than $1 million other than a current or former Franklin Templeton employee or as the result of a spousal rollover, a QDRO, or a rollover of assets from a same employer sponsored Franklin Templeton money purchase plan in existence prior to January 1, 2002, to a new or existing Franklin Templeton profit sharing plan. A "Qualified Retirement Plan" is an employer sponsored pension or profit sharing plan that qualifies under section 401(a) of the Internal Revenue Code, including 401(k), money purchase pension, profit sharing and defined benefit plans. An "Employer Sponsored Retirement Plan" is a Qualified Retirement Plan, ERISA covered 403(b) and certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Retirement Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer sponsored IRAs. A "DCS Plan" is an Employer Sponsored Retirement Plan that (i) has contracted for current participant level record keeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services; or (ii) is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level record keeping related to those DCS services. MAXIMUM PURCHASE AMOUNT The maximum lump sum amount you may invest in Class R share IRA Rollovers is $999,999. We place any investment of $1 million or more in Class A shares since Class A's annual expenses are lower. There is no maximum purchase amount for Qualified plans. CDSC Except for Employer Sponsored Retirement Plans that (i) are DCS Plans; (ii) have contracted with an affiliate of Distributors for plan trustee services; or (iii) first purchase fund shares after January 1, 2003, there is a 1% contingent deferred sales charge (CDSC) on any Class R shares sold within 18 months of purchase. The CDSC is applied at the plan level based on initial investment for Employer Sponsored Retirement Plans. The way we calculate the CDSC is the same for each class (please see below). DISTRIBUTION AND SERVICE (12B-1) FEES Class R has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other fees of up to 0.50% per year for the sale of Class R shares and for services provided to shareholders. Because these fees are paid out of Class R's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B, C & R The CDSC for each class is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gains distributions. [Begin callout] The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your shares will age one month on that same date the next month and each following month. For example, if you buy shares on the 18th of the month, they will age one month on the 18th day of the next month and each following month. [End callout] To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that are not subject to a CDSC. If there are not enough of these to meet your request, we will sell the shares in the order they were purchased. We will use this same method if you exchange your shares into another Franklin Templeton fund (please see page [#] for exchange information). SALES CHARGE REDUCTIONS AND WAIVERS If you qualify for any of the sales charge reductions or waivers below, please let us know at the time you make your investment to help ensure you receive the lower sales charge. QUANTITY DISCOUNTS We offer several ways for you to combine your purchases in Franklin Templeton funds to take advantage of the lower sales charges for large purchases of Class A shares. [Begin callout] FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of Franklin Templeton Investments, except Franklin Templeton Variable Insurance Products Trust and Templeton Capital Accumulator Fund. [End callout] o CUMULATIVE QUANTITY DISCOUNT - lets you combine all of your shares in Franklin Templeton funds for purposes of calculating the sales charge. You also may combine the shares of your spouse, and your children or grandchildren, if they are under the age of 21. Certain company and retirement plan accounts also may be included. o LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount of shares over a 13-month period and lets you receive the same sales charge as if all shares had been purchased at one time. We will reserve a portion of your shares to cover any additional sales charge that may apply if you do not buy the amount stated in your LOI. TO SIGN UP FOR THESE PROGRAMS, COMPLETE THE APPROPRIATE SECTION OF YOUR ACCOUNT APPLICATION. REINSTATEMENT PRIVILEGE If you sell shares of a Franklin Templeton fund, you may reinvest some or all of the proceeds within 365 days without an initial sales charge. The proceeds must be reinvested within the same share class, except proceeds from the sale of Class B shares will be reinvested in Class A shares. If you paid a CDSC when you sold your Class A, C or R shares, we will credit your account with the amount of the CDSC paid but a new CDSC will apply. For Class B shares reinvested in Class A, a new CDSC will not apply, although your account will not be credited with the amount of any CDSC paid when you sold your Class B shares. Proceeds immediately placed in a Franklin Bank Certificate of Deposit (CD) also may be reinvested without an initial sales charge if you reinvest them within 365 days from the date the CD matures, including any rollover. This privilege does not apply to shares you buy and sell under our exchange program. Shares purchased with the proceeds from a money fund may be subject to a sales charge. SALES CHARGE WAIVERS Class A shares may be purchased without an initial sales charge or CDSC by various individuals, institutions and retirement plans or by investors who reinvest certain distributions and proceeds within 365 days. Certain investors also may buy Class C shares without an initial sales charge. The CDSC for each class may be waived for certain redemptions and distributions. If you would like information about available sales charge waivers, call your investment representative or call Shareholder Services at 1-800/632-2301. For information about retirement plans, you may call Retirement Services at 1-800/527-2020. A list of available sales charge waivers also may be found in the Statement of Additional Information (SAI). GROUP INVESTMENT PROGRAM Allows established groups of 11 or more investors to invest as a group. For sales charge purposes, the group's investments are added together. There are certain other requirements and the group must have a purpose other than buying Fund shares at a discount. [Insert graphic of a paper with lines and someone writing] BUYING SHARES ------------- [Class A, B, C and R shares will only be offered if Closed-End Fund shareholders approve the conversion of the Closed-End Fund into an open-end fund at the special shareholders' meeting currently scheduled to be held on June 12, 2003.] MINIMUM INVESTMENTS
- ----------------------------------------------------------------------------------------------- INITIAL ADDITIONAL - ----------------------------------------------------------------------------------------------- Regular accounts $1,000 $50 - ----------------------------------------------------------------------------------------------- Automatic investment plans $50 ($25/1 for a $50 ($25/1 for a Coverdell Education Coverdell Education Savings Plan) Savings Plan) - ----------------------------------------------------------------------------------------------- UGMA/UTMA accounts $100 $50 - ----------------------------------------------------------------------------------------------- Employer Sponsored Retirement Plans no minimum no minimum/2 - ----------------------------------------------------------------------------------------------- IRAs, IRA rollovers, Coverdell Education Savings Plans or Roth IRAs $250 $50 - ----------------------------------------------------------------------------------------------- Broker-dealer sponsored wrap account programs $250 $50 - ----------------------------------------------------------------------------------------------- Full-time employees, officers, trustees $100 $50 and directors of Franklin Templeton entities, and their immediate family members - ------------------------------------------------------------------ -----------------------------
1. Effective July 1, 2003, the $25 minimum investment will increase to $50. 2. Effective July 1, 2003, there will be a $25 minimum investment. PLEASE NOTE THAT YOU MAY ONLY BUY SHARES OF A FUND ELIGIBLE FOR SALE IN YOUR STATE OR JURISDICTION. ACCOUNT APPLICATION If you are opening a new account, please complete and sign the enclosed account application. Make sure you indicate the share class you have chosen. If you do not indicate a class, we will place your purchase in Class A shares. To save time, you can sign up now for services you may want on your account by completing the appropriate sections of the application (see "Investor Services" on page [#]). For example, if you would like to link one of your bank accounts to your Fund account so that you may use electronic funds transfer to and from your bank account to buy and sell shares, please complete the bank information section of the application. We will keep your bank information on file for future purchases and redemptions. We do not accept cash, credit card convenience checks, money orders or travelers checks as forms of payment to purchase shares. BUYING SHARES - ---------------------------------------------------------------------- OPENING AN ACCOUNT ADDING TO AN ACCOUNT - ---------------------------------------------------------------------- [Insert graphic of hands shaking] Contact your investment Contact your investment THROUGH YOUR representative representative INVESTMENT REPRESENTATIVE - ---------------------------------------------------------------------- [Insert graphic If you have another Before requesting a of phone and Franklin Templeton fund telephone or online computer] account with your bank purchase into an account information on existing account, BY PHONE/ONLINE file, you may open a new please make sure we account by phone. At have your bank account (Up to $100,000 this time, a new account information on file. If per shareholder may not be opened online. we do not have this per day) information, you will To make a same day need to send written 1-800/632-2301 investment, your phone instructions with your order must be received bank's name and franklintempleton. and accepted by us by address, a voided check com 1:00 p.m. Pacific time or savings account or the close of the New deposit slip, and a NOTE: CERTAIN York Stock Exchange, signature guarantee if ACCOUNT TYPES ARE whichever is earlier. the bank and Fund NOT AVAILABLE FOR accounts do not have at ONLINE ACCOUNT least one common owner. ACCESS If you have online access, you will be able to add or change bank account information that we can use to process additional purchases into your Franklin Templeton account. To make a same day investment, your phone or online order must be received and accepted by us by 1:00 p.m. Pacific time or the close of the New York Stock Exchange, whichever is earlier. - ----------------------------------------------------------------------------- Make your check payable Make your check payable [Insert graphic to Templeton China World to Templeton China World Fund. of envelope] Fund. Include your account number on the check. Mail the check and your BY MAIL signed application to Investor Services. Fill out the deposit slip from your account statement. If you do not have a slip, include a note with your name, the Fund name, and your account number. Mail the check and deposit slip or note to Investor Services. - ----------------------------------------------------------------------------- [Insert graphic Call to receive a wire Call to receive a wire of three control number and wire control number and wire lightning bolts] instructions. instructions. Wire the funds and mail To make a same day wire your signed application investment, please call BY WIRE to Investor Services. us by 1:00 p.m. Pacific Please include the wire time and make sure your 1-800/632-2301 control number or your wire arrives by 3:00 (or new account number on p.m. 1-650/312-2000 the application. collect) To make a same day wire investment, please call us by 1:00 p.m. Pacific time and make sure your wire arrives by 3:00 p.m. - ---------------------------------------------------------------------- [Insert graphic Call Shareholder Call Shareholder of two Services at the number Services at the number arrows pointing below, or send signed below or our automated in opposite written instructions. TeleFACTS system, or directions] You also may place an send signed written online exchange order. instructions. You also BY EXCHANGE The TeleFACTS system may place an online cannot be used to open exchange order. TeleFACTS(R) a new account. 1-800/247-1753 (Please see page [#] for (around-the-clock (Please see page [#] information on exchanges.) access) for information on exchanges.) franklintempleton. com - ---------------------------------------------------------------------- FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030 CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME) OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK, AT FRANKLINTEMPLETON.COM [Insert graphic of person with a headset] INVESTOR SERVICES ----------------- AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in the Fund by automatically transferring money from your checking or savings account each month to buy shares. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your account application and mail it to Investor Services. If you are opening a new account, please include the minimum initial investment (please see page [#]) with your application. AUTOMATIC PAYROLL DEDUCTION You may invest in the Fund automatically by transferring money from your paycheck to the Fund by electronic funds transfer. If you are interested, indicate on your application that you would like to receive an Automatic Payroll Deduction Program kit. DISTRIBUTION OPTIONS You may reinvest distributions you receive from the Fund in an existing account in the same share class* of the Fund or another Franklin Templeton fund. Initial sales charges and CDSCs will not apply if you reinvest your distributions within 365 days. You also can have your distributions deposited in a bank account, or mailed by check. Deposits to a bank account may be made by electronic funds transfer. [Begin callout] For retirement plans for which Franklin Templeton Bank & Trust is the trustee or custodian, special forms may be needed to receive distributions in cash. Please call 1-800/527-2020 for information. [End callout] Please indicate on your application the distribution option you have chosen, otherwise we will reinvest your distributions in the same share class of the Fund. *Class B and C shareholders may reinvest their distributions in Class A shares of any Franklin Templeton money fund. DCS Plans may direct distributions to Class A shares if Class R shares are not offered by that fund. RETIREMENT PLANS Franklin Templeton Investments offers a variety of retirement plans for individuals and businesses. These plans require separate applications and their policies and procedures may be different than those described in this prospectus. For more information, including a free retirement plan brochure or application, please call Retirement Services at 1-800/527-2020. TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information about your account or any Franklin Templeton fund. This service is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call 1-800/DIAL BEN. TELEPHONE/ONLINE PRIVILEGES You will automatically receive telephone/online privileges when you open your account, allowing you to obtain or view your account information, and conduct a number of transactions by phone or online, including: buy, sell, or exchange shares of most funds; use electronic funds transfer to buy or sell shares of most funds; change your address; add or change your bank account information (online only); and, add or change account services (including distribution options, systematic withdrawal plans and automatic investment plans). To view your account information or request online transactions, you will first need to register for these services at the shareholder section of our website at franklintempleton.com. You will be asked to accept the terms of an online agreement(s) and establish a password for online services. If you are registered for online services, you may enroll online in Franklin Templeton's electronic delivery program for your shareholder documents. This will allow you to receive electronic delivery (through our website) of most funds' prospectuses, annual/semiannual reports to shareholders, and proxy statements, as well as your account(s) statements and trade confirmations, and discontinue receiving your paper copies through the U.S. mail. Using our shareholder website means you are consenting to sending and receiving personal financial information over the Internet, so you should be sure you are comfortable with the risks. As long as we follow reasonable security procedures and act on instructions we reasonably believe are genuine, we will not be responsible for any losses that may occur from unauthorized requests. We will request passwords or other information, and also may record calls. To help safeguard your account, keep your password confidential, and verify the accuracy of your confirmation statements immediately after you receive them. Contact us immediately if you believe someone has obtained unauthorized access to your account or password. For transactions done over the Internet, we recommend the use of an Internet browser with 128-bit encryption. Certain methods of contacting us (such as by phone or by Internet) may be unavailable or delayed during periods of unusual market activity. OF COURSE, YOU CAN DECLINE TELEPHONE BUY, SELL, OR EXCHANGE PRIVILEGES ON YOUR ACCOUNT APPLICATION, OR CHOOSE NOT TO REGISTER FOR ONLINE PRIVILEGES. IF YOU HAVE TELEPHONE/ONLINE PRIVILEGES ON YOUR ACCOUNT AND WANT TO DISCONTINUE THEM, PLEASE CONTACT US FOR INSTRUCTIONS. You may reinstate these privileges at any time in writing, including online registration with respect to online privileges. NOTE: We discourage you from including confidential or sensitive information in any Internet communication to us. If you do choose to send email (encrypted or not) to us over the Internet, you are accepting the associated risks of lack of confidentiality. EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton funds within the same class*, generally without paying any additional sales charges. If you exchange shares held for less than six months, however, you may be charged the difference between the initial sales charge of the two funds if the difference is more than 0.25%. If you exchange shares from a money fund, a sales charge may apply no matter how long you have held the shares. [Begin callout] An EXCHANGE is really two transactions: a sale of one fund and the purchase of another. In general, the same policies that apply to purchases and sales apply to exchanges, including minimum investment amounts. Exchanges also have the same tax consequences as ordinary sales and purchases. [End callout] Generally exchanges may only be made between identically registered accounts, unless you send written instructions with a signature guarantee. Any CDSC will continue to be calculated from the date of your initial investment and will not be charged at the time of the exchange. The purchase price for determining a CDSC on exchanged shares will be the price you paid for the original shares. If you exchange shares subject to a CDSC into a Class A money fund, the time your shares are held in the money fund will not count towards the CDSC holding period. If you exchange your Class B shares for the same class of shares of another Franklin Templeton fund, the time your shares are held in that fund will count towards the eight-year period for automatic conversion to Class A shares. DCS Plans may exchange Class R shares for Class A shares of another Franklin Templeton fund if that fund does not offer Class R shares. Because excessive trading can hurt fund performance, operations and shareholders, the Fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges, reject any exchange, or restrict or refuse purchases if (i) the Fund or its manager believes the Fund would be harmed or unable to invest effectively, or (ii) the Fund receives or anticipates simultaneous orders that may significantly affect the Fund (please see "Market Timers" on page [#]). *Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into Class A without any sales charge. SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your shares and receive regular payments from your account. A CDSC may apply to withdrawals that exceed certain amounts. Certain terms and minimums apply. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your application. [Insert graphic of a certificate] SELLING SHARES -------------- You can sell your shares at any time. Please keep in mind that a contingent deferred sales charge (CDSC) may apply. SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be made over the phone, online, or with a simple letter. Sometimes, however, to protect you and the Fund we will need written instructions signed by all registered owners, with a signature guarantee for each owner, if: [Begin callout] A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a signature guarantee at most banks and securities dealers. A notary public CANNOT provide a signature guarantee. [End callout] o you are selling more than $100,000 worth of shares o you want your proceeds paid to someone who is not a registered owner o you want to send your proceeds somewhere other than the address of record, or preauthorized bank or brokerage firm account We also may require a signature guarantee on instructions we receive from an agent, not the registered owners, or when we believe it would protect the Fund against potential claims based on the instructions received. SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased, we may delay sending you the proceeds until your check, draft or wire/electronic funds transfer has cleared, which may take seven business days or more. A certified or cashier's check may clear in less time. REDEMPTION PROCEEDS Your redemption check will be sent within seven days after we receive your request in proper form. We are not able to receive or pay out cash in the form of currency. Redemption proceeds may be delayed if we have not yet received your signed account application. REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check) all requests for redemption by any shareholder of record, limited in amount, however, during any 90-day period to the lesser of $250,000 or 1% of the value of the Fund's net assets at the beginning of the 90-day period. This commitment is irrevocable without the prior approval of the SEC. In the case of redemption requests in excess of these amounts, the board reserves the right to make payments in whole or in part in securities or other assets of the Fund, in case of an emergency, or if the payment of such a redemption in cash would be detrimental to the existing shareholders of the Fund. In these circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets and you may incur brokerage fees in converting the securities to cash. The Fund does not intend to redeem illiquid securities in kind. If this happens, however, you may not be able to recover your investment in a timely manner. When you redeem your shares in the Fund you may realize a gain or loss for tax purposes, whether you receive cash, securities or other assets of the Fund. The amount realized on redemption of your shares equals the amount of cash and the fair market value on date of distribution of any securities or other assets received by you. Investors should note that, a shareholder owning approximately 30% of the outstanding shares of the Fund as of the date of this Prospectus, has announced that it will redeem all of its shares of the Fund within 30 days after the effective date of this Prospectus and that it will take its redemption proceeds through a pro rata, in-kind distribution of portfolio investments. As a result, the Fund will avoid having to sell significant portfolio assets to raise cash to meet this shareholder's redemption request - thus limiting the potential adverse effect on the Fund's net asset value per share. RETIREMENT PLANS You may need to complete additional forms to sell shares in a Franklin Templeton Bank & Trust retirement plan. For participants under age 591/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for details. SELLING SHARES - ---------------------------------------------------------------------- TO SELL SOME OR ALL OF YOUR SHARES - ---------------------------------------------------------------------- [Insert graphic of Contact your investment representative hands shaking] THROUGH YOUR INVESTMENT REPRESENTATIVE - ---------------------------------------------------------------------- [Insert graphic of Send written instructions and endorsed share envelope] certificates (if you hold share certificates) to Investor Services. Corporate, partnership BY MAIL or trust accounts may need to send additional documents. Specify the Fund, the account number and the dollar value or number of shares you wish to sell. If you own both Class A and B shares, also specify the class of shares, otherwise we will sell your Class A shares first. Be sure to include all necessary signatures and any additional documents, as well as signature guarantees if required. A check will be mailed to the name(s) and address on the account, or otherwise according to your written instructions. - ---------------------------------------------------------------------- [Insert graphic of As long as your transaction is for $100,000 or phone and computer] less, you do not hold share certificates and you have not changed your address by phone or BY PHONE/ONLINE online within the last 15 days, you can sell your shares by phone or online. 1-800/632-2301 A check will be mailed to the name(s) and franklintempleton.com address on the account. Written instructions, with a signature guarantee, are required to send the check to another address or to make it payable to another person. - ---------------------------------------------------------------------- [Insert graphic of You can call, write, or visit us online to three lightning have redemption proceeds sent to a bank bolts] account. See the policies above for selling shares by mail, phone, or online. BY ELECTRONIC FUNDS TRANSFER (ACH) Before requesting to have redemption proceeds sent to a bank account, please make sure we have your bank account information on file. If we do not have this information, you will need to provide the banking instructions online or send written instructions with your bank's name and address, a voided check or savings account deposit slip, and a signature guarantee if the bank and Fund accounts do not have at least one common owner. If we receive your request in proper form by 1:00 p.m. Pacific time, proceeds sent by ACH generally will be available within two to three business days. - ---------------------------------------------------------------------- [Insert graphic of Obtain a current prospectus for the fund you are two arrows pointing considering. Prospectuses are available online at in opposite franklintempleton.com. directions] Call Shareholder Services at the number below BY EXCHANGE or our automated TeleFACTS system, or send signed written instructions. You also may TeleFACTS(R) place an exchange order online. See the 1-800/247-1753 policies above for selling shares by mail, (around-the-clock phone, or online. access) If you hold share certificates, you will need to return them to the Fund before your exchange can be processed. - ---------------------------------------------------------------------- FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030 CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME) OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK, AT FRANKLINTEMPLETON.COM [Insert graphic of paper and pen] ACCOUNT POLICIES ---------------- CALCULATING SHARE PRICE The Fund calculates the net asset value per share (NAV) each business day at the close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). Each class's NAV is calculated by dividing its net assets by the number of its shares outstanding. [Begin callout] When you buy shares, you pay the offering price. The offering price is the NAV plus any applicable sales charge. When you sell shares, you receive the NAV minus any applicable contingent deferred sales charge (CDSC). [End callout] The Fund's assets are generally valued at their market value. If market prices are unavailable, or if an event occurs after the close of the trading market that materially affects the values, assets may be valued at their fair value. If the Fund holds securities listed primarily on a foreign exchange that trades on days when the Fund is not open for business, the value of your shares may change on days that you cannot buy or sell shares. Requests to buy and sell shares are processed at the NAV next calculated after we receive your request in proper form. ACCOUNTS WITH LOW BALANCES If the value of your account falls below $500 ($50 for employee and UGMA/UTMA accounts) because you sell some of your shares, we may mail you a notice asking you to bring the account back up to its applicable minimum investment amount. If you choose not to do so within 30 days, we may close your account and mail the proceeds to the address of record. You will not be charged a CDSC if your account is closed for this reason. STATEMENTS, REPORTS AND PROSPECTUSES You will receive quarterly account statements that show all your account transactions during the quarter. You also will receive written notification after each transaction affecting your account (except for distributions and transactions made through automatic investment or withdrawal programs, which will be reported on your quarterly statement). You also will receive the Fund's financial reports every six months as well as an annual updated prospectus. To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and prospectus. This process, called "householding," will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at 1-800/632-2301. At any time you may view current prospectuses and financial reports on our website. If you choose, you may receive your statements, financial reports and prospectuses through electronic delivery (please see "Telephone/Online Privileges" on page [#]). INVESTMENT REPRESENTATIVE ACCOUNT ACCESS If there is a dealer or other investment representative of record on your account, he or she will be able to obtain your account information, conduct transactions for your account, and also will receive copies of all notifications and statements and other information about your account directly from the Fund. STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or nominee name account of one dealer to another, as long as both dealers have an agreement with Franklin Templeton Distributors, Inc. We will process the transfer after we receive authorization in proper form from your delivering securities dealer. JOINT ACCOUNTS Unless you specify a different registration, accounts with two or more owners are registered as "joint tenants with rights of survivorship" (shown as "Jt Ten" on your account statement). To make any ownership changes to a joint account, all owners must agree in writing, regardless of the law in your state. JOINT ACCOUNT RISK WITH TELEPHONE/ONLINE PRIVILEGES You will automatically receive telephone/online privileges when you open your account. If your account has more than one registered owner, telephone/online privileges allow the Fund to accept online registration for online services (including electronic delivery of shareholder documents) and transaction instructions online or by telephone from only one registered owner. This means that ANY ONE REGISTERED OWNER ON YOUR ACCOUNT, ACTING ALONE AND WITHOUT THE CONSENT OF ANY OTHER REGISTERED OWNER, may give the Fund instructions by telephone, online or in writing (subject to any limitations in telephone or online privileges) to: o Exchange shares from a jointly registered Fund account requiring all registered owner signatures into an identically registered money fund account that only requires one registered owner's signature to redeem shares; o Redeem Fund shares and direct the redemption proceeds to a bank account that may or may not be owned by you and, if owned by you jointly with someone else, only requires one person to withdraw funds by check or otherwise; o Add/Change the bank account to which Fund share redemption proceeds may be sent, which bank account may not be owned by you; o Purchase Fund shares by debiting a bank account that may be owned by you; and o Add/Change the bank account that may be debited for Fund share purchases, which new account may be owned by you. If you do NOT want another registered owner on your account to be able to issue these kinds of instructions to the Fund without your consent, you must instruct the Fund to deny/terminate online privileges and the ability to issue such instructions by telephone so that these types of instructions will only be accepted in writing signed by all account owners. This decision will apply to any other fund into which you may exchange your jointly owned Fund shares. Any later decision to permit these types of instructions by telephone and/or online will need to be given to the Fund in a written instruction signed by all registered owners. MARKET TIMERS The Fund does not allow investments by Market Timers and may restrict or refuse purchases or exchanges by a shareholder who fails to comply with the restrictions set forth below. You may be considered a Market Timer if you have (i) requested an exchange or redemption out of any of the Franklin Templeton funds within two weeks of an earlier purchase or exchange request out of any fund, or (ii) exchanged or redeemed shares out of any of the Franklin Templeton funds more than twice within a rolling 90 day period. Accounts under common ownership or control with an account that is covered by (i) or (ii) also are subject to these limits. Anyone, including the shareholder or the shareholder's agent, who is considered to be a Market Timer by the Fund, its manager or shareholder services agent, will be issued a written notice of their status and the Fund's policies. Identified Market Timers will be required to register with the market timing desk of Franklin Templeton Investor Services, LLC, and to place all purchase, exchange and redemption trade requests through the desk. Identified Market Timers who redeem or exchange their shares of the Fund within 90 days of purchase will be assessed a fee of 2% of redemption proceeds. This redemption fee does not apply to 401(k) participant accounts, accounts not held individually through Franklin Templeton Investor Services, LLC, and funds under the automatic dividend reinvestment program and the systematic withdrawal program. ADDITIONAL POLICIES Please note that the Fund maintains additional policies and reserves certain rights, including: o The Fund may restrict or refuse any order to buy shares, including any purchase under the exchange privilege. o The Fund may modify, suspend, or terminate telephone/online privileges at any time. o At any time, the Fund may change its investment minimums or waive or lower its minimums for certain purchases. o The Fund may modify or discontinue the exchange privilege on 60 days' notice. o In unusual circumstances, we may temporarily suspend redemptions, or postpone the payment of proceeds, as allowed by federal securities laws. o For redemptions over a certain amount, the Fund reserves the right, in the case of an emergency, to make payments in securities or other assets of the Fund, if the payment of cash proceeds by check, wire or electronic funds transfer would be harmful to existing shareholders. o To permit investors to obtain the current price, dealers are responsible for transmitting all orders to the Fund promptly. DEALER COMPENSATION Qualifying dealers who sell Fund shares may receive sales commissions and other payments. These are paid by Franklin Templeton Distributors, Inc. (Distributors) from sales charges, distribution and service (12b-1) fees and its other resources. CLASS A CLASS B CLASS C CLASS R - ------------------------------------------------------------------------------- COMMISSION (%) --- 4.00 2.00/3 1.00/5 Investment under $50,000 5.00 --- --- --- $50,000 but under $100,000 3.75 --- --- --- $100,000 but under $250,000 2.80 --- --- --- $250,000 but under $500,000 2.00 --- --- --- $500,000 but under $1 million 1.60 --- --- --- $1 million or more up to 1.00/1 --- --- --- 12B-1 FEE TO DEALER 0.35%/1 0.25/2 1.00/4 0.35/5 A dealer commission of up to 1% may be paid on Class A NAV purchases by certain retirement plans1 and on Class C NAV purchases. A dealer commission of up to 0.25% may be paid on Class A NAV purchases by certain trust companies and bank trust departments, eligible governmental authorities, and broker-dealers or others on behalf of clients participating in comprehensive fee programs. MARKET TIMERS. Please note that for Class A NAV purchases by Market Timers, including purchases of $1 million or more, dealers are not eligible to receive the dealer commission. Dealers, however, may be eligible to receive the 12b-1 fee from the date of purchase. 1. For purchases at NAV where Distributors paid a prepaid commission, dealers may start to receive the 12b-1 fee in the 13th month after purchase. For purchases at NAV where Distributors did not pay a prepaid commission, dealers may start to receive the 12b-1 fee at the time of purchase. 2. Dealers may be eligible to receive up to 0.25% from the date of purchase. After eight years, Class B shares convert to Class A shares and dealers may then receive the 12b-1 fee applicable to Class A. 3. Commission includes advance of the first year's 0.25% 12b-1 service fee. For purchases at NAV, Distributors may pay a prepaid commission. 4. Dealers may be eligible to receive up to 0.25% at the time of purchase and may be eligible to receive 1% starting in the 13th month. During the first 12 months, the full 12b-1 fee will be paid to Distributors to partially offset commission and the prepaid service fee paid at the time of purchase. For purchases at NAV where Distributors did not pay a prepaid commission, dealers may start to receive the 12b-1 fee at the time of purchase. 5. Dealers may be eligible to receive a 12b-1 fee of 0.35% starting in the 13th month. During the first 12 months, the full 12b-1 fee will be paid to Distributors to partially offset the commission paid at the time of purchase. Starting in the 13th month, Distributors will receive 0.15%. Dealers may be eligible to receive the full 0.50% 12b-1 fee starting at the time of purchase if Distributors did not pay a prepaid commission. [Insert graphic of question mark]QUESTIONS If you have any questions about the Fund or your account, you can write to us at P.O. Box 33030, St. Petersburg, FL 33733-8030. You also can call us at one of the following numbers. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded. HOURS (PACIFIC TIME, DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY) - ------------------------------------------------------------------------------- Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m. 6:30 a.m. to 2:30 p.m. (Saturday) Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m. (1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday) Retirement Services 1-800/527-2020 5:30 a.m. to 5:00 p.m. Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m. FTI Institutional Services 1-800/321-8563 6:00 a.m. to 4:00 p.m. TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m. TeleFACTS(R)(automated) 1-800/247-1753 (around-the-clock access) FOR MORE INFORMATION You can learn more about the Fund in the following documents: ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS Includes a discussion of recent market conditions and Fund strategies that significantly affected Fund performance during its last fiscal year, financial statements, detailed performance information, portfolio holdings and the auditor's report. STATEMENT OF ADDITIONAL INFORMATION (SAI) Contains more information about the Fund, its investments and policies. It is incorporated by reference (is legally a part of this prospectus). For a free copy of the current annual/semiannual report or the SAI, please contact your investment representative or call us at the number below. You also can view the current annual/semiannual report online at franklintempleton.com. You also can obtain information about the Fund by visiting the SEC's Public Reference Room in Washington, DC (phone 1-202/942-8090) or the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this information, after paying a duplicating fee, by writing to the SEC's Public Reference Section, Washington, DC 20549-0102 or by electronic request at the following email address: publicinfo@sec.gov. [Insert FRANKLIN(R)TEMPLETON(R)INVESTMENTS logo] One Franklin Parkway, San Mateo, CA 94403-1906 1-800/DIAL BEN(R) (1-800/342-5236) TDD (Hearing Impaired) 1-800/851-0637 FRANKLINTEMPLETON.COM GAIN FROM OUR PERSPECTIVE(R) Investment Company Act file #811-7876 []P 06/03 PART A PROSPECTUS ADVISOR CLASS SHARES [JUNE 20,] 2003 The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. PROSPECTUS ADVISOR CLASS TEMPLETON CHINA WORLD FUND [Insert FRANKLIN(R)TEMPLETON(R)INVESTMENTS logo] CONTENTS THE FUND [Begin callout] INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING [End callout] [insert page #] Goal and Strategies [insert page #] Main Risks [insert page #] Performance [insert page #] Fees and Expenses [insert page #] Management [insert page #] Distributions and Taxes [insert page #] Financial Highlights YOUR ACCOUNT [Begin callout] INFORMATION ABOUT QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS AND SERVICES [End callout] [insert page #] Qualified Investors [insert page #] Buying Shares [insert page #] Investor Services [insert page #] Selling Shares [insert page #] Account Policies [insert page #] Questions FOR MORE INFORMATION [Begin callout] WHERE TO LEARN MORE ABOUT THE FUND [End callout] Back Cover THE FUND [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES ------------------- GOAL The Fund's investment goal is long-term capital appreciation. MAIN INVESTMENT STRATEGIES Under normal market conditions, the Fund invests at least 80% of its net assets in securities of "China companies," as defined below. Shareholders will be given 60 days' advance notice of any change to this 80% policy. For purposes of the Fund's investments, China companies are those: o that are organized under the laws of, or with a principal office in, the People's Republic of China (China), Hong Kong or Taiwan; or o for which the principal trading market is in China, Hong Kong or Taiwan; or o that derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets, in China. [Begin callout] THE FUND INVESTS PRIMARILY IN THE EQUITY SECURITIES OF CHINA COMPANIES. CHINA COMPANIES MAY BE SMALLER, NEWLY ORGANIZED AND RELATIVELY UNSEASONED COMPANIES. [End callout] An equity security, or stock, represents a proportionate share of the ownership of a company. Its value is based on the success of the company's business, any income paid to stockholders, the value of the company's assets, and general market conditions. Common stocks, preferred stocks and convertible securities are examples of equity securities. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. The Fund also invests in American, Global and European depositary receipts, which are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic corporation. In addition to the Fund's main investments, the Fund may invest up to 20% of its net assets in securities that do not qualify as China company securities, but whose issuers, in the judgment of the manager, are expected to benefit from developments in the economy of China. The Fund may also invest up to 20% of its net assets in debt obligations of China companies, which may be lower-rated or unrated[, when consistent with the Fund's investment goal. When choosing equity investments for this Fund, the manager applies a "bottom up," value-oriented, long-term approach, focusing on the market price of a company's securities relative to the manager's evaluation of the company's long-term earnings, asset value and cash flow potential. The manager also considers a company's price/earnings ratio, profit margins and liquidation value. The Fund should be thought of as a long-term investment for the aggressive portion of a well diversified portfolio. TEMPORARY INVESTMENTS When the manager believes market, economic, financial or political conditions make it advisable, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash or certain short-term and medium-term debt securities rated, at the time of investment, A or higher by Moody's Investors Service (Moody's) or Standard & Poor's Ratings Group (S&P(R)) or, if unrated, determined to be of comparable quality. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS ---------- [Begin callout] Because the securities the Fund holds fluctuate in price, the value of your investment in the Fund will go up and down. This means you could lose money over short or even extended periods. [End callout] FOREIGN SECURITIES Investing in foreign securities, including securities of foreign governments and depositary receipts, typically involves more risks than investing in U.S. securities. Certain of these risks also may apply to securities of U.S. companies with significant foreign operations. These risks can increase the potential for losses in the Fund and affect its share price. CURRENCY EXCHANGE RATES. Foreign securities may be issued and traded in foreign currencies. As a result, their values may be affected by changes in exchange rates between foreign currencies and the U.S. dollar, as well as between currencies of countries other than the U.S. For example, if the value of the U.S. dollar goes up compared to a foreign currency, an investment traded in that foreign currency will go down in value because it will be worth less in U.S. dollars. POLITICAL AND ECONOMIC DEVELOPMENTS. The growing interconnectivity of global economies and financial markets has increased the possibilities that conditions in one country or region might adversely impact the issuers of securities in a different country or region. In particular, the adoption or continuation of protectionist trade policies by one or more countries, or a slowdown in the U.S. economy, could lead to a decrease in demand for Chinese, Hong Kong and Taiwanese products and reduced flows of private capital to these economies. The political, economic and social structures of some foreign countries may be less stable and more volatile than those in the U.S. Investments in these countries may be subject to the risks of internal and external conflicts, currency devaluations, foreign ownership limitations and tax increases. It is possible that a government may take over the assets or operations of a company or impose restrictions on the exchange or export of currency or other assets. Some countries also may have different legal systems that may make it difficult for the Fund to vote proxies, exercise shareholder rights, and pursue legal remedies with respect to its foreign investments. Diplomatic and political developments, including rapid and adverse political changes, social instability, regional conflicts, terrorism and war, could affect the economies, industries and securities and currency markets, and the value of the Fund's investments, in non-U.S. countries. These factors are extremely difficult, if not impossible, to predict and take into account with respect to the Fund's investments. TRADING PRACTICES. Brokerage commissions and other fees generally are higher for foreign securities. Government supervision and regulation of foreign stock exchanges, currency markets, trading systems and brokers may be less than in the U.S. The procedures and rules governing foreign transactions and custody (holding of the Fund's assets) also may involve delays in payment, delivery or recovery of money or investments. AVAILABILITY OF INFORMATION. Foreign companies may not be subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies. Thus, there may be less information publicly available about foreign companies than about most U.S. companies. LIMITED MARKETS. Certain foreign securities may be less liquid (harder to sell) and more volatile than many U.S. securities. This means the Fund may at times be unable to sell foreign securities at favorable prices. EMERGING MARKETS. The economies of some of the countries in which the Fund invests may be considered emerging markets. The risks of foreign investments typically are greater in less developed countries, sometimes referred to as developing or emerging markets. For example, political and economic structures in these countries may be less established and may change rapidly. These countries also are more likely to experience high levels of inflation, deflation or currency devaluation, which can harm their economies and securities markets and increase volatility. In fact, short-term volatility in these markets, and declines of 50% or more, are not uncommon. GEOGRAPHIC CONCENTRATION There is a high correlation among the Chinese, Hong Kong and Taiwanese markets. Accordingly, because the Fund invests a significant amount of its assets in these markets, it is subject to much greater risks of adverse events that occur in that region and may experience greater volatility than a fund that is more broadly diversified geographically. Political, social or economic disruptions in the region, including conflicts and currency devaluations, even in countries in which the Fund is not invested, may adversely affect security values in other countries in the region and thus the Fund's holdings. STOCKS Although this may not be the case in foreign markets, in the U.S., stocks historically have outperformed other types of investments over the long term. Individual stock prices, however, tend to go up and down more dramatically. These price movements may result from factors affecting individual companies or industries, or the securities market as a whole. A slower-growth or recessionary economic environment could have an adverse effect on the price of the various stocks held by the Fund. SMALLER COMPANIES While smaller companies may offer substantial opportunities for capital growth, they also involve substantial risks and should be considered speculative. Historically, smaller company securities have been more volatile in price than larger company securities, especially over the short term. Among the reasons for the greater price volatility are the less certain growth prospects of smaller companies, the lower degree of liquidity in the markets for such securities, and the greater sensitivity of smaller companies to changing economic conditions. In addition, smaller companies may lack depth of management, be unable to generate funds necessary for growth or development, or be developing or marketing new products or services for which markets are not yet established and may never become established. LIQUIDITY The Fund may invest up to 15% of its net assets in securities with a limited trading market. Reduced liquidity may have an adverse impact on market price and the Fund's ability to sell particular securities when necessary to meet the Fund's liquidity needs or in response to a specific economic event. DIVERSIFICATION The Fund is a non-diversified fund. It may invest a greater portion of its assets in the securities of one issuer than a diversified fund. The Fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities, which may result in greater fluctuation in the value of the Fund's shares. The Fund, however, intends to meet certain tax diversification requirements. In addition, as a matter of non-fundamental policy the Fund may not invest more than 10% of its total assets in the securities of any one issuer. INCOME Since the Fund can only distribute what it earns, the Fund's distributions to shareholders may decline when interest rates fall. CREDIT An issuer of securities may be unable to make interest payments and repay principal. Changes in an issuer's financial strength or in a security's credit rating may affect a security's value and, thus, impact Fund performance. INTEREST RATE When interest rates rise, debt security prices fall. The opposite is also true: debt security prices rise when interest rates fall. In general, securities with longer maturities are more sensitive to these price changes. Increases in interest rates may have a negative effect on the types of companies in which the Fund normally invests because these companies may find it more difficult to obtain credit to expand, or may have more difficulty meeting interest payments. Increased interest rates in the U.S. and Europe may also affect the economies of China, Hong Kong and Taiwan and thus their markets and issuers. VALUE INVESTING A value stock may not increase in price as anticipated by the manager if other investors fail to recognize the company's value and bid up the price, the markets favor faster-growing companies, or the factors that the manager believes will increase the price of the security do not occur. More detailed information about the Fund, its policies and risks can be found in the Fund's Statement of Additional Information (SAI). [Begin callout] Mutual fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. government. Mutual fund shares involve investment risks, including the possible loss of principal. [End callout] [Insert graphic of a bull and a bear] PERFORMANCE ----------- On [June 20,] 2003, Templeton China World Fund, Inc. (Closed-End Fund) was converted to an open-end fund in a transaction whereby the Closed-End Fund transferred all of its assets, subject to its liabilities, to the Fund in exchange for Advisor Class shares. Shareholders of the Closed-End Fund received Advisor Class shares of the Fund in exchange for their shares of the Closed-End Fund. The total return information presented below is based upon the Closed-End Fund's performance, which has been restated to reflect all fees and expenses currently applicable to the Advisor Class. TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT Total return represents the change in value of an investment over the periods shown. It includes the current, applicable Fund expenses, account fees and reinvested distributions. The unmanaged index includes reinvested dividends. It differs from the Fund in composition and does not pay management fees or expenses. One cannot invest directly in an index. Of course, past performance cannot predict or guarantee future results. [Insert Advisor Class line graph] This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 9 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. ADVISOR CLASS ANNUAL TOTAL RETURNS/1,2/ [Insert bar graph] []% []% []% []% []% []% []% []% []% - ------------------------------------------------------------ 94 95 96 97 98 99 00 01 02 YEAR [Begin callout] BEST QUARTER: Q[] '[] []% WORST QUARTER: Q[] '[] []% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 2002 SINCE INCEPTION 1 YEAR 5 YEARS (9/9/93) - ------------------------------------------------------------------------------- Templeton China World Fund - Advisor Class/2/ Return Before Taxes []% []% []% Return After Taxes on Distributions []% []% []% Return After Taxes on Distributions and Sale of Fund Shares []% []% []% [] Index/3/ []% []% []% ([index reflects][indices reflect] no deduction for fees, expenses, or taxes) After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown. These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future. 1. As of March 31, 2003, the Fund's year-to-date return as restated for Advisor Class was []%. 2. On [June 20,] 2003, the Fund began offering Advisor Class shares, which do not have sales charges or a Rule 12b-1 plan. For periods prior to [June 20,] 2003, performance quotations are based upon the Closed-End Fund's performance restated to take into account all fees and expenses applicable to the Advisor Class. For periods after [June 20,] 2003, actual Advisor Class performance will be used reflecting all fees and expenses applicable to that class. 3. [Source: Standard & Poor's Micropal [(INSERT APPROPRIATE INDEX HERE)].] The unmanaged [] Index []. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. [Insert graphic of percentage sign] FEES AND EXPENSES ----------------- This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund. SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT) ADVISOR CLASS - ------------------------------------------------------------------------------- Maximum sales charge (load) imposed on purchases None Redemption fee/1/ 2.00% ANNUAL FUND OPERATING EXPENSES (EXPENSES DEDUCTED FROM FUND ASSETS)/2/ ADVISOR CLASS - ------------------------------------------------------------------------------- Management fees 1.25% Distribution and service (12b-1) fees None Other expenses (including administration fees) 0.72% ---------- Total annual Fund operating expenses 1.97% ---------- 1. This fee is only for Market Timers (see page [#]] and former shareholders of the Closed-End Fund who redeem or exchange their shares received in the conversion of the Fund from a Closed-End Fund. The latter redemption fee will be imposed on a redemption that occurs within six months of the effective date of the conversion and the proceeds will be retained by the Fund (see page [#]). 2. The Fund began offering Advisor Class shares on [June 20,] 2003. Management fees are based on the management fees for the Closed-End Fund for the fiscal year ended August 31, 2002. Other expenses are estimated and are based on an assumption that 50% of the Closed-End Fund's shares will be redeemed immediately following the conversion of the Closed-End Fund to an open-end fund. For more information about anticipated redemptions, please see "Redemptions in Kind" on page [#]. EXAMPLE This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes: o You invest $10,000 for the periods shown; o Your investment has a 5% return each year; o The Fund's operating expenses remain the same; and o You sell your shares at the end of the periods shown. Although your actual costs may be higher or lower, based on these assumptions your costs would be: 1 YEAR 3 YEARS 5 YEARS 10 YEARS - ---------------- ---------------- --------------- --------------- $200 $618 $1,062 $2,296 [Insert graphic of briefcase] MANAGEMENT Templeton Asset Management Ltd., whose principal office is 7 Temasek Blvd., Suntec Tower One, #38-03, Singapore 038987, is the Fund's investment manager. Templeton Asset Management Ltd. has a branch office in Hong Kong. Together, Templeton Asset Management Ltd. and its affiliates manage over $252 billion in assets. The Fund's lead portfolio manager is: MARK MOBIUS, PH.D, Managing Director of Templeton Asset Management LTD. Mr. Mobius has been a manager of the Fund since inception. He joined Franklin Templeton Investments in 1987. The following individual has secondary portfolio management responsibilities: ALLAN LAM, PORTFOLIO MANAGER OF TEMPLETON ASSET MANAGEMENT LTD. Mr. Lam has been a manager of the Fund since 19[]. He joined the Hong Kong office of Franklin Templeton Investments in 1987. The Fund pays Templeton Asset Management Ltd. a fee for managing the Fund's assets. For the fiscal year ended August 31, 2002, the Fund paid 1.25% of its average weekly net assets to the manager for its services. [Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES ----------------------- DISTRIBUTIONS AND TAXES The Fund intends to make a distribution at least annually from its net investment income and any net realized capital gains. The amount of any distribution will vary, and there is no guarantee the Fund will pay either an income dividend or a capital gain distribution. AVOID "BUYING A DIVIDEND" If you invest in the Fund shortly before it makes a distribution, you may receive some of your investment back in the form of a taxable distribution. TAX CONSIDERATIONS In general, if you are a taxable investor, Fund distributions are taxable to you as either ordinary income or capital gains. This is true whether you reinvest your distributions in additional Fund shares or receive them in cash. Any capital gains the Fund distributes are taxable as long-term capital gains no matter how long you have owned your shares. Every January, you will receive a statement that shows the tax status of distributions you received for the previous year. BACKUP WITHHOLDING By law, the Fund must withhold a portion of your taxable distributions and sales proceeds unless you: o provide your correct social security or taxpayer identification number, o certify that this number is correct, o certify that you are not subject to backup withholding, and o certify that you are a U.S. person (including a U.S. resident alien). The Fund also must withhold if the IRS instructs it to do so. When withholding is required, the amount will be 30% of any distributions or proceeds paid in calendar year 2003, and 29% of any amounts paid in calendar years 2004 and 2005. When you sell or redeem your shares in the Fund, whether you receive cash, securities or other assets of the Fund, you may realize a capital gain or loss. For tax purposes, an exchange of your Fund shares for shares of a different Franklin Templeton fund is the same as a sale. Fund distributions and gains from the sale of your Fund shares generally are subject to state and local taxes. Any foreign taxes the Fund pays on its investments may be passed through to you as a foreign tax credit. Non-U.S. investors may be subject to U.S. withholding or estate tax, and are subject to special U.S. tax certification requirements. You should consult your tax advisor about the federal, state, local or foreign tax consequences of your investment in the Fund. [Insert graphic of a dollar bill] FINANCIAL HIGHLIGHTS -------------------- This table presents the financial performance for the Closed-End Fund for the past five years. On [June 20,] 2003, the Closed-End Fund was converted to an open-end fund in a transaction whereby the Closed-End Fund transferred all of its assets, subject to its liabilities, to the Fund, in exchange for Advisor Class shares. Shareholders of the Closed-End Fund received Advisor Class shares of the Fund in exchange for their shares of the Closed-End Fund. Certain information reflects financial results for a single Closed-End Fund share. The total returns in the table represent the rate that an investor would have earned or lost on an investment in the Closed-End (assuming reinvestment of dividends and capital gains). The information for the four years ended August 31, 2002 has been audited by PricewaterhouseCoopers LLP, whose report, along with the Closed-End Fund's financial statements, are included in the Closed-End Fund's annual report, which is available upon request. The information for the fiscal year ended 1998 was audited by other auditors. Financial statements and financial highlights for Advisor Class will be included in the Fund's annual report when Advisor Class has completed its first annual period. Advisor Class may have higher total expenses than the Closed-End Fund.
CLOSED-END FUND YEAR ENDED AUGUST 31, - -------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------- PER SHARE DATA ($)/1/ Net asset value, beginning of period 9.52 11.33 9.83 6.30 17.32 ---------------------------------------------------- Net investment income (loss) .21 .18 .23 .10 .30 Net realized and unrealized gains (losses) .98 (1.98) 1.42 3.65 (10.45) --------------------------------------------------- Total from investment operations 1.19 (1.80) 1.65 3.75 (10.15) --------------------------------------------------- Capital share repurchases .11 .09 .07 - .08 --------------------------------------------------- Ddistributions from net investment income (.18) (.10) (.22) (.21) (.26) Distributions from net realized capital gains - - - (.01) (.69) --------------------------------------------------- Total distributions (.18) (.10) (.22) (.22) (.95) --------------------------------------------------- Net asset value, end of period 10.64 9.52 11.33 9.83 6.30 =================================================== Market value, end of period/2/ 9.100 7.730 8.000 7.625 4.313 =================================================== Total return (%) (based on market value per share) 20.27 (2.14) 7.86 82.81 (61.83) RATIOS/SUPPLEMENTAL DATA Net assets, end of period ($ x 1,000) 173,204 172,209 213,953 189,994 121,697 Ratios to average net assets: (%) Expenses 1.66 1.66 1.68 1.69 1.68 Net investment income 2.01 1.70 2.21 1.20 2.88 Portfolio turnover rate (%) 44.62 83.85 142.49 83.88 34.75
1. Based on average weighted shares outstanding effective year ended August 31, 1999. 2. Based on the last sale on the New York Stock Exchange. YOUR ACCOUNT [Insert graphic of pencil marking an "X"] QUALIFIED INVESTORS ------------------- The following investors may qualify to buy Advisor Class shares of the Fund. o Qualified registered investment advisors with clients invested in any series of Franklin Mutual Series Fund Inc. on October 31, 1996, or who buy through a broker-dealer or service agent who has an agreement with Franklin Templeton Distributors, Inc. (Distributors). Minimum investments: $1,000 initial and $50 additional. o Broker-dealers, registered investment advisors or certified financial planners who have an agreement with Distributors for clients participating in comprehensive fee programs. Minimum investments: $250,000 initial ($100,000 initial for an individual client) and $50 additional. o Officers, trustees, directors and full-time employees of Franklin Templeton Investments and their immediate family members. Minimum investments: $100 initial ($50 for accounts with an automatic investment plan) and $50 additional. o Each series of the Franklin Templeton Fund Allocator Series. Minimum investments: $1,000 initial and $1,000 additional. [Begin callout] FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of Franklin Templeton Investments, except Franklin Templeton Variable Insurance Products Trust and Templeton Capital Accumulator Fund. [End callout] o Governments, municipalities, and tax-exempt entities that meet the requirements for qualification under section 501 of the Internal Revenue Code. Minimum investments: $1 million initial investment in Advisor Class or Class Z shares of any Franklin Templeton fund and $50 additional. o Accounts managed by Franklin Templeton Investments. Minimum investments: No initial minimum and $50 additional. o The Franklin Templeton Profit Sharing 401(k) Plan. Minimum investments: No initial or additional minimums. o Defined contribution plans such as employer stock, bonus, pension or profit sharing plans that meet the requirements for qualification under section 401 of the Internal Revenue Code, including salary reduction plans qualified under section 401(k) of the Internal Revenue Code, and that are sponsored by an employer (i) with at least 10,000 employees, (ii) with retirement plan assets of $100 million or more, or (iii) with retirement plan assets of $20 million or more and who has contracted for current participant level record keeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services or is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level record keeping related to those DCS services. Minimum investments: No initial or additional minimums. o Trust companies and bank trust departments initially investing in Franklin Templeton funds at least $1 million of assets held in a fiduciary, agency, advisory, custodial or similar capacity and over which the trust companies and bank trust departments or other plan fiduciaries or participants, in the case of certain retirement plans, have full or shared investment discretion. Minimum investments: No initial or additional minimums. o Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code of 1986, as amended, provided that Distributors or an affiliate of Distributors has entered into a contract with the state sponsor of the program to provide certain services relating to the operation of the program. Minimum investments: No initial or additional minimums. o Individual investors. Minimum investments: $5 million initial and $50 additional. You may combine all of your shares in Franklin Templeton funds for purposes of determining whether you meet the $5 million minimum, as long as $1 million is in Advisor Class or Class Z shares of any Franklin Templeton fund. o Any other investor, including a private investment vehicle such as a family trust or foundation, who is a member of an established group of 11 or more investors. Minimum investments: $5 million initial and $50 additional. For minimum investment purposes, the group's investments are added together. The group may combine all of its shares in Franklin Templeton funds for purposes of determining whether it meets the $5 million minimum, as long as $1 million is in Advisor Class or Class Z shares of any Franklin Templeton fund. There are certain other requirements and the group must have a purpose other than buying Fund shares without a sales charge. Please note that Advisor Class shares of the Fund generally are not available to retirement plans through Franklin Templeton's ValuSelect(R) program. Retirement plans in the ValuSelect program before January 1, 1998, however, may invest in the Fund's Advisor Class shares. [Insert graphic of a paper with lines and someone writing] BUYING SHARES ------------- [Advisor Class shares will only be offered if Closed-End Fund shareholders approve the conversion of the Closed-End Fund into an open-end fund at the special shareholders' meeting currently scheduled to be held on June 12, 2003.] ACCOUNT APPLICATION If you are opening a new account, please complete and sign the enclosed account application. To save time, you can sign up now for services you may want on your account by completing the appropriate sections of the application (see "Investor Services" on page [#]). For example, if you would like to link one of your bank accounts to your Fund account so that you may use electronic funds transfer to and from your bank account to buy and sell shares, please complete the bank information section of the application. We will keep your bank information on file for future purchases and redemptions. We do not accept cash, credit card convenience checks, money orders or travelers checks as forms of payment to purchase shares. BUYING SHARES - ---------------------------------------------------------------------- OPENING AN ACCOUNT ADDING TO AN ACCOUNT - ---------------------------------------------------------------------- [Insert graphic of hands shaking] Contact your investment Contact your investment THROUGH YOUR representative representative INVESTMENT REPRESENTATIVE - ---------------------------------------------------------------------- [Insert graphic If you have another Before requesting a of phone and Franklin Templeton fund telephone or online computer] account with your bank purchase into an account information on existing account, BY PHONE/ONLINE file, you may open a new please make sure we account by phone. At have your bank account (Up to $100,000 this time, a new account information on file. If per shareholder may not be opened online. we do not have this per day) information, you will To make a same day need to send written 1-800/632-2301 investment, your phone instructions with your order must be received bank's name and franklintempleton. and accepted by us by address, a voided check com 1:00 p.m. Pacific time or savings account NOTE: CERTAIN or the close of the New deposit slip, and a ACCOUNT TYPES ARE York Stock Exchange, signature guarantee if NOT AVAILABLE FOR whichever is earlier. the bank and Fund ONLINE ACCOUNT accounts do not have at ACCESS least one common owner. If you have online access, you will be able to add or change bank account information that we can use to process additional purchases into your Franklin Templeton account. To make a same day investment, your phone or online order must be received and accepted by us by 1:00 p.m. Pacific time or the close of the New York Stock Exchange, whichever is earlier. - ----------------------------------------------------------------------------- Make your check payable Make your check payable [Insert graphic to Templeton China World to Templeton China World Fund. of envelope] Fund. Include your account number on the check. Mail the check and your BY MAIL signed application to Investor Services. Fill out the deposit slip from your account statement. If you do not have a slip, include a note with your name, the Fund name, and your account number. Mail the check and deposit slip or note to Investor Services. - ----------------------------------------------------------------------------- [Insert graphic Call to receive a wire Call to receive a wire of three control number and wire control number and wire lightning bolts] instructions. instructions. Wire the funds and mail To make a same day wire your signed application investment, please call BY WIRE to Investor Services. us by 1:00 p.m. Pacific Please include the wire time and make sure your 1-800/632-2301 control number or your wire arrives by 3:00 (or new account number on p.m. 1-650/312-2000 the application. collect) To make a same day wire investment, please call us by 1:00 p.m. Pacific time and make sure your wire arrives by 3:00 p.m. - ---------------------------------------------------------------------- [Insert graphic Call Shareholder Call Shareholder of two Services at the number Services at the number arrows pointing below, or send signed below, or send signed in opposite written instructions. written instructions. You directions] You also may place an also may place an online online exchange order. exchange order. BY EXCHANGE (Please see page [#] (Please see page [#] for for information on information on exchanges.) exchanges.) franklintempleton. com - ---------------------------------------------------------------------- FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030 CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME) OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK, AT FRANKLINTEMPLETON.COM [Insert graphic of person with a headset] INVESTOR SERVICES ----------------- AUTOMATIC INVESTMENT PLAN This plan offers a convenient way for you to invest in the Fund by automatically transferring money from your checking or savings account each month to buy shares. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your account application and mail it to Investor Services. If you are opening a new account, please include your minimum initial investment with your application. AUTOMATIC PAYROLL DEDUCTION You may invest in the Fund automatically by transferring money from your paycheck to the Fund by electronic funds transfer. If you are interested, indicate on your application that you would like to receive an Automatic Payroll Deduction Program kit. DISTRIBUTION OPTIONS You may reinvest distributions you receive from the Fund in an existing account in the same share class of the Fund or in Advisor Class or Class A shares of another Franklin Templeton fund. To reinvest your distributions in Advisor Class shares of another Franklin Templeton fund, you must qualify to buy that fund's Advisor Class shares. For distributions reinvested in Class A shares of another Franklin Templeton fund, initial sales charges and contingent deferred sales charges (CDSCs) will not apply if you reinvest your distributions within 365 days. You also can have your distributions deposited in a bank account, or mailed by check. Deposits to a bank account may be made by electronic funds transfer. [Begin callout] For retirement plans for which Franklin Templeton Bank & Trust is the trustee or custodian, special forms may be needed to receive distributions in cash. Please call 1-800/527-2020 for information. [End callout] Please indicate on your application the distribution option you have chosen, otherwise we will reinvest your distributions in the same share class of the Fund. RETIREMENT PLANS Franklin Templeton Investments offers a variety of retirement plans for individuals and businesses. These plans require separate applications and their policies and procedures may be different than those described in this prospectus. For more information, including a free retirement plan brochure or application, please call Retirement Services at 1-800/527-2020. TELEFACTS(R) Our TeleFACTS system offers around-the-clock access to information about your account or any Franklin Templeton fund. This service is available from touch-tone phones at 1-800/247-1753. For a free TeleFACTS brochure, call 1-800/DIAL BEN. TELEPHONE/ONLINE PRIVILEGES You will automatically receive telephone/online privileges when you open your account, allowing you to obtain or view your account information, and conduct a number of transactions by phone or online, including: buy, sell, or exchange shares of most funds; use electronic funds transfer to buy or sell shares of most funds; change your address; add or change your bank account information (online only); and, add or change account services (including distribution options, systematic withdrawal plans and automatic investment plans). To view your account information or request online transactions, you will first need to register for these services at the shareholder section of our website at franklintempleton.com. You will be asked to accept the terms of an online agreement(s) and establish a password for online services. If you are registered for online services, you may enroll online in Franklin Templeton's electronic delivery program for your shareholder documents. This will allow you to receive electronic delivery (through our website) of most funds' prospectuses, annual/semiannual reports to shareholders, and proxy statements, as well as your account(s) statements and trade confirmations, and discontinue receiving your paper copies through the U.S. mail. Using our shareholder website means you are consenting to sending and receiving personal financial information over the Internet, so you should be sure you are comfortable with the risks. As long as we follow reasonable security procedures and act on instructions we reasonably believe are genuine, we will not be responsible for any losses that may occur from unauthorized requests. We will request passwords or other information, and also may record calls. To help safeguard your account, keep your password confidential, and verify the accuracy of your confirmation statements immediately after you receive them. Contact us immediately if you believe someone has obtained unauthorized access to your account or password. For transactions done over the Internet, we recommend the use of an Internet browser with 128-bit encryption. Certain methods of contacting us (such as by phone or by Internet) may be unavailable or delayed during periods of unusual market activity. OF COURSE, YOU CAN DECLINE TELEPHONE BUY, SELL, OR EXCHANGE PRIVILEGES ON YOUR ACCOUNT APPLICATION, OR CHOOSE NOT TO REGISTER FOR ONLINE PRIVILEGES. IF YOU HAVE TELEPHONE/ONLINE PRIVILEGES ON YOUR ACCOUNT AND WANT TO DISCONTINUE THEM, PLEASE CONTACT US FOR INSTRUCTIONS. You may reinstate these privileges at any time in writing, including online registration with respect to online privileges. NOTE: We discourage you from including confidential or sensitive information in any Internet communication to us. If you do choose to send email (encrypted or not) to us over the Internet, you are accepting the associated risks of lack of confidentiality. EXCHANGE PRIVILEGE You can exchange shares between most Franklin Templeton funds within the same class. You also may exchange your Advisor Class shares for Class A shares of a fund that does not currently offer an Advisor Class (without any sales charge)* or for Class Z shares of Franklin Mutual Series Fund Inc. [Begin callout] An EXCHANGE is really two transactions: a sale of one fund and the purchase of another. In general, the same policies that apply to purchases and sales apply to exchanges, including minimum investment amounts and any applicable redemption fees. Exchanges also have the same tax consequences as ordinary sales and purchases. [End callout] Generally exchanges may only be made between identically registered accounts, unless you send written instructions with a signature guarantee. Because excessive trading can hurt fund performance, operations and shareholders, the Fund reserves the right to revise or terminate the exchange privilege, limit the amount or number of exchanges, reject any exchange, or restrict or refuse purchases if (i) the Fund or its manager believes the Fund would be harmed or unable to invest effectively, or (ii) the Fund receives or anticipates simultaneous orders that may significantly affect the Fund (please see "Market Timers" on page [#]). *If you exchange into Class A shares and you later decide you would like to exchange into a fund that offers an Advisor Class, you may exchange your Class A shares for Advisor Class shares if you otherwise qualify to buy the fund's Advisor Class shares. SYSTEMATIC WITHDRAWAL PLAN This plan allows you to automatically sell your shares and receive regular payments from your account. Certain terms and minimums apply. A redemption fee will apply to shares acquired in connection with the conversion of the Closed-End Fund into an open-end fund that are redeemed within six months of the conversion of the Closed-end Fund into an open-end Fund (see "Selling Shares" on page [#]). To sign up, visit us online at franklintempleton.com or complete the appropriate section of your application. [Insert graphic of a certificate] SELLING SHARES -------------- You can sell your shares at any time. There will be a 2% redemption fee applicable to shareholders that receive Advisor Class shares of the Fund in connection with the conversion of the Closed-End Fund into an open-end Fund. The redemption fee will be imposed on redemptions or exchanges within six months of the effective date of the conversion and the proceeds will be retained by the Fund. SELLING SHARES IN WRITING Generally, requests to sell $100,000 or less can be made over the phone, online, or with a simple letter. Sometimes, however, to protect you and the Fund we will need written instructions signed by all registered owners, with a signature guarantee for each owner, if: [Begin callout] A SIGNATURE GUARANTEE helps protect your account against fraud. You can obtain a signature guarantee at most banks and securities dealers. A notary public CANNOT provide a signature guarantee. [End callout] o you are selling more than $100,000 worth of shares o you want your proceeds paid to someone who is not a registered owner o you want to send your proceeds somewhere other than the address of record, or preauthorized bank or brokerage firm account We also may require a signature guarantee on instructions we receive from an agent, not the registered owners, or when we believe it would protect the Fund against potential claims based on the instructions received. SELLING RECENTLY PURCHASED SHARES If you sell shares recently purchased, we may delay sending you the proceeds until your check, draft or wire/electronic funds transfer has cleared, which may take seven business days or more. A certified or cashier's check may clear in less time. REDEMPTION PROCEEDS Your redemption check will be sent within seven days after we receive your request in proper form. We are not able to receive or pay out cash in the form of currency. Redemption proceeds may be delayed if we have not yet received your signed account application. REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check) all requests for redemption by any shareholder of record, limited in amount, however, during any 90-day period to the lesser of $250,000 or 1% of the value of the Fund's net assets at the beginning of the 90-day period. This commitment is irrevocable without the prior approval of the SEC. In the case of redemption requests in excess of these amounts, the board reserves the right to make payments in whole or in part in securities or other assets of the Fund, in case of an emergency, or if the payment of such a redemption in cash would be detrimental to the existing shareholders of the Fund. In these circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets and you may incur brokerage fees in converting the securities to cash. The Fund does not intend to redeem illiquid securities in kind. If this happens, however, you may not be able to recover your investment in a timely manner. When you redeem your shares in the Fund you may realize a gain or loss for tax purposes, whether you receive cash, securities or other assets of the Fund. The amount realized on redemption of your shares equals the amount of cash and the fair market value on date of distribution of any securities or other assets received by you. Investors should note that, a shareholder owning approximately 30% of the outstanding shares of the Fund as of the date of this Prospectus, has announced that it will redeem all of its shares of the Fund within 30 days after the effective date of this Prospectus and that it will take its redemption proceeds through a pro rata, in-kind distribution of portfolio investments. As a result, the Fund will avoid having to sell significant portfolio assets to raise cash to meet this shareholder's redemption request - thus limiting the potential adverse effect on the Fund's net asset value per share. RETIREMENT PLANS You may need to complete additional forms to sell shares in a Franklin Templeton Bank & Trust retirement plan. For participants under age 59 1/2, tax penalties may apply. Call Retirement Services at 1-800/527-2020 for details. SELLING SHARES - ------------------------------------------------------------------------------- TO SELL SOME OR ALL OF YOUR SHARES - ------------------------------------------------------------------------------- [Insert graphic of hands shaking] Contact your investment representative THROUGH YOUR INVESTMENT REPRESENTATIVE - ------------------------------------------------------------------------------- [Insert graphic of Send written instructions and endorsed share envelope] certificates (if you hold share certificates) to Investor Services. Corporate, partnership BY MAIL or trust accounts may need to send additional documents. Specify the Fund, the account number and the dollar value or number of shares you wish to sell. If you own both Class A and B shares, also specify the class of shares, otherwise we will sell your Class A shares first. Be sure to include all necessary signatures and any additional documents, as well as signature guarantees if required. A check will be mailed to the name(s) and address on the account, or otherwise according to your written instructions. - ------------------------------------------------------------------------------- [Insert graphic of As long as your transaction is for $100,000 or phone and computer] less, you do not hold share certificates and you have not changed your address by phone or BY PHONE/ONLINE online within the last 15 days, you can sell your shares by phone or online. 1-800/632-2301 A check will be mailed to the name(s) and address on franklintempleton.com the account. Written instructions, with a signature guarantee, are required to send the check to another address or to make it payable to another person. - ------------------------------------------------------------------------------- [Insert graphic of You can call, write, or visit us online to have three lightning redemption proceeds sent to a bank account. See the bolts] policies above for selling shares by mail, phone, or online. BY ELECTRONIC FUNDS TRANSFER (ACH) Before requesting to have redemption proceeds sent to a bank account, please make sure we have your bank account information on file. If we do not have this information, you will need to provide the banking instructions online or send written instructions with your bank's name and address, a voided check or savings account deposit slip, and a signature guarantee if the bank and Fund accounts do not have at least one common owner. If we receive your request in proper form by 1:00 p.m. Pacific time, proceeds sent by ACH generally will be available within two to three business days. - ------------------------------------------------------------------------------- [Insert graphic of Obtain a current prospectus for the fund you are two arrows pointing considering. Prospectuses are available online at in opposite franklintempleton.com. directions] Call Shareholder Services at the number below or send BY EXCHANGE signed written instructions. You also may place an exchange order online. See the policies above for selling shares by mail, phone, or online. If you hold share certificates, you will need to return them to the Fund before your exchange can be processed. - ------------------------------------------------------------------------------- FRANKLIN TEMPLETON INVESTOR SERVICES P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030 CALL TOLL-FREE: 1-800/632-2301 (MONDAY THROUGH FRIDAY 5:30 A.M. TO 5:00 P.M., PACIFIC TIME SATURDAY 6:30 A.M. TO 2:30 P.M., PACIFIC TIME) OR VISIT US ONLINE 24 HOURS A DAY, 7 DAYS A WEEK, AT FRANKLINTEMPLETON.COM [Insert graphic of paper and pen] ACCOUNT POLICIES ---------------- CALCULATING SHARE PRICE The Fund calculates the net asset value per share (NAV) each business day at the close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). The NAV for Advisor Class is calculated by dividing its net assets by the number of its shares outstanding. The Fund's assets are generally valued at their market value. If market prices are unavailable, or if an event occurs after the close of the trading market that materially affects the values, assets may be valued at their fair value. If the Fund holds securities listed primarily on a foreign exchange that trades on days when the Fund is not open for business, the value of your shares may change on days that you cannot buy or sell shares. Requests to buy and sell shares are processed at the NAV next calculated after we receive your request in proper form. ACCOUNTS WITH LOW BALANCES If the value of your account falls below $500 ($50 for employee accounts) because you sell some of your shares, we may mail you a notice asking you to bring the account back up to its applicable minimum investment amount. If you choose not to do so within 30 days, we may close your account and mail the proceeds to the address of record. STATEMENTS, REPORTS AND PROSPECTUSES You will receive quarterly account statements that show all your account transactions during the quarter. You also will receive written notification after each transaction affecting your account (except for distributions and transactions made through automatic investment or withdrawal programs, which will be reported on your quarterly statement). You also will receive the Fund's financial reports every six months as well as an annual updated prospectus. To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and prospectus. This process, called "householding," will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at 1-800/632-2301. At any time you may view current prospectuses and financial reports on our website. If you choose, you may receive your statements, financial reports and prospectuses through electronic delivery (please see "Telephone/Online Privileges" on page [#]). INVESTMENT REPRESENTATIVE ACCOUNT ACCESS If there is a dealer or other investment representative of record on your account, he or she will be able to obtain your account information, conduct transactions for your account, and also will receive copies of all notifications and statements and other information about your account directly from the Fund. STREET OR NOMINEE ACCOUNTS You may transfer your shares from the street or nominee name account of one dealer to another, as long as both dealers have an agreement with Franklin Templeton Distributors, Inc. We will process the transfer after we receive authorization in proper form from your delivering securities dealer. JOINT ACCOUNTS Unless you specify a different registration, accounts with two or more owners are registered as "joint tenants with rights of survivorship" (shown as "Jt Ten" on your account statement). To make any ownership changes to a joint account, all owners must agree in writing, regardless of the law in your state. JOINT ACCOUNT RISK WITH TELEPHONE/ONLINE PRIVILEGES You will automatically receive telephone/online privileges when you open your account. If your account has more than one registered owner, telephone/online privileges allow the Fund to accept online registration for online services (including electronic delivery of shareholder documents) and transaction instructions online or by telephone from only one registered owner. This means that ANY ONE REGISTERED OWNER ON YOUR ACCOUNT, ACTING ALONE AND WITHOUT THE CONSENT OF ANY OTHER REGISTERED OWNER, may give the Fund instructions by telephone, online or in writing (subject to any limitations in telephone or online privileges) to: o Exchange shares from a jointly registered Fund account requiring all registered owner signatures into an identically registered money fund account that only requires one registered owner's signature to redeem shares; o Redeem Fund shares and direct the redemption proceeds to a bank account that may or may not be owned by you and, if owned by you jointly with someone else, only requires one person to withdraw funds by check or otherwise; o Add/Change the bank account to which Fund share redemption proceeds may be sent, which bank account may not be owned by you; o Purchase Fund shares by debiting a bank account that may be owned by you; and o Add/Change the bank account that may be debited for Fund share purchases, which new account may be owned by you. If you do NOT want another registered owner on your account to be able to issue these kinds of instructions to the Fund without your consent, you must instruct the Fund to deny/terminate online privileges and the ability to issue such instructions by telephone so that these types of instructions will only be accepted in writing signed by all account owners. This decision will apply to any other fund into which you may exchange your jointly owned Fund shares. Any later decision to permit these types of instructions by telephone and/or online will need to be given to the Fund in a written instruction signed by all registered owners. MARKET TIMERS The Fund does not allow investments by Market Timers and may restrict or refuse purchases or exchanges by a shareholder who fails to comply with the restrictions set forth below. You may be considered a Market Timer if you have (i) requested an exchange or redemption out of any of the Franklin Templeton funds within two weeks of an earlier purchase or exchange request out of any fund, or (ii) exchanged or redeemed shares out of any of the Franklin Templeton funds more than twice within a rolling 90 day period. Accounts under common ownership or control with an account that is covered by (i) or (ii) also are subject to these limits. Anyone, including the shareholder or the shareholder's agent, who is considered to be a Market Timer by the Fund, its manager or shareholder services agent, will be issued a written notice of their status and the Fund's policies. Identified Market Timers will be required to register with the market timing desk of Franklin Templeton Investor Services, LLC, and to place all purchase, exchange and redemption trade requests through the desk. Identified Market Timers who redeem or exchange their shares of the Fund within 90 days of purchase will be assessed a fee of 2% of redemption proceeds. This redemption fee does not apply to 401(k) participant accounts, accounts not held individually through Franklin Templeton Investor Services, LLC, and funds under the automatic dividend reinvestment program and the systematic withdrawal program. ADDITIONAL POLICIES Please note that the Fund maintains additional policies and reserves certain rights, including: o The Fund may restrict or refuse any order to buy shares, including any purchase under the exchange privilege. o The Fund may modify, suspend, or terminate telephone/online privileges at any time. o At any time, the Fund may change its investment minimums or waive or lower its minimums for certain purchases. o The Fund may modify or discontinue the exchange privilege on 60 days' notice. o You may only buy shares of a fund eligible for sale in your state or jurisdiction. o In unusual circumstances, we may temporarily suspend redemptions, or postpone the payment of proceeds, as allowed by federal securities laws. o For redemptions over a certain amount, the Fund reserves the right, in the case of an emergency, to make payments in securities or other assets of the Fund, if the payment of cash proceeds by check, wire or electronic funds transfer would be harmful to existing shareholders. o To permit investors to obtain the current price, dealers are responsible for transmitting all orders to the Fund promptly. DEALER COMPENSATION Qualifying dealers who sell Advisor Class shares may receive up to 0.25% of the amount invested. This amount is paid by Franklin Templeton Distributors, Inc. from its own resources. [Insert graphic of question mark] QUESTIONS ---------- If you have any questions about the Fund or your account, you can write to us at P.O. Box 33030, St. Petersburg, FL 33733-8030. You also can call us at one of the following numbers. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME, DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY) - --------------------------------------------------------------------------------------- Shareholder Services 1-800/632-2301 5:30 a.m. to 5:00 p.m. 6:30 a.m. to 2:30 p.m. (Saturday) Fund Information 1-800/DIAL BEN 5:30 a.m. to 5:00 p.m. (1-800/342-5236) 6:30 a.m. to 2:30 p.m. (Saturday) Retirement Services 1-800/527-2020 5:30 a.m. to 5:00 p.m. Advisor Services 1-800/524-4040 5:30 a.m. to 5:00 p.m. FTI Institutional Services 1-800/321-8563 6:00 a.m. to 4:00 p.m. TDD (hearing impaired) 1-800/851-0637 5:30 a.m. to 5:00 p.m. TeleFACTS(R)(automated) 1-800/247-1753 (around-the-clock access)
FOR MORE INFORMATION You can learn more about the Fund in the following documents: ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS Includes a discussion of recent market conditions and Fund strategies that significantly affected Fund performance during its last fiscal year, financial statements, detailed performance information, portfolio holdings and the auditor's report. STATEMENT OF ADDITIONAL INFORMATION (SAI) Contains more information about the Fund, its investments and policies. It is incorporated by reference (is legally a part of this prospectus). For a free copy of the current annual/semiannual report or the SAI, please contact your investment representative or call us at the number below. You also can view the current annual/semiannual report online at franklintempleton.com. You also can obtain information about the Fund by visiting the SEC's Public Reference Room in Washington, DC (phone 1-202/942-8090) or the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this information, after paying a duplicating fee, by writing to the SEC's Public Reference Section, Washington, DC 20549-0102 or by electronic request at the following email address: publicinfo@sec.gov. [Insert FRANKLIN(R)TEMPLETON(R)INVESTMENTS logo] One Franklin Parkway, San Mateo, CA 94403-1906 1-800/DIAL BEN(R) (1-800/342-5236) TDD (Hearing Impaired) 1-800/851-0637 FRANKLINTEMPLETON.COM GAIN FROM OUR PERSPECTIVE(R) Investment Company Act file #811-7876 [] PA 06/03 PART B STATEMENT OF ADDITIONAL INFORMATION CLASS A, B, C & R SHARES TEMPLETON CHINA WORLD FUND CLASS A, B, C & R STATEMENT OF ADDITIONAL INFORMATION [JUNE 20,] 2003 [Insert Franklin Templeton Investments logo] P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R) - ------------------------------------------------------------------------------- This Statement of Additional Information (SAI) is not a prospectus. It contains information in addition to the information in the Fund's prospectus. The Fund's prospectus, dated [June 20,] 2003, which we may amend from time to time, contains the basic information you should know before investing in the Fund. You should read this SAI together with the Fund's prospectus. On [June 20,] 2003, the Closed-End Fund was converted to an open-end fund in a transaction whereby the Closed-End Fund transferred all of its assets, subject to its liabilities, to the Fund in exchange for Advisor Class shares. Shareholders of the Closed-End Fund received Advisor Class shares of the Fund in exchange for their shares of the Closed-End Fund. The audited financial statements and auditor's report in the Closed-End Fund's Annual Report to Shareholders, for the fiscal year ended August 31, 2002, are incorporated by reference (are legally a part of this SAI). For a free copy of the current prospectus or annual report, contact your investment representative or call 1-800/DIAL BEN (1-800/342-5236). CONTENTS Goal, Strategies and Risks Officers and Trustees Management and Other Services Portfolio Transactions Distributions and Taxes Organization, Voting Rights and Principal Holders Buying and Selling Shares Pricing Shares The Underwriter Performance Miscellaneous Information Description of Ratings - ------------------------------------------------------------------------------- MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS: o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT; o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK; o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. - ------------------------------------------------------------------------------- GOAL, STRATEGIES AND RISKS - ------------------------------------------------------------------------------- Generally, the policies and restrictions discussed in this SAI and in the prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell a security because circumstances change and the security no longer meets one or more of the Fund's policies or restrictions. If a percentage restriction or limitation is met at the time of investment, a later increase or decrease in the percentage due to a change in the value or liquidity of portfolio securities will not be considered a violation of the restriction or limitation. If a bankruptcy or other extraordinary event occurs concerning a particular security the Fund owns, the Fund may receive stock, real estate, or other investments that the Fund would not, or could not, buy. If this happens, the Fund intends to sell such investments as soon as practicable while trying to maximize the return to shareholders. The Fund has adopted certain investment restrictions as fundamental and non-fundamental policies. A fundamental policy may only be changed if the change is approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or more of the Fund's shares present at a shareholder meeting if more than 50% of the Fund's outstanding shares are represented at the meeting in person or by proxy, whichever is less. A non-fundamental policy may be changed by the board of trustees without the approval of shareholders. FUNDAMENTAL INVESTMENT POLICIES The Fund's investment goal is long-term capital appreciation. The Fund may not: 1. Borrow money, except to the extent permitted by the Investment Company Act of 1940, as amended (1940 Act), or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the Securities and Exchange Commission (SEC). 2. Issue senior securities, except to the extent permitted by the 1940 Act and any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. 3. Act as an underwriter except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares. 4. Make loans to other persons except (a) through the lending of its portfolio securities, (b) through the purchase of debt securities, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (c) to the extent the entry into a repurchase agreement is deemed to be a loan. The Fund may also make loans to other investment companies to the extent permitted by the 1940 Act or any rules or exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. 5. Purchase or sell commodities as defined in the Commodity Exchange Act, as amended, and the rules and regulations thereunder, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from engaging in transactions involving futures contracts and options thereon or investing in securities that are secured by physical commodities. 6. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from purchasing or selling securities secured by real estate or interests therein or securities of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein. 7. Invest more than 25% of its net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies). If the Fund receives from an issuer of securities held by the Fund subscription rights to purchase securities of that issuer, and if the Fund exercises such subscription rights at a time when the Fund's portfolio holdings of securities of that issuer would otherwise exceed the limits set forth in fundamental investment policy number 7 above, it will not constitute a violation if, prior to receipt of securities upon exercise of such rights, and after announcement of such rights, the Fund has sold at least as many securities of the same class and value as it would receive on exercise of such rights. NON-FUNDAMENTAL INVESTMENT POLICIES Under normal market conditions, the Fund invests at least 80% of its net assets in securities of "China companies," as defined below. Net assets for this 80% policy include the amount of borrowings for investment purposes. Shareholders will be given 60 days' advance notice of any change to this 80% policy. For purposes of the Fund's investments, China companies are those: o that are organized under the laws of, or with a principal office in, the People's Republic of China (China), Hong Kong or Taiwan; or o for which the principal trading market is in China, Hong Kong or Taiwan; or o that derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets, in China. The manager determines whether a specific company meets this definition of a "China company" based on publicly available information. The Fund may invest up to 20% of its net assets in securities that do not qualify as China company securities, but whose issuers, in the judgment of the manager, are expected to benefit from developments in the economy of China, Hong Kong or Taiwan. The Fund may also invest up to 20% of its net assets in debt obligations of China companies, which may be lower-rated or unrated, when consistent with the Fund's investment goal. In addition, the Fund may invest up to 5% of its total assets in direct equity investments that the manager expects will become listed or otherwise publicly traded securities. he Fund may use various derivative strategies seeking to protect its assets, implement a cash or tax management strategy or enhance its returns. The Fund may invest up to 5% of its total assets in swap agreements, put and call options and collars. In addition, for hedging purposes only, the Fund may buy and sell financial futures contracts, stock index futures contracts, foreign currency futures contracts and options on any of those instruments. With derivatives, the manager attempts to predict whether an underlying investment will increase or decrease in value at some future time. The manager considers various factors, such as availability and cost, in deciding whether to use a particular instrument or strategy. The Fund normally invests its assets over a broad spectrum of the economies of China, Hong Kong and Taiwan, including, as conditions warrant from time to time, trade, financial and business services, transportation, communications, manufacturing, real estate, textiles, food processing and construction. In selecting companies for investment, the manager considers overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, raw material costs and sources, profit margins, returns on investment, capital resources, government regulation, management and other factors in comparison to other companies around the world which the manager believes are comparable. The Fund is not permitted to invest more than 25% of its net assets in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies). In addition, although the Fund is "non-diversified" for purposes of the 1940 Act, the board of trustees has adopted a non-fundamental policy under which the Fund will not invest more than 10% of its total assets in any one issuer. The Fund may invest up to 15% of its net assets in illiquid securities, including direct equity investments that it considers to be illiquid and investments that are subject to repatriation restrictions. INVESTMENTS, TECHNIQUES, STRATEGIES AND THEIR RISKS The value of your shares will increase as the value of the securities owned by the Fund increases and will decrease as the value of the Fund's investments decrease. In this way, you participate in any change in the value of the securities owned by the Fund. In addition to the factors that affect the value of any particular security that the Fund owns, the value of the Fund's shares may also change with movements in the stock and bond markets as a whole. BORROWING The Fund may borrow up to one-third of the value of its total assets from banks to increase its holdings of portfolio securities. Under the 1940 Act, the Fund is required to maintain continuous asset coverage of 300% with respect to such borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of the Fund's holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities on the Fund's net asset value, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances), which may or may not exceed the income or gains received from the securities purchased with borrowed funds. DEBT SECURITIES The Fund may invest in debt securities, including lower-rated and unrated debt securities. A debt security typically has a fixed payment schedule which obligates the issuer to pay interest to the lender and to return the lender's money over a certain time period. A company typically meets its payment obligations associated with its outstanding debt securities before it declares and pays any dividend to holders of its equity securities. Bonds, notes, debentures and commercial paper differ in the length of the issuer's payment schedule, with bonds carrying the longest repayment schedule and commercial paper the shortest. The market value of debt securities generally varies in response to changes in interest rates and the financial condition of each issuer. During periods of declining interest rates, the value of debt securities generally increases. Conversely, during periods of rising interest rates, the value of such securities generally declines. These changes in market value will be reflected in the Fund's net asset value per share. The Fund may buy both rated and unrated debt securities, including debt securities rated below investment grade (rated lower than BBB by Standard & Poor's Ratings Group (S&P(R)) or Baa by Moody's Investors Service (Moody's)). Independent rating organizations rate debt securities based upon their assessment of the financial soundness of the issuer. Generally, a lower rating indicates higher risk. LOWER-RATED DEBT SECURITIES. Securities rated below investment grade, sometimes called "junk bonds," generally have more credit risk than higher-rated securities. The lowest rating category established by Moody's is "C" and by S&P(R) is "D." Debt securities that are rated C by Moody's can be regarded as having extremely poor prospects of ever attaining any real investment standing. Debt securities rated D by S&P(R) are in default as to the payment of principal and interest, which means that the issuer does not have the financial soundness to meet its interest payments or its repayment schedule to security holders. Companies issuing high yield debt securities are not as strong financially as those issuing securities with higher credit ratings. These companies are more likely to encounter financial difficulties and are more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates, that could affect their ability to make interest and principal payments. If an issuer stops making interest and/or principal payments, payments on the securities may never resume. These securities may be worthless and the Fund could lose its entire investment. Although they may offer higher yields than do higher rated securities, lower-rated and unrated debt securities generally involve greater volatility of price and risk of principal and income, including the possibility of default by, or bankruptcy of, the issuers of the securities. Prices are especially sensitive to developments affecting the company's business and to changes in the ratings assigned by rating agencies. Prices often are closely linked with the company's stock prices and typically rise and fall in response to factors that affect stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, stock market activity, large sustained sales by major investors, a high-profile default, or other factors. In addition, the markets in which lower-rated and unrated debt securities are traded are more limited than those in which higher rated securities are traded. Many of these securities do not trade frequently, and when they do their prices may be significantly higher or lower than expected. The existence of limited markets for particular securities may diminish the Fund's ability to sell the securities at fair value either to meet redemption requests or to respond to a specific economic event such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain lower-rated or unrated debt securities also may make it more difficult for the Fund to obtain accurate market quotations for the purposes of valuing the Fund's portfolio. Market quotations are generally available on many lower-rated or unrated securities only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of lower-rated debt securities, especially in a thinly traded market. Analysis of the creditworthiness of issuers of lower-rated debt securities may be more complex than for issuers of higher rated securities, and the ability of the Fund to achieve its investment goal may, to the extent of investment in lower-rated debt securities, be more dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher rated securities. Lower-rated debt securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of lower-rated debt securities have been found to be less sensitive to interest rate changes than higher rated investments, but more sensitive to adverse economic downturns or individual corporate developments. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in lower-rated debt securities prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If the issuer of lower-rated debt securities defaults, the Fund may incur additional expenses to seek recovery. DEPOSITARY RECEIPTS The Fund may invest indirectly in securities of China companies through sponsored or unsponsored American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and other types of Depositary Receipts (which, together with ADRs, GDRs, and EDRs, are collectively referred to as Depositary Receipts) to the extent such Depositary Receipts become available. ADRs are Depositary Receipts typically issued by a U.S. bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. GDRs, EDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they also may be issued by U.S. banks or trust companies, and evidence ownership of underlying securities issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the U.S. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are not obligated to disclose material information in the U.S. and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. For purposes of the Fund's investment policies, the Fund's investments in Depositary Receipts will be deemed to be investments in the underlying securities. DERIVATIVES The Fund may enter into swap agreements; write put and call options; and purchase put and call options on securities, securities indices and futures contracts for the purpose of hedging the Fund's investments against a decline in value, to implement a tax or cash management strategy, and/or to enhance the Fund's returns. FUTURES CONTRACTS. Although the Fund has the authority to buy and sell financial futures contracts, it presently has no intention of entering into such transactions. Although some financial futures contracts call for making or taking delivery of the underlying securities, in most cases these obligations are closed out before the settlement date. The closing of a contractual obligation is accomplished by purchasing or selling an identical offsetting futures contract. Other financial futures contracts by their terms call for cash settlements. The Fund also may buy and sell index futures contracts with respect to any stock index traded on a recognized stock exchange or board of trade. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. The Fund may not commit more than 5% of its total assets to initial margin deposits on futures contracts and related options. In addition, the value of the securities on which the futures contracts are based will not exceed 25% of the Fund's total assets. At the time the Fund purchases a futures contract, an amount of cash, U.S. government securities, or other highly liquid debt securities equal to the market value of the futures contract will be deposited in a segregated account with the Fund's custodian. When writing a futures contract, the Fund will maintain with its custodian liquid assets that, when added to the amounts deposited with a futures commission merchant or broker as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Fund's custodian). OPTIONS ON SECURITIES OR INDICES. The Fund may buy and sell options on securities and securities indices to earn additional income and/or to help protect its portfolio against market and/or exchange rate movements, although it presently has no intention of doing so. The Fund may write covered call and put options and purchase call and put options on securities or stock indices that are traded on U.S. and foreign exchanges and in the over-the-counter markets. The Fund will limit the sale of options on its securities to 15% or less of its total assets. The Fund may only buy options if the total premiums it paid for such options is 5% or less of its total assets. An option on a security is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security (in the case of a call option) or to sell a specified security (in the case of a put option) from or to the writer of the option at a designated price during the term of the option. An option on a securities index gives the purchaser of the option, in return for the premium paid, the right to receive from the seller cash equal to the difference between the closing price of the index and the exercise price of the option. The Fund may write a call or put option only if the option is "covered." A call option on a security written by the Fund is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option on a security is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash or high grade U.S. government securities in a segregated account with its custodian. A put option on a security written by the Fund is "covered" if the Fund maintains cash or fixed income securities with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The Fund will cover call options on stock indices that it writes by owning securities whose price changes, in the opinion of the manager, are expected to be similar to those of the index, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, where the Fund covers a call option on a stock index through ownership of securities, such securities may not match the composition of the index. In that event, the Fund will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. The Fund will cover put options on stock indices that it writes by segregating assets equal to the option's exercise price, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. The Fund will receive a premium from writing a put or call option, which increases the Fund's gross income in the event the option expires unexercised or is closed out at a profit. If the value of a security or an index on which the Fund has written a call option falls or remains the same, the Fund will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the portfolio securities being hedged. If the value of the underlying security or index rises, however, the Fund will realize a loss in its call option position, which will reduce the benefit of any unrealized appreciation in the Fund's investments. By writing a put option, the Fund assumes the risk of a decline in the underlying security or index. To the extent that the price changes of the portfolio securities being hedged correlate with changes in the value of the underlying security or index, writing covered put options on indices or securities will increase the Fund's losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the option. The Fund also may purchase put options to hedge its investments against a decline in value. By purchasing a put option, the Fund will seek to offset a decline in the value of the portfolio securities being hedged through appreciation of the put option. If the value of the Fund's investments does not decline as anticipated, or if the value of the option does not increase, the Fund's loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will depend, in part, on the accuracy of the correlation between the changes in value of the underlying security or index and the changes in value of the Fund's security holdings being hedged. The Fund may purchase call options on individual securities to hedge against an increase in the price of securities that the Fund anticipates purchasing in the future. Similarly, the Fund may purchase call options on a securities index to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when the Fund holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options, the Fund will bear the risk of losing all or a portion of the premium paid if the value of the underlying security or index does not rise. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or the options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position, the Fund may experience losses in some cases as a result of such inability. FUTURES AND OPTIONS RISKS. The Fund's ability to reduce or eliminate its futures and related options positions will depend upon the liquidity of the secondary markets for such futures and options. The Fund intends to buy or sell futures and related options only on exchanges or boards of trade where there appears to be an active secondary market, but there is no assurance that a liquid secondary market will exist for any particular contract or at any particular time. Use of stock index futures and related options for hedging may involve risks because of imperfect correlations between movements in the prices of the futures or related options and movements in the prices of the securities being hedged. Successful use of futures and related options by the Fund for hedging purposes also depends upon the manager's ability to predict correctly movements in the direction of the market, as to which no assurance can be given. There are several risks associated with transactions in options on securities and securities indices. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. If the Fund were unable to close out an option that it had purchased on a securities index, it would have to exercise the option in order to realize any profit or the option may expire worthless. If trading were suspended in an option purchased by the Fund, it would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index or a security written by the Fund is covered by an option on the same index or security purchased by the Fund, movements in the index or the price of the security may result in a loss to the Fund. However, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding. FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign currency exchange rate risks, the Fund may enter into forward foreign currency exchange contracts and foreign currency futures contracts, as well as buy and sell put or call options on foreign currencies, as described below. The Fund may only commit up to 20% of its total assets to forward foreign currency contracts. The Fund also may conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market. The Fund may enter into forward foreign currency exchange contracts (forward contracts) to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers. The Fund may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security. In addition, for example, when the Fund believes that a foreign currency may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell an amount of the former foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. This second investment practice is generally referred to as "cross-hedging." Because in connection with the Fund's forward foreign currency transactions an amount of the Fund's assets equal to the amount of the purchase will be held aside or segregated to be used to pay for the commitment, the Fund will always have cash, cash equivalents or high quality debt securities available sufficient to cover any commitments under these contracts or to limit any potential risk. The segregated account will be marked-to-market on a daily basis. While these contracts are not presently regulated by the Commodity Futures Trading Commission, it may in the future assert authority to regulate forward contracts. In such event, the Fund's ability to utilize forward contracts in the manner set forth above may be restricted. Forward contracts may limit potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not engaged in such contracts. The Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the dollar cost of foreign securities to be acquired. As in the case with other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuation in exchange rates, although, in the event of rate movements adverse to the Fund's position, the Fund may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies to be written or purchased by the Fund will be traded on U.S. and foreign exchanges or over-the-counter. The Fund may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies (foreign currency futures). This investment technique will be used only to hedge against anticipated future changes in exchange rates which otherwise might adversely affect the value of the Fund's portfolio securities or adversely affect the prices of securities that the Fund intends to purchase at a later date. The successful use of foreign currency futures will usually depend on the manager's ability to forecast currency exchange rate movements correctly. Should exchange rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of foreign currency futures or may realize losses. SWAP AGREEMENTS. The Fund may enter into swap agreements for the purpose of attempting to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in a security that yielded or produced that desired return. These instruments also may be used for tax and/or cash management purposes. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested in a particular security, or at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. The "notional amount" of the swap agreement is only a fictive basis on which to calculate the obligations which the parties to a swap agreement have agreed to exchange. The Fund's obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement. The Fund's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash, U.S. government securities, or high grade debt obligations, to limit any potential leveraging of the Fund's portfolio. The Fund will not enter into a swap agreement with any single party if the net amount that would be owed or received under contracts with that party would exceed 5% of the Fund's assets. Whether the Fund's use of swap agreements will be successful in furthering its investment objective will depend on the ability of the manager correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The manager will cause the Fund to enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Fund's repurchase agreement guidelines. Certain positions adopted by the Internal Revenue Service may limit the Fund's ability to use swap agreements in a desired tax strategy. The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market and the laws relating to swaps, including potential government regulation, could adversely effect the Fund's ability to terminate existing swap agreements, to realize amounts to be received under such agreements, or to enter into swap agreements, or could have adverse tax consequences. DIRECT EQUITY INVESTMENTS The Fund may invest in direct equity investments that the manager expects will become listed or otherwise publicly traded securities. Direct equity investments consist of (i) the private purchase from an enterprise of an equity interest in the enterprise in the form of shares of common stock or equity interests in trusts, partnerships, joint ventures or similar enterprises, and (ii) the purchase of such an equity interest in an enterprise from a principal investor in the enterprise. Direct equity investments are generally considered to be illiquid. To the degree that the Fund invests in direct equity investments that it considers to be illiquid, it will limit such investments so that they, together with the Fund's other illiquid investments, constitute no more than 15% of the Fund's net assets. In most cases, the Fund will, at the time of making a direct equity investment, enter into a shareholder or similar agreement with the enterprise and one or more other holders of equity interests in the enterprise. The manager anticipates that these agreements may, in appropriate circumstances, provide the Fund with the ability to appoint a representative to the board of directors or similar body of the enterprise, and eventually to dispose of the Fund's investment in the enterprise through, for example, the listing of the securities or the sale of the securities to the issuer or another investor. In cases where the Fund appoints a representative, the representative would be expected to provide the Fund with the ability to monitor its investment and protect its rights in the investment and will not be appointed for the purpose of exercising management or control of the enterprise. In addition, the Fund intends to make its direct equity investments in such a manner as to avoid subjecting the Fund to unlimited liability with respect to the investments. There can be no assurance that the Fund's direct equity investments will become listed, or that it will be able to sell any direct equity investment to the issuer or another investor. The extent to which the Fund may make direct equity investments may be limited by considerations relating to its status as a regulated investment company. Direct equity investments in China companies may involve a high degree of business and financial risk that can result in substantial losses. Because of the absence of a public trading market for these investments, the Fund may take longer to liquidate these positions than would be the case for publicly traded securities and the prices on these sales could be less than those originally paid by the Fund or less than what may be considered the fair value of such securities. Further, issuers whose securities are not publicly traded may not be subject to disclosure and other investor protection requirements applicable to publicly traded securities. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund's direct equity investments, particularly in China, may include investments in smaller, less-seasoned companies, which may involve greater risks. These companies may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. EQUITY SECURITIES represent a proportionate share of the ownership of a company; their value is based on the success of the company's business, any income paid to stockholders and the value of its assets, as well as general market conditions. The purchaser of an equity security typically receives an ownership interest in the company as well as certain voting rights. The owner of an equity security may participate in a company's success through the receipt of dividends, which are distributions of earnings by the company to its owners. Equity security owners may also participate in a company's success or lack of success through increases or decreases in the value of the company's shares as traded in the public trading market for such shares. Equity securities generally take the form of common stock or preferred stock, as well as securities convertible into common stocks. Preferred stockholders typically receive greater dividends but may receive less appreciation than common stockholders and may have different voting rights as well. Equity securities may also include convertible securities, warrants or rights, equity interests in trusts, partnerships, joint ventures or similar enterprises, and Depositary Receipts. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. Warrants or rights give the holder the right to purchase a common stock at a given time for a specified price. FOREIGN SECURITIES You should consider carefully the substantial risks involved in securities of companies and governments of foreign nations, which are in addition to the usual risks inherent in domestic investments. There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the U.S. Foreign companies are not generally subject to uniform accounting or financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. The Fund, therefore, may encounter difficulty in obtaining market quotations for purposes of valuing its portfolio and calculating its net asset value. Foreign markets have substantially less volume than the New York Stock Exchange (NYSE) and securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Commission rates in foreign countries, which are generally fixed rather than subject to negotiation as in the U.S., are likely to be higher, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of securities exchanges, brokers, dealers and listed companies than in the U.S., thus increasing the risk of delayed settlements of portfolio transactions or loss of certificates for portfolio securities. Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct these transactions. These delays in settlement could result in temporary periods when a portion of the assets of the Fund is uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Losses to the Fund due to subsequent declines in the value of portfolio securities, or losses arising out of the Fund's inability to fulfill a contract to sell these securities, could result in potential liability to the Fund. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect the Fund's investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in growth of gross national product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments positions. Investments in foreign securities where delivery takes place outside the U.S. will have to be made in compliance with any applicable U.S. and foreign currency restrictions and tax laws (including laws imposing withholding taxes on any dividend or interest income) and laws limiting the amount and types of foreign investments. Changes of governmental administrations or of economic or monetary policies, in the U.S. or abroad, or changed circumstances in dealings between nations, or currency convertibility or exchange rates could result in investment losses for the Fund. Brokerage commissions, custodial services, and other costs relating to investment in foreign countries are generally more expensive than in the U.S. Investments by the Fund in the securities of foreign issuers may tend to increase the risks with respect to the liquidity of the Fund's portfolio and the Fund's ability to meet a large number of shareholder redemption requests should there be economic or political turmoil in a country in which the Fund has a substantial portion of its assets invested or should relations between the U.S. and foreign countries deteriorate markedly. In addition, the reporting and disclosure requirements applicable to foreign issuers may differ from those applicable to domestic issuers, and there may be difficulties in obtaining or enforcing judgments against foreign issuers. Certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment of foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Furthermore, in some countries the repatriation of investment income, capital and proceeds of sales by foreign investors may require governmental registration and/or approval. The Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for repatriation. In addition, the limited liquidity in certain Chinese, Taiwanese and Hong Kong markets is a factor to be taken into account in the Fund's valuation of portfolio securities and may affect the Fund's ability to dispose of securities in order to meet redemption requests at the price and time it wishes to do so. DEVELOPING OR EMERGING MARKETS. Investments in companies domiciled in developing or emerging countries may be subject to potentially higher risks than investments in companies in developed countries. These risks include (i) less social, political and economic stability; (ii) the smaller size of the markets for these securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) the lack of publicly available information, including reports of payments of dividends or interest on outstanding securities; (iv) certain national policies that may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (v) foreign taxation; (vi) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property; (vii) the absence, until recently in certain developing countries, of a capital market structure or market-oriented economy; (viii) the possibility that favorable economic developments may be slowed or reversed by unanticipated political or social events in certain countries; (ix) restrictions that may make it difficult or impossible for the Fund to vote proxies, exercise shareholder rights, pursue legal remedies, and obtain judgments in foreign courts; (x) the risk of uninsured loss due to lost, stolen, or counterfeit stock certificates; and (xi) possible losses through the holding of securities in domestic and foreign custodial banks and depositories. In addition, certain countries in which the Fund may invest have experienced substantial, and in some periods, extremely high rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries. The economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. Investments in developing market countries may involve risks of nationalization, expropriation and confiscatory taxation. The communist governments of certain countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there can be no assurance that this expropriation will not occur in the future. In the event of expropriation, the Fund could lose a substantial portion of any investments it has made in the affected countries. Further, no accounting standards exist in certain developing countries. Finally, even though the currencies of some developing countries may be convertible into U.S. dollars, the conversion rates may be artificial to the actual market values and may be adverse to Fund shareholders. CHINA COMPANIES. Investing in China, Hong Kong and Taiwan involves a high degree of risk and special considerations not typically associated with investing in other more established economies or securities markets. Such risks may include: (a) the risk of nationalization or expropriation of assets or confiscatory taxation; (b) greater social, economic and political uncertainty (including the risk of war); (c) dependency on exports and the corresponding importance of international trade; (d) the increasing competition from Asia's other low-cost emerging economies; (e) greater price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets, particularly in China; (f) currency exchange rate fluctuations and the lack of available currency hedging instruments; (g) higher rates of inflation; (h) controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; (i) greater governmental involvement in and control over the economy; (j) the risk that the Chinese government may decide not to continue to support the economic reform programs implemented since 1978 and could return to the prior, completely centrally planned, economy; (k) the fact that China companies, particularly those located in China, may be smaller, less seasoned and newly-organized companies; (l) the difference in, or lack of, auditing and financial reporting standards which may result in unavailability of material information about issuers, particularly in China; (m) the fact that statistical information regarding the economy of China may be inaccurate or not comparable to statistical information regarding the U.S. or other economies; (n) the less extensive, and still developing, regulation of the securities markets, business entities and commercial transactions; (o) the fact that the settlement period of securities transactions in foreign markets may be longer; (p) the willingness and ability of the Chinese government to support the Chinese and Hong Kong economies and markets is uncertain; (q) the risk that it may be more difficult, or impossible, to obtain and/or enforce a judgment than in other countries; (r) the rapidity and erratic nature of growth, particularly in China, resulting in inefficiencies and dislocations; and (s) the risk that, because of the degree of interconnectivity between the economies and financial markets of China, Hong Kong and Taiwan, any sizable reduction in the demand for goods from China, or an economic downturn in China, could negatively affect the economies and financial markets of Hong Kong and Taiwan, as well. Investment in China, Hong Kong and Taiwan is subject to certain political risks. Following the establishment of the People's Republic of China by the Communist Party in 1949, the Chinese government renounced various debt obligations incurred by China's predecessor governments, which obligations remain in default, and expropriated assets without compensation. There can be no assurance that the Chinese government will not take similar action in the future. An investment in the Fund involves risk of a total loss. The political reunification of China and Taiwan is a highly problematic issue and is unlikely to be settled in the near future. This situation poses a threat to Taiwan's economy and could negatively affect its stock market. China has committed by treaty to preserve Hong Kong's autonomy and its economic, political and social freedoms for fifty years from the July 1, 1997 transfer of sovereignty from Great Britain to China. However, if China would exert its authority so as to alter the economic, political or legal structures or the existing social policy of Hong Kong, investor and business confidence in Hong Kong could be negatively affected, which in turn could negatively affect markets and business performance. CURRENCY RISKS. The Fund's management endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread on currency exchange (to cover service charges) may be incurred, particularly when the Fund changes investments from one country to another or when proceeds of the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. Also, some countries may adopt policies which would prevent the Fund from transferring cash out of the country, or withhold portions of interest and dividends at the source. There is the possibility of cessation of trading on national exchanges, expropriation, nationalization or confiscatory taxation, withholding and other foreign taxes on income or other amounts, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability, or diplomatic developments that could affect investments in securities of issuers in foreign nations. The Fund may be affected either unfavorably or favorably by fluctuations in the relative rates of exchange between the currencies of different nations, by exchange control regulations and by indigenous economic and political developments. Some countries in which the Fund may invest also may have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be internationally traded. Any devaluations in the currencies in which the Fund's portfolio securities are denominated may have a detrimental impact on the Fund. Through the Fund's flexible policy, management endeavors to avoid unfavorable consequences and to take advantage of favorable developments in particular nations where, from time to time, it places the Fund's investments. The exercise of this flexible policy may include decisions to purchase securities with substantial risk characteristics and other decisions such as changing the emphasis on investments from one nation to another and from one type of security to another. Some of these decisions may later prove profitable and others may not. No assurance can be given that profits, if any, will exceed losses. INVESTMENT FUNDS The Fund may invest in investment companies that invest principally in securities in which the Fund is authorized to invest. Section 12(d)(1) of the 1940 Act limits the Fund to: (i) investing not more than 10% of its total assets in the securities of other investment companies; (ii) investing not more than 5% of its total assets in the securities of any one investment company; and (iii) acquiring not more than 3% of the outstanding voting securities of the acquired investment company. To the extent the Fund invests in other investment funds, the Fund's shareholders will incur certain duplicative fees and expenses, including investment advisory fees. The Fund also can invest its cash balances in affiliated money market funds to the extent permitted by its investment policies and restrictions and exemptions granted under the 1940 Act. LOANS OF PORTFOLIO SECURITIES To generate additional income, the Fund may lend certain of its portfolio securities to qualified banks and broker-dealers. These loans may not exceed 33 1/3 % of the value of the Fund's total assets, measured at the time of the most recent loan. For each loan, the borrower must maintain with the Fund's custodian collateral (consisting of any combination of cash, securities issued by the U.S. government and its agencies and instrumentalities, or irrevocable letters of credit) with a value at least equal to 102% (for loaned securities issued in the U.S.) or 105% (for loaned securities issued outside the U.S.) of the current market value of the loaned securities. The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. The Fund also continues to receive any distributions paid on the loaned securities. The Fund may terminate a loan at any time and obtain the return of the securities loaned within the normal settlement period for the security involved. Where voting rights with respect to the loaned securities pass with the lending of the securities, the manager intends to call the loaned securities to vote proxies, or to use other practicable and legally enforceable means to obtain voting rights, when the manager has knowledge that, in its opinion, a material event affecting the loaned securities will occur or the manager otherwise believes it necessary to vote. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in collateral in the event of default or insolvency of the borrower. The Fund will loan its securities only to parties who meet creditworthiness standards approved by the Fund's board of trustees, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the loan. NON-DIVERSIFICATION The Fund is classified as a non-diversified investment company under the 1940 Act, which means that the Fund is not limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. Thus, the Fund may invest a greater portion of its assets in the securities of a smaller number of issuers and, as a result, will be subject to greater risk of loss with respect to its portfolio securities. The Fund, however, intends to comply with the diversification requirements imposed by the Internal Revenue Code (Code) for qualification as a regulated investment company. This intention should not be regarded as assurance that the diversification requirements will, in fact, be met. In addition, the board of trustees has adopted a non-fundamental policy under which the Fund will not invest more than 10% of its total assets in the securities of any one issuer. REPURCHASE AGREEMENTS The Fund generally will have a portion of its assets in cash or cash equivalents for a variety of reasons, including to satisfy redemption requests from shareholders, waiting for a suitable investment opportunity or taking a defensive position. To earn income on this portion of its assets, the Fund may enter into repurchase agreements. Under a repurchase agreement, the Fund agrees to buy securities guaranteed as to payment of principal and interest by the U.S. government or its agencies from a qualified bank or broker-dealer and then to sell the securities back to the bank or broker-dealer after a short period of time (generally, less than seven days) at a higher price. The bank or broker-dealer must transfer to the Fund's custodian securities with an initial market value of at least 102% of the dollar amount invested by the Fund in each repurchase agreement. The manager will monitor the value of such securities daily to determine that the value equals or exceeds the repurchase price. Repurchase agreements may involve risks in the event of default or insolvency of the bank or broker-dealer, including possible delays or restrictions upon the Fund's ability to sell the underlying securities. The Fund will enter into repurchase agreements only with parties who meet certain creditworthiness standards, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction. TEMPORARY INVESTMENTS When the manager believes market, economic, financial or political conditions make it advisable, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash or certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities. The short-term and medium-term debt securities in which the Fund generally may invest include: (a) obligations of the U.S., Chinese, Hong Kong or Taiwanese governments, and their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of U.S. or foreign banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by various governments or international development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of U.S., Chinese, Hong Kong or Taiwanese corporations; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. The Fund intends to invest for temporary defensive purposes only in short-term and medium-term debt securities rated, at the time of investment, A or higher by Moody's or S&P(R) or, if unrated, determined to be of comparable quality. To the extent allowed by exemptions granted under the 1940 Act and the Fund's other investment policies and restrictions, the manager also may invest the Fund's assets in shares of one or more money market funds managed by the manager or its affiliates. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES The Fund may purchase securities on a when-issued or delayed delivery basis. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price and yield. No income accrues to the purchaser of a security on a when-issued or delayed delivery basis prior to delivery. Such securities are recorded as an asset and are subject to changes in value based upon changes in the general level of interest rates. Purchasing a security on a when-issued or delayed delivery basis can involve a risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. The Fund will only make commitments to purchase securities on a when-issued or delayed delivery basis with the intention of actually acquiring the securities, but may sell them before the settlement date if it is deemed advisable. The Fund will establish a segregated account in which it will maintain liquid assets in an amount at least equal in value to the Fund's commitments to purchase securities on a when-issued or delayed delivery basis. If the value of these assets declines, the Fund will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments. OFFICERS AND TRUSTEES - ------------------------------------------------------------------------------- Templeton China World Fund (Trust) has a board of trustees. Each trustee will serve until that person's successor is elected and qualified. The board is responsible for the overall management of the Trust, including general supervision and review of the Fund's investment activities. The board, in turn, elects the officers of the Trust who are responsible for administering the Trust's day-to-day operations. The board also monitors the Fund to ensure no material conflicts exist among share classes. While none are expected, the board will act appropriately to resolve any material conflict that may arise. The name, age and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton fund complex are shown below. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX LENGTH OF OVERSEEN BY NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------- --------------------- ---------------- ----------------- ---------------------------- HARRIS J. ASHTON (70) Trustee Since 1993 135 Director, Bar-S Foods 500 East Broward (meat packing company). Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------- FRANK J. CROTHERS (58) Trustee Since 1999 18 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Atlantic Equipment & Power Ltd.; Vice Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power Company Ltd.; Director, Caribbean Electric Utility Services Corporation (Chairman until 2002); and director of various other business and nonprofit organizations. - ------------------------------------------------------------------------------------------------------------- S. JOSEPH FORTUNATO Trustee Since 1993 136 None (70) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch. - ------------------------------------------------------------------------------------------------------------- ANDREW H. HINES, JR. Trustee Since 1993 28 None (80) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Consultant, Triangle Consulting Group; and FORMERLY, Executive-in-Residence, Eckerd College (1991-2002); Chairman and Director, Precise Power Corporation (1990-1997); Director, Checkers Drive-In Restaurant, Inc. (1994-1997); and Chairman of the Board and Chief Executive Officer, Florida Progress Corporation (holding company in the energy area) (1982-1990); and director of various of its subsidiaries. - ------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (51) Trustee Since 1996 82 Director, Amerada Hess 500 East Broward Corporation (exploration Blvd. and refining of oil and Suite 2100 gas); Hercules Fort Lauderdale, FL Incorporated (chemicals, 33394-3091 fibers and resins); Beverly Enterprises, Inc. (health care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); and Canadian National Railway (railroad). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------- BETTY P. KRAHMER (73) Trustee Since 1993 22 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or trustee of various civic associations; and FORMERLY, Economic Analyst, U.S. government. - ------------------------------------------------------------------------------------------------------------- GORDON S. MACKLIN (75) Trustee Since 1993 135 Director, White Mountains 500 East Broward Insurance Group, Ltd. Blvd. (holding company); Martek Suite 2100 Biosciences Corporation; Fort Lauderdale, FL MedImmune, Inc. 33394-3091 (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until 1992); and President, National Association of Securities Dealers, Inc. (until 1987). - ------------------------------------------------------------------------------------------------------------- FRED R. MILLSAPS (74) Trustee Since 1993 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - ------------------------------------------------------------------------------------------------------------- CONSTANTINE D. Trustee Since 1999 18 None TSERETOPOULOS (49) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - -------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX LENGTH OF OVERSEEN BY NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------- --------------------- ---------------- ----------------- ---------------------------- **NICHOLAS F. BRADY Trustee Since 1993 22 Director, Amerada Hess (73) Corporation (exploration 500 East Broward and refining of oil and Blvd. gas); C2, Inc. (operating Suite 2100 and investment business); Fort Lauderdale, FL and H.J. Heinz Company 33394-3091 (processed foods and allied products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Templeton Emerging Markets Investment Trust PLC, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments LDC and Darby Technology Ventures Group, LLC (investment firms) (1994-present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund; and FORMERLY, Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON Trustee, Chairman Trustee and 135 None (70) of the Board and Chairman of One Franklin Parkway Vice President the Board San Mateo, CA since 1995 and 94403-1906 Vice President since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- HARMON E. BURNS (58) Vice President Since 1996 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- JEFFREY A. EVERETT Vice President Since 2001 Not Applicable None (39) PO Box N-7759 Lyford Cay, Nassau, Bahamas PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - ------------------------------------------------------------------------------------------------------------- MARTIN L. FLANAGAN Vice President Since 1993 Not Applicable None (42) One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Chief Financial Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (55) Senior Vice Since 2002 Not Applicable None 500 East Broward President and Chief Blvd. Executive Suite 2100 Fort Officer-Finance and Lauderdale, FL Administration 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 50 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (56) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; Officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 50 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (55) Vice President and Vice President Not Applicable None One Franklin Parkway Secretary since 2000 and San Mateo, CA Secretary 94403-1906 since 1996 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice President, Templeton Worldwide, Inc.; officer of one of the other subsidiaries of Franklin Resources, Inc. and of 50 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------- RUPERT H. JOHNSON, Vice President Since 1996 Not Applicable None JR. (62) One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- JOHN R. KAY (62) Vice President Since 1994 Not Applicable None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of one of the other subsidiaries of Franklin Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------- MICHAEL O. MAGDOL (66) Vice President - Since 2002 Not Applicable Director, FTI Banque, Arch 600 Fifth Avenue AML Compliance Chemicals, Inc. and Rockefeller Center Lingnan Foundation. New York, NY 10048-0772 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- MARK MOBIUS (66) President and Chief President Not Applicable None Two Exchange Square, Executive Officer- since 1993 and 39th Floor, Suites Investment Chief 3905-08 Management Executive Hong Kong Officer- Investment Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; officer of six of the investment companies in Franklin Templeton Investments; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc.; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------- BRUCE S. ROSENBERG Treasurer and Chief Treasurer Not Applicable None (41) Financial Officer since 2000 and 500 East Broward Chief Blvd. Financial Suite 2100 Officer since Fort Lauderdale, FL 2002 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 18 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (66) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer of 50 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - -------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered an interested person of the Trust under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's adviser and distributor. Nicholas F. Brady is considered an interested person of the Trust under the federal securities laws due to his business affiliations with Resources and Templeton Global Advisors Limited. Mr. Brady and Resources are both limited partners of Darby Overseas Partners, L.P. (Darby Overseas). Mr. Brady is Chairman and shareholder of Darby Overseas Investments, Ltd., which is the corporate general partner of Darby Overseas. In addition, Darby Overseas and Templeton Global Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P. (DEMF). Mr. Brady serves as Chairman of the corporate general partner of DEMF, and Darby Overseas and its general partner own 100% of the stock of the general partner of DEMF. Resources also is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby Overseas is a significant investor and for which Darby Overseas has the right to appoint a majority of the directors. Templeton Global Advisors Limited also is a limited partner in Darby-BBVA Latin America Private Equity Fund, L.P. (DBVA), a private equity fund in which Darby Overseas is a significant investor, and the general partner of which Darby Overseas controls jointly with an unaffiliated third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd. (TCAL), which serves as investment manager to certain unregistered funds. TCAL and Templeton Global Advisors Limited are both indirect subsidiaries of Resources. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. The Trust pays noninterested board members and Mr. Brady an annual retainer of $2000 and a fee of $200 per board meeting attended. Board members who serve on the Audit Committee of the Trust and other funds in Franklin Templeton Investments receive a flat fee of $2,000 per committee meeting attended, a portion of which is allocated to the Trust. Members of a committee are not separately compensated for any committee meeting held on the day of a board meeting. Noninterested board members also may serve as directors or trustees of other funds in Franklin Templeton Investments and may receive fees from these funds for their services. The following table provides the total fees paid to noninterested board members and Mr. Brady by the Trust and by Franklin Templeton Investments. NUMBER OF BOARDS IN FRANKLIN TOTAL FEES TEMPLETON TOTAL FEES RECEIVED INVESTMENTS RECEIVED FROM FRANKLIN ON FROM THE CLOSED TEMPLETON WHICH EACH NAME END FUND/1/ ($) INVESTMENTS/2/($) SERVES/3/ - ------------------------------------------------------------------------------- Harris J. Ashton 3,009 372,100 45 Nicholas F. Brady 3,009 140,500 15 Frank J. Crothers 3,064 100,000 12 S. Joseph Fortunato 3,009 372,941 46 Andrew H. Hines, Jr. 3,035 209,500 16 Edith E. Holiday 3,015 273,635 25 Betty P. Krahmer 3,009 142,500 15 Gordon S. Macklin 3,009 363,512 45 Fred R. Millsaps 3,035 219,500 16 Constantine D. Tseretopoulos 3,064 102,500 12 1. For the fiscal year ended August 31, 2002. 2. For the calendar year ended December 31, 2002. 3. We base the number of boards on the number of U.S. registered investment companies in Franklin Templeton Investments. This number does not include the total number of series or portfolios within each investment company for which the board members are responsible. Noninterested board members and Mr. Brady are reimbursed for expenses incurred in connection with attending board meetings, paid pro rata by each fund in Franklin Templeton Investments for which they serve as director or trustee. No officer or board member received any other compensation, including pension or retirement benefits, directly or indirectly from the Fund or other funds in Franklin Templeton Investments. Certain officers or board members who are shareholders of Franklin Resources, Inc. (Resources) may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries. Board members historically have followed a policy of having substantial investments in one or more of the funds in Franklin Templeton Investments, as is consistent with their individual financial goals. In February 1998, this policy was formalized through adoption of a requirement that each board member invest one-third of fees received for serving as a director or trustee of a Templeton fund in shares of one or more Templeton funds and one-third of fees received for serving as a director or trustee of a Franklin fund in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual fees paid such board member. Investments in the name of family members or entities controlled by a board member constitute fund holdings of such board member for purposes of this policy, and a three-year phase-in period applies to such investment requirements for newly elected board members. In implementing such policy, a board member's fund holdings existing on February 27, 1998, are valued as of such date with subsequent investments valued at cost. The following tables provide the dollar range of equity securities beneficially owned by the board members of the Trust on December 31, 2002. INDEPENDENT BOARD MEMBERS AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL FUNDS DOLLAR RANGE OF EQUITY OVERSEEN BY THE BOARD SECURITIES IN THE MEMBER IN THE FRANKLIN NAME OF BOARD MEMBER CLOSED-END FUND TEMPLETON FUND COMPLEX - ------------------------------------------------------------------------------- Harris J. Ashton $1 - $10,000 Over $100,000 Frank J. Crothers None Over $100,000 S. Joseph Fortunato $1 - $10,000 Over $100,000 Andrew H. Hines, Jr. $10,001 - $50,000 Over $100,000 Edith E. Holiday $1 - $10,000 Over $100,000 Betty P. Krahmer $10,001 - $50,000 Over $100,000 Gordon S. Macklin $10,001 - $50,000 Over $100,000 Fred R. Millsaps Over $100,000 Over $100,000 Constantine D. Tseretopoulos None Over $100,000 INTERESTED BOARD MEMBERS AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL FUNDS DOLLAR RANGE OF EQUITY OVERSEEN BY THE BOARD SECURITIES IN THE MEMBER IN THE FRANKLIN NAME OF BOARD MEMBER CLOSED-END FUND TEMPLETON FUND COMPLEX - ------------------------------------------------------------------------------- Nicholas F. Brady $10,001 - $50,000 Over $100,000 Charles B. Johnson $10,001 - $50,000 Over $100,000 BOARD COMMITTEES The board maintains two standing committees: the Audit Committee and the Nominating and Compensation Committee. The Audit Committee is generally responsible for recommending the selection of the Trust's independent auditors, including evaluating their independence and meeting with such auditors to consider and review matters relating to the Trust's financial reports and internal accounting. The Audit Committee is comprised of the following Independent Trustees of the Trust: Frank J. Crothers, Andrew H. Hines, Jr., Fred R. Millsaps and Constantine D. Tseretopoulos. The Nominating and Compensation Committee is comprised of the following Independent Trustees of the Trust: Frank J. Crothers, Andrew H. Hines, Jr., Edith E. Holiday and Gordon S. Macklin. The Trust's Nominating and Compensation Committee sets trustees' fees and is responsible for the nomination of trustees to the board. When vacancies arise or elections are held, the Committee considers qualified nominees, including those recommended by shareholders who provide a written request to the board, care of the Trust's address at: P.O. Box 33030 St. Petersburg, FL 33733-8030 During the fiscal year ended August 31, 2002, the Audit Committee met three times; the Nominating and Compensation Committee met four times. MANAGEMENT AND OTHER SERVICES - ------------------------------------------------------------------------------- MANAGER AND SERVICES PROVIDED The Fund's manager is Templeton Asset Management Ltd. - Hong Kong branch. The manager is an indirect, wholly owned subsidiary of Resources, a publicly owned company engaged in the financial services industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources. The manager provides investment research and portfolio management services, and selects the securities for the Fund to buy, hold or sell. The manager also selects the brokers who execute the Fund's portfolio transactions. The manager provides periodic reports to the board, which reviews and supervises the manager's investment activities. To protect the Fund, the manager and its officers, directors and employees are covered by fidelity insurance. The Templeton organization has been investing globally since 1940. The manager and its affiliates have offices in Argentina, Australia, Bahamas, Belgium, Brazil, Canada, China, France, Germany, Holland (The Netherlands), Hong Kong, India, Ireland, Italy, Japan, Luxembourg, Poland, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, Turkey, United Arab Emirates, United Kingdom, and United States. The manager and its affiliates manage numerous other investment companies and accounts. The manager may give advice and take action with respect to any of the other funds it manages, or for its own account, that may differ from action taken by the manager on behalf of the Fund. Similarly, with respect to the Fund, the manager is not obligated to recommend, buy or sell, or to refrain from recommending, buying or selling any security that the manager and access persons, as defined by applicable federal securities laws, may buy or sell for its or their own account or for the accounts of any other fund. The manager is not obligated to refrain from investing in securities held by the Fund or other funds it manages. Because the manager is a subsidiary of a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999, Federal regulations applicable to FHCs may limit or restrict the Fund's ability to acquire or hold a position in a given security when it might otherwise be advantageous for the Fund to acquire or hold that security. The Fund, its manager and principal underwriter have each adopted a code of ethics, as required by federal securities laws. Under the code of ethics, employees who are designated as access persons may engage in personal securities transactions, including transactions involving securities that are being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions and procedures. The personal securities transactions of access persons of the Fund, its manager and principal underwriter will be governed by the code of ethics. The code of ethics is on file with, and available from, the Securities and Exchange Commission (SEC). During the fiscal year ended August 31, 2002, the board, including a majority of noninterested or independent trustees, approved renewal of the Fund's management agreement. In reaching this decision, the board took into account information furnished throughout the year at regular board meetings, as well as information specifically furnished for a board meeting held annually to specifically consider such renewal. Information furnished throughout the year included reports on the Fund's investment performance, expenses, portfolio composition and sales and redemptions, along with related financial statements, information about the scope and quality of services provided by the manager and its affiliates, as well as periodic reports relating to compliance with the Fund's investment policies and restrictions. The information furnished annually to the board also included special reports prepared by an independent third party analyst comparing the Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by the independent third party analyst as well as information relating to the manager's profitability. In considering such material, the independent board members received assistance and advice from and met separately with independent counsel. Based upon its review of such material and information together with such other information as it deemed relevant, the board, including a majority of independent trustees, concluded that continuance of the management agreement was appropriate and in the best interest of Fund shareholders. At such time, the Fund operated as a closed-end fund and in reaching such decision, the board took into account a combination of factors including the following: o PERFORMANCE. Performance of the Fund was considered in reference to a peer group of closed-end Pacific ex-Japan funds as selected by the independent third party analyst. In evaluating performance, attention was given to both the short term and long term performance of the Fund in comparison with this peer group, in comparison to those particular indices relevant to closed-end Pacific ex-Japan funds, and to the Fund's compliance with its specific investment goals and investment restrictions. o EXPENSES. In considering the reasonableness of expenses, consideration was given to the advisory fee level and breakpoints charged the Fund in relation to those within the relevant peer group of closed-end Pacific ex-Japan funds, as selected by the independent third party analyst. Emphasis is placed on the Fund's overall comparative expense ratio within such peer group in view of the various other functions, such as underwriting, transfer agency and shareholder servicing provided the Fund under separate agreements with the manager and its affiliates, and the manager's management of custodian relationships. o QUALITY OF SERVICES. In considering the scope and quality of investment management services, consideration was given to the manager's continuing need to attract and retain qualified investment management staff, the portfolio research and management process, and the record of compliance with Fund investment policies and restrictions, as well as the code of ethics which governs personal securities trading by Fund management. Consideration was also given to the scope and quality of the various other functions, such as underwriting, transfer agency and shareholder servicing provided the Fund under separate agreements with the manager and its affiliates. In performing this evaluation, the board considers factors such as the level of expenditures in and improvements and enhancements of services provided, as well as data and reports evidencing or measuring the various levels of services provided. In addition to third party data and reports, the trustees, all of whom have significant investments in one or more of the Franklin Templeton family of funds, check on and informally report from time to time on, the level of service personally experienced by them as shareholders. The board also considered the benefit to Fund shareholders of investing in a fund that is part of a large family of funds offering a variety of investment choices and shareholder services. o MANAGER'S PROFITABILITY. The trustees considered the manager's level of profitability in providing management and other services to the Franklin Templeton funds, including the Fund. In doing so, the trustees considered materials and reports prepared annually by the manager that address profitability from its overall U.S. fund business, as well as from services provided the individual funds, including the Fund. The board reviews and discusses in detail the basis on which such reports are prepared and reviews the reasonableness of the cost allocation methodology utilized by the Fund's independent auditors. The board also considers the extent to which the manager may potentially achieve economies of scale and possibly derive other ancillary benefits from Fund operations, including the allocation of Fund brokerage and the use of "soft" commission dollars to pay for research and other similar services. The trustees also considered the manager's profitability in comparison with available industry data. MANAGEMENT FEES The Fund pays the manager a fee equal to an annual rate of 1.25% of the value of average weekly net of the Fund. The fee is computed at the close of business on the last business day of each month according to the terms of the management agreement. Each class of the Fund's shares pays its proportionate share of the fee. For the last three fiscal years ended August 31, the Fund paid the following management fees: MANAGEMENT FEES PAID ($) - ---------------------------------------- 2002 2,311,049 2001 2,376,115 2000 2,531,021 ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, LLC (FT Services) has an agreement with the Fund to provide certain administrative services and facilities for the Fund. FT Services is an indirect, wholly owned subsidiary of Resources and is an affiliate of the Fund's manager and principal underwriter. The administrative services FT Services provides include preparing and maintaining books, records, and tax and financial reports, and monitoring compliance with regulatory requirements. ADMINISTRATION FEES The Fund pays FT Services a fee equal to an annual rate of 0.20% of the average daily net assets of the Fund. As a Closed-End Fund, the Fund paid FT Services a fee equal to an annual rate of 0.25% of the averge weekly net assets of the Fund. During the last three fiscal years ended August 31, the Closed-End Fund paid FT Services the following administration fees: ADMINISTRATION FEES PAID ($) - ------------------------------------------ 2002 462,210 2001 475,225 2000 506,205 SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin Templeton Investor Services, LLC (Investor Services) is the Fund's shareholder servicing agent and acts as the Fund's transfer agent and dividend-paying agent. Investor Services is located at 100 Fountain Parkway, St. Petersburg, FL 33716-1205. Please send all correspondence to Investor Services at P.O. Box 33030, St. Petersburg, FL 33733-8030. Investor Services receives a fee for servicing Fund shareholder accounts. The Fund also will reimburse Investor Services for certain out-of-pocket expenses necessarily incurred in servicing the shareholder accounts in accordance with the terms of its servicing contract with the Fund. The Fund may also pay servicing fees to certain financial institutions that (i) maintain omnibus accounts with the Fund in the institution's name on behalf of numerous beneficial owners of Fund shares who are either direct clients of the institution or are participants in an employer sponsored retirement plan for which the institution, or its affiliate, provides participant level record keeping services (called "Beneficial Owners"); or (ii) provide support for Fund shareholder accounts by sharing account data with Investor Services' through the National Securities Clearing Corporation (NSCC) networking system. In addition to servicing fees received from the Fund, these financial institutions also may charge a fee for their services directly to their clients. Investor Services will also receive a fee from the Fund for services provided in support of Beneficial Owners and NSCC networking system accounts. CUSTODIAN JPMorgan Chase Bank, at its principal office at MetroTech Center, Brooklyn, NY 11245, and at the offices of its branches and agencies throughout the world, acts as custodian of the Fund's assets. As foreign custody manager, the bank selects and monitors foreign sub-custodian banks, selects and evaluates non-compulsory foreign depositories, and furnishes information relevant to the selection of compulsory depositories. AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105, is the Fund's independent auditor. The auditor gives an opinion on the financial statements included in the Fund's Annual Report to Shareholders and reviews the Fund's registration statement filed with the SEC. PORTFOLIO TRANSACTIONS - ------------------------------------------------------------------------------- The manager selects brokers and dealers to execute the Fund's portfolio transactions in accordance with criteria set forth in the management agreement and any directions that the board may give. When placing a portfolio transaction, the manager seeks to obtain prompt execution of orders at the most favorable net price. For portfolio transactions on a securities exchange, the amount of commission paid is negotiated between the manager and the broker executing the transaction. The determination and evaluation of the reasonableness of the brokerage commissions paid are based to a large degree on the professional opinions of the persons responsible for placement and review of the transactions. These opinions are based on the experience of these individuals in the securities industry and information available to them about the level of commissions being paid by other institutional investors of comparable size. The manager will ordinarily place orders to buy and sell over-the-counter securities on a principal rather than agency basis with a principal market maker unless the manager believes that trading on a principal basis will not provide best execution. Purchases of portfolio securities from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include a spread between the bid and ask price. The manager may pay certain brokers commissions that are higher than those another broker may charge, if the manager determines in good faith that the amount paid is reasonable in relation to the value of the brokerage and research services it receives. This may be viewed in terms of either the particular transaction or the manager's overall responsibilities to client accounts over which it exercises investment discretion. The services that brokers may provide to the manager include, among others, supplying information about particular companies, markets, countries, or local, regional, national or transnational economies, statistical data, quotations and other securities pricing information, and other information that provides lawful and appropriate assistance to the manager in carrying out its investment advisory responsibilities. These services may not always directly benefit the Fund. They must, however, be of value to the manager in carrying out its overall responsibilities to its clients. It is not possible to place a dollar value on the special executions or on the research services the manager receives from dealers effecting transactions in portfolio securities. The allocation of transactions to obtain additional research services allows the manager to supplement its own research and analysis activities and to receive the views and information of individuals and research staffs of other securities firms. As long as it is lawful and appropriate to do so, the manager and its affiliates may use this research and data in their investment advisory capacities with other clients. If the Fund's officers are satisfied that the best execution is obtained, the sale of Fund shares, as well as shares of other funds in Franklin Templeton Investments, also may be considered a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the National Association of Securities Dealers, Inc., it may sometimes receive certain fees when the Fund tenders portfolio securities pursuant to a tender-offer solicitation. To recapture brokerage for the benefit of the Fund, any portfolio securities tendered by the Fund will be tendered through Distributors if it is legally permissible to do so. In turn, the next management fee payable to the manager will be reduced by the amount of any fees received by Distributors in cash, less any costs and expenses incurred in connection with the tender. If purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the manager are considered at or about the same time, transactions in these securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the manager, taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. In some cases this procedure could have a detrimental effect on the price or volume of the security so far as the Fund is concerned. In other cases it is possible that the ability to participate in volume transactions may improve execution and reduce transaction costs to the Fund. During the last three fiscal years ended August 31, the Fund paid the following brokerage commissions: BROKERAGE COMMISSIONS ($) -------------------------------------------- 2002 340,144 2001 539,837 2000 1,078,589 For the fiscal year ended August 31, 2002, the Fund paid brokerage commissions of $335,681 from aggregate portfolio transactions of $155,010,635 to brokers who provided research services. As of August 31, 2002, the Fund did not own securities of its regular broker-dealers. Because the Fund may, from time to time, invest in broker-dealers, it is possible that the Fund will own more than 5% of the voting securities of one or more broker-dealers through whom the Fund places portfolio brokerage transactions. In such circumstances, the broker-dealer would be considered an affiliated person of the Fund. To the extent the Fund places brokerage transactions through such a broker-dealer at a time when the broker-dealer is considered to be an affiliate of the Fund, the Fund will be required to adhere to certain rules relating to the payment of commissions to an affiliated broker-dealer. These rules require the Fund to adhere to procedures adopted by the board to ensure that the commissions paid to such broker-dealers do not exceed what would otherwise be the usual and customary brokerage commissions for similar transactions. DISTRIBUTIONS AND TAXES - ------------------------------------------------------------------------------- MULTICLASS DISTRIBUTIONS The Fund calculates income dividends and capital gain distributions the same way for each class. The amount of any income dividends per share will differ, however, generally due to any differences in the distribution and service (Rule 12b-1) fees applicable to the classes. DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in the form of dividends and interest on its investments. This income, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. If you are a taxable investor, any income dividends the Fund pays are taxable to you as ordinary income. DISTRIBUTIONS OF CAPITAL GAINS CAPITAL GAIN DISTRIBUTIONS. The Fund may realize capital gains and losses on the sale of its portfolio securities. Distributions from net short-term capital gains are taxable to you as ordinary income. Distributions from net long-term capital gains are taxable to you as long-term capital gains, regardless of how long you have owned your shares in the Fund. Any net capital gains realized by the Fund generally are distributed once each year, and may be distributed more frequently, if necessary, to reduce or eliminate excise or income taxes on the Fund. TAXATION OF FIVE YEAR GAINS. o SHAREHOLDERS IN THE 10 AND 15% FEDERAL BRACKETS. If you are in the 10 or 15% individual income tax bracket, capital gain distributions generally are subject to a maximum rate of tax of 10%. However, if you receive distributions from the Fund's sale of securities that it owned for more than five years, these gains are subject to a maximum rate of tax of 8%. The Fund will inform you in January of the portion of any capital gain distributions you received for the previous year that were five year gains qualifying for this reduced tax rate. o SHAREHOLDERS IN HIGHER FEDERAL BRACKETS. If you are in a higher individual income tax bracket (the 27% or higher bracket in 2003, or the 26% or higher bracket in 2004 and 2005), capital gain distributions generally are subject to a maximum rate of tax of 20%. BEGINNING IN THE YEAR 2006, any distributions from the Fund's sale of securities purchased after January 1, 2001, that it owned for more than five years will be subject to a maximum rate of tax of 18%. INVESTMENTS IN FOREIGN SECURITIES The next three paragraphs describe tax considerations that are applicable to funds that invest in foreign securities. PASS-THROUGH OF FOREIGN TAX CREDITS. The Fund may be subject to foreign withholding taxes on income from certain foreign securities. If more than 50% of the Fund's total assets at the end of a fiscal year is invested in foreign securities, the Fund may elect to pass through to you your pro rata share of foreign taxes paid by the Fund. If this election is made, the Fund may report more taxable income to you than it actually distributes. You will then be entitled either to deduct your share of these taxes in computing your taxable income, or to claim a foreign tax credit for these taxes against your U.S. federal income tax (subject to limitations for certain shareholders). The Fund will provide you with the information necessary to complete your personal income tax return if it makes this election. EFFECT OF FOREIGN DEBT INVESTMENTS AND HEDGING ON DISTRIBUTIONS. Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized on the sale of debt securities generally are treated as ordinary losses. These gains when distributed are taxable to you as ordinary income, and any losses reduce the Fund's ordinary income otherwise available for distribution to you. THIS TREATMENT COULD INCREASE OR DECREASE THE FUND'S ORDINARY INCOME DISTRIBUTIONS TO YOU, AND MAY CAUSE SOME OR ALL OF THE FUND'S PREVIOUSLY DISTRIBUTED INCOME TO BE CLASSIFIED AS A RETURN OF CAPITAL. A return of capital generally is not taxable to you, but reduces the tax basis of your shares in the Fund. Any return of capital in excess of your basis, however, is taxable as a capital gain. PFIC SECURITIES. The Fund may invest in securities of foreign entities that could be deemed for tax purposes to be passive foreign investment companies (PFICs). When investing in PFIC securities, the Fund intends to mark-to-market these securities and recognize any gains at the end of its fiscal and excise (described below) tax years. Deductions for losses are allowable only to the extent of any current or previously recognized gains. These gains (reduced by allowable losses) are treated as ordinary income that the Fund is required to distribute, even though it has not sold the securities. INFORMATION ON THE AMOUNT AND TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you of the amount of your income dividends and capital gain distributions at the time they are paid, and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not owned your Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income or capital gains, a percentage of income that may not be equal to the actual amount of each type of income earned during the period of your investment in the Fund. Distributions declared in December but paid in January are taxable to you as if paid in December. ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund has elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code (Code). It has qualified as a regulated investment company for its most recent fiscal year, and intends to continue to qualify during the current fiscal year. To meet this test, the Fund must distribute at least 90% of its investment company taxable income (generally its net investment income as described above) for each taxable year. As a regulated investment company, the Fund generally pays no federal income tax on the income and gains it distributes to you, but must pay federal income tax on any income or net capital gains that it does not distribute to you. The board reserves the right not to maintain the qualification of the Fund as a regulated investment company if it determines this course of action to be beneficial to shareholders. In that case, the Fund would be subject to federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to you would be taxed as ordinary income dividends to the extent of the Fund's earnings and profits. EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Code requires the Fund to distribute to you by December 31 of each year, at a minimum, the following amounts: o 98% of its taxable ordinary income earned during the calendar year; o 98% of its capital gain net income earned during the twelve month period ending October 31; and o 100% of any undistributed amounts of these categories of income or gain from the prior year. The Fund intends to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December), but can give no assurances that its distributions will be sufficient to eliminate all taxes. EXCHANGE CONTROL RESTRICTIONS Exchange control restrictions may restrict the ability of the Fund to repatriate investment income or the proceeds of sales of portfolio securities. These restrictions and limitations may limit the Fund's ability to make sufficient distributions to satisfy either the 90% distribution requirement necessary to maintain the Fund's qualification as a regulated investment company, or to avoid the imposition of an income or excise tax on any income or capital gains not timely distributed. SALES OF FUND SHARES Sales and exchanges of Fund shares are taxable transactions for federal and state income tax purposes. If you sell your Fund shares, or exchange them for shares of a different Franklin Templeton fund, the IRS requires you to report any gain or loss on your sale or exchange. If you owned your shares as a capital asset, any gain or loss that you realize generally is a capital gain or loss, and is long-term or short-term, depending on how long you owned your shares. TAXATION OF FIVE YEAR GAINS. o SHAREHOLDERS IN THE 10 AND 15% FEDERAL BRACKETS. If you are in the 10 or 15% individual income tax bracket, gains from the sale of your Fund shares generally are subject to a maximum rate of tax of 10%. However, if you owned your shares for more than five years, these gains are subject to a maximum rate of tax of 8%. o SHAREHOLDERS IN HIGHER FEDERAL BRACKETS. If you are in a higher individual income tax bracket (the 27% or higher bracket in 2003, or 26% or higher bracket in 2004 and 2005), gains from the sale of your Fund shares generally are subject to a maximum rate of tax of 20%. BEGINNING IN THE YEAR 2006, any gains from the sale of Fund shares purchased after January 1, 2001, that you owned for more than five years will be subject to a maximum rate of tax of 18%. However, if you made an election to mark your Fund shares to market as of January 2, 2001, any Fund shares that you acquired before this date will also be eligible for the 18% maximum rate of tax, BEGINNING IN 2006. SALES AT A LOSS WITHIN SIX MONTHS OF PURCHASE. Any loss incurred on the sale or exchange of Fund shares owned for six months or less is treated as a long-term capital loss to the extent of any long-term capital gains distributed to you by the Fund on those shares. DEFERRAL OF BASIS. (CLASS A, B & C ONLY) In reporting gain or loss on the sale of your Fund shares, you may be required to adjust your basis in the shares you sell under the following circumstances: IF: o In your original purchase of Fund shares, you received a reinvestment right (the right to reinvest your sales proceeds at a reduced or with no sales charge), and o You sell some or all of your original shares within 90 days of their purchase, and o You reinvest the sales proceeds in the Fund or in another Franklin Templeton fund, and the sales charge that would otherwise apply is reduced or eliminated; THEN: In reporting any gain or loss on your sale, all or a portion of the sales charge that you paid for your original shares is excluded from your tax basis in the shares sold and added to your tax basis in the new shares. WASH SALES. All or a portion of any loss that you realize on the sale of your Fund shares is disallowed to the extent that you buy other shares in the Fund within 30 days before or after your sale. Any loss disallowed under these rules is added to your tax basis in the new shares. U.S. GOVERNMENT SECURITIES The income earned on certain U.S. government securities is exempt from state and local personal income taxes if earned directly by you. States also grant tax-free status to mutual fund dividends paid to you from interest earned on these securities, subject in some states to minimum investment or reporting requirements that must be met by a fund. The income on Fund investments in certain securities, such as repurchase agreements, commercial paper and federal agency-backed obligations (e.g., Government National Mortgage Association (Ginne Mae) or Fannie Mae securities), generally does not qualify for tax-free treatment. The rules on exclusion of this income are different for corporations. DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS For corporate shareholders, a portion of the dividends paid by a fund may qualify for the dividends-received deduction. This deduction generally is available to corporations for dividends paid by a fund out of income earned on its investments in domestic corporations. Because the income of the Fund is derived primarily from investments in foreign rather than domestic securities, generally none or only a small percentage of its income dividends will be eligible for the corporate dividends-received deduction. INVESTMENT IN COMPLEX SECURITIES The Fund may invest in complex securities that could require it to adjust the amount, timing and/or tax character (ordinary or capital) of gains and losses it recognizes on these investments. This, in turn, could affect the amount, timing and/or tax character of income distributed to you. For example, DERIVATIVES. The Fund is permitted to invest in certain options, futures, forwards or foreign currency contracts. If it makes these investments, it could be required to mark-to-market these contracts and realize any unrealized gains and losses at its fiscal year end even though it continues to hold the contracts. Under these rules, gains or losses on the contracts generally would be treated as 60% long-term and 40% short-term gains or losses, but gains or losses on certain foreign currency contracts would be treated as ordinary income or losses. In determining its net income for excise tax purposes, the Fund would also be required to mark-to-market these contracts annually as of October 31 (for capital gain net income) and December 31 (for taxable ordinary income), and to realize and distribute any resulting income and gains. CONSTRUCTIVE SALES. The Fund's entry into an option or other contract could be treated as the "constructive sale" of an "appreciated financial position," causing it to realize gain, but not loss, on the position. TAX STRADDLES. The Fund's investment in options, futures, forwards, or foreign currency contracts in connection with certain hedging transactions could cause it to hold offsetting positions in securities. If the Fund's risk of loss with respect to specific securities in its portfolio is substantially diminished by the fact that it holds other securities, the Fund could be deemed to have entered into a tax "straddle" or to hold a "successor position" that would require any loss realized by it to be deferred for tax purposes. SECURITIES PURCHASED AT DISCOUNT. The Fund is permitted to invest in securities issued or purchased at a discount that could require it to accrue and distribute income not yet received. If it invests in these securities, the Fund could be required to sell securities in its portfolio that it otherwise might have continued to hold in order to generate sufficient cash to make these distributions. EACH OF THESE INVESTMENTS BY THE FUND IN COMPLEX SECURITIES IS SUBJECT TO SPECIAL TAX RULES THAT COULD AFFECT THE AMOUNT, TIMING AND/OR TAX CHARACTER OF INCOME REALIZED BY THE FUND AND DISTRIBUTED TO YOU. ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS - ------------------------------------------------------------------------------- The Fund is an open-end management investment company, commonly called a mutual fund. The Fund is the successor of a closed-end fund, organized as a Maryland corporation on July 15, 1993. The closed-end fund was reorganized on [June 20,] 2003 into a Delaware statutory trust created on December 3, 2002. The Fund is registered with the SEC. Prior to [June 20,] 2003, the Fund's name was Templeton China World Fund, Inc. The Fund currently offers five classes of shares, Class A, Class B, Class C, Class R and Advisor Class. The Fund began offering Class A, B, C, R and Advisor Class shares on [June 20,] 2003. The Fund may offer additional classes of shares in the future. The full title of each class is: o Templeton China World Fund - Class A o Templeton China World Fund - Class B o Templeton China World Fund - Class C o Templeton China World Fund - Class R o Templeton China World Fund - Advisor Class Shares of each class represent proportionate interests in the Fund's assets. On matters that affect the Fund as a whole, each class has the same voting and other rights and preferences as any other class. On matters that affect only one class, only shareholders of that class may vote. Each class votes separately on matters affecting only that class, or expressly required to be voted on separately by state or federal law. The Fund has noncumulative voting rights. For board member elections, this gives holders of more than 50% of the shares voting the ability to elect all of the members of the board. If this happens, holders of the remaining shares voting will not be able to elect anyone to the board. The Fund does not intend to hold annual shareholder meetings. The Fund may hold special meetings, however, for matters requiring shareholder approval. A meeting may be called by the board to consider the removal of a board member if requested in writing by shareholders holding at least 10% of the outstanding shares. In certain circumstances, we are required to help you communicate with other shareholders about the removal of a board member. A special meeting also may be called by the board in its discretion. To the knowledge of the Fund's management, as of April 16, 2003, the principal shareholders of the Closed-End Fund, beneficial or of record, were: NAME AND ADDRESS PERCENTAGE (%) - ------------------------------------------------------------------------------- President and Fellows of Harvard College 30.3%/1 c/o Harvard Management Company, Inc. 600 Atlantic Avenue Boston, MA 02210 1. The nature of beneficial ownership is sole voting and sole dispositive power as reported on Schedule 13D, Amendment No. 4 dated March 20, 2003 and filed with the SEC on March 21, 2003. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of the Trust is presumed to control the Trust under the provisions of the 1940 Act. For that reason, President and Fellows of Harvard, are considered control persons. Controlling persons possess the ability to impact substantially the outcome of matters submitted for shareholder vote. From time to time, the number of Fund shares held in the "street name" accounts of various securities dealers for the benefit of their clients or in centralized securities depositories may exceed 5% of the total shares outstanding. As of April 16, 2003, the officers and board members, as a group, owned of record and beneficially less than 1% of the outstanding shares of the Closed-End Fund. The board members may own shares in other funds in Franklin Templeton Investments. BUYING AND SELLING SHARES - ------------------------------------------------------------------------------- The Fund continuously offers its shares through securities dealers who have an agreement with Franklin Templeton Distributors, Inc. (Distributors). A securities dealer includes any financial institution that, either directly or through affiliates, has an agreement with Distributors to handle customer orders and accounts with the Fund. This reference is for convenience only and does not indicate a legal conclusion of capacity. Banks and financial institutions that sell shares of the Fund may be required by state law to register as securities dealers. For investors outside the U.S., the offering of Fund shares may be limited in many jurisdictions. An investor who wishes to buy shares of the Fund should determine, or have a broker-dealer determine, the applicable laws and regulations of the relevant jurisdiction. Investors are responsible for compliance with tax, currency exchange or other regulations applicable to redemption and purchase transactions in any jurisdiction to which they may be subject. Investors should consult appropriate tax and legal advisors to obtain information on the rules applicable to these transactions. All checks, drafts, wires and other payment mediums used to buy or sell shares of the Fund must be denominated in U.S. dollars. We may, in our sole discretion, either (a) reject any order to buy or sell shares denominated in any other currency or (b) honor the transaction or make adjustments to your account for the transaction as of a date and with a foreign currency exchange factor determined by the drawee bank. We may deduct any applicable banking charges imposed by the bank from your account. When you buy shares, if you submit a check or a draft that is returned unpaid to the Fund we may impose a $10 charge against your account for each returned item. If you buy shares through the reinvestment of dividends, the shares will be purchased at the net asset value determined on the business day following the dividend record date (sometimes known as the "ex-dividend date"). The processing date for the reinvestment of dividends may vary and does not affect the amount or value of the shares acquired. INITIAL SALES CHARGES The maximum initial sales charge is 5.75% for Class A and 1% for Class C. There is no initial sales charge for Class B and Class R. The initial sales charge for Class A shares may be reduced for certain large purchases, as described in the prospectus. We offer several ways for you to combine your purchases in Franklin Templeton funds to take advantage of the lower sales charges for large purchases. Franklin Templeton funds include the U.S. registered mutual funds in Franklin Templeton Investments except Franklin Templeton Variable Insurance Products Trust and Templeton Capital Accumulator Fund. CUMULATIVE QUANTITY DISCOUNT. For purposes of calculating the sales charge on Class A shares, you may combine the amount of your current purchase with the cost or current value, whichever is higher, of your existing shares in Franklin Templeton funds. You also may combine the shares of your spouse, children under the age of 21 or grandchildren under the age of 21. If you are the sole owner of a company, you also may add any company accounts, including retirement plan accounts. Companies with one or more retirement plans may add together the total plan assets invested in Franklin Templeton funds to determine the sales charge that applies. LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by completing the letter of intent section of your account application. A letter of intent is a commitment by you to invest a specified dollar amount during a 13 month period. The amount you agree to invest determines the sales charge you pay. By completing the letter of intent section of the application, you acknowledge and agree to the following: o You authorize Distributors to reserve 5% of your total intended purchase in Class A shares registered in your name until you fulfill your LOI. Your periodic statements will include the reserved shares in the total shares you own, and we will pay or reinvest dividend and capital gain distributions on the reserved shares according to the distribution option you have chosen. o You give Distributors a security interest in the reserved shares and appoint Distributors as attorney-in-fact. o Distributors may sell any or all of the reserved shares to cover any additional sales charge if you do not fulfill the terms of the LOI. o Although you may exchange your shares, you may not sell reserved shares until you complete the LOI or pay the higher sales charge. After you file your LOI with the Fund, you may buy Class A shares at the sales charge applicable to the amount specified in your LOI. Sales charge reductions based on purchases in more than one Franklin Templeton fund will be effective only after notification to Distributors that the investment qualifies for a discount. Any Class A purchases you made within 90 days before you filed your LOI also may qualify for a retroactive reduction in the sales charge. If you file your LOI with the Fund before a change in the Fund's sales charge, you may complete the LOI at the lower of the new sales charge or the sales charge in effect when the LOI was filed. Your holdings in Franklin Templeton funds acquired more than 90 days before you filed your LOI will be counted towards the completion of the LOI, but they will not be entitled to a retroactive reduction in the sales charge. Any redemptions you make during the 13 month period, except in the case of certain retirement plans, will be subtracted from the amount of the purchases for purposes of determining whether the terms of the LOI have been completed. If the terms of your LOI are met, the reserved shares will be deposited to an account in your name or delivered to you or as you direct. If the amount of your total purchases, less redemptions, is more than the amount specified in your LOI and is an amount that would qualify for a further sales charge reduction, a retroactive price adjustment will be made by Distributors and the securities dealer through whom purchases were made. The price adjustment will be made on purchases made within 90 days before and on those made after you filed your LOI and will be applied towards the purchase of additional shares at the offering price applicable to a single purchase or the dollar amount of the total purchases. If the amount of your total purchases, less redemptions, is less than the amount specified in your LOI, the sales charge will be adjusted upward, depending on the actual amount purchased (less redemptions) during the period. You will need to send Distributors an amount equal to the difference in the actual dollar amount of sales charge paid and the amount of sales charge that would have applied to the total purchases if the total of the purchases had been made at one time. Upon payment of this amount, the reserved shares held for your account will be deposited to an account in your name or delivered to you or as you direct. If within 20 days after written request the difference in sales charge is not paid, we will redeem an appropriate number of reserved shares to realize the difference. If you redeem the total amount in your account before you fulfill your LOI, we will deduct the additional sales charge due from the sale proceeds and forward the balance to you. For LOIs filed on behalf of certain retirement plans, the level and any reduction in sales charge for these plans will be based on actual plan participation and the projected investments in Franklin Templeton funds under the LOI. These plans are not subject to the requirement to reserve 5% of the total intended purchase or to the policy on upward adjustments in sales charges described above, or to any penalty as a result of the early termination of a plan, nor are these plans entitled to receive retroactive adjustments in price for investments made before executing the LOI. GROUP PURCHASES. If you are a member of a qualified group, you may buy Class A shares at a reduced sales charge that applies to the group as a whole. The sales charge is based on the combined dollar value of the group members' existing investments, plus the amount of the current purchase. A qualified group is one that: o Was formed at least six months ago, o Has a purpose other than buying Fund shares at a discount, o Has more than 10 members, o Can arrange for meetings between our representatives and group members, o Agrees to include Franklin Templeton fund sales and other materials in publications and mailings to its members at reduced or no cost to Distributors, o Agrees to arrange for payroll deduction or other bulk transmission of investments to the Fund, and o Meets other uniform criteria that allow Distributors to achieve cost savings in distributing shares. A qualified group generally does not include a 403(b) plan that only allows salary deferral contributions, although any such plan that purchased the Fund's Class A shares at a reduced sales charge under the group purchase privilege before February 1, 1998, may continue to do so. WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased without an initial sales charge or contingent deferred sales charge (CDSC) by investors who reinvest within 365 days: o Dividend and capital gain distributions from any Franklin Templeton fund. The distributions generally must be reinvested in the same share class. Certain exceptions apply, however, to Class C shareholders who chose to reinvest their distributions in Class A shares of the Fund before November 17, 1997, and to Advisor Class or Class Z shareholders of a Franklin Templeton fund who may reinvest their distributions in the Fund's Class A shares. o Annuity payments received under either an annuity option or from death benefit proceeds, if the annuity contract offers as an investment option the Franklin Templeton Variable Insurance Products Trust. You should contact your tax advisor for information on any tax consequences that may apply. o Redemption proceeds from a repurchase of shares of Franklin Floating Rate Trust, if the shares were continuously held for at least 12 months. If you immediately placed your redemption proceeds in a Franklin Bank CD or a Franklin Templeton money fund, you may reinvest them as described above. The proceeds must be reinvested within 365 days from the date the CD matures, including any rollover, or the date you redeem your money fund shares. o Redemption proceeds from the sale of Class A shares of any of the Templeton Global Strategy Funds if you are a qualified investor. If you paid a CDSC when you redeemed your Class A shares from a Templeton Global Strategy Fund, a new CDSC will apply to your purchase of Fund shares and the CDSC holding period will begin again. We will, however, credit your Fund account with additional shares based on the CDSC you previously paid and the amount of the redemption proceeds that you reinvest. If you immediately placed your redemption proceeds in a Franklin Templeton money fund, you may reinvest them as described above. The proceeds must be reinvested within 365 days from the date they are redeemed from the money fund. o Distributions from an existing retirement plan invested in Franklin Templeton funds. WAIVERS FOR CERTAIN INVESTORS. Class A shares also may be purchased without an initial sales charge or CDSC by various individuals and institutions due to anticipated economies in sales efforts and expenses, including: o Trust companies and bank trust departments investing assets held in a fiduciary, agency, advisory, custodial or similar capacity and over which the trust companies and bank trust departments or other plan fiduciaries or participants, in the case of certain retirement plans, have full or shared investment discretion. We may accept orders for these accounts by telephone or other means of electronic data transfer directly from the bank or trust company, with payment by federal funds received by the close of business on the next business day following the order. o Any state or local government or any instrumentality, department, authority or agency thereof that has determined the Fund is a legally permissible investment and that can only buy Fund shares without paying sales charges. Please consult your legal and investment advisors to determine if an investment in the Fund is permissible and suitable for you and the effect, if any, of payments by the Fund on arbitrage rebate calculations. o Broker-dealers, registered investment advisors or certified financial planners who have entered into an agreement with Distributors for clients participating in comprehensive fee programs o Qualified registered investment advisors who buy through a broker-dealer or service agent who has entered into an agreement with Distributors o Registered securities dealers and their affiliates, for their investment accounts only o Current employees of securities dealers and their affiliates and their family members, as allowed by the internal policies of their employer o Officers, trustees, directors and full-time employees of Franklin Templeton Investments, and their family members, consistent with our then-current policies o Any investor who is currently a Class Z shareholder of Franklin Mutual Series Fund Inc. (Mutual Series), or who is a former Mutual Series Class Z shareholder who had an account in any Mutual Series fund on October 31, 1996, or who sold his or her shares of Mutual Series Class Z within the past 365 days o Investment companies exchanging shares or selling assets pursuant to a merger, acquisition or exchange offer o Accounts managed by Franklin Templeton Investments o Certain unit investment trusts and their holders reinvesting distributions from the trusts o Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code of 1986, as amended o Group annuity separate accounts offered to retirement plans o Chilean retirement plans that meet the requirements described under "Retirement plans" below In addition, Class C shares may be purchased without an initial sales charge by any investor who buys Class C shares through an omnibus account with Merrill Lynch Pierce Fenner & Smith, Inc. A CDSC may apply, however, if the shares are sold within 18 months of purchase. Class C shares also may be purchased without limit and without an initial sales charge or CDSC by the Franklin Templeton Charitable Giving Fund. RETIREMENT PLANS. Effective January 1, 2003, (i) individual retirement accounts with investments of $1 million or more, (ii) Employer Sponsored Retirement Plans that are DCS Plans, with assets of $10 million or more, (iii) Employer Sponsored Retirement Plans that are not DCS Plans with assets of $1 million or more, (iv) DCS Plans with assets of less than $10 million if Class R shares are not offered on a particular fund, and (v) investors who open a Franklin Templeton IRA Rollover with less than $1 million from a retirement plan that offered Franklin Templeton funds (except Class C shares) other than a current or former Franklin Templeton employee or as the result of a spousal rollover, a QDRO or a rollover of assets from a same employer sponsored Franklin Templeton money purchase pension plan in existence prior to January 1, 2003, to a new or existing Franklin Templeton profit sharing plan, are eligible to purchase Class A shares without an initial sales charge. The following investors are eligible to buy Class R shares: (i) DCS Plans with assets of less than $10 million (ii) Employer Sponsored Retirement Plans that are not DCS Plans , and (iii) investors who open a Franklin Templeton IRA Rollover. A "Qualified Retirement Plan" is an employer sponsored pension or profit sharing plan that qualifies under section 401(a) of the Internal Revenue Code, including 401(k), money purchase pension, profit sharing and defined benefit plans. An "Employer Sponsored Retirement Plan" is a Qualified Retirement Plan, ERISA covered 403(b) and certain non-qualified deferred compensation arrangements that operate in a similar manner to a Qualified Retirement Plan, such as 457 plans and executive deferred compensation arrangements, but not including employer sponsored IRAs. A "DCS Plan" is an Employer Sponsored Retirement Plan that (i) has contracted for current participant level record keeping with the Defined Contribution Services (DCS) division of Franklin Templeton Investor Services; or (ii) is receiving current DCS services by contracting with the entity identified in DCS promotional material for participant level record keeping related to those DCS services. Retirement plans that are not Qualified Retirement Plans, SIMPLEs (savings incentive match plans for employees) or SEPs (employer sponsored simplified employee pension plans established under section 408(k) of the Internal Revenue Code) must meet the group purchase requirements described above to be able to buy Class A shares without an initial sales charge. We may enter into a special arrangement with a securities dealer, based on criteria established by the Fund, to add together certain small Qualified Retirement Plan accounts for the purpose of meeting these requirements. SALES IN TAIWAN. Under agreements with certain banks in Taiwan, Republic of China, the Fund's shares are available to these banks' trust accounts without a sales charge. The banks may charge service fees to their customers who participate in the trusts. A portion of these service fees may be paid to Distributors or one of its affiliates to help defray expenses of maintaining a service office in Taiwan, including expenses related to local literature fulfillment and communication facilities. The Fund's Class A shares may be offered to investors in Taiwan through securities advisory firms known locally as Securities Investment Consulting Enterprises. In conformity with local business practices in Taiwan, Class A shares may be offered with the following schedule of sales charges: SIZE OF PURCHASE - U.S. DOLLARS SALES CHARGE (%) - ------------------------------------------------------------------------- Under $30,000 3.0 $30,000 but less than $50,000 2.5 $50,000 but less than $100,000 2.0 $100,000 but less than $200,000 1.5 $200,000 but less than $400,000 1.0 $400,000 or more 0 DEALER COMPENSATION Securities dealers may at times receive the entire sales charge. A securities dealer who receives 90% or more of the sales charge may be deemed an underwriter under the Securities Act of 1933, as amended. Financial institutions or their affiliated brokers may receive an agency transaction fee in the percentages indicated in the dealer compensation table in the Fund's prospectus. Distributors may pay the following commissions, out of its own resources, to securities dealers who initiate and are responsible for purchases of Class A shares of $1 million or more: 1% on sales of $1 million to $4 million, plus 0.50% on sales over $4 million to $50 million, plus 0.25% on sales over $50 million. Distributors or one of its affiliates may pay up to 1% on sales of $1 million to $4 million, plus 0.50% on sales over $4 million to $50 million, plus 0.25% on sales over $50 million, out of its own resources, to securities dealers who initiate and are responsible for purchases of Class A shares without an initial sales charge by DCS Plans and retirement plans for which a Distributor's affiliate serves as trustee or custodian. These payments may be made in the form of contingent advance payments, which may be recovered from the securities dealer or set off against other payments due to the dealer if shares are sold within 18 months of the calendar month of purchase. Other conditions may apply. Other terms and conditions may be imposed by an agreement between Distributors, or one of its affiliates, and the securities dealer. In addition to the payments above, Distributors and/or its affiliates may provide financial support to securities dealers that sell shares of Franklin Templeton funds. This support is based primarily on the amount of sales of fund shares and/or total assets with Franklin Templeton funds. The amount of support may be affected by: total sales; net sales; levels of redemptions; the proportion of a securities dealer's sales and marketing efforts in Franklin Templeton funds; a securities dealer's support of, and participation in, Distributors' marketing programs; a securities dealer's compensation programs for its registered representatives; and the extent of a securities dealer's marketing programs relating to Franklin Templeton funds. Financial support to securities dealers may be made by payments from Distributors' resources, from Distributors' retention of underwriting concessions and, in the case of funds that have Rule 12b-1 plans, from payments to Distributors under such plans. In addition, certain securities dealers may receive brokerage commissions generated by fund portfolio transactions in accordance with the rules of the National Association of Securities Dealers, Inc. Distributors routinely sponsors due diligence meetings for registered representatives during which they receive updates on various Franklin Templeton funds and are afforded the opportunity to speak with portfolio managers. Invitation to these meetings is not conditioned on selling a specific number of shares. Those who have shown an interest in Franklin Templeton funds, however, are more likely to be considered. To the extent permitted by their firm's policies and procedures, registered representatives' expenses in attending these meetings may be covered by Distributors. CONTINGENT DEFERRED SALES CHARGE (CDSC) If you invest $1 million or more in Class A, Class C or Class R shares, either as a lump sum or through our cumulative quantity discount or letter of intent programs, a CDSC may apply on any shares you sell within 18 months of purchase. Except for Employer Sponsored Retirement Plans that (i) are DCS Plans; (ii) have contracted with an affiliate of Distributors for plan trustee services; or (iii) first purchased fund shares after January 1, 2003, there is a CDSC applied at the plan level based on the plan's initial investment for R shares sold within 18 months of purchase. The CDSC is 1% of the value of the shares sold or the net asset value at the time of purchase, whichever is less. A CDSC will not apply to Class A shares purchased by an Employer Sponsored Retirement Plan that is not a DCS Plan and has not contracted with an affiliate of Distributors for plan trustee services. For Class B shares, there is a CDSC if you sell your shares within six years, as described in the table below. The charge is based on the value of the shares sold or the net asset value at the time of purchase, whichever is less. IF YOU SELL YOUR CLASS B SHARES WITHIN THIS MANY YEARS AFTER THIS % IS DEDUCTED FROM BUYING THEM YOUR PROCEEDS AS A CDSC - ------------------------------------------------------------------------------- 1 Year 4 2 Years 4 3 Years 3 4 Years 3 5 Years 2 6 Years 1 7 Years 0 CDSC WAIVERS. The CDSC for any share class generally will be waived for: o Account fees o Sales of Class A shares purchased without an initial sales charge by certain retirement plan accounts if (i) the account was opened before May 1, 1997, or (ii) the securities dealer of record received a payment from Distributors of 0.25% or less, or (iii) the securities dealer of record has entered into a supplemental agreement with Distributors o Redemptions of shares by investors if the securities dealer of record at the time of purchase waived its commission in connection with the purchase or if Distributors did not pay a prepaid commission o Redemptions by the Fund when an account falls below the minimum required account size o Redemptions following the death of the shareholder or beneficial owner o Redemptions through a systematic withdrawal plan, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of your account's net asset value depending on the frequency of your plan o Redemptions by a DCS Plan or an Employer Sponsored Retirement Plan that has contracted with an affiliate of Distributors for plan trustee services (not applicable to Class B) o Participant initiated distributions from an Employer Sponsored Retirement Plan or participant initiated exchanges among investment choices offered by an Employer Sponsored Retirement Plan (not applicable to Class B) o Distributions from individual retirement accounts (IRAs) due to death or disability or upon periodic distributions based on life expectancy (for Class B, this applies to all retirement plan accounts, not only IRAs) o Returns of excess contributions (and earnings, if applicable) from retirement plan accounts o Any trust or plan established as part of a qualified tuition program under Section 529 of the Internal Revenue Code of 1986, as amended. EXCHANGE PRIVILEGE If you request the exchange of the total value of your account, declared but unpaid income dividends and capital gain distributions will be reinvested in the Fund and exchanged into the new fund at net asset value when paid. Backup withholding and information reporting may apply. If a substantial number of shareholders should, within a short period, sell their Fund shares under the exchange privilege, the Fund might have to sell portfolio securities it might otherwise hold and incur the additional costs related to such transactions. On the other hand, increased use of the exchange privilege may result in periodic large inflows of money. If this occurs, it is the Fund's general policy to initially invest this money in short-term, interest-bearing money market instruments, unless it is believed that attractive investment opportunities consistent with the Fund's investment goal exist immediately. This money will then be withdrawn from the short-term, interest-bearing money market instruments and invested in portfolio securities in as orderly a manner as is possible when attractive investment opportunities arise. The proceeds from the sale of shares of an investment company generally are not available until the seventh day following the sale. The funds you are seeking to exchange into may delay issuing shares pursuant to an exchange until that seventh day. The sale of Fund shares to complete an exchange will be effected at net asset value at the close of business on the day the request for exchange is received in proper form. SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell your shares and receive regular payments from your account on a monthly, quarterly, semiannual or annual basis. The value of your account must be at least $5,000 and the minimum payment amount for each withdrawal must be at least $50. For retirement plans subject to mandatory distribution requirements, the $50 minimum will not apply. There are no service charges for establishing or maintaining a systematic withdrawal plan. Each month in which a payment is scheduled, we will redeem an equivalent amount of shares in your account on the day of the month you have indicated on your account application or, if no day is indicated, on the 20th day of the month. If that day falls on a weekend or holiday, we will process the redemption on the next business day. Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. When you sell your shares under a systematic withdrawal plan, it is a taxable transaction. To avoid paying sales charges on money you plan to withdraw within a short period of time, you may not want to set up a systematic withdrawal plan if you plan to buy shares on a regular basis. Shares sold under the plan also may be subject to a CDSC. Redeeming shares through a systematic withdrawal plan may reduce or exhaust the shares in your account if payments exceed distributions received from the Fund. This is especially likely to occur if there is a market decline. If a withdrawal amount exceeds the value of your account, your account will be closed and the remaining balance in your account will be sent to you. Because the amount withdrawn under the plan may be more than your actual yield or income, part of the payment may be a return of your investment. To discontinue a systematic withdrawal plan, change the amount and schedule of withdrawal payments, or suspend one payment, we must receive instructions from you at least three business days before a scheduled payment. The Fund may discontinue a systematic withdrawal plan by notifying you in writing and will discontinue a systematic withdrawal plan automatically if all shares in your account are withdrawn or if the Fund receives notification of the shareholder's death or incapacity. SHARE CERTIFICATES We will credit your shares to your Fund account. We do not issue share certificates unless you specifically request them. This eliminates the costly problem of replacing lost, stolen or destroyed certificates. If a certificate is lost, stolen or destroyed, you may have to pay an insurance premium of up to 2% of the value of the certificate to replace it. Any outstanding share certificates must be returned to the Fund if you want to sell or exchange those shares or if you would like to start a systematic withdrawal plan. The certificates should be properly endorsed. You can do this either by signing the back of the certificate or by completing a share assignment form. For your protection, you may prefer to complete a share assignment form and to send the certificate and assignment form in separate envelopes. GENERAL INFORMATION If dividend checks are returned to the Fund marked "unable to forward" by the postal service, we will consider this a request by you to change your dividend option to reinvest all distributions. The proceeds will be reinvested in additional shares at net asset value until we receive new instructions. Distribution or redemption checks sent to you do not earn interest or any other income during the time the checks remain uncashed. Neither the Fund nor its affiliates will be liable for any loss caused by your failure to cash such checks. The Fund is not responsible for tracking down uncashed checks, unless a check is returned as undeliverable. In most cases, if mail is returned as undeliverable we are required to take certain steps to try to find you free of charge. If these attempts are unsuccessful, however, we may deduct the costs of any additional efforts to find you from your account. These costs may include a percentage of the account when a search company charges a percentage fee in exchange for its location services. Sending redemption proceeds by wire or electronic funds transfer (ACH) is a special service that we make available whenever possible. By offering this service to you, the Fund is not bound to meet any redemption request in less than the seven-day period prescribed by law. Neither the Fund nor its agents shall be liable to you or any other person if, for any reason, a redemption request by wire or ACH is not processed as described in the prospectus. There are special procedures for banks and other institutions that wish to open multiple accounts. An institution may open a single master account by filing one application form with the Fund, signed by personnel authorized to act for the institution. Individual sub-accounts may be opened when the master account is opened by listing them on the application, or by providing instructions to the Fund at a later date. These sub-accounts may be registered either by name or number. The Fund's investment minimums apply to each sub-account. The Fund will send confirmation and account statements for the sub-accounts to the institution. If you buy or sell shares through your securities dealer, we use the net asset value next calculated after your securities dealer receives your request, which is promptly transmitted to the Fund. If you sell shares through your securities dealer, it is your dealer's responsibility to transmit the order to the Fund in a timely fashion. Your redemption proceeds will not earn interest between the time we receive the order from your dealer and the time we receive any required documents. Any loss to you resulting from your dealer's failure to transmit your redemption order to the Fund in a timely fashion must be settled between you and your securities dealer. Certain shareholder servicing agents may be authorized to accept your transaction request. For institutional accounts, there may be additional methods of buying or selling Fund shares than those described in this SAI or in the prospectus. In the event of disputes involving multiple claims of ownership or authority to control your account, the Fund has the right (but has no obligation) to: (a) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, before executing instructions regarding the account; (b) interplead disputed funds or accounts with a court of competent jurisdiction; or (c) surrender ownership of all or a portion of the account to the IRS in response to a notice of levy. PRICING SHARES - ------------------------------------------------------------------------------- When you buy shares, you pay the offering price. The offering price is the net asset value (NAV) per share plus any applicable sales charge, calculated to two decimal places using standard rounding criteria. When you sell shares, you receive the NAV minus any applicable CDSC. The value of a mutual fund is determined by deducting the fund's liabilities from the total assets of the portfolio. The net asset value per share is determined by dividing the net asset value of the fund by the number of shares outstanding. The Fund calculates the NAV per share of each class each business day at the close of trading on the New York Stock Exchange (NYSE) (normally 1:00 p.m. Pacific time). The Fund does not calculate the NAV on days the NYSE is closed for trading, which include New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. When determining its NAV, the Fund values cash and receivables at their realizable amounts, and records interest as accrued and dividends on the ex-dividend date. If market quotations are readily available for portfolio securities listed on a securities exchange or on the Nasdaq National Market System, the Fund values those securities at the last quoted sale price of the day or, if there is no reported sale, within the range of the most recent quoted bid and ask prices. The Fund values over-the-counter portfolio securities within the range of the most recent quoted bid and ask prices. If portfolio securities trade both in the over-the-counter market and on a stock exchange, the Fund values them according to the broadest and most representative market as determined by the manager. The Fund values portfolio securities underlying actively traded call options at their market price as determined above. The current market value of any option the Fund holds is its last sale price on the relevant exchange before the Fund values its assets. If there are no sales that day or if the last sale price is outside the bid and ask prices, the Fund values options within the range of the current closing bid and ask prices if the Fund believes the valuation fairly reflects the contract's market value. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business of the NYSE on each day that the NYSE is open. Trading in European or Far Eastern securities generally, or in a particular country or countries, may not take place on every NYSE business day. Furthermore, trading takes place in various foreign markets on days that are not business days for the NYSE and on which the Fund's NAV is not calculated. Thus, the calculation of the Fund's NAV does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in the calculation and, if events materially affecting the values of these foreign securities occur, the securities will be valued at fair value as determined by management and approved in good faith by the board. Generally, trading in corporate bonds, U.S. government securities and money market instruments is substantially completed each day at various times before the close of the NYSE. The value of these securities used in computing the NAV is determined as of such times. Occasionally, events affecting the values of these securities may occur between the times at which they are determined and the close of the NYSE that will not be reflected in the computation of the NAV. If events materially affecting the values of these securities occur during this period, the securities will be valued at their fair value as determined in good faith by the board. Other securities for which market quotations are readily available are valued at the current market price, which may be obtained from a pricing service, based on a variety of factors including recent trades, institutional size trading in similar types of securities (considering yield, risk and maturity) and/or developments related to specific issues. Securities and other assets for which market prices are not readily available are valued at fair value as determined following procedures approved by the board. With the approval of the board, the Fund may use a pricing service, bank or securities dealer to perform any of the above described functions. THE UNDERWRITER - ------------------------------------------------------------------------------- Franklin Templeton Distributors, Inc. (Distributors) acts as the principal underwriter in the continuous public offering of the Fund's shares. Distributors is located at One Franklin Parkway, San Mateo, CA 94403-1906. Distributors pays the expenses of the distribution of Fund shares, including advertising expenses and the costs of printing sales material and prospectuses used to offer shares to the public. The Fund pays the expenses of preparing and printing amendments to its registration statements and prospectuses (other than those necessitated by the activities of Distributors) and of sending prospectuses to existing shareholders. Because it did not engage in the continuous public offering of its shares, the Closed-End Fund did not pay underwriting commissions during the last three fiscal years. Distributors may be entitled to payments from the Fund under the Rule 12b-1 plans, as discussed below. DISTRIBUTION AND SERVICE (12B-1) FEES The board has adopted a separate plan pursuant to Rule 12b-1 for each class. Although the plans differ in some ways for each class, each plan is designed to benefit the Fund and its shareholders. The plans are expected to, among other things, increase advertising of the Fund, encourage sales of the Fund and service to its shareholders, and increase or maintain assets of the Fund so that certain fixed expenses may be spread over a broader asset base, resulting in lower per share expense ratios. In addition, a positive cash flow into the Fund is useful in managing the Fund because the manager has more flexibility in taking advantage of new investment opportunities and handling shareholder redemptions. Under each plan, the Fund pays Distributors or others for the expenses of activities that are primarily intended to sell shares of the class. These expenses also may include service fees paid to securities dealers or others who have executed a servicing agreement with the Fund, Distributors or its affiliates and who provide service or account maintenance to shareholders (service fees); the expenses of printing prospectuses and reports used for sales purposes, and of preparing and distributing sales literature and advertisements; and a prorated portion of Distributors' overhead expenses related to these activities. Together, these expenses, including the service fees, are "eligible expenses." The 12b-1 fees charged to each class are based only on the fees attributable to that particular class. THE CLASS A, B, C AND R PLANS. The Fund pays Distributors up to 0.35% per year of Class A's average daily net assets, out of which 0.25% may be paid for services to the shareholders (service fees). The Fund pays Distributors up to 1% per year of Class B and Class C's average daily net assets, out of which 0.25% may be paid for service fees. For Class R shares, the Fund pays Distributors up to 0.50% per year of the class's average daily net assets. The Class B, C and R plans also may be used to pay Distributors for advancing commissions to securities dealers with respect to the initial sale of Class B and C shares. Class B plan fees payable to Distributors are used by Distributors to pay third party financing entities that have provided financing to Distributors in connection with advancing commissions to securities dealers. Resources owns a minority interest in one of the third party financing entities. The Class A, B, C and R plans are compensation plans. They allow the Fund to pay a fee to Distributors that may be more than the eligible expenses Distributors has incurred at the time of the payment. Distributors must, however, demonstrate to the board that it has spent or has near-term plans to spend the amount received on eligible expenses. The Fund will not pay more than the maximum amount allowed under the plans. In addition to the payments that Distributors or others are entitled to under each plan, each plan also provides that to the extent the Fund, the manager or Distributors or other parties on behalf of the Fund, the manager or Distributors make payments that are deemed to be for the financing of any activity primarily intended to result in the sale of Fund shares within the context of Rule 12b-1 under the Investment Company Act of 1940, as amended, then such payments shall be deemed to have been made pursuant to the plan. To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks may not participate in the plans because of applicable federal law prohibiting certain banks from engaging in the distribution of mutual fund shares. These banks, however, are allowed to receive fees under the plans for administrative servicing or for agency transactions. Distributors must provide written reports to the board at least quarterly on the amounts and purpose of any payment made under the plans and any related agreements, and furnish the board with such other information as the board may reasonably request to enable it to make an informed determination of whether the plans should be continued. Each plan has been approved according to the provisions of Rule 12b-1. The terms and provisions of each plan also are consistent with Rule 12b-1. PERFORMANCE - ------------------------------------------------------------------------------- Performance quotations are subject to SEC rules. These rules require the use of standardized performance quotations or, alternatively, that every non-standardized performance quotation furnished by the Fund be accompanied by certain standardized performance information computed as required by the SEC. Average annual total return before taxes, average annual total return after taxes on distributions and average annual total return after taxes on distributions and sale of shares quotations used by the Fund are based on the standardized methods of computing performance mandated by the SEC. An explanation of these and other methods used by the Fund to compute or express performance follows. Regardless of the method used, past performance does not guarantee future results, and is an indication of the return to shareholders only for the limited historical period used. The Closed-End Fund's shares were offered without a sales charge and Rule 12b-1 expenses. The Fund began offering Class A, B, C and R shares on [June 20,] 2003. Returns shown are a restatement of the Closed-End Fund's performance to take into account all charges, fees and expenses applicable to the Fund and each share class, including the Rule 12b-1 fees and the current sales charges applicable to that share class and are calculated based on the standardized method of computing performance as described below. For periods after [June 20,] 2003, Class A, B, C and R standardized performance quotations will be calculated as described below using the applicable class's actual performance. AVERAGE ANNUAL TOTAL RETURN BEFORE TAXES Average annual total return before taxes is determined by finding the average annual rates of return over the periods indicated below that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes the maximum initial sales charge is deducted from the initial $1,000 purchase, and income dividends and capital gain distributions are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect. When considering the average annual total return before taxes quotations for Class A and C shares, you should keep in mind that the maximum initial sales charge reflected in each quotation is a one time fee charged on all direct purchases, which will have its greatest impact during the early stages of your investment. This charge will affect actual performance less the longer you retain your investment in the Fund. The average annual total returns before taxes for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class A []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class B []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class C []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class R []% []% []% The following SEC formula was used to calculate these figures: P(1+T)n = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of each period at the end of each period AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS Average annual total return after taxes on distributions is determined by finding the average annual rates of return over the periods indicated below that would equate an initial hypothetical $1,000 investment to its ending redeemable value, after taxes on distributions. The calculation assumes the maximum initial sales charge is deducted from the initial $1,000 purchase, and income dividends and capital gain distributions, less the taxes due on such distributions, are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees, but assumes that the redemption itself had no tax consequences. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect. Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (e.g., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (e.g., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits. The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (pre-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A and C shares, you should keep in mind that the maximum initial sales charge reflected in each quotation is a one time fee charged on all direct purchases, which will have its greatest impact during the early stages of your investment. This charge will affect actual performance less the longer you retain your investment in the Fund. The average annual total returns after taxes on distributions for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class A []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class B []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class C []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class R []% []% []% The following SEC formula was used to calculate these figures: P(1+T)n = ATV/D where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATV/D = ending value of a hypothetical $1,000 payment made at the beginning of each period at the end of each period, after taxes on fund distributions but not after taxes on redemption. AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES Average annual total return after taxes on distributions and sale of fund shares is determined by finding the average annual rates of return over the periods indicated below that would equate an initial hypothetical $1,000 investment to its ending redeemable value, after taxes on distributions and sale of fund shares. The calculation assumes the maximum initial sales charge is deducted from the initial $1,000 purchase, and income dividends and capital gain distributions are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees, including taxes upon sale of fund shares. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect. Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (e.g., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (e.g., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits. The capital gain or loss upon redemption is calculated by subtracting the tax basis from the redemption proceeds, after deducting any nonrecurring charges assessed at the end of the period, subtracting capital gains taxes resulting from the redemption, or adding the tax benefit from capital losses resulting from the redemption. In determining the basis for a reinvested distribution, the distribution is included net of taxes assumed paid from the distribution, but not net of any sales loads imposed upon reinvestment. Tax basis is adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable federal law. The amount and character (e.g., short-term or long-term) of capital gain or loss upon redemption is separately determined for shares acquired through the initial investment and each subsequent purchase through reinvested distributions. Shares acquired through reinvestment of distributions are not assumed to have the same holding period as the initial investment. The tax character of such reinvestments is determined by the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. Capital gains taxes (or the benefit resulting from tax losses) is calculated using the highest federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with federal law applicable on the redemption date. Shareholders are assumed to have sufficient capital gains of the same character from other investments to offset any capital losses from the redemption, so that the taxpayer may deduct the capital losses in full. The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (post-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A and C shares, you should keep in mind that the maximum initial sales charge reflected in each quotation is a one time fee charged on all direct purchases, which will have its greatest impact during the early stages of your investment. This charge will affect actual performance less the longer you retain your investment in the Fund. The average annual total returns after taxes on distributions and redemption for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class A []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class B []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class C []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class R []% []% []% The following SEC formula was used to calculate these figures: P(1+T)n = ATV/DR where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions and redemptions) n = number of years ATV/DR= ending value of a hypothetical $1,000 payment made at the beginning of each period at the end of each period, after taxes on fund distributions and redemption. CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total return assumes the maximum initial sales charge is deducted from the initial $1,000 purchase, income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. Cumulative total return, however, is based on the actual return for a specified period rather than on the average return over the periods indicated above. The cumulative total returns for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class A []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class B []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class C []% []% []% SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93) (%) - ------------------------------------------------------------------------------- Class R []% []% []% VOLATILITY Occasionally statistics may be used to show the Fund's volatility or risk. Measures of volatility or risk are generally used to compare the Fund's net asset value or performance to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market, as represented by an index considered representative of the types of securities in which the fund invests. A beta of more than 1.00 indicates volatility greater than the market and a beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is used to measure variability of net asset value or total return around an average over a specified period of time. The idea is that greater volatility means greater risk undertaken in achieving performance. OTHER PERFORMANCE QUOTATIONS The Fund also may quote the performance of its shares based on the following methods of calculation: (a) for periods prior to [June 20,] 2003, based upon the Closed-End Fund's actual performance (and not restated to reflect the applicable charges, fees and expenses of the Fund and Class A, B, C and R for such period); and (b) for periods after [June 20,] 2003, actual performance for Class A, B, C and R reflecting all charges and fees applicable to that class. The Fund also may quote the performance of shares without a sales charge. Sales literature and advertising may quote a cumulative total return, average annual total return and other measures of performance with the substitution of net asset value for the public offering price. Sales literature referring to the use of the Fund as a potential investment for IRAs, business retirement plans, and other tax-advantaged retirement plans may quote a total return based upon compounding of dividends on which it is presumed no federal income tax applies. The Fund may include in its advertising or sales material information relating to investment goals and performance results of funds belonging to Franklin Templeton Investments. Resources is the parent company of the advisors and underwriter of Franklin Templeton funds. COMPARISONS To help you better evaluate how an investment in the Fund may satisfy your investment goal, advertisements and other materials about the Fund may discuss certain measures of Fund performance as reported by various financial publications. Materials also may compare performance (as calculated above) to performance as reported by other investments, indices, and averages. These comparisons may include, but are not limited to, the following examples: (i) unmanaged indices so that you may compare the Fund's results with those of a group of unmanaged securities widely regarded by investors as representative of the securities market in general; (ii) other groups of mutual funds tracked by Lipper(R) Inc., a widely used independent research firm that ranks mutual funds by overall performance, investment goals and assets, or tracked by other services, companies, publications, or persons who rank mutual funds on overall performance or other criteria; and (iii) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Fund. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. From time to time, the Fund and the manager also may refer to the following information: o The manager's and its affiliates' market share of international equities managed in mutual funds prepared or published by Strategic Insight or a similar statistical organization. o The performance of U.S. equity and debt markets relative to foreign markets prepared or published by Morgan Stanley Capital International or a similar financial organization. o The capitalization of U.S. and foreign stock markets as prepared or published by the International Finance Corporation, Morgan Stanley Capital International or a similar financial organization. o The geographic and industry distribution of the Fund's portfolio and the Fund's top ten holdings. o The gross national product and populations, including age characteristics, literacy rates, foreign investment improvements due to a liberalization of securities laws and a reduction of foreign exchange controls, and improving communication technology, of various countries as published by various statistical organizations. o To assist investors in understanding the different returns and risk characteristics of various investments, the Fund may show historical returns of various investments and published indices (e.g., Ibbotson Associates, Inc. and Morgan Stanley Capital International). o The major industries located in various jurisdictions as published by the Morgan Stanley Index. o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder services. o Allegorical stories illustrating the importance of persistent long-term investing. o The Fund's portfolio turnover rate and its ranking relative to industry standards as published by Lipper(R)Inc. or Morningstar, Inc. o A description of the Templeton organization's investment management philosophy and approach, including its worldwide search for undervalued or "bargain" securities and its diversification by industry, nation and type of stocks or other securities. o Comparison of the characteristics of various emerging markets, including population, financial and economic conditions. o Quotations from the Templeton organization's founder, Sir John Templeton,* advocating the virtues of diversification and long-term investing. From time to time, advertisements or information for the Fund may include a discussion of certain attributes or benefits to be derived from an investment in the Fund. The advertisements or information may include symbols, headlines, or other material that highlights or summarizes the information discussed in more detail in the communication. Advertisements or information also may compare the Fund's performance to the return on certificates of deposit (CDs) or other investments. You should be aware, however, that an investment in the Fund involves the risk of fluctuation of principal value, a risk generally not present in an investment in a CD issued by a bank. CDs are frequently insured by an agency of the U.S. government. An investment in the Fund is not insured by any federal, state or private entity. In assessing comparisons of performance, you should keep in mind that the composition of the investments in the reported indices and averages is not identical to the Fund's portfolio, the indices and averages are generally unmanaged, and the items included in the calculations of the averages may not be identical to the formula used by the Fund to calculate its figures. In addition, there can be no assurance that the Fund will continue its performance as compared to these other averages. - -------------------------- * Sir John Templeton sold the Templeton organization to Franklin Resources, Inc. in October 1992. He is no longer involved with the investment management process. MISCELLANEOUS INFORMATION - ------------------------------------------------------------------------------- RECENT LITIGATION AND MATERIAL TRANSACTIONS On January 29, 2003, the Closed-End Fund, together with Templeton Dragon Fund, Inc. (Dragon Fund), another closed-end management investment company in Franklin Templeton Investments, and Templeton Asset Management Ltd., the investment adviser to the Fund and Dragon Fund, filed a complaint in the United States District Court for the District of Maryland, Northern Division, against Harvard College, Harvard Management Company, Inc. (Harvard Management), which is an investment advisor to Harvard College, and Steven Alperin, an officer of Harvard Management (referred to collectively as "Harvard"). The complaint alleged that Harvard violated several provisions of the Federal securities laws and the rules of the SEC. On February 7, 2003, Harvard counterclaimed, alleging that the Closed-End Fund, Dragon Fund, Templeton Asset Management Ltd. and each fund's directors violated certain provisions of the federal securities laws and SEC rules. Harvard also asserted counterclaims of breach of fiduciary duty under Maryland state law against Templeton Asset Management Ltd. and each fund's directors. On March 20, 2003, the parties announced a settlement that will result in, among other things, the dismissal of their litigation claims against each other and the withdrawal of Harvard College's shareholder proposals for the Closed-End Fund's annual shareholder meeting. DISMISSAL OF LAWSUIT. The Settlement Agreement between the Closed-End Fund and Harvard will result in the dismissal without prejudice of the lawsuit originally brought in January 2003 by the Closed-End Fund, Dragon Fund and Templeton Asset Management Ltd. against Harvard, as well as the dismissal without prejudice of the counterclaims brought by Harvard against the Closed-End Fund, Dragon Fund, each fund's directors and Templeton Asset Management Ltd. The parties have also entered into covenants not to sue each other with respect to the claims that were made or could have been made in the litigation absent a breach of the settlement agreements. CONVERSION OF THE CLOSED-END FUND TO AN OPEN-END FUND. When the settlement was announced, Harvard also announced that, if and when the Closed-End Fund converted to an open-end fund, Harvard College would redeem all of its shares of the Fund within 30 days after the open-ending, and that under the settlement it would take its redemption proceeds through a pro rata, in-kind distribution of portfolio investments. As a result, the Fund will avoid having to sell significant portfolio assets to raise cash to meet Harvard's redemption request - - thus limiting the potential adverse effect on the Fund's net asset value per share. Because Harvard College will have owned approximately 30% of the outstanding shares of the Fund immediately prior to Harvard College's redemption, its redemption of those shares may be deemed to have resulted in a change in control of the Fund. Representatives of Harvard and the Closed-End Fund also agreed to discuss, prior to open-ending, steps the Fund might take to minimize any adverse effect on the net asset value per share of the Fund resulting from a need to sell portfolio securities of the Fund to raise cash to satisfy redemption requests. OTHER The Fund may help you achieve various investment goals such as accumulating money for retirement, saving for a down payment on a home, college costs and other long-term goals. The Franklin College Costs Planner may help you in determining how much money must be invested on a monthly basis to have a projected amount available in the future to fund a child's college education. (Projected college cost estimates are based upon current costs published by the College Board.) The Franklin Retirement Planning Guide leads you through the steps to start a retirement savings program. Of course, an investment in the Fund cannot guarantee that these goals will be met. The Fund is a member of Franklin Templeton Investments, one of the largest mutual fund organizations in the U.S., and may be considered in a program for diversification of assets. Founded in 1947, Franklin is one of the oldest mutual fund organizations and now services approximately 3 million shareholder accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton, a pioneer in international investing. The Mutual Series team, known for its value-driven approach to domestic equity investing, became part of the organization four years later. In 2001, the Fiduciary Trust team, known for providing global investment management to institutions and high net worth clients worldwide, joined the organization. Together, Franklin Templeton Investments has over $252 billion in assets under management for more than 5 million U.S. based mutual fund shareholder and other accounts. Franklin Templeton Investments offers 102 U.S. based open-end investment companies to the public. The Fund may identify itself by its Nasdaq symbol or CUSIP number. Currently, there are more mutual funds than there are stocks listed on the NYSE. While many of them have similar investment goals, no two are exactly alike. Shares of the Fund are generally sold through securities dealers, whose investment representatives are experienced professionals who can offer advice on the type of investments suitable to your unique goals and needs, as well as the risks associated with such investments. DESCRIPTION OF RATINGS - ------------------------------------------------------------------------------- CORPORATE BOND RATINGS MOODY'S INVESTORS SERVICE (MOODY'S) INVESTMENT GRADE Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edged." Interest payments are protected by a large or exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large, fluctuation of protective elements may be of greater amplitude, or there may be other elements present that make the long-term risks appear somewhat larger. A: Bonds rated A possess many favorable investment attributes and are considered upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment sometime in the future. Baa: Bonds rated Baa are considered medium-grade obligations. They are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. These bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BELOW INVESTMENT GRADE Ba: Bonds rated Ba are judged to have predominantly speculative elements and their future cannot be considered well assured. Often the protection of interest and principal payments is very moderate and, thereby, not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa: Bonds rated Caa are of poor standing. These issues may be in default or there may be present elements of danger with respect to principal or interest. Ca: Bonds rated Ca represent obligations that are speculative to a high degree. These issues are often in default or have other marked shortcomings. C: Bonds rated C are the lowest rated class of bonds and can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond ratings. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates that the issue ranks in the lower end of its generic rating category. STANDARD & POOR'S RATINGS GROUP (S&P(R)) INVESTMENT GRADE AAA: This is the highest rating assigned by S&P to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong and, in the majority of instances, differ from AAA issues only in a small degree. A: Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB: Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BELOW INVESTMENT GRADE BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While these bonds will likely have some quality and protective characteristics, they are outweighed by large uncertainties or major risk exposures to adverse conditions. C: Bonds rated C are typically subordinated debt to senior debt that is assigned an actual or implied CCC- rating. The C rating also may reflect the filing of a bankruptcy petition under circumstances where debt service payments are continuing. The C1 rating is reserved for income bonds on which no interest is being paid. D: Debt rated D is in default and payment of interest and/or repayment of principal is in arrears. Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS MOODY'S Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually their promissory obligations not having an original maturity in excess of nine months. Moody's employs the following designations for both short-term debt and commercial paper, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: P-1 (Prime-1): Superior capacity for repayment. P-2 (Prime-2): Strong capacity for repayment. S&P S&P's ratings are a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Issues within the "A" category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety, as follows: A-1: This designation indicates the degree of safety regarding timely payment is very strong. A "plus" (+) designation indicates an even stronger likelihood of timely payment. A-2: Capacity for timely payment on issues with this designation is strong. The relative degree of safety, however, is not as overwhelming as for issues designated A-1. A-3: Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. PART B STATEMENT OF ADDITIONAL INFORMATION ADVISOR CLASS SHARES TEMPLETON CHINA WORLD FUND ADVISOR CLASS STATEMENT OF ADDITIONAL INFORMATION JUNE 20, 2003 [Insert Franklin Templeton Investments logo] P.O. BOX 33030, ST. PETERSBURG, FL 33733-8030 1-800/DIAL BEN(R) - ------------------------------------------------------------------------------- This Statement of Additional Information (SAI) is not a prospectus. It contains information in addition to the information in the Fund's prospectus. The Fund's prospectus, dated June 20, 2003, which we may amend from time to time, contains the basic information you should know before investing in the Fund. You should read this SAI together with the Fund's prospectus. On June 20, 2003, the Closed-End Fund was converted to an open-end fund in a transaction whereby the Closed-End Fund transferred all of its assets, subject to its liabilities, to the Fund in exchange for Advisor Class shares. Shareholders of the Closed-End Fund received Advisor Class shares of the Fund in exchange for their shares of the Closed-End Fund. The audited financial statements and auditor's report in the Closed-End Fund's Annual Report to Shareholders, for the fiscal year ended August 31, 2002, and the unaudited financial statements in the Closed-End Fund's Semi-Annual Report to Shareholders, for the period ended February 28, 2003, are incorporated by reference (are legally a part of this SAI). For a free copy of the current prospectus or annual report, contact your investment representative or call 1-800/DIAL BEN (1-800/342-5236). CONTENTS Goal, Strategies and Risks Officers and Trustees Management and Other Services Portfolio Transactions Distributions and Taxes Organization, Voting Rights and Principal Holders Buying and Selling Shares Pricing Shares The Underwriter Performance Miscellaneous Information Description of Ratings - ------------------------------------------------------------------------------- MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS: o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT; o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK; o ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. - ------------------------------------------------------------------------------- GOAL, STRATEGIES AND RISKS - ------------------------------------------------------------------------------- Generally, the policies and restrictions discussed in this SAI and in the prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell a security because circumstances change and the security no longer meets one or more of the Fund's policies or restrictions. If a percentage restriction or limitation is met at the time of investment, a later increase or decrease in the percentage due to a change in the value or liquidity of portfolio securities will not be considered a violation of the restriction or limitation. If a bankruptcy or other extraordinary event occurs concerning a particular security the Fund owns, the Fund may receive stock, real estate, or other investments that the Fund would not, or could not, buy. If this happens, the Fund intends to sell such investments as soon as practicable while trying to maximize the return to shareholders. The Fund has adopted certain investment restrictions as fundamental and non-fundamental policies. A fundamental policy may only be changed if the change is approved by (i) more than 50% of the Fund's outstanding shares or (ii) 67% or more of the Fund's shares present at a shareholder meeting if more than 50% of the Fund's outstanding shares are represented at the meeting in person or by proxy, whichever is less. A non-fundamental policy may be changed by the board of trustees without the approval of shareholders. FUNDAMENTAL INVESTMENT POLICIES The Fund's investment goal is long-term capital appreciation. The Fund may not: 1. Borrow money, except to the extent permitted by the Investment Company Act of 1940, as amended (1940 Act), or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the Securities and Exchange Commission (SEC). 2. Issue senior securities, except to the extent permitted by the 1940 Act and any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. 3. Act as an underwriter except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares. 4. Make loans to other persons except (a) through the lending of its portfolio securities, (b) through the purchase of debt securities, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (c) to the extent the entry into a repurchase agreement is deemed to be a loan. The Fund may also make loans to other investment companies to the extent permitted by the 1940 Act or any rules or exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. 5. Purchase or sell commodities as defined in the Commodity Exchange Act, as amended, and the rules and regulations thereunder, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from engaging in transactions involving futures contracts and options thereon or investing in securities that are secured by physical commodities. 6. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from purchasing or selling securities secured by real estate or interests therein or securities of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein. 7. Invest more than 25% of its net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies). If the Fund receives from an issuer of securities held by the Fund subscription rights to purchase securities of that issuer, and if the Fund exercises such subscription rights at a time when the Fund's portfolio holdings of securities of that issuer would otherwise exceed the limits set forth in fundamental investment policy number 7 above, it will not constitute a violation if, prior to receipt of securities upon exercise of such rights, and after announcement of such rights, the Fund has sold at least as many securities of the same class and value as it would receive on exercise of such rights. NON-FUNDAMENTAL INVESTMENT POLICIES Under normal market conditions, the Fund invests at least 80% of its net assets in securities of "China companies," as defined below. Net assets for this 80% policy include the amount of borrowings for investment purposes. Shareholders will be given 60 days' advance notice of any change to this 80% policy. For purposes of the Fund's investments, China companies are those: o that are organized under the laws of, or with a principal office in, the People's Republic of China (China), Hong Kong or Taiwan; or o for which the principal trading market is in China, Hong Kong or Taiwan; or o that derive at least 50% of their revenues from goods or services sold or produced, or have at least 50% of their assets, in China. The manager determines whether a specific company meets this definition of a "China company" based on publicly available information. The Fund may invest up to 20% of its net assets in securities that do not qualify as China company securities, but whose issuers, in the judgment of the manager, are expected to benefit from developments in the economy of China, Hong Kong or Taiwan. The Fund may also invest up to 20% of its net assets in debt obligations of China companies, which may be lower-rated or unrated, when consistent with the Fund's investment goal. In addition, the Fund may invest up to 5% of its total assets in direct equity investments that the manager expects will become listed or otherwise publicly traded securities. he Fund may use various derivative strategies seeking to protect its assets, implement a cash or tax management strategy or enhance its returns. The Fund may invest up to 5% of its total assets in swap agreements, put and call options and collars. In addition, for hedging purposes only, the Fund may buy and sell financial futures contracts, stock index futures contracts, foreign currency futures contracts and options on any of those instruments. With derivatives, the manager attempts to predict whether an underlying investment will increase or decrease in value at some future time. The manager considers various factors, such as availability and cost, in deciding whether to use a particular instrument or strategy. The Fund normally invests its assets over a broad spectrum of the economies of China, Hong Kong and Taiwan, including, as conditions warrant from time to time, trade, financial and business services, transportation, communications, manufacturing, real estate, textiles, food processing and construction. In selecting companies for investment, the manager considers overall growth prospects, competitive positions in export markets, technologies, research and development, productivity, labor costs, raw material costs and sources, profit margins, returns on investment, capital resources, government regulation, management and other factors in comparison to other companies around the world which the manager believes are comparable. The Fund is not permitted to invest more than 25% of its net assets in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies). In addition, although the Fund is "non-diversified" for purposes of the 1940 Act, the board of trustees has adopted a non-fundamental policy under which the Fund will not invest more than 10% of its total assets in any one issuer. The Fund may invest up to 15% of its net assets in illiquid securities, including direct equity investments that it considers to be illiquid and investments that are subject to repatriation restrictions. INVESTMENTS, TECHNIQUES, STRATEGIES AND THEIR RISKS The value of your shares will increase as the value of the securities owned by the Fund increases and will decrease as the value of the Fund's investments decrease. In this way, you participate in any change in the value of the securities owned by the Fund. In addition to the factors that affect the value of any particular security that the Fund owns, the value of the Fund's shares may also change with movements in the stock and bond markets as a whole. BORROWING The Fund may borrow up to one-third of the value of its total assets from banks to increase its holdings of portfolio securities. Under the 1940 Act, the Fund is required to maintain continuous asset coverage of 300% with respect to such borrowings and to sell (within three days) sufficient portfolio holdings to restore such coverage if it should decline to less than 300% due to market fluctuations or otherwise, even if such liquidations of the Fund's holdings may be disadvantageous from an investment standpoint. Leveraging by means of borrowing may exaggerate the effect of any increase or decrease in the value of portfolio securities on the Fund's net asset value, and money borrowed will be subject to interest and other costs (which may include commitment fees and/or the cost of maintaining minimum average balances), which may or may not exceed the income or gains received from the securities purchased with borrowed funds. DEBT SECURITIES The Fund may invest in debt securities, including lower-rated and unrated debt securities. A debt security typically has a fixed payment schedule which obligates the issuer to pay interest to the lender and to return the lender's money over a certain time period. A company typically meets its payment obligations associated with its outstanding debt securities before it declares and pays any dividend to holders of its equity securities. Bonds, notes, debentures and commercial paper differ in the length of the issuer's payment schedule, with bonds carrying the longest repayment schedule and commercial paper the shortest. The market value of debt securities generally varies in response to changes in interest rates and the financial condition of each issuer. During periods of declining interest rates, the value of debt securities generally increases. Conversely, during periods of rising interest rates, the value of such securities generally declines. These changes in market value will be reflected in the Fund's net asset value per share. The Fund may buy both rated and unrated debt securities, including debt securities rated below investment grade (rated lower than BBB by Standard & Poor's Ratings Group (S&P(R)) or Baa by Moody's Investors Service (Moody's)). Independent rating organizations rate debt securities based upon their assessment of the financial soundness of the issuer. Generally, a lower rating indicates higher risk. LOWER-RATED DEBT SECURITIES. Securities rated below investment grade, sometimes called "junk bonds," generally have more credit risk than higher-rated securities. The lowest rating category established by Moody's is "C" and by S&P(R) is "D." Debt securities that are rated C by Moody's can be regarded as having extremely poor prospects of ever attaining any real investment standing. Debt securities rated D by S&P(R) are in default as to the payment of principal and interest, which means that the issuer does not have the financial soundness to meet its interest payments or its repayment schedule to security holders. Companies issuing high yield debt securities are not as strong financially as those issuing securities with higher credit ratings. These companies are more likely to encounter financial difficulties and are more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates, that could affect their ability to make interest and principal payments. If an issuer stops making interest and/or principal payments, payments on the securities may never resume. These securities may be worthless and the Fund could lose its entire investment. Although they may offer higher yields than do higher rated securities, lower-rated and unrated debt securities generally involve greater volatility of price and risk of principal and income, including the possibility of default by, or bankruptcy of, the issuers of the securities. Prices are especially sensitive to developments affecting the company's business and to changes in the ratings assigned by rating agencies. Prices often are closely linked with the company's stock prices and typically rise and fall in response to factors that affect stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, stock market activity, large sustained sales by major investors, a high-profile default, or other factors. In addition, the markets in which lower-rated and unrated debt securities are traded are more limited than those in which higher rated securities are traded. Many of these securities do not trade frequently, and when they do their prices may be significantly higher or lower than expected. The existence of limited markets for particular securities may diminish the Fund's ability to sell the securities at fair value either to meet redemption requests or to respond to a specific economic event such as a deterioration in the creditworthiness of the issuer. Reduced secondary market liquidity for certain lower-rated or unrated debt securities also may make it more difficult for the Fund to obtain accurate market quotations for the purposes of valuing the Fund's portfolio. Market quotations are generally available on many lower-rated or unrated securities only from a limited number of dealers and may not necessarily represent firm bids of such dealers or prices for actual sales. Adverse publicity and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of lower-rated debt securities, especially in a thinly traded market. Analysis of the creditworthiness of issuers of lower-rated debt securities may be more complex than for issuers of higher rated securities, and the ability of the Fund to achieve its investment goal may, to the extent of investment in lower-rated debt securities, be more dependent upon such creditworthiness analysis than would be the case if the Fund were investing in higher rated securities. Lower-rated debt securities may be more susceptible to real or perceived adverse economic and competitive industry conditions than investment grade securities. The prices of lower-rated debt securities have been found to be less sensitive to interest rate changes than higher rated investments, but more sensitive to adverse economic downturns or individual corporate developments. A projection of an economic downturn or of a period of rising interest rates, for example, could cause a decline in lower-rated debt securities prices because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on its debt securities. If the issuer of lower-rated debt securities defaults, the Fund may incur additional expenses to seek recovery. DEPOSITARY RECEIPTS The Fund may invest indirectly in securities of China companies through sponsored or unsponsored American Depositary Receipts (ADRs), Global Depositary Receipts (GDRs), European Depositary Receipts (EDRs) and other types of Depositary Receipts (which, together with ADRs, GDRs, and EDRs, are collectively referred to as Depositary Receipts) to the extent such Depositary Receipts become available. ADRs are Depositary Receipts typically issued by a U.S. bank or trust company that evidence ownership of underlying securities issued by a foreign corporation. GDRs, EDRs and other types of Depositary Receipts are typically issued by foreign banks or trust companies, although they also may be issued by U.S. banks or trust companies, and evidence ownership of underlying securities issued by either a foreign or a U.S. corporation. Generally, Depositary Receipts in registered form are designed for use in the U.S. securities market and Depositary Receipts in bearer form are designed for use in securities markets outside the U.S. Depositary Receipts may not necessarily be denominated in the same currency as the underlying securities. In addition, the issuers of the securities underlying unsponsored Depositary Receipts are not obligated to disclose material information in the U.S. and, therefore, there may be less information available regarding such issuers and there may not be a correlation between such information and the market value of the Depositary Receipts. For purposes of the Fund's investment policies, the Fund's investments in Depositary Receipts will be deemed to be investments in the underlying securities. DERIVATIVES The Fund may enter into swap agreements; write put and call options; and purchase put and call options on securities, securities indices and futures contracts for the purpose of hedging the Fund's investments against a decline in value, to implement a tax or cash management strategy, and/or to enhance the Fund's returns. FUTURES CONTRACTS. Although the Fund has the authority to buy and sell financial futures contracts, it presently has no intention of entering into such transactions. Although some financial futures contracts call for making or taking delivery of the underlying securities, in most cases these obligations are closed out before the settlement date. The closing of a contractual obligation is accomplished by purchasing or selling an identical offsetting futures contract. Other financial futures contracts by their terms call for cash settlements. The Fund also may buy and sell index futures contracts with respect to any stock index traded on a recognized stock exchange or board of trade. An index futures contract is a contract to buy or sell units of an index at a specified future date at a price agreed upon when the contract is made. The stock index futures contract specifies that no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at the expiration of the contract. The Fund may not commit more than 5% of its total assets to initial margin deposits on futures contracts and related options. In addition, the value of the securities on which the futures contracts are based will not exceed 25% of the Fund's total assets. At the time the Fund purchases a futures contract, an amount of cash, U.S. government securities, or other highly liquid debt securities equal to the market value of the futures contract will be deposited in a segregated account with the Fund's custodian. When writing a futures contract, the Fund will maintain with its custodian liquid assets that, when added to the amounts deposited with a futures commission merchant or broker as margin, are equal to the market value of the instruments underlying the contract. Alternatively, the Fund may "cover" its position by owning the instruments underlying the contract (or, in the case of an index futures contract, a portfolio with a volatility substantially similar to that of the index on which the futures contract is based), or holding a call option permitting the Fund to purchase the same futures contract at a price no higher than the price of the contract written by the Fund (or at a higher price if the difference is maintained in liquid assets with the Fund's custodian). OPTIONS ON SECURITIES OR INDICES. The Fund may buy and sell options on securities and securities indices to earn additional income and/or to help protect its portfolio against market and/or exchange rate movements, although it presently has no intention of doing so. The Fund may write covered call and put options and purchase call and put options on securities or stock indices that are traded on U.S. and foreign exchanges and in the over-the-counter markets. The Fund will limit the sale of options on its securities to 15% or less of its total assets. The Fund may only buy options if the total premiums it paid for such options is 5% or less of its total assets. An option on a security is a contract that gives the purchaser of the option, in return for the premium paid, the right to buy a specified security (in the case of a call option) or to sell a specified security (in the case of a put option) from or to the writer of the option at a designated price during the term of the option. An option on a securities index gives the purchaser of the option, in return for the premium paid, the right to receive from the seller cash equal to the difference between the closing price of the index and the exercise price of the option. The Fund may write a call or put option only if the option is "covered." A call option on a security written by the Fund is "covered" if the Fund owns the underlying security covered by the call or has an absolute and immediate right to acquire that security without additional cash consideration (or for additional cash consideration held in a segregated account by its custodian) upon conversion or exchange of other securities held in its portfolio. A call option on a security is also covered if the Fund holds a call on the same security and in the same principal amount as the call written where the exercise price of the call held (a) is equal to or less than the exercise price of the call written or (b) is greater than the exercise price of the call written if the difference is maintained by the Fund in cash or high grade U.S. government securities in a segregated account with its custodian. A put option on a security written by the Fund is "covered" if the Fund maintains cash or fixed income securities with a value equal to the exercise price in a segregated account with its custodian, or else holds a put on the same security and in the same principal amount as the put written where the exercise price of the put held is equal to or greater than the exercise price of the put written. The Fund will cover call options on stock indices that it writes by owning securities whose price changes, in the opinion of the manager, are expected to be similar to those of the index, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. Nevertheless, where the Fund covers a call option on a stock index through ownership of securities, such securities may not match the composition of the index. In that event, the Fund will not be fully covered and could be subject to risk of loss in the event of adverse changes in the value of the index. The Fund will cover put options on stock indices that it writes by segregating assets equal to the option's exercise price, or in such other manner as may be in accordance with the rules of the exchange on which the option is traded and applicable laws and regulations. The Fund will receive a premium from writing a put or call option, which increases the Fund's gross income in the event the option expires unexercised or is closed out at a profit. If the value of a security or an index on which the Fund has written a call option falls or remains the same, the Fund will realize a profit in the form of the premium received (less transaction costs) that could offset all or a portion of any decline in the value of the portfolio securities being hedged. If the value of the underlying security or index rises, however, the Fund will realize a loss in its call option position, which will reduce the benefit of any unrealized appreciation in the Fund's investments. By writing a put option, the Fund assumes the risk of a decline in the underlying security or index. To the extent that the price changes of the portfolio securities being hedged correlate with changes in the value of the underlying security or index, writing covered put options on indices or securities will increase the Fund's losses in the event of a market decline, although such losses will be offset in part by the premium received for writing the option. The Fund also may purchase put options to hedge its investments against a decline in value. By purchasing a put option, the Fund will seek to offset a decline in the value of the portfolio securities being hedged through appreciation of the put option. If the value of the Fund's investments does not decline as anticipated, or if the value of the option does not increase, the Fund's loss will be limited to the premium paid for the option plus related transaction costs. The success of this strategy will depend, in part, on the accuracy of the correlation between the changes in value of the underlying security or index and the changes in value of the Fund's security holdings being hedged. The Fund may purchase call options on individual securities to hedge against an increase in the price of securities that the Fund anticipates purchasing in the future. Similarly, the Fund may purchase call options on a securities index to attempt to reduce the risk of missing a broad market advance, or an advance in an industry or market segment, at a time when the Fund holds uninvested cash or short-term debt securities awaiting investment. When purchasing call options, the Fund will bear the risk of losing all or a portion of the premium paid if the value of the underlying security or index does not rise. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. Trading could be interrupted, for example, because of supply and demand imbalances arising from a lack of either buyers or sellers, or the options exchange could suspend trading after the price has risen or fallen more than the maximum specified by the exchange. Although the Fund may be able to offset to some extent any adverse effects of being unable to liquidate an option position, the Fund may experience losses in some cases as a result of such inability. FUTURES AND OPTIONS RISKS. The Fund's ability to reduce or eliminate its futures and related options positions will depend upon the liquidity of the secondary markets for such futures and options. The Fund intends to buy or sell futures and related options only on exchanges or boards of trade where there appears to be an active secondary market, but there is no assurance that a liquid secondary market will exist for any particular contract or at any particular time. Use of stock index futures and related options for hedging may involve risks because of imperfect correlations between movements in the prices of the futures or related options and movements in the prices of the securities being hedged. Successful use of futures and related options by the Fund for hedging purposes also depends upon the manager's ability to predict correctly movements in the direction of the market, as to which no assurance can be given. There are several risks associated with transactions in options on securities and securities indices. For example, there are significant differences between the securities and options markets that could result in an imperfect correlation between these markets, causing a given transaction not to achieve its objectives. A decision as to whether, when and how to use options involves the exercise of skill and judgment, and even a well-conceived transaction may be unsuccessful to some degree because of market behavior or unexpected events. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. If the Fund were unable to close out an option that it had purchased on a securities index, it would have to exercise the option in order to realize any profit or the option may expire worthless. If trading were suspended in an option purchased by the Fund, it would not be able to close out the option. If restrictions on exercise were imposed, the Fund might be unable to exercise an option it has purchased. Except to the extent that a call option on an index or a security written by the Fund is covered by an option on the same index or security purchased by the Fund, movements in the index or the price of the security may result in a loss to the Fund. However, such losses may be mitigated by changes in the value of the Fund's securities during the period the option was outstanding. FOREIGN CURRENCY HEDGING TRANSACTIONS. In order to hedge against foreign currency exchange rate risks, the Fund may enter into forward foreign currency exchange contracts and foreign currency futures contracts, as well as buy and sell put or call options on foreign currencies, as described below. The Fund may only commit up to 20% of its total assets to forward foreign currency contracts. The Fund also may conduct its foreign currency exchange transactions on a spot (i.e., cash) basis at the spot rate prevailing in the foreign currency exchange market. The Fund may enter into forward foreign currency exchange contracts (forward contracts) to attempt to minimize the risk to the Fund from adverse changes in the relationship between the U.S. dollar and foreign currencies. A forward contract is an obligation to purchase or sell a specific currency for an agreed price at a future date which is individually negotiated and privately traded by currency traders and their customers. The Fund may enter into a forward contract, for example, when it enters into a contract for the purchase or sale of a security denominated in a foreign currency in order to "lock in" the U.S. dollar price of the security. In addition, for example, when the Fund believes that a foreign currency may suffer or enjoy a substantial movement against another currency, it may enter into a forward contract to sell an amount of the former foreign currency approximating the value of some or all of the Fund's portfolio securities denominated in such foreign currency. This second investment practice is generally referred to as "cross-hedging." Because in connection with the Fund's forward foreign currency transactions an amount of the Fund's assets equal to the amount of the purchase will be held aside or segregated to be used to pay for the commitment, the Fund will always have cash, cash equivalents or high quality debt securities available sufficient to cover any commitments under these contracts or to limit any potential risk. The segregated account will be marked-to-market on a daily basis. While these contracts are not presently regulated by the Commodity Futures Trading Commission, it may in the future assert authority to regulate forward contracts. In such event, the Fund's ability to utilize forward contracts in the manner set forth above may be restricted. Forward contracts may limit potential gain from a positive change in the relationship between the U.S. dollar and foreign currencies. Unanticipated changes in currency prices may result in poorer overall performance for the Fund than if it had not engaged in such contracts. The Fund may purchase and write put and call options on foreign currencies for the purpose of protecting against declines in the dollar value of foreign portfolio securities and against increases in the dollar cost of foreign securities to be acquired. As in the case with other kinds of options, however, the writing of an option on foreign currency will constitute only a partial hedge, up to the amount of the premium received, and the Fund could be required to purchase or sell foreign currencies at disadvantageous exchange rates, thereby incurring losses. The purchase of an option on foreign currency may constitute an effective hedge against fluctuation in exchange rates, although, in the event of rate movements adverse to the Fund's position, the Fund may forfeit the entire amount of the premium plus related transaction costs. Options on foreign currencies to be written or purchased by the Fund will be traded on U.S. and foreign exchanges or over-the-counter. The Fund may enter into exchange-traded contracts for the purchase or sale for future delivery of foreign currencies (foreign currency futures). This investment technique will be used only to hedge against anticipated future changes in exchange rates which otherwise might adversely affect the value of the Fund's portfolio securities or adversely affect the prices of securities that the Fund intends to purchase at a later date. The successful use of foreign currency futures will usually depend on the manager's ability to forecast currency exchange rate movements correctly. Should exchange rates move in an unexpected manner, the Fund may not achieve the anticipated benefits of foreign currency futures or may realize losses. SWAP AGREEMENTS. The Fund may enter into swap agreements for the purpose of attempting to obtain a particular desired return at a lower cost to the Fund than if the Fund had invested directly in a security that yielded or produced that desired return. These instruments also may be used for tax and/or cash management purposes. Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard "swap" transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or "swapped" between the parties are calculated with respect to a "notional amount," i.e., the return on or increase in value of a particular dollar amount invested in a particular security, or at a particular interest rate, in a particular foreign currency, or in a "basket" of securities representing a particular index. The "notional amount" of the swap agreement is only a fictive basis on which to calculate the obligations which the parties to a swap agreement have agreed to exchange. The Fund's obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement. The Fund's obligations under a swap agreement will be accrued daily (offset against any amounts owing to the Fund) and any accrued but unpaid net amounts owed to a swap counterparty will be covered by the maintenance of a segregated account consisting of cash, U.S. government securities, or high grade debt obligations, to limit any potential leveraging of the Fund's portfolio. The Fund will not enter into a swap agreement with any single party if the net amount that would be owed or received under contracts with that party would exceed 5% of the Fund's assets. Whether the Fund's use of swap agreements will be successful in furthering its investment objective will depend on the ability of the manager correctly to predict whether certain types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty. The manager will cause the Fund to enter into swap agreements only with counterparties that would be eligible for consideration as repurchase agreement counterparties under the Fund's repurchase agreement guidelines. Certain positions adopted by the Internal Revenue Service may limit the Fund's ability to use swap agreements in a desired tax strategy. The swap market is a relatively new market and is largely unregulated. It is possible that developments in the swap market and the laws relating to swaps, including potential government regulation, could adversely effect the Fund's ability to terminate existing swap agreements, to realize amounts to be received under such agreements, or to enter into swap agreements, or could have adverse tax consequences. DIRECT EQUITY INVESTMENTS The Fund may invest in direct equity investments that the manager expects will become listed or otherwise publicly traded securities. Direct equity investments consist of (i) the private purchase from an enterprise of an equity interest in the enterprise in the form of shares of common stock or equity interests in trusts, partnerships, joint ventures or similar enterprises, and (ii) the purchase of such an equity interest in an enterprise from a principal investor in the enterprise. Direct equity investments are generally considered to be illiquid. To the degree that the Fund invests in direct equity investments that it considers to be illiquid, it will limit such investments so that they, together with the Fund's other illiquid investments, constitute no more than 15% of the Fund's net assets. In most cases, the Fund will, at the time of making a direct equity investment, enter into a shareholder or similar agreement with the enterprise and one or more other holders of equity interests in the enterprise. The manager anticipates that these agreements may, in appropriate circumstances, provide the Fund with the ability to appoint a representative to the board of directors or similar body of the enterprise, and eventually to dispose of the Fund's investment in the enterprise through, for example, the listing of the securities or the sale of the securities to the issuer or another investor. In cases where the Fund appoints a representative, the representative would be expected to provide the Fund with the ability to monitor its investment and protect its rights in the investment and will not be appointed for the purpose of exercising management or control of the enterprise. In addition, the Fund intends to make its direct equity investments in such a manner as to avoid subjecting the Fund to unlimited liability with respect to the investments. There can be no assurance that the Fund's direct equity investments will become listed, or that it will be able to sell any direct equity investment to the issuer or another investor. The extent to which the Fund may make direct equity investments may be limited by considerations relating to its status as a regulated investment company. Direct equity investments in China companies may involve a high degree of business and financial risk that can result in substantial losses. Because of the absence of a public trading market for these investments, the Fund may take longer to liquidate these positions than would be the case for publicly traded securities and the prices on these sales could be less than those originally paid by the Fund or less than what may be considered the fair value of such securities. Further, issuers whose securities are not publicly traded may not be subject to disclosure and other investor protection requirements applicable to publicly traded securities. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. Certain of the Fund's direct equity investments, particularly in China, may include investments in smaller, less-seasoned companies, which may involve greater risks. These companies may have limited product lines, markets or financial resources, or they may be dependent on a limited management group. EQUITY SECURITIES represent a proportionate share of the ownership of a company; their value is based on the success of the company's business, any income paid to stockholders and the value of its assets, as well as general market conditions. The purchaser of an equity security typically receives an ownership interest in the company as well as certain voting rights. The owner of an equity security may participate in a company's success through the receipt of dividends, which are distributions of earnings by the company to its owners. Equity security owners may also participate in a company's success or lack of success through increases or decreases in the value of the company's shares as traded in the public trading market for such shares. Equity securities generally take the form of common stock or preferred stock, as well as securities convertible into common stocks. Preferred stockholders typically receive greater dividends but may receive less appreciation than common stockholders and may have different voting rights as well. Equity securities may also include convertible securities, warrants or rights, equity interests in trusts, partnerships, joint ventures or similar enterprises, and Depositary Receipts. Convertible securities generally are debt securities or preferred stock that may be converted into common stock after certain time periods or under certain circumstances. Warrants or rights give the holder the right to purchase a common stock at a given time for a specified price. FOREIGN SECURITIES You should consider carefully the substantial risks involved in securities of companies and governments of foreign nations, which are in addition to the usual risks inherent in domestic investments. There may be less publicly available information about foreign companies comparable to the reports and ratings published about companies in the U.S. Foreign companies are not generally subject to uniform accounting or financial reporting standards, and auditing practices and requirements may not be comparable to those applicable to U.S. companies. The Fund, therefore, may encounter difficulty in obtaining market quotations for purposes of valuing its portfolio and calculating its net asset value. Foreign markets have substantially less volume than the New York Stock Exchange (NYSE) and securities of some foreign companies are less liquid and more volatile than securities of comparable U.S. companies. Commission rates in foreign countries, which are generally fixed rather than subject to negotiation as in the U.S., are likely to be higher, although the Fund endeavors to achieve the most favorable net results on its portfolio transactions. There is generally less government supervision and regulation of securities exchanges, brokers, dealers and listed companies than in the U.S., thus increasing the risk of delayed settlements of portfolio transactions or loss of certificates for portfolio securities. Foreign markets also have different clearance and settlement procedures, and in certain markets there have been times when settlements have been unable to keep pace with the volume of securities transactions, making it difficult to conduct these transactions. These delays in settlement could result in temporary periods when a portion of the assets of the Fund is uninvested and no return is earned thereon. The inability of the Fund to make intended security purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Losses to the Fund due to subsequent declines in the value of portfolio securities, or losses arising out of the Fund's inability to fulfill a contract to sell these securities, could result in potential liability to the Fund. In addition, with respect to certain foreign countries, there is the possibility of nationalization, expropriation or confiscatory taxation, political or social instability, or diplomatic developments that could affect the Fund's investments in those countries. Moreover, individual foreign economies may differ favorably or unfavorably from the U.S. economy in growth of gross national product, rate of inflation, currency depreciation, capital reinvestment, resource self-sufficiency and balance of payments positions. Investments in foreign securities where delivery takes place outside the U.S. will have to be made in compliance with any applicable U.S. and foreign currency restrictions and tax laws (including laws imposing withholding taxes on any dividend or interest income) and laws limiting the amount and types of foreign investments. Changes of governmental administrations or of economic or monetary policies, in the U.S. or abroad, or changed circumstances in dealings between nations, or currency convertibility or exchange rates could result in investment losses for the Fund. Brokerage commissions, custodial services, and other costs relating to investment in foreign countries are generally more expensive than in the U.S. Investments by the Fund in the securities of foreign issuers may tend to increase the risks with respect to the liquidity of the Fund's portfolio and the Fund's ability to meet a large number of shareholder redemption requests should there be economic or political turmoil in a country in which the Fund has a substantial portion of its assets invested or should relations between the U.S. and foreign countries deteriorate markedly. In addition, the reporting and disclosure requirements applicable to foreign issuers may differ from those applicable to domestic issuers, and there may be difficulties in obtaining or enforcing judgments against foreign issuers. Certain countries require governmental approval prior to investments by foreign persons, or limit the amount of investment by foreign persons in a particular company, or limit the investment of foreign persons to only a specific class of securities of a company that may have less advantageous terms than securities of the company available for purchase by nationals. Furthermore, in some countries the repatriation of investment income, capital and proceeds of sales by foreign investors may require governmental registration and/or approval. The Fund could be adversely affected by delays in or a refusal to grant any required governmental registration or approval for repatriation. In addition, the limited liquidity in certain Chinese, Taiwanese and Hong Kong markets is a factor to be taken into account in the Fund's valuation of portfolio securities and may affect the Fund's ability to dispose of securities in order to meet redemption requests at the price and time it wishes to do so. DEVELOPING OR EMERGING MARKETS. Investments in companies domiciled in developing or emerging countries may be subject to potentially higher risks than investments in companies in developed countries. These risks include (i) less social, political and economic stability; (ii) the smaller size of the markets for these securities and the currently low or nonexistent volume of trading, which result in a lack of liquidity and in greater price volatility; (iii) the lack of publicly available information, including reports of payments of dividends or interest on outstanding securities; (iv) certain national policies that may restrict the Fund's investment opportunities, including restrictions on investment in issuers or industries deemed sensitive to national interests; (v) foreign taxation; (vi) the absence of developed structures governing private or foreign investment or allowing for judicial redress for injury to private property; (vii) the absence, until recently in certain developing countries, of a capital market structure or market-oriented economy; (viii) the possibility that favorable economic developments may be slowed or reversed by unanticipated political or social events in certain countries; (ix) restrictions that may make it difficult or impossible for the Fund to vote proxies, exercise shareholder rights, pursue legal remedies, and obtain judgments in foreign courts; (x) the risk of uninsured loss due to lost, stolen, or counterfeit stock certificates; and (xi) possible losses through the holding of securities in domestic and foreign custodial banks and depositories. In addition, certain countries in which the Fund may invest have experienced substantial, and in some periods, extremely high rates of inflation for many years. Inflation and rapid fluctuations in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries. The economies of developing countries generally are heavily dependent upon international trade and, accordingly, have been and may continue to be adversely affected by trade barriers, exchange controls, managed adjustments in relative currency values and other protectionist measures imposed or negotiated by the countries with which they trade. Investments in developing market countries may involve risks of nationalization, expropriation and confiscatory taxation. The communist governments of certain countries expropriated large amounts of private property in the past, in many cases without adequate compensation, and there can be no assurance that this expropriation will not occur in the future. In the event of expropriation, the Fund could lose a substantial portion of any investments it has made in the affected countries. Further, no accounting standards exist in certain developing countries. Finally, even though the currencies of some developing countries may be convertible into U.S. dollars, the conversion rates may be artificial to the actual market values and may be adverse to Fund shareholders. CHINA COMPANIES. Investing in China, Hong Kong and Taiwan involves a high degree of risk and special considerations not typically associated with investing in other more established economies or securities markets. Such risks may include: (a) the risk of nationalization or expropriation of assets or confiscatory taxation; (b) greater social, economic and political uncertainty (including the risk of war); (c) dependency on exports and the corresponding importance of international trade; (d) the increasing competition from Asia's other low-cost emerging economies; (e) greater price volatility, substantially less liquidity and significantly smaller market capitalization of securities markets, particularly in China; (f) currency exchange rate fluctuations and the lack of available currency hedging instruments; (g) higher rates of inflation; (h) controls on foreign investment and limitations on repatriation of invested capital and on the Fund's ability to exchange local currencies for U.S. dollars; (i) greater governmental involvement in and control over the economy; (j) the risk that the Chinese government may decide not to continue to support the economic reform programs implemented since 1978 and could return to the prior, completely centrally planned, economy; (k) the fact that China companies, particularly those located in China, may be smaller, less seasoned and newly-organized companies; (l) the difference in, or lack of, auditing and financial reporting standards which may result in unavailability of material information about issuers, particularly in China; (m) the fact that statistical information regarding the economy of China may be inaccurate or not comparable to statistical information regarding the U.S. or other economies; (n) the less extensive, and still developing, regulation of the securities markets, business entities and commercial transactions; (o) the fact that the settlement period of securities transactions in foreign markets may be longer; (p) the willingness and ability of the Chinese government to support the Chinese and Hong Kong economies and markets is uncertain; (q) the risk that it may be more difficult, or impossible, to obtain and/or enforce a judgment than in other countries; (r) the rapidity and erratic nature of growth, particularly in China, resulting in inefficiencies and dislocations; and (s) the risk that, because of the degree of interconnectivity between the economies and financial markets of China, Hong Kong and Taiwan, any sizable reduction in the demand for goods from China, or an economic downturn in China, could negatively affect the economies and financial markets of Hong Kong and Taiwan, as well. Investment in China, Hong Kong and Taiwan is subject to certain political risks. Following the establishment of the People's Republic of China by the Communist Party in 1949, the Chinese government renounced various debt obligations incurred by China's predecessor governments, which obligations remain in default, and expropriated assets without compensation. There can be no assurance that the Chinese government will not take similar action in the future. An investment in the Fund involves risk of a total loss. The political reunification of China and Taiwan is a highly problematic issue and is unlikely to be settled in the near future. This situation poses a threat to Taiwan's economy and could negatively affect its stock market. China has committed by treaty to preserve Hong Kong's autonomy and its economic, political and social freedoms for fifty years from the July 1, 1997 transfer of sovereignty from Great Britain to China. However, if China would exert its authority so as to alter the economic, political or legal structures or the existing social policy of Hong Kong, investor and business confidence in Hong Kong could be negatively affected, which in turn could negatively affect markets and business performance. CURRENCY RISKS. The Fund's management endeavors to buy and sell foreign currencies on as favorable a basis as practicable. Some price spread on currency exchange (to cover service charges) may be incurred, particularly when the Fund changes investments from one country to another or when proceeds of the sale of shares in U.S. dollars are used for the purchase of securities in foreign countries. Also, some countries may adopt policies which would prevent the Fund from transferring cash out of the country, or withhold portions of interest and dividends at the source. There is the possibility of cessation of trading on national exchanges, expropriation, nationalization or confiscatory taxation, withholding and other foreign taxes on income or other amounts, foreign exchange controls (which may include suspension of the ability to transfer currency from a given country), default in foreign government securities, political or social instability, or diplomatic developments that could affect investments in securities of issuers in foreign nations. The Fund may be affected either unfavorably or favorably by fluctuations in the relative rates of exchange between the currencies of different nations, by exchange control regulations and by indigenous economic and political developments. Some countries in which the Fund may invest also may have fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be internationally traded. Any devaluations in the currencies in which the Fund's portfolio securities are denominated may have a detrimental impact on the Fund. Through the Fund's flexible policy, management endeavors to avoid unfavorable consequences and to take advantage of favorable developments in particular nations where, from time to time, it places the Fund's investments. The exercise of this flexible policy may include decisions to purchase securities with substantial risk characteristics and other decisions such as changing the emphasis on investments from one nation to another and from one type of security to another. Some of these decisions may later prove profitable and others may not. No assurance can be given that profits, if any, will exceed losses. INVESTMENT FUNDS The Fund may invest in investment companies that invest principally in securities in which the Fund is authorized to invest. Section 12(d)(1) of the 1940 Act limits the Fund to: (i) investing not more than 10% of its total assets in the securities of other investment companies; (ii) investing not more than 5% of its total assets in the securities of any one investment company; and (iii) acquiring not more than 3% of the outstanding voting securities of the acquired investment company. To the extent the Fund invests in other investment funds, the Fund's shareholders will incur certain duplicative fees and expenses, including investment advisory fees. The Fund also can invest its cash balances in affiliated money market funds to the extent permitted by its investment policies and restrictions and exemptions granted under the 1940 Act. LOANS OF PORTFOLIO SECURITIES To generate additional income, the Fund may lend certain of its portfolio securities to qualified banks and broker-dealers. These loans may not exceed 33 1/3 % of the value of the Fund's total assets, measured at the time of the most recent loan. For each loan, the borrower must maintain with the Fund's custodian collateral (consisting of any combination of cash, securities issued by the U.S. government and its agencies and instrumentalities, or irrevocable letters of credit) with a value at least equal to 102% (for loaned securities issued in the U.S.) or 105% (for loaned securities issued outside the U.S.) of the current market value of the loaned securities. The Fund retains all or a portion of the interest received on investment of the cash collateral or receives a fee from the borrower. The Fund also continues to receive any distributions paid on the loaned securities. The Fund may terminate a loan at any time and obtain the return of the securities loaned within the normal settlement period for the security involved. Where voting rights with respect to the loaned securities pass with the lending of the securities, the manager intends to call the loaned securities to vote proxies, or to use other practicable and legally enforceable means to obtain voting rights, when the manager has knowledge that, in its opinion, a material event affecting the loaned securities will occur or the manager otherwise believes it necessary to vote. As with other extensions of credit, there are risks of delay in recovery or even loss of rights in collateral in the event of default or insolvency of the borrower. The Fund will loan its securities only to parties who meet creditworthiness standards approved by the Fund's board of trustees, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the loan. NON-DIVERSIFICATION The Fund is classified as a non-diversified investment company under the 1940 Act, which means that the Fund is not limited by the 1940 Act in the proportion of its assets that may be invested in the securities of a single issuer. Thus, the Fund may invest a greater portion of its assets in the securities of a smaller number of issuers and, as a result, will be subject to greater risk of loss with respect to its portfolio securities. The Fund, however, intends to comply with the diversification requirements imposed by the Internal Revenue Code (Code) for qualification as a regulated investment company. This intention should not be regarded as assurance that the diversification requirements will, in fact, be met. In addition, the board of trustees has adopted a non-fundamental policy under which the Fund will not invest more than 10% of its total assets in the securities of any one issuer. REPURCHASE AGREEMENTS The Fund generally will have a portion of its assets in cash or cash equivalents for a variety of reasons, including to satisfy redemption requests from shareholders, waiting for a suitable investment opportunity or taking a defensive position. To earn income on this portion of its assets, the Fund may enter into repurchase agreements. Under a repurchase agreement, the Fund agrees to buy securities guaranteed as to payment of principal and interest by the U.S. government or its agencies from a qualified bank or broker-dealer and then to sell the securities back to the bank or broker-dealer after a short period of time (generally, less than seven days) at a higher price. The bank or broker-dealer must transfer to the Fund's custodian securities with an initial market value of at least 102% of the dollar amount invested by the Fund in each repurchase agreement. The manager will monitor the value of such securities daily to determine that the value equals or exceeds the repurchase price. Repurchase agreements may involve risks in the event of default or insolvency of the bank or broker-dealer, including possible delays or restrictions upon the Fund's ability to sell the underlying securities. The Fund will enter into repurchase agreements only with parties who meet certain creditworthiness standards, i.e., banks or broker-dealers that the manager has determined present no serious risk of becoming involved in bankruptcy proceedings within the time frame contemplated by the repurchase transaction. TEMPORARY INVESTMENTS When the manager believes market, economic, financial or political conditions make it advisable, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash or certain short-term (less than twelve months to maturity) and medium-term (not greater than five years to maturity) debt securities. The short-term and medium-term debt securities in which the Fund generally may invest include: (a) obligations of the U.S., Chinese, Hong Kong or Taiwanese governments, and their respective agencies or instrumentalities; (b) bank deposits and bank obligations (including certificates of deposit, time deposits and bankers' acceptances) of U.S. or foreign banks denominated in any currency; (c) floating rate securities and other instruments denominated in any currency issued by various governments or international development agencies; (d) finance company and corporate commercial paper and other short-term corporate debt obligations of U.S., Chinese, Hong Kong or Taiwanese corporations; and (e) repurchase agreements with banks and broker-dealers with respect to such securities. The Fund intends to invest for temporary defensive purposes only in short-term and medium-term debt securities rated, at the time of investment, A or higher by Moody's or S&P(R) or, if unrated, determined to be of comparable quality. To the extent allowed by exemptions granted under the 1940 Act and the Fund's other investment policies and restrictions, the manager also may invest the Fund's assets in shares of one or more money market funds managed by the manager or its affiliates. The manager also may invest in these types of securities or hold cash while looking for suitable investment opportunities or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal. WHEN-ISSUED AND DELAYED DELIVERY SECURITIES The Fund may purchase securities on a when-issued or delayed delivery basis. Securities purchased on a when-issued or delayed delivery basis are purchased for delivery beyond the normal settlement date at a stated price and yield. No income accrues to the purchaser of a security on a when-issued or delayed delivery basis prior to delivery. Such securities are recorded as an asset and are subject to changes in value based upon changes in the general level of interest rates. Purchasing a security on a when-issued or delayed delivery basis can involve a risk that the market price at the time of delivery may be lower than the agreed-upon purchase price, in which case there could be an unrealized loss at the time of delivery. The Fund will only make commitments to purchase securities on a when-issued or delayed delivery basis with the intention of actually acquiring the securities, but may sell them before the settlement date if it is deemed advisable. The Fund will establish a segregated account in which it will maintain liquid assets in an amount at least equal in value to the Fund's commitments to purchase securities on a when-issued or delayed delivery basis. If the value of these assets declines, the Fund will place additional liquid assets in the account on a daily basis so that the value of the assets in the account is equal to the amount of such commitments. OFFICERS AND TRUSTEES - ------------------------------------------------------------------------------- Templeton China World Fund (Trust) has a board of trustees. Each trustee will serve until that person's successor is elected and qualified. The board is responsible for the overall management of the Trust, including general supervision and review of the Fund's investment activities. The board, in turn, elects the officers of the Trust who are responsible for administering the Trust's day-to-day operations. The board also monitors the Fund to ensure no material conflicts exist among share classes. While none are expected, the board will act appropriately to resolve any material conflict that may arise. The name, age and address of the officers and board members, as well as their affiliations, positions held with the Trust, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton fund complex are shown below. INDEPENDENT BOARD MEMBERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX LENGTH OF OVERSEEN BY NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------- --------------------- ---------------- ----------------- ---------------------------- HARRIS J. ASHTON (70) Trustee Since 1993 135 Director, Bar-S Foods 500 East Broward (meat packing company). Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - ------------------------------------------------------------------------------------------------------------- FRANK J. CROTHERS (58) Trustee Since 1999 18 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Atlantic Equipment & Power Ltd.; Vice Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power Company Ltd.; Director, Caribbean Electric Utility Services Corporation (Chairman until 2002); and director of various other business and nonprofit organizations. - ------------------------------------------------------------------------------------------------------------- S. JOSEPH FORTUNATO Trustee Since 1993 136 None (70) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch. - ------------------------------------------------------------------------------------------------------------- ANDREW H. HINES, JR. Trustee Since 1993 28 None (80) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Consultant, Triangle Consulting Group; and FORMERLY, Executive-in-Residence, Eckerd College (1991-2002); Chairman and Director, Precise Power Corporation (1990-1997); Director, Checkers Drive-In Restaurant, Inc. (1994-1997); and Chairman of the Board and Chief Executive Officer, Florida Progress Corporation (holding company in the energy area) (1982-1990); and director of various of its subsidiaries. - ------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (51) Trustee Since 1996 82 Director, Amerada Hess 500 East Broward Corporation (exploration Blvd. and refining of oil and Suite 2100 gas); Hercules Fort Lauderdale, FL Incorporated (chemicals, 33394-3091 fibers and resins); Beverly Enterprises, Inc. (health care); H.J. Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); and Canadian National Railway (railroad). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - ------------------------------------------------------------------------------------------------------------- BETTY P. KRAHMER (73) Trustee Since 1993 22 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or trustee of various civic associations; and FORMERLY, Economic Analyst, U.S. government. - ------------------------------------------------------------------------------------------------------------- GORDON S. MACKLIN (75) Trustee Since 1993 135 Director, White Mountains 500 East Broward Insurance Group, Ltd. Blvd. (holding company); Martek Suite 2100 Biosciences Corporation; Fort Lauderdale, FL MedImmune, Inc. 33394-3091 (biotechnology); Overstock.com (Internet services); and Spacehab, Inc. (aerospace services). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (until 1998) and Hambrecht & Quist Group (investment banking) (until 1992); and President, National Association of Securities Dealers, Inc. (until 1987). - ------------------------------------------------------------------------------------------------------------- FRED R. MILLSAPS (74) Trustee Since 1993 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - ------------------------------------------------------------------------------------------------------------- CONSTANTINE D. Trustee Since 1999 18 None TSERETOPOULOS (49) 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - -------------------------------------------------------------------------------------------------------------
INTERESTED BOARD MEMBERS AND OFFICERS
NUMBER OF PORTFOLIOS IN FUND COMPLEX LENGTH OF OVERSEEN BY NAME, AGE AND ADDRESS POSITION TIME SERVED BOARD MEMBER* OTHER DIRECTORSHIPS HELD - ----------------------- --------------------- ---------------- ----------------- ---------------------------- **NICHOLAS F. BRADY Trustee Since 1993 22 Director, Amerada Hess (73) Corporation (exploration 500 East Broward and refining of oil and Blvd. gas); C2, Inc. (operating Suite 2100 and investment business); Fort Lauderdale, FL and H.J. Heinz Company 33394-3091 (processed foods and allied products). PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Templeton Emerging Markets Investment Trust PLC, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments LDC and Darby Technology Ventures Group, LLC (investment firms) (1994-present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund; and FORMERLY, Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - ------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON Trustee, Chairman Trustee and 135 None (70) of the Board and Chairman of One Franklin Parkway Vice President the Board San Mateo, CA since 1995 and 94403-1906 Vice President since 1993 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 45 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- HARMON E. BURNS (58) Vice President Since 1996 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- JEFFREY A. EVERETT Vice President Since 2001 Not Applicable None (39) PO Box N-7759 Lyford Cay, Nassau, Bahamas PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - ------------------------------------------------------------------------------------------------------------- MARTIN L. FLANAGAN Vice President Since 1993 Not Applicable None (42) One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Chief Financial Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (55) Senior Vice Since 2002 Not Applicable None 500 East Broward President and Chief Blvd. Executive Suite 2100 Fort Officer-Finance and Lauderdale, FL Administration 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 50 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (56) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; Officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 50 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - ------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (55) Vice President and Vice President Not Applicable None One Franklin Parkway Secretary since 2000 and San Mateo, CA Secretary 94403-1906 since 1996 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice President, Templeton Worldwide, Inc.; officer of one of the other subsidiaries of Franklin Resources, Inc. and of 50 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - ------------------------------------------------------------------------------------------------------------- RUPERT H. JOHNSON, Vice President Since 1996 Not Applicable None JR. (62) One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- JOHN R. KAY (62) Vice President Since 1994 Not Applicable None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of one of the other subsidiaries of Franklin Resources, Inc. and of 21 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - ------------------------------------------------------------------------------------------------------------- MICHAEL O. MAGDOL (66) Vice President - Since 2002 Not Applicable Director, FTI Banque, Arch 600 Fifth Avenue AML Compliance Chemicals, Inc. and Rockefeller Center Lingnan Foundation. New York, NY 10048-0772 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc.; and officer of 47 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------- MARK MOBIUS (66) President and Chief President Not Applicable None Two Exchange Square, Executive Officer- since 1993 and 39th Floor, Suites Investment Chief 3905-08 Management Executive Hong Kong Officer- Investment Management since 2002 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Portfolio Manager of various Templeton advisory affiliates; Managing Director, Templeton Asset Management Ltd.; Executive Vice President and Director, Templeton Global Advisors Limited; officer of six of the investment companies in Franklin Templeton Investments; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc.; and FORMERLY, President, International Investment Trust Company Limited (investment manager of Taiwan R.O.C. Fund) (1986-1987); and Director, Vickers da Costa, Hong Kong (1983-1986). - ------------------------------------------------------------------------------------------------------------- BRUCE S. ROSENBERG Treasurer and Chief Treasurer Not Applicable None (41) Financial Officer since 2000 and 500 East Broward Chief Blvd. Financial Suite 2100 Officer since Fort Lauderdale, FL 2002 33394-3091 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 18 of the investment companies in Franklin Templeton Investments. - ------------------------------------------------------------------------------------------------------------ MURRAY L. SIMPSON (66) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director of some of the subsidiaries of Franklin Resources, Inc.; officer of 50 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - -------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered an interested person of the Trust under the federal securities laws due to his position as officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's adviser and distributor. Nicholas F. Brady is considered an interested person of the Trust under the federal securities laws due to his business affiliations with Resources and Templeton Global Advisors Limited. Mr. Brady and Resources are both limited partners of Darby Overseas Partners, L.P. (Darby Overseas). Mr. Brady is Chairman and shareholder of Darby Overseas Investments, Ltd., which is the corporate general partner of Darby Overseas. In addition, Darby Overseas and Templeton Global Advisors Limited are limited partners of Darby Emerging Markets Fund, L.P. (DEMF). Mr. Brady serves as Chairman of the corporate general partner of DEMF, and Darby Overseas and its general partner own 100% of the stock of the general partner of DEMF. Resources also is an investor in Darby Technology Ventures Group, LLC (DTV) in which Darby Overseas is a significant investor and for which Darby Overseas has the right to appoint a majority of the directors. Templeton Global Advisors Limited also is a limited partner in Darby-BBVA Latin America Private Equity Fund, L.P. (DBVA), a private equity fund in which Darby Overseas is a significant investor, and the general partner of which Darby Overseas controls jointly with an unaffiliated third party. Mr. Brady is also a director of Templeton Capital Advisors Ltd. (TCAL), which serves as investment manager to certain unregistered funds. TCAL and Templeton Global Advisors Limited are both indirect subsidiaries of Resources. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. The Trust pays noninterested board members and Mr. Brady an annual retainer of $2000 and a fee of $200 per board meeting attended. Board members who serve on the Audit Committee of the Trust and other funds in Franklin Templeton Investments receive a flat fee of $2,000 per committee meeting attended, a portion of which is allocated to the Trust. Members of a committee are not separately compensated for any committee meeting held on the day of a board meeting. Noninterested board members also may serve as directors or trustees of other funds in Franklin Templeton Investments and may receive fees from these funds for their services. The following table provides the total fees paid to noninterested board members and Mr. Brady by the Trust and by Franklin Templeton Investments. NUMBER OF BOARDS IN FRANKLIN TOTAL FEES TEMPLETON TOTAL FEES RECEIVED INVESTMENTS RECEIVED FROM FRANKLIN ON FROM THE CLOSED TEMPLETON WHICH EACH NAME END FUND/1/ ($) INVESTMENTS/2/($) SERVES/3/ - ------------------------------------------------------------------------------- Harris J. Ashton 3,009 372,100 45 Nicholas F. Brady 3,009 140,500 15 Frank J. Crothers 3,064 100,000 12 S. Joseph Fortunato 3,009 372,941 46 Andrew H. Hines, Jr. 3,035 209,500 16 Edith E. Holiday 3,015 273,635 25 Betty P. Krahmer 3,009 142,500 15 Gordon S. Macklin 3,009 363,512 45 Fred R. Millsaps 3,035 219,500 16 Constantine D. Tseretopoulos 3,064 102,500 12 1. For the fiscal year ended August 31, 2002. 2. For the calendar year ended December 31, 2002. 3. We base the number of boards on the number of U.S. registered investment companies in Franklin Templeton Investments. This number does not include the total number of series or portfolios within each investment company for which the board members are responsible. Noninterested board members and Mr. Brady are reimbursed for expenses incurred in connection with attending board meetings, paid pro rata by each fund in Franklin Templeton Investments for which they serve as director or trustee. No officer or board member received any other compensation, including pension or retirement benefits, directly or indirectly from the Fund or other funds in Franklin Templeton Investments. Certain officers or board members who are shareholders of Franklin Resources, Inc. (Resources) may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries. Board members historically have followed a policy of having substantial investments in one or more of the funds in Franklin Templeton Investments, as is consistent with their individual financial goals. In February 1998, this policy was formalized through adoption of a requirement that each board member invest one-third of fees received for serving as a director or trustee of a Templeton fund in shares of one or more Templeton funds and one-third of fees received for serving as a director or trustee of a Franklin fund in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual fees paid such board member. Investments in the name of family members or entities controlled by a board member constitute fund holdings of such board member for purposes of this policy, and a three-year phase-in period applies to such investment requirements for newly elected board members. In implementing such policy, a board member's fund holdings existing on February 27, 1998, are valued as of such date with subsequent investments valued at cost. The following tables provide the dollar range of equity securities beneficially owned by the board members of the Trust on December 31, 2002. INDEPENDENT BOARD MEMBERS AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL FUNDS DOLLAR RANGE OF EQUITY OVERSEEN BY THE BOARD SECURITIES IN THE MEMBER IN THE FRANKLIN NAME OF BOARD MEMBER CLOSED-END FUND TEMPLETON FUND COMPLEX - ------------------------------------------------------------------------------- Harris J. Ashton $1 - $10,000 Over $100,000 Frank J. Crothers None Over $100,000 S. Joseph Fortunato $1 - $10,000 Over $100,000 Andrew H. Hines, Jr. $10,001 - $50,000 Over $100,000 Edith E. Holiday $1 - $10,000 Over $100,000 Betty P. Krahmer $10,001 - $50,000 Over $100,000 Gordon S. Macklin $10,001 - $50,000 Over $100,000 Fred R. Millsaps Over $100,000 Over $100,000 Constantine D. Tseretopoulos None Over $100,000 INTERESTED BOARD MEMBERS AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL FUNDS DOLLAR RANGE OF EQUITY OVERSEEN BY THE BOARD SECURITIES IN THE MEMBER IN THE FRANKLIN NAME OF BOARD MEMBER CLOSED-END FUND TEMPLETON FUND COMPLEX - ------------------------------------------------------------------------------- Nicholas F. Brady $10,001 - $50,000 Over $100,000 Charles B. Johnson $10,001 - $50,000 Over $100,000 BOARD COMMITTEES The board maintains two standing committees: the Audit Committee and the Nominating and Compensation Committee. The Audit Committee is generally responsible for recommending the selection of the Trust's independent auditors, including evaluating their independence and meeting with such auditors to consider and review matters relating to the Trust's financial reports and internal accounting. The Audit Committee is comprised of the following Independent Trustees of the Trust: Frank J. Crothers, Andrew H. Hines, Jr., Fred R. Millsaps and Constantine D. Tseretopoulos. The Nominating and Compensation Committee is comprised of the following Independent Trustees of the Trust: Frank J. Crothers, Andrew H. Hines, Jr., Edith E. Holiday and Gordon S. Macklin. The Trust's Nominating and Compensation Committee sets trustees' fees and is responsible for the nomination of trustees to the board. When vacancies arise or elections are held, the Committee considers qualified nominees, including those recommended by shareholders who provide a written request to the board, care of the Trust's address at: P.O. Box 33030 St. Petersburg, FL 33733-8030 During the fiscal year ended August 31, 2002, the Audit Committee met three times; the Nominating and Compensation Committee met four times. MANAGEMENT AND OTHER SERVICES - ------------------------------------------------------------------------------- MANAGER AND SERVICES PROVIDED The Fund's manager is Templeton Asset Management Ltd. - Hong Kong branch. The manager is an indirect, wholly owned subsidiary of Resources, a publicly owned company engaged in the financial services industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources. The manager provides investment research and portfolio management services, and selects the securities for the Fund to buy, hold or sell. The manager also selects the brokers who execute the Fund's portfolio transactions. The manager provides periodic reports to the board, which reviews and supervises the manager's investment activities. To protect the Fund, the manager and its officers, directors and employees are covered by fidelity insurance. The Templeton organization has been investing globally since 1940. The manager and its affiliates have offices in Argentina, Australia, Bahamas, Belgium, Brazil, Canada, China, France, Germany, Holland (The Netherlands), Hong Kong, India, Ireland, Italy, Japan, Luxembourg, Poland, Russia, Singapore, South Korea, Spain, Sweden, Switzerland, Taiwan, Turkey, United Arab Emirates, United Kingdom, and United States. The manager and its affiliates manage numerous other investment companies and accounts. The manager may give advice and take action with respect to any of the other funds it manages, or for its own account, that may differ from action taken by the manager on behalf of the Fund. Similarly, with respect to the Fund, the manager is not obligated to recommend, buy or sell, or to refrain from recommending, buying or selling any security that the manager and access persons, as defined by applicable federal securities laws, may buy or sell for its or their own account or for the accounts of any other fund. The manager is not obligated to refrain from investing in securities held by the Fund or other funds it manages. Because the manager is a subsidiary of a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999, Federal regulations applicable to FHCs may limit or restrict the Fund's ability to acquire or hold a position in a given security when it might otherwise be advantageous for the Fund to acquire or hold that security. The Fund, its manager and principal underwriter have each adopted a code of ethics, as required by federal securities laws. Under the code of ethics, employees who are designated as access persons may engage in personal securities transactions, including transactions involving securities that are being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions and procedures. The personal securities transactions of access persons of the Fund, its manager and principal underwriter will be governed by the code of ethics. The code of ethics is on file with, and available from, the Securities and Exchange Commission (SEC). During the fiscal year ended August 31, 2002, the board, including a majority of noninterested or independent trustees, approved renewal of the Fund's management agreement. In reaching this decision, the board took into account information furnished throughout the year at regular board meetings, as well as information specifically furnished for a board meeting held annually to specifically consider such renewal. Information furnished throughout the year included reports on the Fund's investment performance, expenses, portfolio composition and sales and redemptions, along with related financial statements, information about the scope and quality of services provided by the manager and its affiliates, as well as periodic reports relating to compliance with the Fund's investment policies and restrictions. The information furnished annually to the board also included special reports prepared by an independent third party analyst comparing the Fund's investment performance and expenses with those of other mutual funds deemed comparable to the Fund as selected by the independent third party analyst as well as information relating to the manager's profitability. In considering such material, the independent board members received assistance and advice from and met separately with independent counsel. Based upon its review of such material and information together with such other information as it deemed relevant, the board, including a majority of independent trustees, concluded that continuance of the management agreement was appropriate and in the best interest of Fund shareholders. At such time, the Fund operated as a closed-end fund and in reaching such decision, the board took into account a combination of factors including the following: o PERFORMANCE. Performance of the Fund was considered in reference to a peer group of closed-end Pacific ex-Japan funds as selected by the independent third party analyst. In evaluating performance, attention was given to both the short term and long term performance of the Fund in comparison with this peer group, in comparison to those particular indices relevant to closed-end Pacific ex-Japan funds, and to the Fund's compliance with its specific investment goals and investment restrictions. o EXPENSES. In considering the reasonableness of expenses, consideration was given to the advisory fee level and breakpoints charged the Fund in relation to those within the relevant peer group of closed-end Pacific ex-Japan funds, as selected by the independent third party analyst. Emphasis is placed on the Fund's overall comparative expense ratio within such peer group in view of the various other functions, such as underwriting, transfer agency and shareholder servicing provided the Fund under separate agreements with the manager and its affiliates, and the manager's management of custodian relationships. o QUALITY OF SERVICES. In considering the scope and quality of investment management services, consideration was given to the manager's continuing need to attract and retain qualified investment management staff, the portfolio research and management process, and the record of compliance with Fund investment policies and restrictions, as well as the code of ethics which governs personal securities trading by Fund management. Consideration was also given to the scope and quality of the various other functions, such as underwriting, transfer agency and shareholder servicing provided the Fund under separate agreements with the manager and its affiliates. In performing this evaluation, the board considers factors such as the level of expenditures in and improvements and enhancements of services provided, as well as data and reports evidencing or measuring the various levels of services provided. In addition to third party data and reports, the trustees, all of whom have significant investments in one or more of the Franklin Templeton family of funds, check on and informally report from time to time on, the level of service personally experienced by them as shareholders. The board also considered the benefit to Fund shareholders of investing in a fund that is part of a large family of funds offering a variety of investment choices and shareholder services. o MANAGER'S PROFITABILITY. The trustees considered the manager's level of profitability in providing management and other services to the Franklin Templeton funds, including the Fund. In doing so, the trustees considered materials and reports prepared annually by the manager that address profitability from its overall U.S. fund business, as well as from services provided the individual funds, including the Fund. The board reviews and discusses in detail the basis on which such reports are prepared and reviews the reasonableness of the cost allocation methodology utilized by the Fund's independent auditors. The board also considers the extent to which the manager may potentially achieve economies of scale and possibly derive other ancillary benefits from Fund operations, including the allocation of Fund brokerage and the use of "soft" commission dollars to pay for research and other similar services. The trustees also considered the manager's profitability in comparison with available industry data. MANAGEMENT FEES The Fund pays the manager a fee equal to an annual rate of 1.25% of the value of average weekly net of the Fund. The fee is computed at the close of business on the last business day of each month according to the terms of the management agreement. Each class of the Fund's shares pays its proportionate share of the fee. For the last three fiscal years ended August 31, the Fund paid the following management fees: MANAGEMENT FEES PAID ($) - ---------------------------------------- 2002 2,311,049 2001 2,376,115 2000 2,531,021 ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, LLC (FT Services) has an agreement with the Fund to provide certain administrative services and facilities for the Fund. FT Services is an indirect, wholly owned subsidiary of Resources and is an affiliate of the Fund's manager and principal underwriter. The administrative services FT Services provides include preparing and maintaining books, records, and tax and financial reports, and monitoring compliance with regulatory requirements. ADMINISTRATION FEES The Fund pays FT Services a fee equal to an annual rate of 0.20% of the average daily net assets of the Fund. As a Closed-End Fund, the Fund paid FT Services a fee equal to an annual rate of 0.25% of the average weekly net assts of the Fund. During the last three fiscal years ended August 31, the Closed-End Fund paid FT Services the following administration fees: ADMINISTRATION FEES PAID ($) - ------------------------------------------ 2002 462,210 2001 475,225 2000 506,205 SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin Templeton Investor Services, LLC (Investor Services) is the Fund's shareholder servicing agent and acts as the Fund's transfer agent and dividend-paying agent. Investor Services is located at 100 Fountain Parkway, St. Petersburg, FL 33716-1205. Please send all correspondence to Investor Services at P.O. Box 33030, St. Petersburg, FL 33733-8030. Investor Services receives a fee for servicing Fund shareholder accounts. The Fund also will reimburse Investor Services for certain out-of-pocket expenses necessarily incurred in servicing the shareholder accounts in accordance with the terms of its servicing contract with the Fund. The Fund may also pay servicing fees to certain financial institutions that (i) maintain omnibus accounts with the Fund in the institution's name on behalf of numerous beneficial owners of Fund shares who are either direct clients of the institution or are participants in an employer sponsored retirement plan for which the institution, or its affiliate, provides participant level record keeping services (called "Beneficial Owners"); or (ii) provide support for Fund shareholder accounts by sharing account data with Investor Services' through the National Securities Clearing Corporation (NSCC) networking system. In addition to servicing fees received from the Fund, these financial institutions also may charge a fee for their services directly to their clients. Investor Services will also receive a fee from the Fund for services provided in support of Beneficial Owners and NSCC networking system accounts. CUSTODIAN JPMorgan Chase Bank, at its principal office at MetroTech Center, Brooklyn, NY 11245, and at the offices of its branches and agencies throughout the world, acts as custodian of the Fund's assets. As foreign custody manager, the bank selects and monitors foreign sub-custodian banks, selects and evaluates non-compulsory foreign depositories, and furnishes information relevant to the selection of compulsory depositories. AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105, is the Fund's independent auditor. The auditor gives an opinion on the financial statements included in the Fund's Annual Report to Shareholders and reviews the Fund's registration statement filed with the SEC. PORTFOLIO TRANSACTIONS - ------------------------------------------------------------------------------- The manager selects brokers and dealers to execute the Fund's portfolio transactions in accordance with criteria set forth in the management agreement and any directions that the board may give. When placing a portfolio transaction, the manager seeks to obtain prompt execution of orders at the most favorable net price. For portfolio transactions on a securities exchange, the amount of commission paid is negotiated between the manager and the broker executing the transaction. The determination and evaluation of the reasonableness of the brokerage commissions paid are based to a large degree on the professional opinions of the persons responsible for placement and review of the transactions. These opinions are based on the experience of these individuals in the securities industry and information available to them about the level of commissions being paid by other institutional investors of comparable size. The manager will ordinarily place orders to buy and sell over-the-counter securities on a principal rather than agency basis with a principal market maker unless the manager believes that trading on a principal basis will not provide best execution. Purchases of portfolio securities from underwriters will include a commission or concession paid by the issuer to the underwriter, and purchases from dealers will include a spread between the bid and ask price. The manager may pay certain brokers commissions that are higher than those another broker may charge, if the manager determines in good faith that the amount paid is reasonable in relation to the value of the brokerage and research services it receives. This may be viewed in terms of either the particular transaction or the manager's overall responsibilities to client accounts over which it exercises investment discretion. The services that brokers may provide to the manager include, among others, supplying information about particular companies, markets, countries, or local, regional, national or transnational economies, statistical data, quotations and other securities pricing information, and other information that provides lawful and appropriate assistance to the manager in carrying out its investment advisory responsibilities. These services may not always directly benefit the Fund. They must, however, be of value to the manager in carrying out its overall responsibilities to its clients. It is not possible to place a dollar value on the special executions or on the research services the manager receives from dealers effecting transactions in portfolio securities. The allocation of transactions to obtain additional research services allows the manager to supplement its own research and analysis activities and to receive the views and information of individuals and research staffs of other securities firms. As long as it is lawful and appropriate to do so, the manager and its affiliates may use this research and data in their investment advisory capacities with other clients. If the Fund's officers are satisfied that the best execution is obtained, the sale of Fund shares, as well as shares of other funds in Franklin Templeton Investments, also may be considered a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the National Association of Securities Dealers, Inc., it may sometimes receive certain fees when the Fund tenders portfolio securities pursuant to a tender-offer solicitation. To recapture brokerage for the benefit of the Fund, any portfolio securities tendered by the Fund will be tendered through Distributors if it is legally permissible to do so. In turn, the next management fee payable to the manager will be reduced by the amount of any fees received by Distributors in cash, less any costs and expenses incurred in connection with the tender. If purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the manager are considered at or about the same time, transactions in these securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the manager, taking into account the respective sizes of the funds and the amount of securities to be purchased or sold. In some cases this procedure could have a detrimental effect on the price or volume of the security so far as the Fund is concerned. In other cases it is possible that the ability to participate in volume transactions may improve execution and reduce transaction costs to the Fund. During the last three fiscal years ended August 31, the Fund paid the following brokerage commissions: BROKERAGE COMMISSIONS ($) - -------------------------------------------------- 2002 340,144 2001 539,837 2000 1,078,589 For the fiscal year ended August 31, 2002, the Fund paid brokerage commissions of $335,681 from aggregate portfolio transactions of $155,010,635 to brokers who provided research services. As of August 31, 2002, the Fund did not own securities of its regular broker-dealers. Because the Fund may, from time to time, invest in broker-dealers, it is possible that the Fund will own more than 5% of the voting securities of one or more broker-dealers through whom the Fund places portfolio brokerage transactions. In such circumstances, the broker-dealer would be considered an affiliated person of the Fund. To the extent the Fund places brokerage transactions through such a broker-dealer at a time when the broker-dealer is considered to be an affiliate of the Fund, the Fund will be required to adhere to certain rules relating to the payment of commissions to an affiliated broker-dealer. These rules require the Fund to adhere to procedures adopted by the board to ensure that the commissions paid to such broker-dealers do not exceed what would otherwise be the usual and customary brokerage commissions for similar transactions. DISTRIBUTIONS AND TAXES - ------------------------------------------------------------------------------- MULTICLASS DISTRIBUTIONS The Fund calculates income dividends and capital gain distributions the same way for each class. The amount of any income dividends per share will differ, however, generally due to any differences in the distribution and service (Rule 12b-1) fees applicable to the classes. DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in the form of dividends and interest on its investments. This income, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. If you are a taxable investor, any income dividends the Fund pays are taxable to you as ordinary income. DISTRIBUTIONS OF CAPITAL GAINS CAPITAL GAIN DISTRIBUTIONS. The Fund may realize capital gains and losses on the sale of its portfolio securities. Distributions from net short-term capital gains are taxable to you as ordinary income. Distributions from net long-term capital gains are taxable to you as long-term capital gains, regardless of how long you have owned your shares in the Fund. Any net capital gains realized by the Fund generally are distributed once each year, and may be distributed more frequently, if necessary, to reduce or eliminate excise or income taxes on the Fund. TAXATION OF FIVE YEAR GAINS. o SHAREHOLDERS IN THE 10 AND 15% FEDERAL BRACKETS. If you are in the 10 or 15% individual income tax bracket, capital gain distributions generally are subject to a maximum rate of tax of 10%. However, if you receive distributions from the Fund's sale of securities that it owned for more than five years, these gains are subject to a maximum rate of tax of 8%. The Fund will inform you in January of the portion of any capital gain distributions you received for the previous year that were five year gains qualifying for this reduced tax rate. o SHAREHOLDERS IN HIGHER FEDERAL BRACKETS. If you are in a higher individual income tax bracket (the 27% or higher bracket in 2003, or the 26% or higher bracket in 2004 and 2005), capital gain distributions generally are subject to a maximum rate of tax of 20%. BEGINNING IN THE YEAR 2006, any distributions from the Fund's sale of securities purchased after January 1, 2001, that it owned for more than five years will be subject to a maximum rate of tax of 18%. INVESTMENTS IN FOREIGN SECURITIES The next three paragraphs describe tax considerations that are applicable to funds that invest in foreign securities. PASS-THROUGH OF FOREIGN TAX CREDITS. The Fund may be subject to foreign withholding taxes on income from certain foreign securities. If more than 50% of the Fund's total assets at the end of a fiscal year is invested in foreign securities, the Fund may elect to pass through to you your pro rata share of foreign taxes paid by the Fund. If this election is made, the Fund may report more taxable income to you than it actually distributes. You will then be entitled either to deduct your share of these taxes in computing your taxable income, or to claim a foreign tax credit for these taxes against your U.S. federal income tax (subject to limitations for certain shareholders). The Fund will provide you with the information necessary to complete your personal income tax return if it makes this election. EFFECT OF FOREIGN DEBT INVESTMENTS AND HEDGING ON DISTRIBUTIONS. Most foreign exchange gains realized on the sale of debt securities are treated as ordinary income by the Fund. Similarly, foreign exchange losses realized on the sale of debt securities generally are treated as ordinary losses. These gains when distributed are taxable to you as ordinary income, and any losses reduce the Fund's ordinary income otherwise available for distribution to you. THIS TREATMENT COULD INCREASE OR DECREASE THE FUND'S ORDINARY INCOME DISTRIBUTIONS TO YOU, AND MAY CAUSE SOME OR ALL OF THE FUND'S PREVIOUSLY DISTRIBUTED INCOME TO BE CLASSIFIED AS A RETURN OF CAPITAL. A return of capital generally is not taxable to you, but reduces the tax basis of your shares in the Fund. Any return of capital in excess of your basis, however, is taxable as a capital gain. PFIC SECURITIES. The Fund may invest in securities of foreign entities that could be deemed for tax purposes to be passive foreign investment companies (PFICs). When investing in PFIC securities, the Fund intends to mark-to-market these securities and recognize any gains at the end of its fiscal and excise (described below) tax years. Deductions for losses are allowable only to the extent of any current or previously recognized gains. These gains (reduced by allowable losses) are treated as ordinary income that the Fund is required to distribute, even though it has not sold the securities. INFORMATION ON THE AMOUNT AND TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you of the amount of your income dividends and capital gain distributions at the time they are paid, and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. If you have not owned your Fund shares for a full year, the Fund may designate and distribute to you, as ordinary income or capital gains, a percentage of income that may not be equal to the actual amount of each type of income earned during the period of your investment in the Fund. Distributions declared in December but paid in January are taxable to you as if paid in December. ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund has elected to be treated as a regulated investment company under Subchapter M of the Internal Revenue Code (Code). It has qualified as a regulated investment company for its most recent fiscal year, and intends to continue to qualify during the current fiscal year. To meet this test, the Fund must distribute at least 90% of its investment company taxable income (generally its net investment income as described above) for each taxable year. As a regulated investment company, the Fund generally pays no federal income tax on the income and gains it distributes to you, but must pay federal income tax on any income or net capital gains that it does not distribute to you. The board reserves the right not to maintain the qualification of the Fund as a regulated investment company if it determines this course of action to be beneficial to shareholders. In that case, the Fund would be subject to federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to you would be taxed as ordinary income dividends to the extent of the Fund's earnings and profits. EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Code requires the Fund to distribute to you by December 31 of each year, at a minimum, the following amounts: o 98% of its taxable ordinary income earned during the calendar year; o 98% of its capital gain net income earned during the twelve month period ending October 31; and o 100% of any undistributed amounts of these categories of income or gain from the prior year. The Fund intends to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December), but can give no assurances that its distributions will be sufficient to eliminate all taxes. EXCHANGE CONTROL RESTRICTIONS Exchange control restrictions may restrict the ability of the Fund to repatriate investment income or the proceeds of sales of portfolio securities. These restrictions and limitations may limit the Fund's ability to make sufficient distributions to satisfy either the 90% distribution requirement necessary to maintain the Fund's qualification as a regulated investment company, or to avoid the imposition of an income or excise tax on any income or capital gains not timely distributed. SALES OF FUND SHARES Sales and exchanges of Fund shares are taxable transactions for federal and state income tax purposes. If you sell your Fund shares, or exchange them for shares of a different Franklin Templeton fund, the IRS requires you to report any gain or loss on your sale or exchange. If you owned your shares as a capital asset, any gain or loss that you realize generally is a capital gain or loss, and is long-term or short-term, depending on how long you owned your shares. TAXATION OF FIVE YEAR GAINS. o SHAREHOLDERS IN THE 10 AND 15% FEDERAL BRACKETS. If you are in the 10 or 15% individual income tax bracket, gains from the sale of your Fund shares generally are subject to a maximum rate of tax of 10%. However, if you owned your shares for more than five years, these gains are subject to a maximum rate of tax of 8%. o SHAREHOLDERS IN HIGHER FEDERAL BRACKETS. If you are in a higher individual income tax bracket (the 27% or higher bracket in 2003, or 26% or higher bracket in 2004 and 2005), gains from the sale of your Fund shares generally are subject to a maximum rate of tax of 20%. BEGINNING IN THE YEAR 2006, any gains from the sale of Fund shares purchased after January 1, 2001, that you owned for more than five years will be subject to a maximum rate of tax of 18%. However, if you made an election to mark your Fund shares to market as of January 2, 2001, any Fund shares that you acquired before this date will also be eligible for the 18% maximum rate of tax, BEGINNING IN 2006. SALES AT A LOSS WITHIN SIX MONTHS OF PURCHASE. Any loss incurred on the sale or exchange of Fund shares owned for six months or less is treated as a long-term capital loss to the extent of any long-term capital gains distributed to you by the Fund on those shares. WASH SALES. All or a portion of any loss that you realize on the sale of your Fund shares is disallowed to the extent that you buy other shares in the Fund within 30 days before or after your sale. Any loss disallowed under these rules is added to your tax basis in the new shares. U.S. GOVERNMENT SECURITIES The income earned on certain U.S. government securities is exempt from state and local personal income taxes if earned directly by you. States also grant tax-free status to mutual fund dividends paid to you from interest earned on these securities, subject in some states to minimum investment or reporting requirements that must be met by a fund. The income on Fund investments in certain securities, such as repurchase agreements, commercial paper and federal agency-backed obligations (e.g., Government National Mortgage Association (Ginnie Mae) or Fannie Mae securiteis), generally does not qualify for tax-free treatment. The rules on exclusion of this income are different for corporations. DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS For corporate shareholders, a portion of the dividends paid by a fund may qualify for the dividends-received deduction. This deduction generally is available to corporations for dividends paid by a fund out of income earned on its investments in domestic corporations. Because the income of the Fund is derived primarily from investments in foreign rather than domestic securities, generally none or only a small percentage of its income dividends will be eligible for the corporate dividends-received deduction. INVESTMENT IN COMPLEX SECURITIES The Fund may invest in complex securities that could require it to adjust the amount, timing and/or tax character (ordinary or capital) of gains and losses it recognizes on these investments. This, in turn, could affect the amount, timing and/or tax character of income distributed to you. For example, DERIVATIVES. The Fund is permitted to invest in certain options, futures, forwards or foreign currency contracts. If it makes these investments, it could be required to mark-to-market these contracts and realize any unrealized gains and losses at its fiscal year end even though it continues to hold the contracts. Under these rules, gains or losses on the contracts generally would be treated as 60% long-term and 40% short-term gains or losses, but gains or losses on certain foreign currency contracts would be treated as ordinary income or losses. In determining its net income for excise tax purposes, the Fund would also be required to mark-to-market these contracts annually as of October 31 (for capital gain net income) and December 31 (for taxable ordinary income), and to realize and distribute any resulting income and gains. CONSTRUCTIVE SALES. The Fund's entry into an option or other contract could be treated as the "constructive sale" of an "appreciated financial position," causing it to realize gain, but not loss, on the position. TAX STRADDLES. The Fund's investment in options, futures, forwards, or foreign currency contracts in connection with certain hedging transactions could cause it to hold offsetting positions in securities. If the Fund's risk of loss with respect to specific securities in its portfolio is substantially diminished by the fact that it holds other securities, the Fund could be deemed to have entered into a tax "straddle" or to hold a "successor position" that would require any loss realized by it to be deferred for tax purposes. SECURITIES PURCHASED AT DISCOUNT. The Fund is permitted to invest in securities issued or purchased at a discount that could require it to accrue and distribute income not yet received. If it invests in these securities, the Fund could be required to sell securities in its portfolio that it otherwise might have continued to hold in order to generate sufficient cash to make these distributions. EACH OF THESE INVESTMENTS BY THE FUND IN COMPLEX SECURITIES IS SUBJECT TO SPECIAL TAX RULES THAT COULD AFFECT THE AMOUNT, TIMING AND/OR TAX CHARACTER OF INCOME REALIZED BY THE FUND AND DISTRIBUTED TO YOU. ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS - ------------------------------------------------------------------------------- The Fund is an open-end management investment company, commonly called a mutual fund. The Fund is the successor of a closed-end fund, organized as a Maryland corporation on July 15, 1993. The closed-end fund was reorganized on [June 20,] 2003 into a Delaware statutory trust created on December 3, 2002. The Fund is registered with the SEC. Prior to [June 20,] 2003, the Fund's name was Templeton China World Fund, Inc. The Fund currently offers five classes of shares, Class A, Class B, Class C, Class R and Advisor Class. The Fund began offering Class A, B, C, R and Advisor Class shares on [June 20,] 2003. The Fund may offer additional classes of shares in the future. The full title of each class is: o Templeton China World Fund - Class A o Templeton China World Fund - Class B o Templeton China World Fund - Class C o Templeton China World Fund - Class R o Templeton China World Fund - Advisor Class Shares of each class represent proportionate interests in the Fund's assets. On matters that affect the Fund as a whole, each class has the same voting and other rights and preferences as any other class. On matters that affect only one class, only shareholders of that class may vote. Each class votes separately on matters affecting only that class, or expressly required to be voted on separately by state or federal law. The Fund has noncumulative voting rights. For board member elections, this gives holders of more than 50% of the shares voting the ability to elect all of the members of the board. If this happens, holders of the remaining shares voting will not be able to elect anyone to the board. The Fund does not intend to hold annual shareholder meetings. The Fund may hold special meetings, however, for matters requiring shareholder approval. A meeting may be called by the board to consider the removal of a board member if requested in writing by shareholders holding at least 10% of the outstanding shares. In certain circumstances, we are required to help you communicate with other shareholders about the removal of a board member. A special meeting also may be called by the board in its discretion. To the knowledge of the Fund's management, as of April 16, 2003, the principal shareholders of the Closed-End Fund, beneficial or of record, were: NAME AND ADDRESS PERCENTAGE (%) - --------------------------------------------------------------------------- President and Fellows of Harvard College 30.3%/1/ c/o Harvard Management Company, Inc. 600 Atlantic Avenue Boston, MA 02210 1. The nature of beneficial ownership is sole voting and sole dispositive power as reported on Schedule 13D, Amendment No. 4 dated March 20, 2003 and filed with the SEC on March 21, 2003. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25% of the voting securities of the Trust is presumed to control the Trust under the provisions of the 1940 Act. For that reason, President and Fellows of Harvard, are considered control persons. Controlling persons possess the ability to impact substantially the outcome of matters submitted for shareholder vote. From time to time, the number of Fund shares held in the "street name" accounts of various securities dealers for the benefit of their clients or in centralized securities depositories may exceed 5% of the total shares outstanding. As of April 16, 2003, the officers and board members, as a group, owned of record and beneficially less than 1% of the outstanding shares of the Closed-End Fund. The board members may own shares in other funds in Franklin Templeton Investments. BUYING AND SELLING SHARES - ------------------------------------------------------------------------------ The Fund continuously offers its shares through securities dealers who have an agreement with Franklin Templeton Distributors, Inc. (Distributors). A securities dealer includes any financial institution that, either directly or through affiliates, has an agreement with Distributors to handle customer orders and accounts with the Fund. This reference is for convenience only and does not indicate a legal conclusion of capacity. Banks and financial institutions that sell shares of the Fund may be required by state law to register as securities dealers. For investors outside the U.S., the offering of Fund shares may be limited in many jurisdictions. An investor who wishes to buy shares of the Fund should determine, or have a broker-dealer determine, the applicable laws and regulations of the relevant jurisdiction. Investors are responsible for compliance with tax, currency exchange or other regulations applicable to redemption and purchase transactions in any jurisdiction to which they may be subject. Investors should consult appropriate tax and legal advisors to obtain information on the rules applicable to these transactions. All checks, drafts, wires and other payment mediums used to buy or sell shares of the Fund must be denominated in U.S. dollars. We may, in our sole discretion, either (a) reject any order to buy or sell shares denominated in any other currency or (b) honor the transaction or make adjustments to your account for the transaction as of a date and with a foreign currency exchange factor determined by the drawee bank. We may deduct any applicable banking charges imposed by the bank from your account. When you buy shares, if you submit a check or a draft that is returned unpaid to the Fund we may impose a $10 charge against your account for each returned item. If you buy shares through the reinvestment of dividends, the shares will be purchased at the net asset value determined on the business day following the dividend record date (sometimes known as the "ex-dividend date"). The processing date for the reinvestment of dividends may vary and does not affect the amount or value of the shares acquired. GROUP PURCHASES As described in the prospectus, members of a qualified group may add the group's investments together for minimum investment purposes. A qualified group is one that: o Was formed at least six months ago, o Has a purpose other than buying Fund shares at a discount, o Has more than 10 members, o Can arrange for meetings between our representatives and group members, o Agrees to include Franklin Templeton fund sales and other materials in publications and mailings to its members at reduced or no cost to Distributors, o Agrees to arrange for payroll deduction or other bulk transmission of investments to the Fund, and o Meets other uniform criteria that allow Distributors to achieve cost savings in distributing shares. DEALER COMPENSATION Distributors and/or its affiliates may provide financial support to securities dealers that sell shares of Franklin Templeton funds. This support is based primarily on the amount of sales of fund shares and/or total assets with Franklin Templeton funds. The amount of support may be affected by: total sales; net sales; levels of redemptions; the proportion of a securities dealer's sales and marketing efforts in Franklin Templeton funds; a securities dealer's support of, and participation in, Distributors' marketing programs; a securities dealer's compensation programs for its registered representatives; and the extent of a securities dealer's marketing programs relating to Franklin Templeton funds. Financial support to securities dealers may be made by payments from Distributors' resources, from Distributors' retention of underwriting concessions and, in the case of funds that have Rule 12b-1 plans, from payments to Distributors under such plans. In addition, certain securities dealers may receive brokerage commissions generated by fund portfolio transactions in accordance with the rules of the National Association of Securities Dealers, Inc. Distributors routinely sponsors due diligence meetings for registered representatives during which they receive updates on various Franklin Templeton funds and are afforded the opportunity to speak with portfolio managers. Invitation to these meetings is not conditioned on selling a specific number of shares. Those who have shown an interest in Franklin Templeton funds, however, are more likely to be considered. To the extent permitted by their firm's policies and procedures, registered representatives' expenses in attending these meetings may be covered by Distributors. EXCHANGE PRIVILEGE If you request the exchange of the total value of your account, declared but unpaid income dividends and capital gain distributions will be reinvested in the Fund and exchanged into the new fund at net asset value when paid. Backup withholding and information reporting may apply. If a substantial number of shareholders should, within a short period, sell their Fund shares under the exchange privilege, the Fund might have to sell portfolio securities it might otherwise hold and incur the additional costs related to such transactions. On the other hand, increased use of the exchange privilege may result in periodic large inflows of money. If this occurs, it is the Fund's general policy to initially invest this money in short-term, interest-bearing money market instruments, unless it is believed that attractive investment opportunities consistent with the Fund's investment goal exist immediately. This money will then be withdrawn from the short-term, interest-bearing money market instruments and invested in portfolio securities in as orderly a manner as is possible when attractive investment opportunities arise. The proceeds from the sale of shares of an investment company generally are not available until the seventh day following the sale. The funds you are seeking to exchange into may delay issuing shares pursuant to an exchange until that seventh day. The sale of Fund shares to complete an exchange will be effected at net asset value at the close of business on the day the request for exchange is received in proper form. SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell your shares and receive regular payments from your account on a monthly, quarterly, semiannual or annual basis. The value of your account must be at least $5,000 and the minimum payment amount for each withdrawal must be at least $50. For retirement plans subject to mandatory distribution requirements, the $50 minimum will not apply. There are no service charges for establishing or maintaining a systematic withdrawal plan. A 2% redemption fee will apply to shares acquired in connection with the conversion of the Closed-End Fund into an open-end fund that are redeemed within six months of the conversion of the Closed-End Fund into an open-end Fund. Each month in which a payment is scheduled, we will redeem an equivalent amount of shares in your account on the day of the month you have indicated on your account application or, if no day is indicated, on the 20th day of the month. If that day falls on a weekend or holiday, we will process the redemption on the next business day. Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. When you sell your shares under a systematic withdrawal plan, it is a taxable transaction. Redeeming shares through a systematic withdrawal plan may reduce or exhaust the shares in your account if payments exceed distributions received from the Fund. This is especially likely to occur if there is a market decline. If a withdrawal amount exceeds the value of your account, your account will be closed and the remaining balance in your account will be sent to you. Because the amount withdrawn under the plan may be more than your actual yield or income, part of the payment may be a return of your investment. To discontinue a systematic withdrawal plan, change the amount and schedule of withdrawal payments, or suspend one payment, we must receive instructions from you at least three business days before a scheduled payment. The Fund may discontinue a systematic withdrawal plan by notifying you in writing and will discontinue a systematic withdrawal plan automatically if all shares in your account are withdrawn or if the Fund receives notification of the shareholder's death or incapacity. SHARE CERTIFICATES We will credit your shares to your Fund account. We do not issue share certificates unless you specifically request them. This eliminates the costly problem of replacing lost, stolen or destroyed certificates. If a certificate is lost, stolen or destroyed, you may have to pay an insurance premium of up to 2% of the value of the certificate to replace it. Any outstanding share certificates must be returned to the Fund if you want to sell or exchange those shares or if you would like to start a systematic withdrawal plan. The certificates should be properly endorsed. You can do this either by signing the back of the certificate or by completing a share assignment form. For your protection, you may prefer to complete a share assignment form and to send the certificate and assignment form in separate envelopes. GENERAL INFORMATION If dividend checks are returned to the Fund marked "unable to forward" by the postal service, we will consider this a request by you to change your dividend option to reinvest all distributions. The proceeds will be reinvested in additional shares at net asset value until we receive new instructions. Distribution or redemption checks sent to you do not earn interest or any other income during the time the checks remain uncashed. Neither the Fund nor its affiliates will be liable for any loss caused by your failure to cash such checks. The Fund is not responsible for tracking down uncashed checks, unless a check is returned as undeliverable. In most cases, if mail is returned as undeliverable we are required to take certain steps to try to find you free of charge. If these attempts are unsuccessful, however, we may deduct the costs of any additional efforts to find you from your account. These costs may include a percentage of the account when a search company charges a percentage fee in exchange for its location services. Sending redemption proceeds by wire or electronic funds transfer (ACH) is a special service that we make available whenever possible. By offering this service to you, the Fund is not bound to meet any redemption request in less than the seven-day period prescribed by law. Neither the Fund nor its agents shall be liable to you or any other person if, for any reason, a redemption request by wire or ACH is not processed as described in the prospectus. There are special procedures for banks and other institutions that wish to open multiple accounts. An institution may open a single master account by filing one application form with the Fund, signed by personnel authorized to act for the institution. Individual sub-accounts may be opened when the master account is opened by listing them on the application, or by providing instructions to the Fund at a later date. These sub-accounts may be registered either by name or number. The Fund's investment minimums apply to each sub-account. The Fund will send confirmation and account statements for the sub-accounts to the institution. If you buy or sell shares through your securities dealer, we use the net asset value next calculated after your securities dealer receives your request, which is promptly transmitted to the Fund. If you sell shares through your securities dealer, it is your dealer's responsibility to transmit the order to the Fund in a timely fashion. Your redemption proceeds will not earn interest between the time we receive the order from your dealer and the time we receive any required documents. Any loss to you resulting from your dealer's failure to transmit your redemption order to the Fund in a timely fashion must be settled between you and your securities dealer. Certain shareholder servicing agents may be authorized to accept your transaction request. For institutional accounts, there may be additional methods of buying or selling Fund shares than those described in this SAI or in the prospectus. In the event of disputes involving multiple claims of ownership or authority to control your account, the Fund has the right (but has no obligation) to: (a) freeze the account and require the written agreement of all persons deemed by the Fund to have a potential property interest in the account, before executing instructions regarding the account; (b) interplead disputed funds or accounts with a court of competent jurisdiction; or (c) surrender ownership of all or a portion of the account to the IRS in response to a notice of levy. PRICING SHARES - ------------------------------------------------------------------------------- When you buy and sell shares, you pay and receive the net asset value (NAV) per share. The value of a mutual fund is determined by deducting the fund's liabilities from the total assets of the portfolio. The net asset value per share is determined by dividing the net asset value of the fund by the number of shares outstanding. The Fund calculates the NAV per share of each class each business day at the close of trading on the New York Stock Exchange (NYSE) (normally 1:00 p.m. Pacific time). The Fund does not calculate the NAV on days the NYSE is closed for trading, which include New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. When determining its NAV, the Fund values cash and receivables at their realizable amounts, and records interest as accrued and dividends on the ex-dividend date. If market quotations are readily available for portfolio securities listed on a securities exchange or on the Nasdaq National Market System, the Fund values those securities at the last quoted sale price of the day or, if there is no reported sale, within the range of the most recent quoted bid and ask prices. The Fund values over-the-counter portfolio securities within the range of the most recent quoted bid and ask prices. If portfolio securities trade both in the over-the-counter market and on a stock exchange, the Fund values them according to the broadest and most representative market as determined by the manager. The Fund values portfolio securities underlying actively traded call options at their market price as determined above. The current market value of any option the Fund holds is its last sale price on the relevant exchange before the Fund values its assets. If there are no sales that day or if the last sale price is outside the bid and ask prices, the Fund values options within the range of the current closing bid and ask prices if the Fund believes the valuation fairly reflects the contract's market value. Trading in securities on European and Far Eastern securities exchanges and over-the-counter markets is normally completed well before the close of business of the NYSE on each day that the NYSE is open. Trading in European or Far Eastern securities generally, or in a particular country or countries, may not take place on every NYSE business day. Furthermore, trading takes place in various foreign markets on days that are not business days for the NYSE and on which the Fund's NAV is not calculated. Thus, the calculation of the Fund's NAV does not take place contemporaneously with the determination of the prices of many of the portfolio securities used in the calculation and, if events materially affecting the values of these foreign securities occur, the securities will be valued at fair value as determined by management and approved in good faith by the board. Generally, trading in corporate bonds, U.S. government securities and money market instruments is substantially completed each day at various times before the close of the NYSE. The value of these securities used in computing the NAV is determined as of such times. Occasionally, events affecting the values of these securities may occur between the times at which they are determined and the close of the NYSE that will not be reflected in the computation of the NAV. If events materially affecting the values of these securities occur during this period, the securities will be valued at their fair value as determined in good faith by the board. Other securities for which market quotations are readily available are valued at the current market price, which may be obtained from a pricing service, based on a variety of factors including recent trades, institutional size trading in similar types of securities (considering yield, risk and maturity) and/or developments related to specific issues. Securities and other assets for which market prices are not readily available are valued at fair value as determined following procedures approved by the board. With the approval of the board, the Fund may use a pricing service, bank or securities dealer to perform any of the above described functions. THE UNDERWRITER - ------------------------------------------------------------------------------- Franklin Templeton Distributors, Inc. (Distributors) acts as the principal underwriter in the continuous public offering of the Fund's shares. Distributors is located at One Franklin Parkway, San Mateo, CA 94403-1906. Distributors pays the expenses of the distribution of Fund shares, including advertising expenses and the costs of printing sales material and prospectuses used to offer shares to the public. The Fund pays the expenses of preparing and printing amendments to its registration statements and prospectuses (other than those necessitated by the activities of Distributors) and of sending prospectuses to existing shareholders. Because it did not engage in the continuous public offering of its shares, the Closed-End Fund did not pay underwriting commissions during the last three fiscal years. Distributors does not receive compensation from the Fund for acting as underwriter of the Fund's Advisor Class shares. PERFORMANCE - -------------------------------------------------------------------------------- Performance quotations are subject to SEC rules. These rules require the use of standardized performance quotations or, alternatively, that every non-standardized performance quotation furnished by the Fund be accompanied by certain standardized performance information computed as required by the SEC. Average annual total return before taxes, average annual total return after taxes on distributions and average annual total return after taxes on distributions and sale of shares quotations used by the Fund are based on the standardized methods of computing performance mandated by the SEC. An explanation of these and other methods used by the Fund to compute or express performance follows. Regardless of the method used, past performance does not guarantee future results, and is an indication of the return to shareholders only for the limited historical period used. The Fund began offering Advisor Class shares on [June 20,] 2003. Returns shown are a restatement of the Closed-End Fund's performance to take into account all charges, fees and expenses applicable to the Fund and each share class, including the Rule 12b-1 fees and the current sales charges applicable to that share class and are calculated based on the standardized method of computing performance as described below. For periods after [June 20,] 2003, Advisor Class standardized performance quotations will be calculated as described below using the actual Advisor Class performance. AVERAGE ANNUAL TOTAL RETURN BEFORE TAXES Average annual total return before taxes is determined by finding the average annual rates of return over the periods indicated below that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes income dividends and capital gain distributions are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect. The average annual total returns before taxes for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93)(%) - ------------------------------------------------------------------------------- Advisor Class []% []% []% The following SEC formula was used to calculate these figures: P(1+T)n = ERV where: P = a hypothetical initial payment of $1,000 T = average annual total return n = number of years ERV = ending redeemable value of a hypothetical $1,000 payment made at the beginning of each period at the end of each period AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS Average annual total return after taxes on distributions is determined by finding the average annual rates of return over the periods indicated below that would equate an initial hypothetical $1,000 investment to its ending redeemable value, after taxes on distributions. The calculation assumes that income dividends and capital gain distributions, less the taxes due on such distributions, are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees, but assumes that the redemption itself had no tax consequences. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect. Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (e.g., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (e.g., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits. The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (pre-liquidation). The average annual total returns after taxes on distributions for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93)(%) - ------------------------------------------------------------------------------- Advisor Class []% []% []% The following SEC formula was used to calculate these figures: P(1+T)n = ATVD where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions) n = number of years ATV/D = ending value of a hypothetical $1,000 payment made at the beginning of each period at the end of each period, after taxes on fund distributions but not after taxes on redemption. AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES Average annual total return after taxes on distributions and sale of fund shares is determined by finding the average annual rates of return over the periods indicated below that would equate an initial hypothetical $1,000 investment to its ending redeemable value, after taxes on distributions and sale of fund shares. The calculation assumes that income dividends and capital gain distributions are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees, including taxes upon sale of fund shares. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect. Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (e.g., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (e.g., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits. The capital gain or loss upon redemption is calculated by subtracting the tax basis from the redemption proceeds, after deducting any nonrecurring charges assessed at the end of the period, subtracting capital gains taxes resulting from the redemption, or adding the tax benefit from capital losses resulting from the redemption. In determining the basis for a reinvested distribution, the distribution is included net of taxes assumed paid from the distribution, but not net of any sales loads imposed upon reinvestment. Tax basis is adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable federal law. The amount and character (e.g., short-term or long-term) of capital gain or loss upon redemption is separately determined for shares acquired through the initial investment and each subsequent purchase through reinvested distributions. Shares acquired through reinvestment of distributions are not assumed to have the same holding period as the initial investment. The tax character of such reinvestments is determined by the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. Capital gains taxes (or the benefit resulting from tax losses) is calculated using the highest federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with federal law applicable on the redemption date. Shareholders are assumed to have sufficient capital gains of the same character from other investments to offset any capital losses from the redemption, so that the taxpayer may deduct the capital losses in full. The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (post-liquidation). The average annual total returns after taxes on distributions and redemption for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93)(%) - ------------------------------------------------------------------------------- Advisor Class []% []% []% The following SEC formula was used to calculate these figures: P(1+T)n = ATV/DR where: P = a hypothetical initial payment of $1,000 T = average annual total return (after taxes on distributions and redemptions) n = number of years ATV/DR = ending value of a hypothetical $1,000 payment made at the beginning of each period at the end of each period, after taxes on fund distributions and redemption. CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total return assumes income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. Cumulative total return, however, is based on the actual return for a specified period rather than on the average return over the periods indicated above. The cumulative total returns for the indicated periods ended August 31, 2002, were: SINCE INCEPTION 1 YEAR (%) 5 YEARS (%) (9/9/93)(%) - ------------------------------------------------------------------------------- Advisor Class []% []% []% VOLATILITY Occasionally statistics may be used to show the Fund's volatility or risk. Measures of volatility or risk are generally used to compare the Fund's net asset value or performance to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market, as represented by an index considered representative of the types of securities in which the fund invests. A beta of more than 1.00 indicates volatility greater than the market and a beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is used to measure variability of net asset value or total return around an average over a specified period of time. The idea is that greater volatility means greater risk undertaken in achieving performance. OTHER PERFORMANCE QUOTATIONS The Fund may also quote the performance of Advisor Class based on the following methods of calculation: (a) for periods prior to [June 20,] 2003, based upon the Closed-End Fund's actual performance (and not restated to reflect the fees and expenses of the Advisor Class for such period); and (b) for periods after [June 20,] 2003, actual performance for the Advisor Class reflecting all feesand expenses applicable to that class. Sales literature referring to the use of the Fund as a potential investment for IRAs, business retirement plans, and other tax-advantaged retirement plans may quote a total return based upon compounding of dividends on which it is presumed no federal income tax applies. The Fund may include in its advertising or sales material information relating to investment goals and performance results of funds belonging to Franklin Templeton Investments. Resources is the parent company of the advisors and underwriter of Franklin Templeton funds. COMPARISONS To help you better evaluate how an investment in the Fund may satisfy your investment goal, advertisements and other materials about the Fund may discuss certain measures of Fund performance as reported by various financial publications. Materials also may compare performance (as calculated above) to performance as reported by other investments, indices, and averages. These comparisons may include, but are not limited to, the following examples: (i) unmanaged indices so that you may compare the Fund's results with those of a group of unmanaged securities widely regarded by investors as representative of the securities market in general; (ii) other groups of mutual funds tracked by Lipper(R) Inc., a widely used independent research firm that ranks mutual funds by overall performance, investment goals and assets, or tracked by other services, companies, publications, or persons who rank mutual funds on overall performance or other criteria; and (iii) the Consumer Price Index (measure for inflation) to assess the real rate of return from an investment in the Fund. Unmanaged indices may assume the reinvestment of dividends but generally do not reflect deductions for administrative and management costs and expenses. From time to time, the Fund and the manager also may refer to the following information: o The manager's and its affiliates' market share of international equities managed in mutual funds prepared or published by Strategic Insight or a similar statistical organization. o The performance of U.S. equity and debt markets relative to foreign markets prepared or published by Morgan Stanley Capital International or a similar financial organization. o The capitalization of U.S. and foreign stock markets as prepared or published by the International Finance Corporation, Morgan Stanley Capital International or a similar financial organization. o The geographic and industry distribution of the Fund's portfolio and the Fund's top ten holdings. o The gross national product and populations, including age characteristics, literacy rates, foreign investment improvements due to a liberalization of securities laws and a reduction of foreign exchange controls, and improving communication technology, of various countries as published by various statistical organizations. o To assist investors in understanding the different returns and risk characteristics of various investments, the Fund may show historical returns of various investments and published indices (e.g., Ibbotson Associates, Inc. and Morgan Stanley Capital International). o The major industries located in various jurisdictions as published by the Morgan Stanley Index. o Rankings by DALBAR Surveys, Inc. with respect to mutual fund shareholder services. o Allegorical stories illustrating the importance of persistent long-term investing. o The Fund's portfolio turnover rate and its ranking relative to industry standards as published by Lipper(R)Inc. or Morningstar, Inc. o A description of the Templeton organization's investment management philosophy and approach, including its worldwide search for undervalued or "bargain" securities and its diversification by industry, nation and type of stocks or other securities. o Comparison of the characteristics of various emerging markets, including population, financial and economic conditions. o Quotations from the Templeton organization's founder, Sir John Templeton,* advocating the virtues of diversification and long-term investing. From time to time, advertisements or information for the Fund may include a discussion of certain attributes or benefits to be derived from an investment in the Fund. The advertisements or information may include symbols, headlines, or other material that highlights or summarizes the information discussed in more detail in the communication. Advertisements or information also may compare the Fund's performance to the return on certificates of deposit (CDs) or other investments. You should be aware, however, that an investment in the Fund involves the risk of fluctuation of principal value, a risk generally not present in an investment in a CD issued by a bank. CDs are frequently insured by an agency of the U.S. government. An investment in the Fund is not insured by any federal, state or private entity. In assessing comparisons of performance, you should keep in mind that the composition of the investments in the reported indices and averages is not identical to the Fund's portfolio, the indices and averages are generally unmanaged, and the items included in the calculations of the averages may not be identical to the formula used by the Fund to calculate its figures. In addition, there can be no assurance that the Fund will continue its performance as compared to these other averages. - ---------------------- * Sir John Templeton sold the Templeton organization to Franklin Resources, Inc. in October 1992. He is no longer involved with the investment management process. MISCELLANEOUS INFORMATION - ------------------------------------------------------------------------------- RECENT LITIGATION AND MATERIAL TRANSACTIONS On January 29, 2003, the Closed-End Fund, together with Templeton Dragon Fund, Inc. (Dragon Fund), another closed-end management investment company in Franklin Templeton Investments, and Templeton Asset Management Ltd., the investment adviser to the Fund and Dragon Fund, filed a complaint in the United States District Court for the District of Maryland, Northern Division, against Harvard College, Harvard Management Company, Inc. (Harvard Management), which is an investment advisor to Harvard College, and Steven Alperin, an officer of Harvard Management (referred to collectively as "Harvard"). The complaint alleged that Harvard violated several provisions of the Federal securities laws and the rules of the SEC. On February 7, 2003, Harvard counterclaimed, alleging that the Closed-End Fund, Dragon Fund, Templeton Asset Management Ltd. and each fund's directors violated certain provisions of the federal securities laws and SEC rules. Harvard also asserted counterclaims of breach of fiduciary duty under Maryland state law against Templeton Asset Management Ltd. and each fund's directors. On March 20, 2003, the parties announced a settlement that will result in, among other things, the dismissal of their litigation claims against each other and the withdrawal of Harvard College's shareholder proposals for the Closed-End Fund's annual shareholder meeting. DISMISSAL OF LAWSUIT. The Settlement Agreement between the Closed-End Fund and Harvard will result in the dismissal without prejudice of the lawsuit originally brought in January 2003 by the Closed-End Fund, Dragon Fund and Templeton Asset Management Ltd. against Harvard, as well as the dismissal without prejudice of the counterclaims brought by Harvard against the Closed-End Fund, Dragon Fund, each fund's directors and Templeton Asset Management Ltd. The parties have also entered into covenants not to sue each other with respect to the claims that were made or could have been made in the litigation absent a breach of the settlement agreements. CONVERSION OF THE CLOSED-END FUND TO AN OPEN-END FUND. When the settlement was announced, Harvard also announced that, if and when the Closed-End Fund converted to an open-end fund, Harvard College would redeem all of its shares of the Fund within 30 days after the open-ending, and that under the settlement it would take its redemption proceeds through a pro rata, in-kind distribution of portfolio investments. As a result, the Fund will avoid having to sell significant portfolio assets to raise cash to meet Harvard's redemption request - - thus limiting the potential adverse effect on the Fund's net asset value per share. Because Harvard College will have owned approximately 30% of the outstanding shares of the Fund immediately prior to Harvard College's redemption, its redemption of those shares may be deemed to have resulted in a change in control of the Fund. Representatives of Harvard and the Closed-End Fund also agreed to discuss, prior to open-ending, steps the Fund might take to minimize any adverse effect on the net asset value per share of the Fund resulting from a need to sell portfolio securities of the Fund to raise cash to satisfy redemption requests. OTHER The Fund may help you achieve various investment goals such as accumulating money for retirement, saving for a down payment on a home, college costs and other long-term goals. The Franklin College Costs Planner may help you in determining how much money must be invested on a monthly basis to have a projected amount available in the future to fund a child's college education. (Projected college cost estimates are based upon current costs published by the College Board.) The Franklin Retirement Planning Guide leads you through the steps to start a retirement savings program. Of course, an investment in the Fund cannot guarantee that these goals will be met. The Fund is a member of Franklin Templeton Investments, one of the largest mutual fund organizations in the U.S., and may be considered in a program for diversification of assets. Founded in 1947, Franklin is one of the oldest mutual fund organizations and now services approximately 3 million shareholder accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton, a pioneer in international investing. The Mutual Series team, known for its value-driven approach to domestic equity investing, became part of the organization four years later. In 2001, the Fiduciary Trust team, known for providing global investment management to institutions and high net worth clients worldwide, joined the organization. Together, Franklin Templeton Investments has over $252 billion in assets under management for more than 5 million U.S. based mutual fund shareholder and other accounts. Franklin Templeton Investments offers 102 U.S. based open-end investment companies to the public. The Fund may identify itself by its Nasdaq symbol or CUSIP number. Currently, there are more mutual funds than there are stocks listed on the NYSE. While many of them have similar investment goals, no two are exactly alike. Shares of the Fund are generally sold through securities dealers, whose investment representatives are experienced professionals who can offer advice on the type of investments suitable to your unique goals and needs, as well as the risks associated with such investments. DESCRIPTION OF RATINGS - -------------------------------------------------------------------------------- CORPORATE BOND RATINGS MOODY'S INVESTORS SERVICE (MOODY'S) INVESTMENT GRADE Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the smallest degree of investment risk and are generally referred to as "gilt-edged." Interest payments are protected by a large or exceptionally stable margin, and principal is secure. While the various protective elements are likely to change, such changes as can be visualized are most unlikely to impair the fundamentally strong position of such issues. Aa: Bonds rated Aa are judged to be high quality by all standards. Together with the Aaa group, they comprise what are generally known as high-grade bonds. They are rated lower than the best bonds because margins of protection may not be as large, fluctuation of protective elements may be of greater amplitude, or there may be other elements present that make the long-term risks appear somewhat larger. A: Bonds rated A possess many favorable investment attributes and are considered upper medium-grade obligations. Factors giving security to principal and interest are considered adequate, but elements may be present that suggest a susceptibility to impairment sometime in the future. Baa: Bonds rated Baa are considered medium-grade obligations. They are neither highly protected nor poorly secured. Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great length of time. These bonds lack outstanding investment characteristics and, in fact, have speculative characteristics as well. BELOW INVESTMENT GRADE Ba: Bonds rated Ba are judged to have predominantly speculative elements and their future cannot be considered well assured. Often the protection of interest and principal payments is very moderate and, thereby, not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. B: Bonds rated B generally lack characteristics of the desirable investment. Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small. Caa: Bonds rated Caa are of poor standing. These issues may be in default or there may be present elements of danger with respect to principal or interest. Ca: Bonds rated Ca represent obligations that are speculative to a high degree. These issues are often in default or have other marked shortcomings. C: Bonds rated C are the lowest rated class of bonds and can be regarded as having extremely poor prospects of ever attaining any real investment standing. Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond ratings. The modifier 1 indicates that the security ranks in the higher end of its generic rating category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates that the issue ranks in the lower end of its generic rating category. STANDARD & POOR'S RATINGS GROUP (S&P(R)) INVESTMENT GRADE AAA: This is the highest rating assigned by S&P to a debt obligation and indicates an extremely strong capacity to pay principal and interest. AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to pay principal and interest is very strong and, in the majority of instances, differ from AAA issues only in a small degree. A: Bonds rated A have a strong capacity to pay principal and interest, although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions. BBB: Bonds rated BBB are regarded as having an adequate capacity to pay principal and interest. Whereas they normally exhibit protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay principal and interest for bonds in this category than for bonds in the A category. BELOW INVESTMENT GRADE BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as predominantly speculative with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligations. BB indicates the lowest degree of speculation and CC the highest degree of speculation. While these bonds will likely have some quality and protective characteristics, they are outweighed by large uncertainties or major risk exposures to adverse conditions. C: Bonds rated C are typically subordinated debt to senior debt that is assigned an actual or implied CCC- rating. The C rating also may reflect the filing of a bankruptcy petition under circumstances where debt service payments are continuing. The C1 rating is reserved for income bonds on which no interest is being paid. D: Debt rated D is in default and payment of interest and/or repayment of principal is in arrears. Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories. SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS MOODY'S Moody's short-term debt ratings are opinions of the ability of issuers to repay punctually senior debt obligations. These obligations have an original maturity not exceeding one year, unless explicitly noted. Moody's commercial paper ratings are opinions of the ability of issuers to repay punctually their promissory obligations not having an original maturity in excess of nine months. Moody's employs the following designations for both short-term debt and commercial paper, all judged to be investment grade, to indicate the relative repayment capacity of rated issuers: P-1 (Prime-1): Superior capacity for repayment. P-2 (Prime-2): Strong capacity for repayment. S&P S&P's ratings are a current assessment of the likelihood of timely payment of debt having an original maturity of no more than 365 days. Ratings are graded into four categories, ranging from "A" for the highest quality obligations to "D" for the lowest. Issues within the "A" category are delineated with the numbers 1, 2 and 3 to indicate the relative degree of safety, as follows: A-1: This designation indicates the degree of safety regarding timely payment is very strong. A "plus" (+) designation indicates an even stronger likelihood of timely payment. A-2: Capacity for timely payment on issues with this designation is strong. The relative degree of safety, however, is not as overwhelming as for issues designated A-1. A-3: Issues carrying this designation have a satisfactory capacity for timely payment. They are, however, somewhat more vulnerable to the adverse effects of changes in circumstances than obligations carrying the higher designations. PART C OTHER INFORMATION ITEM 23 EXHIBITS The following exhibits are incorporated by reference to the previously filed documents indicated below, except as noted: (A) DECLARATION OF TRUST ( i) Agreement and Declaration of Trust dated December 3, 2002 (ii) Certificate of Trust dated December 3, 2002 (B) BY-LAWS (i) By-Laws (C) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS Not Applicable (D) INVESTMENT ADVISORY CONTRACTS (i) Form of Investment Management Agreement between Registrant and Templeton Asset Management Ltd. (E) UNDERWRITING CONTRACTS ( i) Form of Distribution Agreement between Registrant and Franklin Templeton Distributors, Inc. (ii) Form of Dealer Agreement between Registrant and Franklin Templeton Distributors, Inc. and Securities Dealers dated March 1, 1998 (iii) Amendment to Dealer Agreement dated May 15, 1998 (F) BONUS OR PROFIT SHARING CONTRACTS Not Applicable (G) CUSTODIAN AGREEMENTS ( i) Custody Agreement dated September 7, 1993 ( ii) Amendment dated March 2, 1998 to the Custody Agreement (iii) Amendment No. 2 dated July 23, 1998 to the Custody Agreement ( iv) Amendment No. 3 dated May 1, 2001 to the Custody Agreement (H) OTHER MATERIAL CONTRACTS (i) Form of Transfer Agent Agreement between Registrant and Franklin Templeton Investor Services, LLC (ii) Form of Fund Administration Agreement between Registrant and Franklin Templeton Services, LLC (I) LEGAL OPINION To Be Filed By Amendment (J) OTHER OPINION (i) Consent of Independent Auditors - PricewaterhouseCoopers LLP (K) OMITTED FINANCIAL STATEMENTS Not Applicable (L) INITIAL CAPITAL AGREEMENTS Not Applicable (M) RULE 12B-1 PLAN ( i) Form of Distribution Plan - Class A Shares ( ii) Form of Distribution Plan - Class C Shares (iii) Form of Distribution Plan - Class B Shares ( iv) Form of Distribution Plan - Class R Shares (N) RULE 18F-3 PLAN (i) Form of Multiple Class Plan (P) CODE OF ETHICS (i) Code of Ethics (Q) POWER OF ATTORNEY (i) Power of Attorney dated December 3, 2002 ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT None ITEM 25. INDEMNIFICATION. Reference is made to Article VII of the Registrant's Declaration of Trust, which is filed herewith. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Act and, therefore, is unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by trustees, officers or controlling persons of the Registrant in connection with the successful defense of any action, suit or proceeding) is asserted by such trustees, officers or controlling persons in connection with the shares being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues. ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER (a) Templeton Asset Management Ltd. The officers and directors of the Registrant's manager also serve as officers and/or directors for (1) the manager's corporate parent, Franklin Resources, Inc., and/or (2) other investment companies in Franklin Templeton Investments. For additional information please see Part B and Schedules A and D of Form ADV of the Fund's Investment Manager (SEC File 801-46997), incorporated herein by reference, which sets forth the officers and directors of the investment manager and information as to any business, profession, vocation or employment of a substantial nature engaged in by those officers and directors during the past two years. ITEM 27. PRINCIPAL UNDERWRITERS (a) Franklin/Templeton Distributors, Inc. (Distributors) also acts as principal underwriter of shares of: Templeton Capital Accumulator Fund Templeton Developing Markets Trust Templeton Funds, Inc. Templeton Global Investment Trust Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund, Inc. Templeton Growth Fund, Inc. Templeton Income Trust Templeton Institutional Funds, Inc. Franklin California Tax Free Income Fund, Inc. Franklin California Tax Free Trust Franklin Capital Growth Fund Franklin Custodian Funds, Inc. Franklin Federal Money Fund Franklin Federal Tax-Free Income Fund Franklin Floating Rate Trust Franklin Global Trust Franklin Gold and Precious Metals Fund Franklin High Income Trust Franklin Investors Securities Trust Franklin Managed Trust Franklin Money Fund Franklin Mutual Series Fund Inc. Franklin Municipal Securities Trust Franklin New York Tax-Free Income Fund Franklin New York Tax-Free Trust Franklin Real Estate Securities Trust Franklin Strategic Mortgage Portfolio Franklin Strategic Series Franklin Tax Exempt Money Fund Franklin Tax-Free Trust Franklin Templeton Fund Allocator Series Franklin Templeton Global Trust Franklin Templeton International Trust Franklin Templeton Money Fund Trust Franklin Templeton Variable Insurance Products Trust Franklin Value Investors Trust Institutional Fiduciary Trust (b) The information required by this Item 27 with respect to each director and officer of Distributors is incorporated by reference to Part B of this Form N-1A and Schedule A of Form BD filed by Distributors with the Securities and Exchange Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889) (c) Registrant's principal underwriter is an affiliated person of an affiliated person of the Registrant. ITEM 28. LOCATION OF ACCOUNTS AND RECORDS Certain accounts, books, and other documents required to be maintained by Registrant pursuant to Section 31(a) of the Investment Company Act of 1940 and rules thereunder are located at 500 East Broward Boulevard, Fort Lauderdale, Florida 33394. Other records are maintained at the offices of Franklin Templeton Investor Services, LLC, 100 Fountain Parkway, St. Petersburg, Florida 33716-1205 and Franklin Resources, Inc., One Franklin Parkway, San Mateo, California 94403-1906. ITEM 29. MANAGEMENT SERVICES There are no management-related service contracts not discussed in Part A or Part B. ITEM 30. UNDERTAKINGS. Not Applicable. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 17th day of April, 2003. TEMPLETON CHINA WORLD FUND (REGISTRANT) By:/s/DAVID P. GOSS ----------------------- David P. Goss, Vice President Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated: SIGNATURE TITLE DATE - ------------------------------------------------------------------------------- J. Mark Mobius - ----------------------------- Chief Executive April 17, 2003 J. Mark Mobius* Officer - Investment Management Jimmy D. Gambill - ----------------------------- Chief Executive April 17, 2003 Jimmy D. Gambill* Officer - Finance & Administration Bruce S. Rosenberg - ----------------------------- Chief Financial April 17, 2003 Bruce S. Rosenberg* Officer Harris J. Ashton Trustee April 17, 2003 - ----------------------------- Harris J. Ashton* Nicholas F. Brady Trustee April 17, 2003 - ----------------------------- Nicholas F. Brady* Frank J. Crothers Trustee April 17, 2003 - ----------------------------- Frank J. Crothers* S. Joseph Fortunato Trustee April 17, 2003 - ----------------------------- S. Joseph Fortunato* Andrew H. Hines, Jr. Trustee April 17, 2003 - ----------------------------- Andrew H. Hines, Jr.* Edith E. Holiday Trustee April 17, 2003 - ----------------------------- Edith E. Holiday* Charles B. Johnson Trustee April 17, 2003 - ----------------------------- Charles B. Johnson* Betty P. Krahmer Trustee April 17, 2003 - ----------------------------- Betty P. Krahmer* Gordon S. Macklin Trustee April 17, 2003 - ----------------------------- Gordon S. Macklin* Fred R. Millsaps Trustee April 17, 2003 - ----------------------------- Fred R. Millsaps* Constantine D. Tseretopoulos Trustee April 17, 2003 - ----------------------------- Constantine D. Tseretopoulos* *By:/s/DAVID P. GOSS ---------------------------------------- David P. Goss Attorney-in-Fact (Pursuant to Power of Attorney filed herewith) SIGNATURES Pursuant to the requirements of the Investment Company Act of 1940, Templeton China World Fund, Inc. has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 17th day of April, 2003. TEMPLETON CHINA WORLD FUND, INC. By: /s/DAVID P. GOSS ------------------------------ David P. Goss Vice President TEMPLETON CHINA WORLD FUND REGISTRATION STATEMENT EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION - ----------------------------------------------------------------------------------------------------------- EX-99 (a)(i) Agreement and Declaration of Trust dated December 3, 2002 Attached EX-99 (a)(ii) Certificate of Trust dated December 3, 2002 Attached EX-99 (b)(i) By-Laws Attached EX-99 (d)(i) Form of Investment Management Agreement between Registrant Attached and Templeton Asset Management Ltd. EX-99 (e)(i) Form of Distribution Agreement between Registrant and Attached Franklin/Templeton Distributors, Inc. EX-99 (e)(ii) Form of Dealer Agreement between Registrant, Franklin Attached Templeton Distributors, Inc. and Securities Dealers dated March 1, 1998 EX-99 (e)(iii) Amendment to Dealer Agreement dated MaY 15, 1998 Attached EX-99 (g)(i) Custody Agreement dated September 7, 1993 Attached EX-99 (g)(ii) Amendment to the Custody Agreement dated March 2, 1998 Attached EX-99 (g)(iii) Amendment No. 2 to the Custody Agreement dated July 23, 1998 Attached EX-99 (g)(iv) Amendment No. 3 to the Custody Agreement dated May 1, 2001 Attached EX-99 (h)(i) Form of Transfer Agent Agreement between Registrant and Attached Franklin Templeton Investor Services, LLC EX-99 (h)(ii) Form of Fund Administration Agreement Attached EX-99 (j)(i) Consent of Independent Auditors - PricewaterhouseCoopers LLP Attached EX-99 (m)(i) Form of Distribution Plan - Class A Shares Attached EX-99 (m)(ii) Form of Distribution Plan - Class C Shares Attached EX-99 (m)(iii) Form of Distribution Plan - Class B Shares Attached EX-99 (m)(iv) Form of Distribution Plan - Class R Shares Attached EX-99 (n)(i) Form of Multiple Class Plan Attached EX-99 (p)(i) Code of Ethics Attached EX-99 (q)(i) Power of Attorney dated December 3, 2002 Attached
EX-99.A 3 exhibita-i.txt AGREEMENT AND DECLARATION OF TRUST AGREEMENT AND DECLARATION OF TRUST OF TEMPLETON CHINA WORLD FUND A DELAWARE STATUTORY TRUST TABLE OF CONTENTS PAGE ARTICLE I. NAME; OFFICES; REGISTERED AGENT; DEFINITIONS.................1 SECTION 1. NAME.........................................................1 SECTION 2. OFFICES OF THE TRUST.........................................1 SECTION 3. REGISTERED AGENT AND REGISTERED OFFICE.......................1 SECTION 4. DEFINITIONS..................................................1 ARTICLE II. PURPOSE OF TRUST.............................................3 ARTICLE III. SHARES.......................................................6 SECTION 1. DIVISION OF BENEFICIAL INTEREST..............................6 SECTION 2. OWNERSHIP OF SHARES..........................................7 SECTION 3. SALE OF SHARES...............................................8 SECTION 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY........8 SECTION 5. POWER OF BOARD OF TRUSTEES TO MAKE TAX STATUS ELECTION.......8 SECTION 6. ESTABLISHMENT AND DESIGNATION OF SERIES AND CLASSES..........8 (a) Assets Held with Respect to a Particular Series..........9 (b) Liabilities Held with Respect to a Particular Series or Class.........................................10 (c) Dividends, Distributions and Redemptions................11 (d) Voting..................................................11 (e) Equality................................................11 (f) Fractions...............................................11 (g) Exchange Privilege......................................11 (h) Combination of Series...................................11 (i) Dissolution or Termination..............................11 SECTION 7. INDEMNIFICATION OF SHAREHOLDERS.............................12 ARTICLE IV. THE BOARD OF TRUSTEES.......................................12 SECTION 1. NUMBER, ELECTION, TERM, REMOVAL AND RESIGNATION.............12 SECTION 2. TRUSTEE ACTION BY WRITTEN CONSENT WITHOUT A MEETING.........13 SECTION 3. POWERS; OTHER BUSINESS INTERESTS; QUORUM AND REQUIRED VOTE..13 (a) Powers..................................................13 (b) Other Business Interests................................14 (c) Quorum and Required Vote................................14 SECTION 4. PAYMENT OF EXPENSES BY THE TRUST............................14 SECTION 5. PAYMENT OF EXPENSES BY SHAREHOLDERS.........................15 SECTION 6. OWNERSHIP OF TRUST PROPERTY.................................15 SECTION 7. SERVICE CONTRACTS...........................................15 ARTICLE V. SHAREHOLDERS' VOTING POWERS AND MEETINGS....................16 SECTION 1. VOTING POWERS...............................................16 SECTION 2. QUORUM AND REQUIRED VOTE....................................17 SECTION 3. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.....17 SECTION 4. RECORD DATES................................................18 SECTION 5. ADDITIONAL PROVISIONS.......................................18 ARTICLE VI. NET ASSET VALUE; DISTRIBUTIONS; REDEMPTIONS; TRANSFERS......19 SECTION 1. DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS..............................................19 SECTION 2. REDEMPTIONS AT THE OPTION OF A SHAREHOLDER..................20 SECTION 3. REDEMPTIONS AT THE OPTION OF THE TRUST......................21 SECTION 4. TRANSFER OF SHARES..........................................21 ARTICLE VII. LIMITATION OF LIABILITY AND INDEMNIFICATION OF AGENT........21 SECTION 1. LIMITATION OF LIABILITY.....................................21 SECTION 2. INDEMNIFICATION.............................................22 (a) Indemnification by Trust................................22 (b) Exclusion of Indemnification............................22 (c) Required Approval.......................................23 (d) Advancement of Expenses.................................23 (e) Other Contractual Rights................................23 (f) Fiduciaries of Employee Benefit Plan....................23 SECTION 3. INSURANCE...................................................23 SECTION 4. DERIVATIVE ACTIONS..........................................23 ARTICLE VIII. CERTAIN TRANSACTIONS........................................24 SECTION 1. DISSOLUTION OF TRUST OR SERIES..............................24 SECTION 2. MERGER OR CONSOLIDATION; CONVERSION; REORGANIZATION.........25 (a) Merger or Consolidation.................................25 (b) Conversion..............................................25 (c) Reorganization..........................................26 SECTION 3. MASTER FEEDER STRUCTURE.....................................26 ARTICLE IX. AMENDMENTS..................................................27 SECTION 1. AMENDMENTS GENERALLY........................................27 ARTICLE X. MISCELLANEOUS...............................................27 SECTION 1. REFERENCES; HEADINGS; COUNTERPARTS..........................27 SECTION 2. APPLICABLE LAW..............................................27 SECTION 3. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS..............27 SECTION 4. STATUTORY TRUST ONLY........................................28 SECTION 5. USE OF THE NAMES "FRANKLIN" OR "TEMPLETON"..................28 AGREEMENT AND DECLARATION OF TRUST OF TEMPLETON CHINA WORLD FUND AGREEMENT AND DECLARATION OF TRUST made as of this 3rd day of December, 2002, by the Trustees hereunder, and by the holders of Shares to be issued by the Trust hereunder as hereinafter provided. WITNESSETH: WHEREAS this Trust is being formed to carry on the business of an open-end management investment company as defined in the 1940 Act; and WHEREAS this Trust is authorized to issue its Shares in separate Series, to divide Shares of any Series into two or more classes and to issue classes of any Series, all in accordance with the provisions hereinafter set forth; and WHEREAS the Trustees have agreed to manage all property coming into their hands as trustees of a Delaware statutory trust in accordance with the provisions of the Delaware Statutory Trust Act, as amended from time to time, and the provisions hereinafter set forth; NOW, THEREFORE, the Trustees hereby declare that they will hold all cash, securities and other assets that they may from time to time acquire in any manner as Trustees hereunder IN TRUST to manage and dispose of the same upon the following terms and conditions for the benefit of the holders from time to time of Shares created hereunder as hereinafter set forth. ARTICLE I. NAME; OFFICES; REGISTERED AGENT; DEFINITIONS Section 1. NAME. This Trust shall be known as "Templeton China World Fund" and the Board of Trustees shall conduct the business of the Trust under that name, or any other name as it may from time to time designate. Section 2. OFFICES OF THE TRUST. The Board may at any time establish offices of the Trust at any place or places where the Trust intends to do business. Section 3. REGISTERED AGENT AND REGISTERED OFFICE. The name of the registered agent of the Trust and the address of the registered office of the Trust are as set forth in the Trust's Certificate of Trust. Section 4. DEFINITIONS. Whenever used herein, unless otherwise required by the context or specifically provided: (a) "1940 ACT" shall mean the Investment Company Act of 1940 and the rules and regulations thereunder, all as adopted or amended from time to time; (b) "AFFILIATE" shall have the same meaning as "affiliated person" as such term is defined in the 1940 Act when used with reference to a specified Person, as defined below. (c) "BOARD OF TRUSTEES" shall mean the governing body of the Trust, that is comprised of the number of Trustees of the Trust fixed from time to time pursuant to Article IV hereof, having the powers and duties set forth herein; (d) "BY-LAWS" shall mean By-Laws of the Trust, as amended or restated from time to time in accordance with Article VIII therein. Such By-Laws may contain any provision not inconsistent with applicable law or this Declaration of Trust, relating to the governance of the Trust; (e) "CERTIFICATE OF TRUST" shall mean the certificate of trust of the Trust to be filed with the office of the Secretary of State of the State of Delaware as required under the Delaware Statutory Trust Act, as amended from time to time, to form the Trust, as such certificate shall be amended or restated from time to time and filed with such office; (f) "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations thereunder, all as adopted or amended from time to time; (g) "COMMISSION" shall have the meaning given that term in the 1940 Act; (h) "DSTA" shall mean the Delaware Statutory Trust Act (12 DEL. C.ss.3801, ET SEQ.), as amended from time to time; (i) "DECLARATION OF TRUST" shall mean this Agreement and Declaration of Trust, as amended or restated from time to time; (j) "GENERAL LIABILITIES" shall have the meaning given it in Article III, Section 6(b) of this Declaration Trust; (k) "INTERESTED PERSON" shall have the meaning given that term in the 1940 Act; (l) "INVESTMENT ADVISER" or "ADVISER" shall mean a Person, as defined below, furnishing services to the Trust pursuant to any investment advisory or investment management contract described in Article IV, Section 7(a) hereof; (m) "NATIONAL FINANCIAL EMERGENCY" shall mean the whole or any part of any period during (i) which an emergency exists as a result of which disposal by the Trust of securities or other assets owned by the Trust is not reasonably practicable; (ii) which it is not reasonably practicable for the Trust fairly to determine the net asset value of its assets; or (iii) such other period as the Commission may by order permit for the protection of investors; (n) "PERSON" shall mean a natural person, partnership, limited partnership, limited liability company, trust, estate, association, corporation, organization, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case, whether domestic or foreign, and a statutory trust or a foreign statutory trust; (o) "PRINCIPAL UNDERWRITER" shall have the meaning given that term in the 1940 Act; (p) "SERIES" shall refer to each Series of Shares established and designated under and in accordance with the provisions of Article III hereof and shall mean an entity such as that described in the 1940 Act; (q) "SHARES" shall mean the outstanding shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time, and shall include fractional and whole shares; (r) "SHAREHOLDER" shall mean a record owner of Shares pursuant to the By-Laws; (s) "TRUST" shall mean the Delaware statutory trust formed pursuant to this Declaration of Trust and the filing of the Certificate of Trust with the office of the Secretary of State of the State of Delaware; (t) "TRUST PROPERTY" shall mean any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust, or one or more of any Series thereof, including, without limitation, the rights referenced in Article X, Section 5 hereof; (u) "TRUSTEE" or "TRUSTEES" shall mean each Person that signs this Declaration of Trust as a trustee, so long as such signatory continues in office in accordance with the terms hereof, and all other Persons who may, from time to time, be duly elected or appointed, qualified and serving on the Board of Trustees in accordance with the provisions hereof and the By-Laws. Reference herein to a Trustee or the Trustees shall refer to such Person or Persons in such Person's or Persons' capacity as a trustee or trustees hereunder and under the By-Laws; and (v) "VOTE OF A MAJORITY OF THE OUTSTANDING VOTING SECURITIES" shall have the meaning provided under Subsection 2(a)(42) of the 1940 Act or any successor provision thereof, which Subsection, as of the date hereof, is as follows: the vote, at a meeting of the Shareholders, (i) of sixty-seven percent (67%) or more of the voting securities present in person or represented by proxy at such meeting, if the holders of more than fifty percent (50%) of the outstanding voting securities of the Trust are present or represented by proxy; or (ii) of more than fifty percent (50%) of the outstanding voting securities of the Trust, whichever is the less. ARTICLE II. PURPOSE OF TRUST The purpose of the Trust is to conduct, operate and carry on the business of a registered management investment company registered under the 1940 Act directly, or if one or more Series is established hereunder, through one or more Series, investing primarily in securities, and to exercise all of the powers granted to a statutory trust formed under the DSTA, including, without limitation, the following powers: (a) To invest and reinvest cash, to hold cash uninvested, and to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign, mortgage, transfer, exchange, distribute, write options on, lend or otherwise deal in or dispose of contracts for the future acquisition or delivery of fixed income or other securities, and securities or property of every nature and kind, including, without limitation, all types of bonds, debentures, stocks, preferred stocks, negotiable or non-negotiable instruments, obligations, evidences of indebtedness, certificates of deposit or indebtedness, commercial paper, repurchase agreements, bankers' acceptances, and other securities of any kind, issued, created, guaranteed, or sponsored by any and all Persons, including, without limitation, states, territories, and possessions of the United States and the District of Columbia and any political subdivision, agency, or instrumentality thereof, any foreign government or any political subdivision of the U.S. Government or any foreign government, or any international instrumentality, or by any bank or savings institution, or by any corporation or organization organized under the laws of the United States or of any state, territory, or possession thereof, or by any corporation or organization organized under any foreign law, or in "when issued" contracts for any such securities, to change the investments of the assets of the Trust; (b) To exercise any and all rights, powers and privileges with reference to or incident to ownership or interest, use and enjoyment of any of such securities and other instruments or property of every kind and description, including, but without limitation, the right, power and privilege to own, vote, hold, purchase, sell, negotiate, assign, exchange, lend, transfer, mortgage, hypothecate, lease, pledge or write options with respect to or otherwise deal with, dispose of, use, exercise or enjoy any rights, title, interest, powers or privileges under or with reference to any of such securities and other instruments or property, the right to consent and otherwise act with respect thereto, with power to designate one or more Persons, to exercise any of said rights, powers, and privileges in respect of any of said instruments, and to do any and all acts and things for the preservation, protection, improvement and enhancement in value of any of such securities and other instruments or property; (c) To sell, exchange, lend, pledge, mortgage, hypothecate, lease or write options with respect to or otherwise deal in any property rights relating to any or all of the assets of the Trust or any Series, subject to any requirements of the 1940 Act; (d) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such person or persons as the Trustees shall deem proper, granting to such person or persons such power and discretion with relation to securities or property as the Trustees shall deem proper; (e) To exercise powers and right of subscription or otherwise which in any manner arise out of ownership of securities; (f) To hold any security or property in a form not indicating that it is trust property, whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a custodian or subcustodian or a nominee or nominees or otherwise or to authorize the custodian or a subcustodian or a nominee or nominees to deposit the same in a securities depository, subject in each case to proper safeguards according to the usual practice of investment companies or any rules or regulations applicable thereto; (g) To consent to, or participate in, any plan for the reorganization, consolidation or merger of any corporation or issuer of any security which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay calls or subscriptions with respect to any security held in the Trust; (h) To join with other security holders in acting through a committee, depositary, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depositary or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depositary or trustee as the Trustees shall deem proper; (i) To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including but not limited to claims for taxes; (j) To enter into joint ventures, general or limited partnerships and any other combinations or associations; (k) To endorse or guarantee the payment of any notes or other obligations of any Person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof; (l) To purchase and pay for entirely out of Trust Property such insurance as the Board of Trustees may deem necessary or appropriate for the conduct of the business, including, without limitation, insurance policies insuring the assets of the Trust or payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, Investment Advisers, Principal Underwriters, or independent contractors of the Trust, individually against all claims and liabilities of every nature arising by reason of holding Shares, holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such Person as Trustee, officer, employee, agent, Investment Adviser, Principal Underwriter, or independent contractor, to the fullest extent permitted by this Declaration of Trust, the By-Laws and by applicable law; and (m) To adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust. (n) To purchase or otherwise acquire, own, hold, sell, negotiate, exchange, assign, transfer, mortgage, pledge or otherwise deal with, dispose of, use, exercise or enjoy, property of all kinds. (o) To buy, sell, mortgage, encumber, hold, own, exchange, rent or otherwise acquire and dispose of, and to develop, improve, manage, subdivide, and generally to deal and trade in real property, improved and unimproved, and wheresoever situated; and to build, erect, construct, alter and maintain buildings, structures, and other improvements on real property. (p) To borrow or raise moneys for any of the purposes of the Trust, and to mortgage or pledge the whole or any part of the property and franchises of the Trust, real, personal, and mixed, tangible or intangible, and wheresoever situated. (q) To enter into, make and perform contracts and undertakings of every kind for any lawful purpose, without limit as to amount. (r) To issue, purchase, sell and transfer, reacquire, hold, trade and deal in Shares, bonds, debentures and other securities, instruments or other property of the Trust, from time to time, to such extent as the Board of Trustees shall, consistent with the provisions of this Declaration of Trust, determine; and to re-acquire and redeem, from time to time, its Shares or, if any, its bonds, debentures and other securities. The Trust shall not be limited to investing in obligations maturing before the possible dissolution of the Trust or one or more of its Series. Neither the Trust nor the Board of Trustees shall be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder. The foregoing clauses shall each be construed as purposes, objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific purposes, objects and powers shall not be held to limit or restrict in any manner the powers of the Trust, and that they are in furtherance of, and in addition to, and not in limitation of, the general powers conferred upon the Trust by the DSTA and the other laws of the State of Delaware or otherwise; nor shall the enumeration of one thing be deemed to exclude another, although it be of like nature, not expressed. ARTICLE III. SHARES Section 1. DIVISION OF BENEFICIAL INTEREST. (a) The beneficial interest in the Trust shall at all times be divided into outstanding shares of the Trust, all without par value. The number of shares of beneficial interest in the Trust authorized hereunder is unlimited. The Board of Trustees may authorize the division of Shares into separate and distinct Series and the division of any Series into separate classes of Shares in accordance with the 1940 Act. The different Series and classes shall be established and designated pursuant to Article III, Section 6 hereof. If no separate Series or classes of Series shall be established, the Shares shall have the rights, powers and duties provided for herein and in Article III, Section 6 hereof to the extent relevant and not otherwise provided for herein, and all references to Series and classes shall be construed (as the context may require) to refer to the Trust. The fact that a Series shall have initially been established and designated without any specific establishment or designation of classes (i.e., that all Shares of such Series are initially of a single class) shall not limit the authority of the Board of Trustees to establish and designate separate classes of said Series. The fact that a Series shall have more than one established and designated class, shall not limit the authority of the Board of Trustees to establish and designate additional classes of said Series, or to establish and designate separate classes of the previously established and designated classes. (b) The Board of Trustees shall have the power to issue authorized, but unissued shares of beneficial interest of the Trust, or any Series and class thereof, from time to time for such consideration paid wholly or partly in cash or securities as may be determined from time to time by the Board of Trustees, subject to any requirements or limitations of the 1940 Act. The Board of Trustees, on behalf of the Trust, may acquire and hold as treasury shares, reissue for such consideration and on such terms as it may determine, or cancel, at its discretion from time to time, any Shares reacquired by the Trust. The Board of Trustees may classify or reclassify any unissued shares of beneficial interest or any shares of beneficial interest of the Trust or any Series or class thereof, that were previously issued and are reacquired, into one or more Series or classes that may be established and designated from time to time. Notwithstanding the foregoing, the Trust and any Series thereof may acquire, hold, sell and otherwise deal in, for purposes of investment or otherwise, the Shares of any other Series of the Trust or Shares of the Trust, and such Shares shall not be deemed treasury shares or cancelled. (c) Subject to the provisions of Section 6 of this Article III, each Share shall entitle the holder to voting rights as provided in Article V hereof. Shareholders shall have no preemptive or other right to subscribe for new or additional authorized, but unissued shares or other securities issued by the Trust or any Series thereof. The Board of Trustees may from time to time divide or combine the Shares of the Trust or any particular Series thereof into a greater or lesser number of Shares of the Trust or that Series, respectively. Such division or combination shall not materially change the proportionate beneficial interests of the holders of Shares of the Trust or that Series, as the case may be, in the Trust Property at the time of such division or combination that is held with respect to the Trust or that Series, as the case may be, or materially affect the rights of Shares of the Trust or any other Series. (d) Any Trustee, officer or other agent of the Trust, and any organization in which any such Person has an economic or other interest, may acquire, own, hold and dispose of shares of beneficial interest in the Trust or any Series and class thereof, whether such shares are authorized but unissued, or already outstanding, to the same extent as if such Person were not a Trustee, officer or other agent of the Trust; and the Trust or any Series may issue and sell and may purchase such Shares from any such Person or any such organization, subject to the limitations, restrictions or other provisions applicable to the sale or purchase of such shares herein and the 1940 Act. Section 2. OWNERSHIP OF SHARES. The ownership of Shares shall be recorded on the books of the Trust kept by the Trust or by a transfer or similar agent for the Trust, which books shall be maintained separately for the Shares of each Series and class thereof that has been established and designated. No certificates certifying the ownership of Shares shall be issued except as the Board of Trustees may otherwise determine from time to time. The Board of Trustees may make such rules not inconsistent with the provisions of the 1940 Act as it considers appropriate for the issuance of Share certificates, the transfer of Shares of the Trust and each Series and class thereof, if any, and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to who are the Shareholders of the Trust and each Series and class thereof and as to the number of Shares of the Trust and each Series and class thereof held from time to time by each such Shareholder. Section 3. SALE OF SHARES. Subject to the 1940 Act and applicable law, the Trust may sell its authorized but unissued shares of beneficial interest to such Persons, at such times, on such terms, and for such consideration as the Board of Trustees may from time to time authorize. Each sale shall be credited to the individual purchaser's account in the form of full or fractional Shares of the Trust or such Series thereof (and class thereof, if any), as the purchaser may select, at the net asset value per Share, subject to Section 22 of the 1940 Act, and the rules and regulations adopted thereunder; PROVIDED, HOWEVER, that the Board of Trustees may, in its sole discretion, permit the Principal Underwriter to impose a sales charge upon any such sale. Every Shareholder by virtue of having become a Shareholder shall be deemed to have expressly assented and agreed to the terms of this Declaration of Trust and to have become bound as a party hereto. Section 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares shall be deemed to be personal property giving to Shareholders only the rights provided in this Declaration of Trust, the By-Laws, and under applicable law. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners. Subject to Article VIII, Section 1 hereof, the death, incapacity, dissolution, termination, or bankruptcy of a Shareholder during the existence of the Trust and any Series thereof shall not operate to dissolve the Trust or any such Series, nor entitle the representative of any deceased, incapacitated, dissolved, terminated or bankrupt Shareholder to an accounting or to take any action in court or elsewhere against the Trust, the Trustees or any such Series, but entitles such representative only to the rights of said deceased, incapacitated, dissolved, terminated or bankrupt Shareholder under this Declaration of Trust. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust, shall have any power to bind personally any Shareholder, nor, except as specifically provided herein, to call upon any Shareholder for the payment of any sum of money other than such as the Shareholder may at any time personally agree to pay. Each Share, when issued on the terms determined by the Board of Trustees, shall be fully paid and nonassessable. As provided in the DSTA, Shareholders shall be entitled to the same limitation of personal liability as that extended to stockholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware. Section 5. POWER OF BOARD OF TRUSTEES TO MAKE TAX STATUS ELECTION. The Board of Trustees shall have the power, in its discretion, to make such elections as to the tax status of the Trust as may be permitted or required under the Code, without the vote of any Shareholder. Section 6. ESTABLISHMENT AND DESIGNATION OF SERIES AND CLASSES. The establishment and designation of any Series or class thereof shall be effective, without the requirement of Shareholder approval, upon the adoption of a resolution by not less than a majority of the then Board of Trustees, which resolution shall set forth such establishment and designation and may provide, to the extent permitted by the DSTA, for rights, powers and duties of such Series or class thereof (including variations in the relative rights and preferences as between the different Series and classes thereof) otherwise than as provided herein. Each such resolution shall be incorporated herein by reference upon adoption. Any such resolution may be amended by a further resolution of a majority of the Board of Trustees, and if Shareholder approval would be required to make such an amendment to the language set forth in this Declaration of Trust, such further resolution shall require the same Shareholder approval that would be necessary to make such amendment to the language set forth in this Declaration of Trust. Each such further resolution shall be incorporated herein by reference upon adoption. Section 7. Each Series shall be separate and distinct from any other Series, separate and distinct records on the books of the Trust shall be maintained for each Series, and the assets and liabilities belonging to any such Series shall be held and accounted for separately from the assets and liabilities of the Trust or any other Series. Each class of a Series shall be separate and distinct from any other class of the Series. As appropriate, in a manner determined by the Board of Trustees, the liabilities belonging to any such class of the Series shall be held and accounted for separately from the liabilities of the Trust, the Series or any other class of the Series and separate and distinct records on the books of the Trust for the class of the Series shall be maintained for this purpose. Subject to Article II hereof, each such Series shall operate as a separate and distinct investment medium, with separately defined investment objectives and policies and a distinct investment purpose. Shares of each Series (and class thereof where applicable) established and designated pursuant to this Section 6, unless otherwise provided to the extent permitted by the DSTA, in the resolution establishing and designating such Series or class, shall have the following rights, powers and duties: (a) ASSETS HELD WITH RESPECT TO A PARTICULAR SERIES. All consideration received by the Trust for the issue or sale of Shares of a particular Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably be held with respect to that Series for all purposes, subject only to the rights of creditors with respect to that Series, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets held with respect to" that Series. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments which are not readily identifiable as assets held with respect to any particular Series (collectively "General Assets"), the Board of Trustees, or an appropriate officer as determined by the Board of Trustees, shall allocate such General Assets to, between or among any one or more of the Series in such manner and on such basis as the Board of Trustees, in its sole discretion, deems fair and equitable, and any General Asset so allocated to a particular Series shall be held with respect to that Series. Each such allocation by or under the direction of the Board of Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes. (b) LIABILITIES HELD WITH RESPECT TO A PARTICULAR SERIES OR CLASS. The assets of the Trust held with respect to a particular Series shall be charged against the liabilities, debts, obligations, costs, charges, reserves and expenses of the Trust incurred, contracted for or otherwise existing with respect to such Series. Such liabilities, debts, obligations, costs, charges, reserves and expenses incurred, contracted for or otherwise existing with respect to a particular Series are herein referred to as "liabilities held with respect to" that Series. Any liabilities, debts, obligations, costs, charges, reserves and expenses of the Trust which are not readily identifiable as being liabilities held with respect to any particular Series (collectively "General Liabilities") shall be allocated by the Board of Trustees, or an appropriate officer as determined by the Board of Trustees, to and among any one or more of the Series in such manner and on such basis as the Board of Trustees in its sole discretion deems fair and equitable. Each allocation of liabilities, debts, obligations, costs, charges, reserves and expenses by or under the direction of the Board of Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes. All Persons who have extended credit that has been allocated to a particular Series, or who have a claim or contract that has been allocated to any particular Series, shall look, and shall be required by contract to look exclusively, to the assets of that particular Series for payment of such credit, claim, or contract. In the absence of an express contractual agreement so limiting the claims of such creditors, claimants and contract providers, each creditor, claimant and contract provider shall be deemed nevertheless to have impliedly agreed to such limitation. Subject to the right of the Board of Trustees in its discretion to allocate General Liabilities as provided herein, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series, whether such Series is now authorized and existing pursuant to this Declaration of Trust or is hereafter authorized and existing pursuant to this Declaration of Trust, shall be enforceable against the assets held with respect to that Series only, and not against the assets of any other Series or the Trust generally and none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other Series thereof shall be enforceable against the assets held with respect to such Series. Notice of this limitation on liabilities between and among Series shall be set forth in the Certificate of Trust to be filed in the Office of the Secretary of State of the State of Delaware pursuant to the DSTA, and upon the giving of such notice in the Certificate of Trust, the statutory provisions of Section 3804 of the DSTA relating to limitations on liabilities between and among Series (and the statutory effect under Section 3804 of setting forth such notice in the Certificate of Trust) shall become applicable to the Trust and each Series. Liabilities, debts, obligations, costs, charges, reserves and expenses related to the distribution of, and other identified expenses that should properly be allocated to, the Shares of a particular class may be charged to and borne solely by such class. The bearing of expenses solely by a particular class of Shares may be appropriately reflected (in a manner determined by the Board of Trustees) and may affect the net asset value attributable to, and the dividend, redemption and liquidation rights of, such class. Each allocation of liabilities, debts, obligations, costs, charges, reserves and expenses by or under the direction of the Board of Trustees shall be conclusive and binding upon the Shareholders of all classes for all purposes. All Persons who have extended credit that has been allocated to a particular class, or who have a claim or contract that has been allocated to any particular class, shall look, and may be required by contract to look exclusively, to that particular class for payment of such credit, claim, or contract. (c) DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Notwithstanding any other provisions of this Declaration of Trust, including, without limitation, Article VI hereof, no dividend or distribution including, without limitation, any distribution paid upon dissolution of the Trust or of any Series with respect to, nor any redemption of, the Shares of any Series or class of such Series shall be effected by the Trust other than from the assets held with respect to such Series, nor, except as specifically provided in Section 7 of this Article III, shall any Shareholder of any particular Series otherwise have any right or claim against the assets held with respect to any other Series or the Trust generally except, in the case of a right or claim against the assets held with respect to any other Series, to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series. The Board of Trustees shall have full discretion, to the extent not inconsistent with the 1940 Act, to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders. (d) VOTING. All Shares of the Trust entitled to vote on a matter shall vote on the matter, separately by Series and, if applicable, by class, PROVIDED THAT: (1) where the 1940 Act requires all Shares of the Trust to be voted in the aggregate without differentiation between the separate Series or classes, then all of the Trust's Shares shall vote in the aggregate; and (2) if any matter affects only the interests of some but not all Series or classes, then only the Shareholders of such affected Series or classes shall be entitled to vote on the matter. (e) EQUALITY. Each Share of any particular Series shall be equal to each other Share of such Series (subject to the rights and preferences with respect to separate classes of such Series). (f) FRACTIONS. A fractional Share of a Series shall carry proportionately all the rights and obligations of a whole Share of such Series, including rights with respect to voting, receipt of dividends and distributions, redemption of Shares and dissolution of the Trust or that Series. (g) EXCHANGE PRIVILEGE. The Board of Trustees shall have the authority to provide that the holders of Shares of any Series shall have the right to exchange said Shares for Shares of one or more other Series in accordance with such requirements and procedures as may be established by the Board of Trustees, and in accordance with the 1940 Act. (h) COMBINATION OF SERIES. The Board of Trustees shall have the authority, without the approval of the Shareholders of any Series unless otherwise required by applicable law, to combine the assets and liabilities held with respect to any two or more Series into assets and liabilities held with respect to a single Series; PROVIDED that upon completion of such combination of Series, the proportionate interest of each Shareholder, in the assets and liabilities held with respect to the combined Series shall equal the proportionate interest of each such Shareholder in the assets and liabilities held with respect to each Series that was combined. (i) DISSOLUTION OR TERMINATION. Any particular Series shall be dissolved upon the occurrence of the applicable dissolution events set forth in Article VIII, Section 1 hereof. Upon dissolution of a particular Series, the Trustees shall wind up the affairs of such Series in accordance with Article VIII Section 1 hereof and thereafter, rescind the establishment and designation thereof. The Board of Trustees shall terminate any particular class and rescind the establishment and designation thereof upon the vote of the holders of not less than a majority of the Shares outstanding and entitled to vote of such class. In addition, at any time there are no Shares outstanding of a particular class, the Board of Trustees may terminate such class and rescind the establishment and designation thereof; PROVIDED, HOWEVER, that upon the rescission of the establishment and designation of any particular Series, every class of such Series shall thereby be terminated and its establishment and designation rescinded. Each resolution of the Board of Trustees pursuant to this Section 6(i) shall be incorporated herein by reference upon adoption. Section 8. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder or former Shareholder shall be exposed to liability by reason of a claim or demand relating exclusively to his or her being or having been a Shareholder of the Trust or a Shareholder of a particular Series thereof, and not because of such Shareholder's actions or omissions, such Shareholder or former Shareholder (or, in the case of a natural person, his or her heirs, executors, administrators, or other legal representatives or, in the case of a corporation or other entity, its corporate or other general successor) shall be entitled to be held harmless from and indemnified out of the assets of the Trust or out of the assets of such Series thereof, as the case may be, against all loss and expense arising from such claim or demand; PROVIDED, HOWEVER, such indemnity shall not cover (i) any taxes due or paid by reason of such Shareholder's ownership of any Shares and (ii) expenses charged to a Shareholder pursuant to Article IV, Section 5 hereof. ARTICLE IV. THE BOARD OF TRUSTEES Section 1. NUMBER, ELECTION, TERM, REMOVAL AND RESIGNATION. (a) The initial Board of Trustees shall be comprised of the Trustees entering into this Declaration of Trust on the date first written above, who shall hold office until the initial holder of a Share executes a consent in writing to elect a Board of Trustees that holds office in accordance with paragraph (c) of this Section 1. The initial Trustees shall (i) execute and file or cause to be filed the Certificate of Trust with the office of the Secretary of State of the State of Delaware and (ii) adopt the By-Laws. Each Trustee shall execute a counterpart to this Declaration of Trust. (b) The number of Trustees constituting the entire Board of Trustees may be fixed from time to time by the vote of a majority of the then Board of Trustees; PROVIDED, HOWEVER, that the number of Trustees shall in no event be less than one (1) nor more than fifteen (15) and the percentage of Trustees who are not Interested Persons of the Trust shall be no less than that permitted by the 1940 Act. The number of Trustees shall not be reduced so as to shorten the term of any Trustee then in office. (c) Each Trustee shall hold office for the lifetime of the Trust or until such Trustee's earlier death, resignation, removal or inability otherwise to serve, or, if sooner than any of such events, until the next meeting of Shareholders called for the purpose of electing Trustees or consent of Shareholders in lieu thereof for the election of Trustees, and until the election and qualification of his or her successor. (d) Any Trustee may be removed, with or without cause, by the Board of Trustees, by action of a majority of the Trustees. Shareholders shall have the power to remove a Trustee only to the extent provided by the 1940 Act. (e) Any Trustee may resign at any time by giving written notice to the secretary of the Trust or to a meeting of the Board of Trustees. Such resignation shall be effective upon receipt, unless specified to be effective at some later time. Section 2. TRUSTEE ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action that may be taken at any meeting of the Board of Trustees or any committee thereof may be taken without a meeting and without prior written notice if a consent or consents in writing setting forth the action so taken is signed by the Trustees having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all Trustees on the Board of Trustees or any committee thereof, as the case may be, were present and voted. A consent transmitted by electronic transmission (as defined in the DSTA) by a Trustee shall be deemed to be written and signed for purposes of this Section. All such consents shall be filed with the secretary of the Trust and shall be maintained in the Trust's records. Section 3. POWERS; OTHER BUSINESS INTERESTS; QUORUM AND REQUIRED VOTE. (a) POWERS. Subject to the provisions of this Declaration of Trust, the business of the Trust (including every Series thereof) shall be managed by or under the direction of the Board of Trustees, and such Board of Trustees shall have all powers necessary or convenient to carry out that responsibility. The Board of Trustees shall have full power and authority to do any and all acts and to make and execute any and all contracts and instruments that it may consider necessary or appropriate in connection with the operation and administration of the Trust (including every Series thereof). The Board of Trustees shall not be bound or limited by present or future laws or customs with regard to investments by trustees or fiduciaries, but, subject to the other provisions of this Declaration of Trust and the By-Laws, shall have full authority and absolute power and control over the assets and the business of the Trust (including every Series thereof) to the same extent as if the Board of Trustees was the sole owner of such assets and business in its own right, including such authority, power and control to do all acts and things as it, in its sole discretion, shall deem proper to accomplish the purposes of this Trust. Without limiting the foregoing, the Board of Trustees may, subject to the requisite vote for such actions as set forth in this Declaration of Trust and the By-Laws: (1) adopt By-Laws not inconsistent with applicable law or this Declaration of Trust; (2) amend, restate and repeal such By-Laws, subject to and in accordance with the provisions of such By-Laws; (3) fill vacancies on the Board of Trustees in accordance with this Declaration of Trust and the By-Laws; (4) elect and remove such officers and appoint and terminate such agents as it considers appropriate, in accordance with this Declaration of Trust and the By-Laws; (5) establish and terminate one or more committees of the Board of Trustees pursuant to the By-Laws; (6) place Trust Property in custody as required by the 1940 Act, employ one or more custodians of the Trust Property and authorize such custodians to employ sub-custodians and to place all or any part of such Trust Property with a custodian or a custodial system meeting the requirements of the 1940 Act; (7) retain a transfer agent, dividend disbursing agent, a shareholder servicing agent or administrative services agent, or any number thereof or any other service provider as deemed appropriate; (8) provide for the issuance and distribution of shares of beneficial interest in the Trust or other securities or financial instruments directly or through one or more Principal Underwriters or otherwise; (9) retain one or more Investment Adviser(s); (10) re-acquire and redeem Shares on behalf of the Trust and transfer Shares pursuant to applicable law; (11) set record dates for the determination of Shareholders with respect to various matters, in the manner provided in Article V, Section 4 of this Declaration of Trust; (12) declare and pay dividends and distributions to Shareholders from the Trust Property, in accordance with this Declaration of Trust and the By-Laws; (13) establish and designate from time to time, in accordance with the provisions of Article III, Section 6 hereof, any Series or class thereof; and (14) in general delegate such authority as it considers desirable to any officer of the Trust, to any committee of the Trust and to any agent or employee of the Trust or to any such custodian, transfer, dividend disbursing, shareholder servicing agent, Principal Underwriter, Investment Adviser, or other service provider, to the extent authorized and in accordance with this Declaration of Trust, the By-Laws and applicable law. The powers of the Board of Trustees set forth in this Section 3(a) are without prejudice to any other powers of the Board of Trustees set forth in this Declaration of Trust and the By-Laws. Any determination as to what is in the best interests of the Trust or any Series (or class) thereof and its Shareholders made by the Board of Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Board of Trustees. (b) OTHER BUSINESS INTERESTS. The Trustees shall devote to the affairs of the Trust (including every Series thereof) such time as may be necessary for the proper performance of their duties hereunder, but neither the Trustees nor the officers, directors, shareholders, partners or employees of the Trustees, if any, shall be expected to devote their full time to the performance of such duties. The Trustees, or any Affiliate, shareholder, officer, director, partner or employee thereof, or any Person owning a legal or beneficial interest therein, may engage in, or possess an interest in, any business or venture other than the Trust or any Series thereof, of any nature and description, independently or with or for the account of others. None of the Trust, any Series thereof or any Shareholder shall have the right to participate or share in such other business or venture or any profit or compensation derived therefrom. (c) QUORUM AND REQUIRED VOTE. At all meetings of the Board of Trustees, a majority of the Board of Trustees shall be present in person in order to constitute a quorum for the transaction of business. A meeting at which a quorum is initially present may continue to transact business notwithstanding the departure of Trustees from the meeting, if any action taken is approved by at least a majority of the required quorum for that meeting. Subject to Article III, Sections 1 and 6 of the By-Laws and except as otherwise provided herein or required by applicable law, the vote of not less than a majority of the Trustees present at a meeting at which a quorum is present shall be the act of the Board of Trustees. Section 4. PAYMENT OF EXPENSES BY THE TRUST. An authorized officer of the Trust shall pay or cause to be paid out of the principal or income of the Trust or any particular Series or class thereof, or partly out of the principal and partly out of the income of the Trust or any particular Series or class thereof, and charge or allocate the same to, between or among such one or more of the Series or class that may be established or designated pursuant to Article III, Section 6 hereof, as such officer deems fair, all expenses, fees, charges, taxes and liabilities incurred by or arising in connection with the maintenance or operation of the Trust or a particular Series or class thereof, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses, fees, charges, taxes and liabilities associated with the services of the Trust's officers, employees, Investment Adviser(s), Principal Underwriter, auditors, counsel, custodian, sub-custodian, transfer agent, dividend disbursing agent, shareholder servicing agent, and such other agents or independent contractors and such other expenses, fees, charges, taxes and liabilities as the Board of Trustees may deem necessary or proper to incur. Section 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Board of Trustees shall have the power, as frequently as it may determine, to cause any Shareholder of the Trust, or any Shareholder of any particular Series thereof, to pay directly, in advance or arrears, for charges of the Trust's custodian or transfer, dividend disbursing, shareholder servicing or similar agent for services provided to such Shareholder, an amount fixed from time to time by the Board of Trustees, by setting off such amount due from such Shareholder from the amount of (i) declared but unpaid dividends or distributions owed such Shareholder, or (ii) proceeds from the redemption by the Trust of Shares from such Shareholder pursuant to Article VI hereof. Section 6. OWNERSHIP OF TRUST PROPERTY. Legal title to all of the Trust Property shall at all times be vested in the Trust, except that the Board of Trustees shall have the power to cause legal title to any Trust Property to be held by or in the name of any Person as nominee, on such terms as the Board of Trustees may determine, in accordance with applicable law. Section 7. SERVICE CONTRACTS. (a) Subject to this Declaration of Trust, the By-Laws and the 1940 Act, the Board of Trustees may, at any time and from time to time, contract for exclusive or nonexclusive investment advisory or investment management services for the Trust or for any Series thereof with any corporation, trust, association or other organization, including any Affiliate; and any such contract may contain such other terms as the Board of Trustees may determine, including without limitation, delegation of authority to the Investment Adviser to determine from time to time without prior consultation with the Board of Trustees what securities and other instruments or property shall be purchased or otherwise acquired, owned, held, invested or reinvested in, sold, exchanged, transferred, mortgaged, pledged, assigned, negotiated, or otherwise dealt with or disposed of, and what portion, if any, of the Trust Property shall be held uninvested and to make changes in the Trust's or a particular Series' investments, or to engage in such other activities, including administrative services, as may specifically be delegated to such party. (b) The Board of Trustees may also, at any time and from time to time, contract with any Person, including any Affiliate, appointing it or them as the exclusive or nonexclusive placement agent, distributor or Principal Underwriter for the shares of beneficial interest of the Trust or one or more of the Series or classes thereof, or for other securities or financial instruments to be issued by the Trust, or appointing it or them to act as the administrator, custodian, transfer agent, dividend disbursing agent and/or shareholder servicing agent for the Trust or one or more of the Series or classes thereof. (c) The Board of Trustees is further empowered, at any time and from time to time, to contract with any Persons to provide such other services to the Trust or one or more of its Series, as the Board of Trustees determines to be in the best interests of the Trust, such Series and its Shareholders. (d) None of the following facts or circumstances shall affect the validity of any of the following contracts or disqualify any Shareholder, Trustee, employee or officer of the Trust from voting upon or executing the same, or create any liability or accountability to the Trust, any Series thereof or the Shareholders, provided that the establishment of and performance of each such contract is permissible under the 1940 Act, and provided further that such Person is authorized to vote upon such contract under the 1940 Act: (i) the fact that any of the Shareholders, Trustees, employees or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, manager, Adviser, placement agent, Principal Underwriter, distributor, or Affiliate or agent of or for any Person, or for any parent or Affiliate of any Person, with which any type of service contract provided for in this Article IV, Section 7 may have been or may hereafter be made, or that any such Person, or any parent or Affiliate thereof, is a Shareholder or has an interest in the Trust, or (ii) the fact that any Person with which any type of service contract provided for in this Article IV, Section 7 may have been or may hereafter be made also has such a service contract with one or more other Persons, or has other business or interests. (e) Every contract referred to in this Section 7 is required to comply with this Declaration of Trust, the By-Laws, the 1940 Act, other applicable law and any stipulation by resolution of the Board of Trustees. ARTICLE V. SHAREHOLDERS' VOTING POWERS AND MEETINGS Section 1. VOTING POWERS. Subject to the provisions of Article III, Section 6 hereof, the Shareholders shall have the power to vote only (i) on such matters required by this Declaration of Trust, the By-Laws, the 1940 Act, other applicable law and any registration statement of the Trust filed with the Commission, the registration of which is effective; and (ii) on such other matters as the Board of Trustees may consider necessary or desirable. Subject to Article III hereof, the Shareholder of record (as of the record date established pursuant to Section 4 of this Article V) of each Share shall be entitled to one vote for each full Share, and a fractional vote for each fractional Share. Shareholders shall not be entitled to cumulative voting in the election of Trustees or on any other matter. Section 2. QUORUM AND REQUIRED VOTE. (a) Forty percent (40%) of the Shares entitled to vote at a Shareholders' meeting, which are present in person or represented by proxy, shall constitute a quorum at the Shareholders' meeting, except when a larger quorum is required by this Declaration of Trust, the By-Laws, applicable law or the requirements of any securities exchange on which Shares are listed for trading, in which case such quorum shall comply with such requirements. When a separate vote by one or more Series or classes is required, forty percent (40%) of the Shares of each such Series or class entitled to vote at a Shareholders' meeting of such Series or class, which are present in person or represented by proxy, shall constitute a quorum at the Shareholders' meeting of such Series or class, except when a larger quorum is required by this Declaration of Trust, the By-Laws, applicable law or the requirements of any securities exchange on which Shares of such Series or class are listed for trading, in which case such quorum shall comply with such requirements. (b) Subject to any provision of this Declaration of Trust, the By-Laws, the 1940 Act or other applicable law that requires a different vote: (1) in all matters other than the election of Trustees, the affirmative "vote of a majority of the outstanding voting securities" (as defined herein) of the Trust entitled to vote at a Shareholders' meeting at which a quorum is present, shall be the act of the Shareholders; and (2) Trustees shall be elected by not less than a plurality of the votes cast of the holders of Shares entitled to vote present in person or represented by proxy at a Shareholders' meeting at which a quorum is present. Pursuant to Article III, Section 6(d) hereof, where a separate vote by Series and, if applicable, by classes is required, the preceding sentence shall apply to such separate votes by Series and classes. (c) Abstentions and broker non-votes will be treated as votes present at a Shareholders' meeting, but will not be treated as votes cast. Abstentions and broker non-votes, therefore (i) will be included for purposes of determining whether a quorum is present, and (ii) will have no effect on proposals which require a plurality or majority of votes cast for approval, but (iii) will have the same effect as a vote "against" on proposals requiring any percentage of the outstanding voting securities of the Trust for approval. Section 3. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any meeting of Shareholders may be taken without a meeting and without prior notice if a consent or consents in writing setting forth the action so taken is signed by the holders of all Shares entitled to vote on that action, and is received by the secretary of the Trust. A consent transmitted by electronic transmission (as defined in the DSTA) by a Shareholder or by a person or persons authorized to act for a Shareholder shall be deemed to be written and signed for purposes of this Section. All such consents shall be filed with the secretary of the Trust and shall be maintained in the Trust's records. Any Shareholder that has given a written consent or the Shareholder's proxyholder or a personal representative of the Shareholder or its respective proxyholder may revoke the consent by a writing received by the secretary of the Trust before the written consents of all Shares entitled to vote have been received by the secretary of the Trust. Section 4. RECORD DATES. (a) For purposes of determining the Shareholders entitled to notice of, and to vote at, any meeting of Shareholders, the Board of Trustees may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Trustees, and which record date shall not be more than one hundred and twenty (120) days nor less than ten (10) days before the date of any such meeting. For purposes of determining the Shareholders entitled to vote on any action without a meeting, the Board of Trustees may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Trustees, and which record date shall not be more than thirty (30) days after the date upon which the resolution fixing the record date is adopted by the Board of Trustees. (b) If the Board of Trustees does not so fix a record date: (i) the record date for determining Shareholders entitled to notice of, and to vote at, a meeting of Shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) the record date for determining Shareholders entitled to vote on any action by consent in writing without a meeting of Shareholders, (1) when no prior action by the Board of Trustees has been taken, shall be the day on which the first signed written consent setting forth the action taken is delivered to the Trust, or (2) when prior action of the Board of Trustees has been taken, shall be at the close of business on the day on which the Board of Trustees adopts the resolution taking such prior action. (c) For the purpose of determining the Shareholders of the Trust or any Series or class thereof who are entitled to receive payment of any dividend or of any other distribution of assets of the Trust or any Series or class thereof, the Board of Trustees may from time to time fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than sixty (60) days before the date for the payment of such dividend or such other distribution. Nothing in this Section shall be construed as precluding the Board of Trustees from setting different record dates for different Series or classes. Section 5. ADDITIONAL PROVISIONS. The By-Laws may include further provisions for Shareholders' votes, meetings and related matters. ARTICLE VI. NET ASSET VALUE; DISTRIBUTIONS; REDEMPTIONS; TRANSFERS Section 1. DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS. (a) Subject to Article III, Section 6 hereof, the Board of Trustees shall have the power to determine from time to time the offering price for authorized, but unissued, shares of beneficial interest of the Trust or any Series or class thereof, respectively, that shall yield to the Trust or such Series or class not less than the net asset value thereof, at which price the Shares of the Trust or such Series or class, respectively, shall be offered for sale, subject to any other requirements or limitations of the 1940 Act. (b) Subject to Article III, Section 6 hereof, the Board of Trustees may, subject to the 1940 Act, prescribe and shall set forth in the By-Laws, this Declaration of Trust or in a resolution of the Board of Trustees such bases and time for determining the net asset value per Share of the Trust or any Series or class thereof, or net income attributable to the Shares of the Trust or any Series or class thereof or the declaration and payment of dividends and distributions on the Shares of the Trust or any Series or class thereof, as it may deem necessary or desirable. (c) The Shareholders of the Trust or any Series or class, if any, shall be entitled to receive dividends and distributions, when, if and as declared by the Board of Trustees with respect thereto, provided that with respect to classes, such dividends and distributions shall comply with the 1940 Act. The right of Shareholders to receive dividends or other distributions on Shares of any class may be set forth in a plan adopted by the Board of Trustees and amended from time to time pursuant to the 1940 Act. No Share shall have any priority or preference over any other Share of the same Series with respect to dividends or distributions paid in the ordinary course of business or distributions upon dissolution of the Trust or of such Series made pursuant to Article VIII, Section 1 hereof; provided however, that if the Shares of a Series are divided into classes thereof, no Share of a particular class shall have any priority or preference over any other Share of the same class with respect to dividends or distributions paid in the ordinary course of business or distributions upon dissolution of the Trust or of such Series made pursuant to Article VIII, Section 1 hereof. All dividends and distributions shall be made ratably among all Shareholders of the Trust or a particular Series from the Trust Property held with respect to the Trust or such Series thereof, respectively, according to the number of Shares of the Trust or such Series held of record by such Shareholders on the record date for any dividend or distribution; provided however, that if the Shares of a Series are divided into classes thereof, all dividends and distributions from the Trust Property held with respect to such Series shall be distributed to each class of such Series according to the net asset value computed for such class and within such particular class, shall be distributed ratably to the Shareholders of such class according to the number of Shares of such class held of record by such Shareholders on the record date for any dividend or distribution. Dividends may be paid in cash or in kind. (d) Before payment of any dividend there may be set aside out of any funds of the Trust, or the applicable Series thereof, available for dividends such sum or sums as the Board of Trustees may from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Trust, or any Series thereof, or for such other lawful purpose as the Board of Trustees shall deem to be in the best interests of the Trust, or the applicable Series, as the case may be, and the Board of Trustees may abolish any such reserve in the manner in which it was created. Section 2. REDEMPTIONS AT THE OPTION OF A SHAREHOLDER. Unless otherwise provided in the prospectus of the Trust relating to the Shares, as such prospectus may be amended from time to time: (a) The Trust shall purchase such Shares as are offered by any Shareholder for redemption upon the presentation of a proper instrument of transfer together with a request directed to the Trust or a Person designated by the Trust that the Trust purchase such Shares and/or in accordance with such other procedures for redemption as the Board of Trustees may from time to time authorize. If certificates have been issued to a Shareholder, any request for redemption by such Shareholder must be accompanied by surrender of any outstanding certificate or certificates for such Shares in form for transfer, together with such proof of the authenticity of signatures as may reasonably be required on such Shares and accompanied by proper stock transfer stamps, if applicable. (b) The Trust shall pay for such Shares the net asset value thereof, in accordance with this Declaration of Trust, the By-Laws, the 1940 Act and other applicable law. Payments for Shares so redeemed by the Trust shall be made in cash, except payment for such Shares may, at the option of the Board of Trustees, or such officer or officers as it may duly authorize in its complete discretion, be made in kind or partially in cash and partially in kind. In case of any payment in kind, the Board of Trustees, or its authorized officers, shall have absolute discretion as to what security or securities of the Trust or the applicable Series shall be distributed in kind and the amount of the same; and the securities shall be valued for purposes of distribution at the value at which they were appraised in computing the then current net asset value of the Shares, provided that any Shareholder who cannot legally acquire securities so distributed in kind by reason of the prohibitions of the 1940 Act or the provisions of the Employee Retirement Income Security Act of 1974, as amended, or any other applicable law, shall receive cash. Shareholders shall bear the expenses of in-kind transactions, including, but not limited to, transfer agency fees, custodian fees and costs of disposition of such securities. (c) Payment by the Trust for such redemption of Shares shall be made by the Trust to the Shareholder within seven days after the date on which the redemption request is received in proper form and/or such other procedures authorized by the Board of Trustees are complied with; provided, however, that if payment shall be made other than exclusively in cash, any securities to be delivered as part of such payment shall be delivered as promptly as any necessary transfers of such securities on the books of the several corporations whose securities are to be delivered practicably can be made, which may not necessarily occur within such seven-day period. In no case shall the Trust be liable for any delay of any corporation or other Person in transferring securities selected for delivery as all or part of any payment in kind. (d) The obligations of the Trust set forth in this Section 2 are subject to the provision that such obligations may be suspended or postponed by the Board of Trustees (1) during any time the New York Stock Exchange (the "Exchange") is closed for other than weekends or holidays; (2) if permitted by the rules of the Commission, during periods when trading on the Exchange is restricted; or (3) during any National Financial Emergency. The Board of Trustees may, in its discretion, declare that the suspension relating to a National Financial Emergency shall terminate, as the case may be, on the first business day on which the Exchange shall have reopened or the period specified above shall have expired (as to which, in the absence of an official ruling by the Commission, the determination of the Board of Trustees shall be conclusive). (e) The right of any Shareholder of the Trust or any Series or class thereof to receive dividends or other distributions on Shares redeemed and all other rights of such Shareholder with respect to the Shares so redeemed, except the right of such Shareholder to receive payment for such Shares, shall cease at the time the purchase price of such Shares shall have been fixed, as provided above. Section 3. REDEMPTIONS AT THE OPTION OF THE TRUST. At the option of the Board of Trustees the Trust may, from time to time, without the vote of the Shareholders, but subject to the 1940 Act, redeem Shares or authorize the closing of any Shareholder account, subject to such conditions as may be established by the Board of Trustees. Section 4. TRANSFER OF SHARES. Shares shall be transferable in accordance with the provisions of the By-Laws. ARTICLE VII. LIMITATION OF LIABILITY AND INDEMNIFICATION OF AGENT Section 1. LIMITATION OF LIABILITY. (a) For the purpose of this Article, "Agent" means any Person who is or was a Trustee, officer, employee or other agent of the Trust or is or was serving at the request of the Trust as a trustee, director, officer, employee or other agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "Expenses" include without limitation attorneys' fees and any expenses of establishing a right to indemnification under this Article. (b) An Agent shall be liable to the Trust and to any Shareholder solely for such Agent's own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Agent (such conduct referred to herein as "Disqualifying Conduct"), and for nothing else. (c) Subject to subsection (b) of this Section 1 and to the fullest extent that limitations on the liability of Agents are permitted by the DSTA, the Agents shall not be responsible or liable in any event for any act or omission of any other Agent of the Trust or any Investment Adviser or Principal Underwriter of the Trust. (d) No Agent, when acting in its respective capacity as such, shall be personally liable to any Person, other than the Trust or a Shareholder to the extent provided in subsections (b) and (c) of this Section 1, for any act, omission or obligation of the Trust or any Trustee thereof. (e) The officers and Trustees may obtain the advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, the By-Laws, applicable law and their respective duties as officers or Trustees. No such officer or Trustee shall be liable for any act or omission in accordance with such advice and no inference concerning liability shall arise from a failure to follow such advice. The officers and Trustees shall not be required to give any bond hereunder, nor any surety if a bond is required by applicable law. (f) The failure to make timely collection of dividends or interest, or to take timely action with respect to entitlements, on the Trust's securities issued in emerging countries, shall not be deemed to be negligence or other fault on the part of any Agent, and no Agent shall have any liability for such failure or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Trust's assets or from any war or political act of any foreign government to which such assets might be exposed, except, in the case of a Trustee or officer, for liability resulting from such Trustee's or officer's Disqualifying Conduct. (g) The limitation on liability contained in this Article applies to events occurring at the time a Person serves as an Agent whether or not such Person is an Agent at the time of any Proceeding in which liability is asserted. (h) No amendment or repeal of this Article shall adversely affect any right or protection of an Agent that exists at the time of such amendment or repeal. Section 2. INDEMNIFICATION. (a) INDEMNIFICATION BY TRUST. The Trust shall indemnify, out of Trust Property, to the fullest extent permitted under applicable law, any Person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that such Person is or was an Agent of the Trust, against Expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such Proceeding if such Person acted in good faith or in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such Person was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or plea of nolo contendere or its equivalent shall not of itself create a presumption that the Person did not act in good faith or that the Person had reasonable cause to believe that the Person's conduct was unlawful. (b) EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for any liability arising by reason of the Agent's Disqualifying Conduct. In respect of any claim, issue or matter as to which that Person shall have been adjudged to be liable in the performance of that Person's duty to the Trust or the Shareholders, indemnification shall be made only to the extent that the court in which that action was brought shall determine, upon application or otherwise, that in view of all the circumstances of the case, that Person was not liable by reason of that Person's Disqualifying Conduct. (c) REQUIRED APPROVAL. Any indemnification under this Article shall be made by the Trust if authorized in the specific case on a determination that indemnification of the Agent is proper in the circumstances by a majority vote of Trustees, even though such number of Trustees shall be less than a quorum, who are not parties to the Proceeding and have no economic or other interest in connection with such specific case; a committee of such Trustees designated by majority vote of such Trustees even though such number of Trustees shall be less than a quorum; or by independent legal counsel in a written opinion. (d) ADVANCEMENT OF EXPENSES. Expenses incurred by an Agent in defending any Proceeding may be advanced by the Trust before the final disposition of the Proceeding on receipt of an undertaking by or on behalf of the Agent to repay the amount of the advance if it shall be determined ultimately that the Agent is not entitled to be indemnified as authorized in this Article. (e) OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which Persons other than Trustees and officers of the Trust or any subsidiary thereof may be entitled by contract or otherwise. (f) FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply to any Proceeding against any trustee, investment manager or other fiduciary of an employee benefit plan in that Person's capacity as such, even though that Person may also be an Agent of the Trust as defined in Section 1 of this Article. Nothing contained in this Article shall limit any right to indemnification to which such a trustee, investment manager, or other fiduciary may be entitled by contract or otherwise which shall be enforceable to the extent permitted by applicable law other than this Article. Section 3. INSURANCE. To the fullest extent permitted by applicable law, the Board of Trustees shall have the authority to purchase with Trust Property, insurance for liability and for all Expenses reasonably incurred or paid or expected to be paid by an Agent in connection with any Proceeding in which such Agent becomes involved by virtue of such Agent's actions, or omissions to act, in its capacity or former capacity with the Trust, whether or not the Trust would have the power to indemnify such Agent against such liability. Section 4. DERIVATIVE ACTIONS. Subject to the requirements set forth in Section 3816 of the DSTA, a Shareholder or Shareholders may bring a derivative action on behalf of the Trust only if the Shareholder or Shareholders first make a pre-suit demand upon the Board of Trustees to bring the subject action unless an effort to cause the Board of Trustees to bring such action is excused. A demand on the Board of Trustees shall only be excused if a majority of the Board of Trustees, or a majority of any committee established to consider the merits of such action, has a material personal financial interest in the action at issue. A Trustee shall not be deemed to have a material personal financial interest in an action or otherwise be disqualified from ruling on a Shareholder demand by virtue of the fact that such Trustee receives remuneration from his service on the Board of Trustees of the Trust or on the boards of one or more investment companies with the same or an affiliated investment advisor or underwriter. ARTICLE VIII. CERTAIN TRANSACTIONS Section 1. DISSOLUTION OF TRUST OR SERIES. The Trust and each Series shall have perpetual existence, except that the Trust (or a particular Series) shall be dissolved: (a) With respect to the Trust, (i) upon the vote of the holders of not less than a majority of the Shares of the Trust entitled to vote or (ii) at the discretion of the Board of Trustees at any time there are no Shares outstanding of the Trust; or (b) With respect to a particular Series, (i) upon the vote of the holders of not less than a majority of the Shares of that Series entitled to vote or (ii) at the discretion of the Board of Trustees at any time there are no Shares outstanding of that Series; or (c) With respect to the Trust (or a particular Series), upon the occurrence of a dissolution or termination event pursuant to any other provision of this Declaration of Trust or the DSTA; or (d) With respect to any Series, upon any event that causes the dissolution of the Trust. Upon dissolution of the Trust (or a particular Series, as the case may be), the Board of Trustees shall (in accordance with Section 3808 of the DSTA) pay or make reasonable provision to pay all claims and obligations of the Trust and/or each Series (or the particular Series, as the case may be), including all contingent, conditional or unmatured claims and obligations known to the Trust, and all claims and obligations which are known to the Trust, but for which the identity of the claimant is unknown. If there are sufficient assets held with respect to the Trust and/or each Series of the Trust (or the particular Series, as the case may be), such claims and obligations shall be paid in full and any such provisions for payment shall be made in full. If there are insufficient assets held with respect to the Trust and/or each Series of the Trust (or the particular Series, as the case may be), such claims and obligations shall be paid or provided for according to their priority and, among claims and obligations of equal priority, ratably to the extent of assets available therefore. Any remaining assets (including, without limitation, cash, securities or any combination thereof) held with respect to the Trust and/or each Series of the Trust (or the particular Series, as the case may be) shall be distributed to the Shareholders of the Trust and/or each Series of the Trust (or the particular Series, as the case may be) ratably according to the number of Shares of the Trust and/or such Series thereof (or the particular Series, as the case may be) held of record by the several Shareholders on the date for such dissolution distribution; provided, however, that if the Shares of a Series are divided into classes thereof, any remaining assets (including, without limitation, cash, securities or any combination thereof) held with respect to such Series shall be distributed to each class of such Series according to the net asset value computed for such class and within such particular class, shall be distributed ratably to the Shareholders of such class according to the number of Shares of such class held of record by the several Shareholders on the date for such dissolution distribution. Upon the winding up of the Trust in accordance with Section 3808 of the DSTA and its termination, any one (1) Trustee shall execute, and cause to be filed, a certificate of cancellation, with the office of the Secretary of State of the State of Delaware in accordance with the provisions of Section 3810 of the DSTA. Section 2. MERGER OR CONSOLIDATION; CONVERSION; REORGANIZATION. (a) MERGER OR CONSOLIDATION. Pursuant to an agreement of merger or consolidation, the Board of Trustees, by vote of a majority of the Trustees, may cause the Trust to merge or consolidate with or into one or more statutory trusts or "other business entities" (as defined in Section 3801 of the DSTA) formed or organized or existing under the laws of the State of Delaware or any other state or the United States or any foreign country or other foreign jurisdiction. Any such merger or consolidation shall not require the vote of the Shareholders unless such vote is required by the 1940 Act; provided however, that the Board of Trustees shall provide thirty (30) days' prior written notice to the Shareholders of such merger or consolidation. By reference to Section 3815(f) of the DSTA, any agreement of merger or consolidation approved in accordance with this Section 2(a) may, without a Shareholder vote, unless required by the 1940 Act, the requirements of any securities exchange on which Shares are listed for trading or any other provision of this Declaration of Trust or the By-Laws, effect any amendment to this Declaration of Trust or the By-Laws or effect the adoption of a new governing instrument if the Trust is the surviving or resulting statutory trust in the merger or consolidation, which amendment or new governing instrument shall be effective at the effective time or date of the merger or consolidation. In all respects not governed by the DSTA, the 1940 Act, other applicable law or the requirements of any securities exchange on which Shares are listed for trading, the Board of Trustees shall have the power to prescribe additional procedures necessary or appropriate to accomplish a merger or consolidation, including the power to create one or more separate statutory trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares into beneficial interests in such separate statutory trust or trusts. Upon completion of the merger or consolidation, if the Trust is the surviving or resulting statutory trust, any one (1) Trustee shall execute, and cause to be filed, a certificate of merger or consolidation in accordance with Section 3815 of the DSTA. (b) CONVERSION. The Board of Trustees, by vote of a majority of the Trustees, may cause (i) the Trust to convert to an "other business entity" (as defined in Section 3801 of the DSTA) formed or organized under the laws of the State of Delaware as permitted pursuant to Section 3821 of the DSTA; (ii) the Shares of the Trust or any Series to be converted into beneficial interests in another statutory trust (or series thereof) created pursuant to this Section 2 of this Article VIII, or (iii) the Shares to be exchanged under or pursuant to any state or federal statute to the extent permitted by law. Any such statutory conversion, Share conversion or Share exchange shall not require the vote of the Shareholders unless such vote is required by the 1940 Act; provided however, that the Board of Trustees shall provide thirty (30) days' prior written notice to the Shareholders of the Trust of any conversion of Shares of the Trust pursuant to Subsections (b)(i) or (b)(ii) of this Section 2 or exchange of Shares of the Trust pursuant to Subsection (b)(iii) of this Section 2, and thirty (30) days' prior written notice to the Shareholders of a particular Series of any conversion of Shares of such Series pursuant to Subsection (b)(ii) of this Section 2 or exchange of Shares of such Series pursuant to Subsection (b)(iii) of this Section 2. In all respects not governed by the DSTA, the 1940 Act, other applicable law or the requirements of any securities exchange on which Shares are listed for trading, the Board of Trustees shall have the power to prescribe additional procedures necessary or appropriate to accomplish a statutory conversion, Share conversion or Share exchange, including the power to create one or more separate statutory trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares of the Trust or any Series thereof into beneficial interests in such separate statutory trust or trusts (or series thereof). (c) REORGANIZATION. The Board of Trustees, by vote of a majority of the Trustees, may cause the Trust to sell, convey and transfer all or substantially all of the assets of the Trust ("sale of Trust assets") or all or substantially all of the assets associated with any one or more Series ("sale of such Series' assets"), to another trust, statutory trust, partnership, limited partnership, limited liability company, corporation or other association organized under the laws of any state, or to one or more separate series thereof, or to the Trust to be held as assets associated with one or more other Series of the Trust, in exchange for cash, shares or other securities (including, without limitation, in the case of a transfer to another Series of the Trust, Shares of such other Series) with such sale, conveyance and transfer either (a) being made subject to, or with the assumption by the transferee of, the liabilities associated with the Trust or the liabilities associated with the Series the assets of which are so transferred, as applicable, or (b) not being made subject to, or not with the assumption of, such liabilities. Any such sale, conveyance and transfer shall not require the vote of the Shareholders unless such vote is required by the 1940 Act; provided however, that the Board of Trustees shall provide thirty (30) days' prior written notice to the Shareholders of the Trust of any such sale of Trust assets, and thirty (30) days prior written notice to the Shareholders of a particular Series of any sale of such Series' assets. Following such sale of Trust assets, the Board of Trustees shall distribute such cash, shares or other securities ratably among the Shareholders of the Trust (giving due effect to the assets and liabilities associated with and any other differences among the various Series the assets associated with which have been so sold, conveyed and transferred, and due effect to the differences among the various classes within each such Series). Following a sale of such Series' assets, the Board of Trustees shall distribute such cash, shares or other securities ratably among the Shareholders of such Series (giving due effect to the differences among the various classes within each such Series). If all of the assets of the Trust have been so sold, conveyed and transferred, the Trust shall be dissolved. In all respects not governed by the DSTA, the 1940 Act or other applicable law, the Board of Trustees shall have the power to prescribe additional procedures necessary or appropriate to accomplish such sale, conveyance and transfer, including the power to create one or more separate statutory trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares into beneficial interests in such separate statutory trust or trusts. Section 3. MASTER FEEDER STRUCTURE. If permitted by the 1940 Act, the Board of Trustees, by vote of a majority of the Trustees, and without a Shareholder vote, may cause the Trust to convert to a master feeder structure (a structure in which a feeder fund invests all of its assets into a master fund, rather than making investments in securities directly) and thereby cause existing Series of the Trust to either become feeders into a master fund, or to become master funds into which other funds are feeders. ARTICLE IX. AMENDMENTS Section 1. AMENDMENTS GENERALLY. This Declaration of Trust may be restated and/or amended at any time by an instrument in writing signed by not less than a majority of the Board of Trustees and, to the extent required by this Declaration of Trust, the 1940 Act or the requirements of any securities exchange on which Shares are listed for trading, by approval of such amendment by the Shareholders in accordance with Article III, Section 6 hereof and Article V hereof. Any such restatement and/or amendment hereto shall be effective immediately upon execution and approval or upon such future date and time as may be stated therein. The Certificate of Trust shall be restated and/or amended at any time by the Board of Trustees, without Shareholder approval, to correct any inaccuracy contained therein. Any such restatement and/or amendment of the Certificate of Trust shall be executed by at least one (1) Trustee and shall be effective immediately upon its filing with the office of the Secretary of State of the State of Delaware or upon such future date as may be stated therein. ARTICLE X. MISCELLANEOUS Section 1. REFERENCES; HEADINGS; COUNTERPARTS. In this Declaration of Trust and in any restatement hereof and/or amendment hereto, references to this instrument, and all expressions of similar effect to "herein," "hereof' and "hereunder," shall be deemed to refer to this instrument as so restated and/or amended. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. Any references herein to specific sections of the DSTA, the Code or the 1940 Act shall refer to such sections as amended from time to time or any successor sections thereof. This instrument may be executed in any number of counterparts, each of which shall be deemed an original. Section 2. APPLICABLE LAW. This Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of the State of Delaware and the applicable provisions of the 1940 Act and the Code. The Trust shall be a Delaware statutory trust pursuant to the DSTA, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a statutory trust. Section 3. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The provisions of this Declaration of Trust are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the Code, the DSTA, or with other applicable laws and regulations, the conflicting provision shall be deemed not to have constituted a part of this Declaration of Trust from the time when such provisions became inconsistent with such laws or regulations; PROVIDED, HOWEVER, that such determination shall not affect any of the remaining provisions of this Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction. Section 4. STATUTORY TRUST ONLY. It is the intention of the Trustees to create hereby a statutory trust pursuant to the DSTA, and thereby to create the relationship of trustee and beneficial owners within the meaning of the DSTA between, respectively, the Trustees and each Shareholder. It is not the intention of the Trustees to create a general or limited partnership, limited liability company, joint stock association, corporation, bailment, or any form of legal relationship other than a statutory trust pursuant to the DSTA. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association. Section 5. USE OF THE NAMES "FRANKLIN" OR "TEMPLETON".(a) The Board of Trustees expressly agrees and acknowledges that the names "Franklin" and "Templeton" are the sole property of Franklin Resources, Inc. ("FRI"). FRI has granted to the Trust a non-exclusive license to use such names as part of the name of the Trust now and in the future. The Board of Trustees further expressly agrees and acknowledges that the non-exclusive license granted herein may be terminated by FRI if the Trust ceases to use FRI or one of its Affiliates as Investment Adviser or to use other Affiliates or successors of FRI for such purposes. In such event, the nonexclusive license may be revoked by FRI and the Trust shall cease using the names "Franklin" and "Templeton," or any name misleadingly implying a continuing relationship between the Trust and FRI or any of its Affiliates, as part of its name unless otherwise consented to by FRI or any successor to its interests in such names. The Board of Trustees further understands and agrees that so long as FRI and/or any future advisory Affiliate of FRI shall continue to serve as the Trust's Investment Adviser, other registered open- or closed-end investment companies ("funds") as may be sponsored or advised by FRI or its Affiliates shall have the right permanently to adopt and to use the names "Franklin" and "Templeton" in their names and in the names of any series or class of shares of such funds. [The remainder of this page has been intentionally left blank.] IN WITNESS WHEREOF, the Trustees named below do hereby make and enter into this Agreement and Declaration of Trust as of the date first written above. /s/CHARLES B. JOHNSON /s/ANDREW H. HINES, JR. - ------------------------------------ -------------------------------- Charles B. Johnson Andrew H. Hines, Jr. /s/HARRIS J. ASHTON /s/EDITH E. HOLIDAY - ------------------------------------ -------------------------------- Harris J. Ashton Edith E. Holiday /s/NICHOLAS F. BRADY /s/BETTY P. KRAHMER - ------------------------------------ -------------------------------- Nicholas F. Brady Betty P. Krahmer /s/FRANK J. CROTHERS /s/GORDON S. MACKLIN - ------------------------------------ -------------------------------- Frank J. Crothers Gordon S. Macklin /s/S. JOSEPH FORTUNATO /s/FRED R. MILLSAPS - ------------------------------------ -------------------------------- S. Joseph Fortunato Fred R. Millsaps /s/CONSTANTINE D. TSERETOPOULOS - ------------------------------------ Constantine D. Tseretopoulos EX-99.A 4 exhibita-ii.txt CERTIFICATE OF TRUST 12/3/02 CERTIFICATE OF TRUST OF TEMPLETON CHINA WORLD FUND This Certificate of Trust of Templeton China World Fund, a statutory trust (the "Trust"), executed by the undersigned trustees, and filed under and in accordance with the provisions of the Delaware Statutory Trust Act (12 DEL. C.ss.3801 et seq.) (the "Act"), sets forth the following: FIRST: The name of the statutory trust formed hereby is Templeton China World Fund. SECOND: The address of the registered office of the Trust in the State of Delaware is 919 North Market Street, Suite 600, Wilmington, Delaware 19801. The name of the Trust's registered agent at such address is SR Services, LLC. THIRD: The Trust formed hereby is or will become an investment company registered under the Investment Company Act of 1940, as amended (15 U.S.C. ss.ss.80a-1 et seq.). FOURTH: Pursuant to Section 3804 of the Act, the debts, liabilities, obligations, costs, charges, reserves and expenses incurred, contracted for or otherwise existing with respect to a particular series, whether such series is now authorized and existing pursuant to the governing instrument of the Trust or is hereafter authorized and existing pursuant to said governing instrument, shall be enforceable against the assets associated with such series only, and not against the assets of the Trust generally or any other series thereof, and, except as otherwise provided in the governing instrument of the Trust, none of the debts, liabilities, obligations, costs, charges, reserves and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other series thereof shall be enforceable against the assets of such series. IN WITNESS WHEREOF, the undersigned, being all of the trustees of Templeton China World Fund, have duly executed this Certificate of Trust as of the 3rd day of December, 2002. /s/CHARLES B. JOHNSON /s/ANDREW H. HINES, JR. - ------------------------------------ --------------------------------- Charles B. Johnson Andrew H. Hines, Jr. /s/HARRIS J. ASHTON /s/EDITH E. HOLIDAY - ------------------------------------ --------------------------------- Harris J. Ashton Edith E. Holiday /s/NICHOLAS F. BRADY /s/BETTY P. KRAHMER - ------------------------------------ --------------------------------- Nicholas F. Brady Betty P. Krahmer /s/FRANK J. CROTHERS /s/GORDON S. MACKLIN - ------------------------------------ --------------------------------- Frank J. Crothers Gordon S. Macklin /s/S. JOSEPH FORTUNATO /s/FRED R. MILLSAPS - ------------------------------------ --------------------------------- S. Joseph Fortunato Fred R. Millsaps /s/CONSTANTINE D. TSERETOPOULOS - ------------------------------------ Constantine D. Tseretopoulos EX-99.B 5 exhibitb.txt BY-LAWS BY-LAWS of TEMPLETON CHINA WORLD FUND A Delaware Statutory Trust (Effective as of December 3, 2002) These By-Laws may contain any provision not inconsistent with applicable law or the Declaration of Trust, relating to the governance of the Trust. Unless otherwise specified in these By-Laws, capitalized terms used in these By-Laws shall have the meanings assigned to them in the Declaration of Trust. Every Shareholder by virtue of having become a Shareholder shall be bound by these By-Laws. ARTICLE I DEFINITIONS Section 1. Whenever used herein the following terms shall have the following meanings: (a) "1940 ACT" shall mean the Investment Company Act of 1940 and the rules and regulations thereunder, all as adopted or amended from time to time; (b) "BOARD OF TRUSTEES" OR "BOARD" shall mean the governing body of the Trust, that is comprised of the number of Trustees of the Trust fixed from time to time pursuant to Article IV of the Declaration of Trust, having the powers and duties set forth therein; (c) "BY-LAWS" shall mean these by-laws of the Trust, as amended or restated from time to time in accordance with Article VIII hereof; (d) "CERTIFICATE OF TRUST" shall mean the certificate of trust to be filed with the office of the Secretary of State of the State of Delaware as required under the DSTA to form the Trust, as amended or restated from time to time and filed with such office; (e) "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations thereunder, all as adopted or amended from time to time; (f) "COMMISSION" shall have the meaning given that term in the 1940 Act; (g) "DSTA" shall mean the Delaware Statutory Trust Act (12 DEL. C.ss.3801, ET SEQ.), as amended from time to time; (h) "DECLARATION OF TRUST" shall mean the Agreement and Declaration of Trust of the Trust, as amended or restated from time to time; (i) "INVESTMENT ADVISER" or "ADVISER" shall mean a Person, as defined below, furnishing services to the Trust pursuant to any investment advisory or investment management contract described in Article IV, Section 7(a) of the Declaration of Trust; (j) "PERSON" shall mean a natural person, partnership, limited partnership, limited liability company, trust, estate, association, corporation, organization, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case, whether domestic or foreign, and a statutory trust or a foreign statutory trust; (k) "SERIES" shall refer to each Series of Shares established and designated under and in accordance with the provisions of Article III of the Declaration of Trust and shall mean an entity such as that described in the 1940 Act; (l) "SHARES" shall mean the outstanding shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time, and shall include fractional and whole shares; (m) "SHAREHOLDER" shall mean a record owner of Shares; (n) "TRUST" shall refer to the Delaware statutory trust formed pursuant to the Declaration of Trust and the filing of the Certificate of Trust with the office of the Secretary of State of the State of Delaware; and (o) "TRUSTEE" or "TRUSTEES" shall refer to each signatory to the Declaration of Trust as a trustee, so long as such signatory continues in office in accordance with the terms of the Declaration of Trust, and all other Persons who may, from time to time, be duly elected or appointed, qualified and serving on the Board of Trustees in accordance with the provisions hereof and the Declaration of Trust. Reference herein to a Trustee or the Trustees shall refer to such Person or Persons in such Person's or Persons' capacity as a trustee or trustees hereunder and under the Declaration of Trust. ARTICLE II MEETINGS OF SHAREHOLDERS Section 1. PLACE OF MEETINGS. Meetings of Shareholders shall be held at any place within or outside the State of Delaware designated by the Board. In the absence of any such designation by the Board, Shareholders' meetings shall be held at the offices of the Trust. Section 2. MEETINGS. (a) CALL OF MEETINGS. Any meeting of Shareholders may be called at any time by the Board, by the chairperson of the Board or by the president of the Trust for the purpose of taking action upon any matter deemed by the Board to be necessary or desirable. To the extent permitted by the 1940 Act, a meeting of the Shareholders for the purpose of electing Trustees may also be called by the chairperson of the Board, or shall be called by the president or any vice-president of the Trust at the request of the Shareholders holding not less than ten (10) percent of the Shares, provided that the Shareholders requesting such meeting shall have paid the Trust the reasonably estimated cost of preparing and mailing the notice thereof, which an authorized officer of the Trust shall determine and specify to such Shareholders. No meeting shall be called upon the request of Shareholders to consider any matter which is substantially the same as a matter voted upon at any meeting of the Shareholders held during the preceding twelve (12) months, unless requested by the holders of a majority of all Shares entitled to be voted at such meeting. Section 3. NOTICE OF SHAREHOLDERS' MEETING. Notice of any meeting of Shareholders shall be given to each Shareholder entitled to vote at such meeting in accordance with Section 4 of this Article II not less than ten (10) nor more than one hundred and twenty (120) days before the date of the meeting. The notice shall specify (i) the place, date and hour of the meeting, and (ii) the general nature of the business to be transacted and to the extent required by the 1940 Act, the purpose or purposes thereof. The notice of any meeting at which Trustees are to be elected also shall include the name of any nominee or nominees who are intended to be presented for election. Section 4. MANNER OF GIVING NOTICE. Notice of any meeting of Shareholders shall be given either personally or by United States mail, courier, cablegram, telegram, facsimile or electronic mail, or other form of communication permitted by then current law, charges prepaid, addressed to the Shareholder or to the group of Shareholders at the same address as may be permitted pursuant to applicable laws, or as Shareholders may otherwise consent, at the address of that Shareholder appearing on the books of the Trust or its transfer or other duly authorized agent or provided in writing by the Shareholder to the Trust for the purpose of notice. Notice shall be deemed to have been duly given when delivered personally, deposited in the United States mail or with a courier, or sent by cablegram, telegram, facsimile or electronic mail. If no address of a Shareholder appears on the Trust's books or has been provided in writing by a Shareholder, notice shall be deemed to have been duly given without a mailing, or substantial equivalent thereof, if such notice shall be available to the Shareholder on written demand of the Shareholder at the offices of the Trust. If any notice addressed to a Shareholder at the address of that Shareholder appearing on the books of the Trust or that has been provided in writing by that Shareholder to the Trust for the purpose of notice, is returned to the Trust marked to indicate that the notice to the Shareholder cannot be delivered at that address, all future notices or reports shall be deemed to have been duly given without further mailing, or substantial equivalent thereof, if such notices shall be available to the Shareholder on written demand of the Shareholder at the offices of the Trust. Section 5. ADJOURNED MEETING; NOTICE. Any Shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time for any reason whatsoever by vote of the holders of Shares entitled to vote holding not less than a majority of the Shares present in person or by proxy at the meeting, or by the chairperson of the Board, the president of the Trust, in the absence of the chairperson of the Board, or any vice president or other authorized officer of the Trust, in the absence of the president. Any adjournment may be made with respect to any business which might have been transacted at such meeting and any adjournment will not delay or otherwise affect the effectiveness and validity of any business transacted at the Shareholders' meeting prior to adjournment. When any Shareholders' meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless after the adjournment, a new record date is fixed for the adjourned meeting, or unless the adjournment is for more than thirty (30) days after the date of the original meeting, in which case, notice shall be given to each Shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 3 and 4 of this Article II. At any adjourned meeting, any business may be transacted that might have been transacted at the original meeting. Section 6. VOTING. (a) The Shareholders entitled to vote at any meeting of Shareholders and the Shareholder vote required to take action shall be determined in accordance with the provisions of the Declaration of Trust. Unless determined by the inspector of the meeting to be advisable, the vote on any question need not be by written ballot. (b) Unless otherwise determined by the Board at the time it approves an action to be submitted to the Shareholders for approval, Shareholder approval of an action shall remain in effect until such time as the approved action is implemented or the Shareholders vote to the contrary. Notwithstanding the foregoing, an agreement of merger or consolidation may be terminated or amended notwithstanding prior approval if so authorized by such agreement of merger or consolidation pursuant to Section 3815 of the DSTA. Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. Attendance by a Shareholder, in person or by proxy, at a meeting shall constitute a waiver of notice of that meeting with respect to that Shareholder, except when the Shareholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Whenever notice of a Shareholders' meeting is required to be given to a Shareholder under the Declaration of Trust or these By-Laws, a written waiver thereof, executed before or after the time notice is required to be given, by such Shareholder or his or her attorney thereunto authorized, shall be deemed equivalent to such notice. The waiver of notice need not specify the purpose of, or the business to be transacted at, the meeting. Section 8. PROXIES. Every Shareholder entitled to vote for Trustees or on any other matter that may properly come before the meeting shall have the right to do so either in person or by one or more agents authorized by a written proxy executed by the Shareholder and filed with the secretary of the Trust; PROVIDED, that an alternative to the execution of a written proxy may be permitted as described in the next paragraph of this Section 8. A proxy shall be deemed executed if the Shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic or electronic transmission or otherwise) by the Shareholder or the Shareholder's attorney-in-fact. A valid proxy that does not state that it is irrevocable shall continue in full force and effect unless revoked by the Shareholder executing it, or using one of the permitted alternatives to execution, described in the next paragraph, by a written notice delivered to the secretary of the Trust prior to the exercise of the proxy or by the Shareholder's attendance and vote in person at the meeting; PROVIDED, HOWEVER, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy unless otherwise expressly provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of the General Corporation Law of the State of Delaware. With respect to any Shareholders' meeting, the Board, or, in case the Board does not act, the president, any vice president or the secretary, may permit proxies by electronic transmission, telephonic, computerized, telecommunications or other reasonable alternative to the execution of a written instrument authorizing the holder of the proxy to act. A proxy with respect to Shares held in the name of two or more Persons shall be valid if executed, or a permitted alternative to execution is used, by any one of them unless, at or prior to the exercise of the proxy, the secretary of the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest with the challenger. Section 9. INSPECTORS. Before any meeting of Shareholders, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust, may appoint any person other than nominees for office to act as inspector at the meeting or any adjournment. If any person appointed as inspector fails to appear or fails or refuses to act, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust, shall appoint a person to fill the vacancy. Such appointments may be made by such officers in person or by telephone. The inspector shall: (a) determine the number of Shares and the voting power of each, the Shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies; (b) receive votes or ballots; (c) hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) count and tabulate all votes; (e) determine when the polls shall close; (f) determine the result of voting; and (g) do any other acts that may be proper to conduct the election or vote with fairness to all Shareholders. ARTICLE III TRUSTEES Section 1. VACANCIES. (a) Whenever a vacancy in the Board shall occur (by reason of death, resignation, removal, an increase in the authorized number of Trustees or other cause), until such vacancy is filled as provided herein or the number of authorized Trustees constituting the Board of Trustees is decreased pursuant to Article IV, Section 1 of the Declaration of Trust, the Trustee(s) then in office, regardless of the number and even if less than a quorum, shall have all the powers granted to the Board and shall discharge all the duties imposed upon the Board by the Declaration of Trust and these By-Laws as though such number constitutes the entire Board. (b) Vacancies in the Board of Trustees may be filled by not less than a majority vote of the Trustee(s) then in office, regardless of the number and even if less than a quorum; provided however, that a meeting of Shareholders shall be called for the purpose of electing Trustees if required by the 1940 Act. Notwithstanding the above, whenever and for so long as the Trust is a participant in or otherwise has in effect a plan under which the Trust may be deemed to bear expenses of distributing its Shares as that practice is described in Rule 12b-1 under the 1940 Act, then the selection and nomination of the Trustees who are not "interested persons" of the Trust, as that term is defined in the 1940 Act (such Trustees are referred to herein as "disinterested Trustees"), shall be, and is, committed to the discretion of the disinterested Trustees remaining in office. In the event that all Trustee offices become vacant, an authorized officer of the Investment Adviser shall serve as the sole remaining Trustee effective upon the vacancy in the office of the last Trustee, subject to the provisions of the 1940 Act. In such case, the Investment Adviser, as the sole remaining Trustee, shall, as soon as practicable, fill all of the vacancies on the Board; provided, however, that the percentage of Trustees who are not Interested Persons of the Trust shall be no less than that permitted by the 1940 Act. Thereupon, the Investment Adviser shall resign as Trustee and a meeting of the Shareholders shall be called, as required by the 1940 Act, for the election of Trustees. Section 2. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of the Board may be held at any place within or outside the State of Delaware that is designated from time to time by the Board, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust. In the absence of such a designation, regular meetings shall be held at the offices of the Trust. Any meeting, regular or special, may be held, with respect to one or more participating Trustees, by conference telephone or similar communication equipment, so long as all Trustees participating in the meeting can hear one another, and all such Trustees shall be deemed to be present in person at such meeting. Section 3. REGULAR MEETINGS. Regular meetings of the Board shall be held at such time and place as shall from time to time be fixed by the Board, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust. Regular meetings may be held without notice. Section 4. SPECIAL MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by any Trustee, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust. Notice of the purpose, time and place of special meetings (or of the time and place for each regular meeting for which notice is given) shall be given personally, sent by first-class mail, courier, cablegram or telegram, charges prepaid, or by facsimile or electronic mail, addressed to each Trustee at that Trustee's address as has been provided to the Trust for purposes of notice. In case the notice is mailed, it shall be deemed to be duly given if deposited in the United States mail at least seven (7) days before the time the meeting is to be held. In case the notice is given personally or is given by courier, cablegram, telegram, facsimile or electronic mail, it shall be deemed to be duly given if delivered at least twenty-four (24) hours before the time of the holding of the meeting. The notice need not specify the place of the meeting if the meeting is to be held at the offices of the Trust. Section 5. WAIVER OF NOTICE. Whenever notice is required to be given to a Trustee under this Article, a written waiver of notice signed by the Trustee, whether before or after the time notice is required to be given, shall be deemed equivalent to notice. The waiver of notice need not specify the purpose of, or the business to be transacted at, the meeting. All such waivers shall be filed with the records of the Trust or made a part of the minutes of the meeting. Attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting, except when the Trustee attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened. Section 6. ADJOURNMENT. A majority of the Trustees present at a meeting of the Board, whether or not a quorum is present, may adjourn such meeting to another time and place. Any adjournment will not delay or otherwise affect the effectiveness and validity of any business transacted at the meeting prior to adjournment. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. Section 7. NOTICE OF ADJOURNMENT. Notice of the time and place of an adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than thirty (30) days after the date of the original meeting, notice of the adjourned meeting shall be given to each Trustee. Section 8. COMPENSATION OF TRUSTEES. Trustees may receive from the Trust reasonable compensation for their services and reimbursement of reasonable expenses as may be determined by the Board. This Section 8 shall not be construed to preclude any Trustee from serving the Trust in any other capacity as an officer, agent, employee, or otherwise and receiving compensation and reimbursement of expenses for those services. ARTICLE IV COMMITTEES Section 1. COMMITTEES OF TRUSTEES. The Board may, by majority vote, designate one or more committees of the Board, each consisting of two (2) or more Trustees, to serve at the pleasure of the Board. The Board may, by majority vote, designate one or more Trustees as alternate members of any such committee who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided by the Board, shall have the authority of the Board, except with respect to: (a) the approval of any action which under the Declaration of Trust, these By-Laws or applicable law also requires Shareholder approval or requires approval by a majority of the entire Board or certain members of the Board; (b) the filling of vacancies on the Board or on any committee thereof; provided however, that such committee may nominate Trustees to fill such vacancies, subject to the Trust's compliance with the rules under the 1940 Act upon which the Trust relies that require that: (i) a majority of the Trustees not be "interested persons" ("disinterested Trustees"); (ii) Trustees that are disinterested Trustees be selected and nominated by disinterested Trustees then in office; and (iii) legal counsel, if any, of the disinterested Trustees be independent. (c) the amendment, restatement or repeal of the Declaration of Trust or these By-Laws or the adoption of a new Declaration of Trust or new By-Laws; (d) the amendment or repeal of any resolution of the Board; or (e) the designation of any other committee of the Board or the members of such committee. Section 2. MEETINGS AND ACTION OF BOARD COMMITTEES. Meetings and actions of any committee of the Board shall, to the extent applicable, be held and taken in the manner provided in Article IV of the Declaration of Trust and Article III of these By-Laws, with such changes in the context thereof as are necessary to substitute the committee and its members for the Board and its members, except that the time of regular meetings of any committee may be determined either by the Board or by the committee. Special meetings of any committee may also be called by resolution of the Board or such committee, and notice of special meetings of any committee shall also be given to all alternate members who shall have the right to attend all meetings of the committee. The Board may from time to time adopt other rules for the governance of any committee. Section 3. ADVISORY COMMITTEES. The Board may appoint one or more advisory committees comprised of such number of individuals appointed by the Board who may meet at such time, place and upon such notice, if any, as determined by the Board. Such advisory committees shall have no power to require the Trust to take any specific action. ARTICLE V OFFICERS Section 1. OFFICERS. The officers of the Trust shall be a president, a secretary, and a treasurer. The Trust may also have, at the discretion of the Board, a chairperson of the Board, one or more vice presidents, one or more assistant vice presidents, one or more assistant secretaries, one or more assistant treasurers and such other officers, who shall have such authority and perform such duties as are provided in the Declaration of Trust, these By-Laws or as the Board, or to the extent permitted by the Board, as the president, may from time to time determine. Any number of offices may be held by the same person, except the offices of president and vice president. Section 2. APPOINTMENT OF OFFICERS. The officers of the Trust shall be appointed by the Board, or to the extent permitted by the Board, by the president, and each shall serve at the pleasure of the Board, or to the extent permitted by the Board, at the pleasure of the president, subject to the rights, if any, of an officer under any contract of employment. Section 3. REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board at any regular or special meeting of the Board, or, to the extent permitted by the Board, by the president. Any officer may resign at any time by giving written notice to the Trust. Such resignation shall take effect upon receipt unless specified to be effective at some later time and unless otherwise specified in such notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Trust under any contract to which the officer is a party. Section 4. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, incapacity or other cause shall be filled in the manner prescribed in these By-Laws for regular appointment to that office. Section 5. CHAIRPERSON OF THE BOARD. The chairperson of the Board shall preside at all meetings of the Shareholders and at all meetings of the Board and shall have such other powers and duties as may be prescribed by the Board, as provided in the Declaration of Trust or these By-Laws. In the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust designated by the president, shall preside at all meetings of the Shareholders and at all meetings of the Board. Section 6. PRESIDENT. The president shall, subject to the control of the Board, have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the Board, as provided in the Declaration of Trust or these By-Laws. Section 7. VICE PRESIDENTS. In the absence, resignation, removal, incapacity or death of the president, the vice presidents, if any, in order of their rank as fixed by the Board or if not ranked, a vice president designated by the Board, shall exercise all the powers and perform all the duties of, and be subject to all the restrictions upon, the president until the president's return, his incapacity ceases or a new president is appointed. Each vice president shall have such other powers and perform such other duties as from time to time may be prescribed by the Board or the president, or as provided in the Declaration of Trust or these By-Laws. Section 8. SECRETARY. The secretary shall keep or cause to be kept at the offices of the Trust or such other place as the Board may direct a book of minutes of all meetings and actions (including consents) of the Board, committees of the Board and Shareholders. The secretary shall keep a record of the time and place of such meetings, whether regular or special, and if special, how authorized, the notice given, the names of those present at Board meetings or committee meetings, the number of Shares present or represented by proxy at Shareholders' meetings, and the proceedings. The secretary shall cause to be kept at the offices of the Trust or at the office of the Trust's transfer or other duly authorized agent, a share register or a duplicate share register showing the names of all Shareholders and their addresses, the number, Series and classes (if applicable) of Shares held by each, the number and date of certificates, if any, issued for such Shares and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give or cause to be given notice of all meetings of the Shareholders and of the Board required by the Declaration of Trust, these By-Laws or by applicable law to be given and shall have such other powers and perform such other duties as may be prescribed by the Board or the president of the Trust, or as provided in the Declaration of Trust or these By-Laws. Section 9. TREASURER. The treasurer shall be the chief financial officer of the Trust and shall keep and maintain or cause to be kept and maintained adequate and correct books and records of accounts of the properties and business transactions of the Trust (and every Series and class thereof), including accounts of assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and Shares. All books shall be kept in accordance with the Declaration of Trust and these By-Laws. The treasurer shall deposit all monies and other valuables in the name and to the credit of the Trust with such depositories as may be designated by the Board. He shall disburse the funds of the Trust (and any Series and class thereof) as may be ordered by the Board, shall render to the president of the Trust and the Board, whenever either requests it, an account of all of his transactions as chief financial officer and of the financial condition of the Trust (and any Series and class thereof), and shall have such other powers and perform such other duties as may be prescribed by the Board and as provided in the Declaration of Trust or these By-Laws. ARTICLE VI RECORDS AND REPORTS Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The Trust shall keep at its offices or at the office of its transfer or other duly authorized agent, records of its Shareholders, that provide the names and addresses of all Shareholders and the number, Series and classes, if any, of Shares held by each Shareholder. Such records may be inspected during the Trust's regular business hours by any Shareholder, or its duly authorized representative, upon reasonable written demand to the Trust, for any purpose reasonably related to such Shareholder's interest as a Shareholder. Section 2. MAINTENANCE AND INSPECTION OF DECLARATION OF TRUST AND BY-LAWS. The Trust shall keep at its offices the original or a copy of the Declaration of Trust and these By-Laws, as amended or restated from time to time, where they may be inspected during the Trust's regular business hours by any Shareholder, or its duly authorized representative, upon reasonable written demand to the Trust, for any purpose reasonably related to such Shareholder's interest as a Shareholder. Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting books and records and minutes of proceedings of the Shareholders, the Board, any committee of the Board or any advisory committee shall be kept at such place or places designated by the Board or, in the absence of such designation, at the offices of the Trust. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. If information is requested by a Shareholder, the Board, or, in case the Board does not act, the president, any vice president or the secretary, shall establish reasonable standards governing, without limitation, the information and documents to be furnished and the time and the location, if appropriate, of furnishing such information and documents. Costs of providing such information and documents shall be borne by the requesting Shareholder. The Trust shall be entitled to reimbursement for its direct, out-of-pocket expenses incurred in declining unreasonable requests (in whole or in part) for information or documents. The Board, or, in case the Board does not act, the president, any vice president or the secretary, may keep confidential from Shareholders for such period of time as the Board or such officer, as applicable, deems reasonable any information that the Board or such officer, as applicable, reasonably believes to be in the nature of trade secrets or other information that the Board or such officer, as the case may be, in good faith believes would not be in the best interests of the Trust to disclose or that could damage the Trust or its business or that the Trust is required by law or by agreement with a third party to keep confidential. Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the absolute right during the Trust's regular business hours to inspect all books, records, and documents of every kind and the physical properties of the Trust. This inspection by a Trustee may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. ARTICLE VII GENERAL MATTERS Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the Trust shall be signed or endorsed by such person or persons and in such manner as the Board from time to time shall determine. Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board, except as otherwise provided in the Declaration of Trust and these By-Laws, may authorize any officer or officers or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Trust or any Series thereof and this authority may be general or confined to specific instances. Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for Shares may be issued to Shareholders at the discretion of the Board. All certificates shall be signed in the name of the Trust by the chairperson of the Board or the Trust's president or vice president, and by the Trust's treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of Shares and the Series and class thereof, if any, owned by the Shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer or transfer or other duly authorized agent who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be such officer or transfer or other duly authorized agent before such certificate is issued, it may be issued by the Trust with the same effect as if such person were an officer or transfer or other duly authorized agent at the date of issue. Notwithstanding the foregoing, the Trust may adopt and use a system of issuance, recordation and transfer of its shares by electronic or other means. Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no new certificates for Shares shall be issued to replace an old certificate unless the latter is surrendered to the Trust and cancelled at the same time. The Board may, in case any Share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the Board may require, including a provision for indemnification of the Board and the Trust secured by a bond or other adequate security sufficient to protect the Trust and the Board against any claim that may be made against either, including any expense or liability on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The chairperson of the Board, the Trust's president or any vice president or any other person authorized by the Board or by any of the foregoing designated officers, is authorized to vote or represent on behalf of the Trust, or any Series thereof, any and all shares of any corporation, partnership, trust, or other entity, foreign or domestic, standing in the name of the Trust or such Series thereof. The authority granted may be exercised in person or by a proxy duly executed by such authorized person. Section 6. TRANSFERS OF SHARES. Shares are transferable, if authorized by the Declaration of Trust, only on the record books of the Trust by the Person in whose name such Shares are registered, or by his or her duly authorized attorney-in-fact or representative. Shares represented by certificates shall be transferred on the books of the Trust upon surrender for cancellation of certificates for the same number of Shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Trust or its agents may reasonably require. Upon receipt of proper transfer instructions from the registered owner of uncertificated Shares such uncertificated Shares shall be cancelled and issuance of new equivalent uncertificated Shares or certificated Shares shall be made to the Person entitled thereto and the transaction shall be recorded upon the books of the Trust. The Trust, its transfer agent or other duly authorized agents may refuse any requested transfer of Shares, or request additional evidence of authority to safeguard the assets or interests of the Trust or of its Shareholders, in their sole discretion. In all cases of transfer by an attorney-in-fact, the original power of attorney, or an official copy thereof duly certified, shall be deposited and remain with the Trust, its transfer agent or other duly authorized agent. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be presented to the Trust, its transfer agent or other duly authorized agent, and may be required to be deposited and remain with the Trust, its transfer agent or other duly authorized agent. Section 7. HOLDERS OF RECORD. The record books of the Trust as kept by the Trust, its transfer agent or other duly authorized agent, as the case may be, shall be conclusive as to the identity of the Shareholders of the Trust and as to the number, Series and classes, if any, of Shares held from time to time by each such Shareholder. The Trust shall be entitled to treat the holder of record of any Share as the owner thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Share on the part of any other Person, whether or not the Trust shall have express or other notice thereof. Section 8. FISCAL YEAR. The fiscal year of the Trust, and each Series thereof, shall be determined by the Board. Section 9. HEADINGS; REFERENCES. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. Any references herein to specific sections of the DSTA, the Code or the 1940 Act shall refer to such sections as amended from time to time or any successor sections thereof. Section 10. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The provisions of these By-Laws are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the Declaration of Trust, the 1940 Act, the Code, the DSTA, or with other applicable laws and regulations, the conflicting provision shall be deemed not to have constituted a part of these By-Laws from the time when such provisions became inconsistent with such laws or regulations; PROVIDED, HOWEVER, that such determination shall not affect any of the remaining provisions of these By-Laws or render invalid or improper any action taken or omitted prior to such determination. (b) If any provision of these By-Laws shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of these By-Laws in any jurisdiction. ARTICLE VIII AMENDMENTS Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended, restated or repealed or new By-Laws may be adopted by the affirmative vote of a majority of the Shares entitled to vote. Section 2. AMENDMENT BY TRUSTEES. These By-Laws may also be amended, restated or repealed or new By-Laws may be adopted by the Board, by a vote of the Board as set forth in Article IV, Section 3(c) of the Declaration of Trust. Section 3. OTHER AMENDMENT. Subject to the 1940 Act, these By-Laws may also be amended pursuant to Article VIII, Section 2(a) of the Declaration of Trust and Section 3815(f) of the DSTA. EX-99.D 6 exhibitd-i.txt FORM OF INVESTMENT MANAGEMENT AGMT FORM OF TEMPLETON CHINA WORLD FUND INVESTMENT MANAGEMENT AGREEMENT AGREEMENT made as of the 3rd day of December, 2002, by and between TEMPLETON CHINA WORLD FUND (hereinafter referred to as the "Company"), and TEMPLETON ASSET MANAGEMENT LTD. (hereinafter referred to as the "Manager"). In consideration of the mutual agreements herein made, the Company and the Manager understand and agree as follows: (1) The Manager agrees, during the life of this Agreement, to manage the investment and reinvestment of the Company's assets consistent with the provisions of the Agreement and Declaration of Trust of the Company and the investment policies adopted and declared by the Company's Board of Trustees. In pursuance of the foregoing, the Manager shall make all determinations with respect to the investment of the Company's assets and the purchase and sale of its investment securities, and shall take all such steps as may be necessary to implement those determinations. It is understood that all acts of the Manager in performing this Agreement are performed by it outside of the United States. (2) The Manager is not required to furnish any personnel, overhead items or facilities for the Company. (3) The Manager shall be responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Company's portfolio transactions consistent with the Company's brokerage policies and, when applicable, the negotiation of commissions in connection therewith. All decisions and placements shall be made in accordance with the following principles: A. Purchase and sale orders will usually be placed with brokers which are selected by the Manager as able to achieve "best execution" of such orders. "Best execution" shall mean prompt and reliable execution at the most favorable security price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Company (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Manager in determining the overall reasonableness of brokerage commissions. B. In selecting brokers for portfolio transactions, the Manager shall take into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Company. C. The Manager is authorized to allocate brokerage and principal business to brokers who have provided brokerage and research services, as such services are defined in Section 28(e) of the Securities Exchange Act of 1934, as amended (the "1934 Act"), for the Company and/or other accounts, if any, for which the Manager exercises investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to transactions for which fixed minimum commission rates are not applicable, to cause the Company to pay a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting that transaction, if the Manager determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Manager's overall responsibilities with respect to the Company and the other accounts, if any, as to which it exercises investment discretion. In reaching such determination, the Manager will not be required to place or attempt to place a specific dollar value on the research or execution services of a broker or on the portion of any commission reflecting either of said services. In demonstrating that such determinations were made in good faith, the Manager shall be prepared to show that all commissions were allocated and paid for purposes contemplated by the Company's brokerage policy; that the research services provide lawful and appropriate assistance to the Manager in the performance of its investment decision-making responsibilities; and that the commissions paid were within a reasonable range. Whether commissions were within a reasonable range shall be based on any available information as to the level of commissions known to be charged by other brokers on comparable transactions, but there shall be taken into account the Company's policies that (i) obtaining a low commission is deemed secondary to obtaining a favorable securities price, since it is recognized that usually it is more beneficial to the Company to obtain a favorable price than to pay the lowest commission; and (ii) the quality, comprehensiveness and frequency of research studies that are provided for the Manager are useful to the Manager in performing its advisory activities under this Agreement. Research services provided by brokers to the Manager are considered to be in addition to, and not in lieu of, services required to be performed by the Manager under this Agreement. Research furnished by brokers through which the Company effects securities transactions may be used by the Manager for any of its accounts, and not all research may be used by the Manager for the Company. When execution of portfolio transactions is allocated to brokers trading on exchanges with fixed brokerage commission rates, account may be taken of various services provided by the broker. D. Purchases and sales of portfolio securities within the United States other than on a securities exchange shall be executed with primary market makers acting as principal, except where, in the judgment of the Manager, better prices and execution may be obtained on a commission basis or from other sources. E. Sales of the Company's shares (which shall include also shares of other registered investment companies that have either the same adviser or an investment adviser affiliated the Manager) by a broker are one factor among others to be taken into account in deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of the Company to that broker; provided that the broker shall furnish "best execution," as defined subparagraph A above, and that such allocation shall be within the scope of the Company's brokerage policy as stated above; provided further, that in every allocation made to a broker in which the sale of Company shares is taken into account, there shall be no increase in the amount of the commissions or other compensation paid to such broker beyond a reasonable commission or other compensation determined, as set forth in subparagraph C above, on the basis of best execution alone or best execution plus research services, without taking account of or placing any value upon such sale of the Company's shares. (4) The Company agrees to pay to the Manager a monthly fee in dollars at an annual rate of 1.25% of the Company's average weekly net assets, payable at the end of each calendar month. (5) This Agreement shall be effective as of the date first written above and shall continue in effect until November 30, 2004. If not sooner terminated, this Agreement shall continue in effect for successive periods of 12 months each thereafter, provided that each such continuance shall be specifically approved annually by the vote of a majority of the Company's Board of Trustees who are not parties to this Agreement or "interested persons" (as defined in the Investment Company Act of 1940, as amended (the "1940 Act")) of any such party, cast in person at a meeting called for the purpose of voting on such approval and either the vote of (a) a majority of the outstanding voting securities of the Company, as defined in the 1940 Act, or (b) a majority of the Company's Board of Trustees as a whole. (6) Notwithstanding the foregoing, this Agreement may be terminated by either party at any time, without the payment of any penalty, on sixty (60) days' written notice to the other party, provided that termination by the Company is approved by vote of a majority of the Company's Board of Trustees in office at the time or by vote of a majority of the outstanding voting securities of the Company. (7) This Agreement will terminate automatically and immediately in the event of its assignment (as defined in the 1940 Act). (8) In the event this Agreement is terminated and the Manager no longer acts as Manager to the Company, the Manager reserves the right to withdraw from the Company the use of the name "Templeton" or any name misleadingly implying a continuing relationship between the Company and the Manager or any of its affiliates. (9) Except as may otherwise be provided by the 1940 Act, neither the Manager nor its officers, directors, employees or agents shall be subject to any liability for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Manager of its duties under this Agreement or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Company's assets, or from acts or omissions of custodians, or securities depositories, or from any war or political act of any foreign government to which such assets might be exposed, or for failure, on the part of the custodian or otherwise, timely to collect payments or to exercise rights with respect to emerging country securities, except for any liability, loss or damage resulting from willful misfeasance, bad faith or gross negligence on the Manager's part or by reason of reckless disregard of the Manager's duties under this Agreement. It is hereby understood and acknowledged by the Company that the value of the investments made for the Company may increase as well as decrease and are not guaranteed by the Manager. It is further understood and acknowledged by the Company that investment decisions made on behalf of the Company by the Manager are subject to a variety of factors that may affect the values and income generated by the Company's portfolio of securities, including general economic conditions, market factors and currency exchange rates, and that investment decisions made by the Manager will not always be profitable or prove to have been correct. (10) It is understood that the services of the Manager are not deemed to be exclusive, and nothing in this Agreement shall prevent the Manager, or any affiliate thereof, from providing similar services to other investment companies and other clients, including clients which may invest in the same types of securities as the Company, or, in providing such services, from using information furnished by others. When the Manager determines to buy or sell the same security for the Company that the Manager or one or more of its affiliates has selected for clients of the Manager or its affiliates, the orders for all such security transactions shall be placed for execution by methods determined by the Manager, with approval by the Company's Board of Trustees, to be impartial and fair. (11) Pursuant to Section 6.2 of the Code of Conduct for Persons Registered with the Securities and Futures Commission (the "SFC"), the following information is included in this Agreement: A. UNDERTAKINGS. Each party undertakes to notify the other party in the event of any material change to the information provided in this Agreement. B. CERTAIN INFORMATION ABOUT THE MANAGER. (i) The Manager's full name and address is: Templeton Asset Management Ltd. Templeton Asset Management Ltd. 7 Temasek Boulevard Two Exchange Square #38-03 Suntec Tower One Suite 3905-08 Singapore 038987 Connaught Road, Central Hong King (ii) The Manager's registration status with the SFC is active. C. CERTAIN INFORMATION ABOUT THE COMPANY. The Company's full name and verified address is: Templeton China World Fund 500 East Broward Boulevard Fort Lauderdale, Florida 33394 (12) This Agreement shall be construed in accordance with the laws of the State of Delaware, PROVIDED that nothing herein shall be construed as being inconsistent with applicable Federal and state securities laws and any rules, regulations and orders thereunder. (13) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. (14) Nothing herein shall be construed as constituting the Manager an agent of the Company. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers as of the date first written above. TEMPLETON CHINA WORLD FUND By ---------------------------------------- Name: Title: TEMPLETON ASSET MANAGEMENT LTD. By ----------------------------------------- Name: Title: EX-99.E 7 exhibite-i.txt FORM OF DISTRIBUTION AGREEMENT FORM OF TEMPLETON CHINA WORLD FUND 500 East Broward Boulevard, Suite 2100 Fort Lauderdale, Florida 33394-3091 Franklin/Templeton Distributors, Inc. 100 Fountain Parkway St. Petersburg, Florida 33716-1205 Re: Distribution Agreement Gentlemen: We are a Delaware statutory trust operating as an open-end management investment company. As such, our company, Templeton China World Fund (referred to herein as the "Company"), comprised of one series (Templeton China World Fund) and any additional series that may be created in the future, is registered under the Investment Company Act of 1940, as amended (the "1940 Act"), and its shares are registered under the Securities Act of 1933, as amended (the "1933 Act"). We desire to begin issuing our authorized but unissued shares of beneficial interest (the "Shares") to authorized persons in accordance with applicable Federal and State securities laws. Shares will be made available for the Funds (referred to herein as a "Fund" or collectively as the "Funds") formed as a series of the Company. You have informed us that your company is registered as a broker-dealer under the provisions of the Securities Exchange Act of 1934, as amended, and that your company is a member of the National Association of Securities Dealers, Inc. You have indicated your desire to act as the exclusive selling agent and distributor for the Shares. We have been authorized to execute and deliver this Agreement to you by a resolution of our Board of Trustees passed at a meeting at which a majority of our Trustees, including a majority who are not otherwise interested persons of the Company and who are not interested persons of our investment adviser, its related organizations or with you or your related organizations, were present and voted in favor of the said resolution approving this Agreement. 1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in consideration of the agreements on your part herein expressed and upon the terms and conditions set forth herein, we hereby appoint you as the exclusive sales agent for our Shares (except for sales made directly by the Funds without sales charge) and agree that we will deliver such Shares as you may sell. You agree to use your best efforts to promote the sale of Shares, but are not obligated to sell any specific number of Shares. 2. INDEPENDENT CONTRACTOR. You will undertake and discharge your obligations hereunder as an independent contractor and shall have no authority or power to obligate or bind us by your actions, conduct or contracts except that you are authorized to accept orders for the purchase or repurchase of Shares as our agent. You may appoint sub-agents or distribute through dealers or otherwise as you may determine from time to time, but this Agreement shall not be construed as authorizing any dealer or other person to accept orders for sale or repurchase on our behalf or otherwise act as our agent for any purpose. You may allow such sub-agents or dealers such commissions or discounts not exceeding the total sales commission as you shall deem advisable so long as any such commissions or discounts are set forth in our current prospectus to the extent required by the applicable Federal and State securities laws. 3. OFFERING PRICE. The Shares of the Funds shall be offered for sale at a price equivalent to their respective net asset value (as specified in the Fund's prospectus). On each business day on which the New York Stock Exchange is open for business, we will furnish you with the net asset value of the Shares which shall be determined in accordance with our then effective prospectus. All Shares will be sold in the manner set forth in our then effective prospectus. 4. COMPENSATION. A. SALES COMMISSION. You shall be entitled to charge a sales commission on the sale or redemption, as appropriate, of each series and class of each Fund's Shares in the amount of any initial, deferred or contingent deferred sales charge as set forth in our then effective prospectus. You may allow any sub-agents or dealers such commissions or discounts from and not exceeding the total sales commission as you shall deem advisable, so long as any such commissions or discounts are set forth in our current prospectus to the extent required by the applicable Federal and State securities laws. You may also make payments to sub-agents or dealers from your own resources, subject to the following conditions: (a) any such payments shall not create any obligation for or recourse against the Fund or any series or class, and (b) the terms and conditions of any such payments are consistent with our prospectus and applicable federal and state securities laws and are disclosed in our prospectus or statement of additional information to the extent such laws may require. B. DISTRIBUTION PLANS. You shall also be entitled to compensation for your services as provided in any Distribution Plan adopted as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under the 1940 Act. The compensation provided in the Class B Distribution Plan applicable to Class B Shares (the "Class B Plan") is divided into a distribution fee and a service fee, each of which fees is in compensation for different services to be rendered to the Fund. Subject to the termination provisions in the Class B Plan, the distribution fee with respect to the sale of a Class B Share shall be earned when such Class B Share is sold and shall be payable from time to time as provided in the Class B Plan. The distribution fee payable to you as provided in the Class B Plan shall be payable without offset, defense or counterclaim (it being understood by the parties hereto that nothing in this sentence shall be deemed a waiver by the Fund of any claim the Fund may have against you). You may direct the Fund to cause our custodian to pay such distribution fee to Lightning Finance Company Limited ("LFL") or other persons providing funds to you to cover expenses referred to in Section 2(a) of the Class B Plan and to cause our custodian to pay the service fee to you to cover expenses referred to in Section 2(b) of the Class B Plan. We understand that you intend to assign your right to receive certain distribution fees with respect to Class B Shares to LFL in exchange for funds that you will use to cover expenses referred to in Section 2(a) of the Class B Plan. In recognition that we will benefit from your arrangement with LFL, we agree that, in addition to the provisions of Section 7 (iii) of the Class B Plan, we will not pay to any person or entity, other than LFL, any such assigned distribution fees related to Class B Shares sold by you prior to the termination of either the Agreement or the Class B Plan. We agree that the preceding sentence shall survive termination of the Agreement. C. With respect to the sales commission on the redemption of Shares of each series and class of Fund as provided in Subsection 4.A. above, we will cause our shareholder services agent (the "Transfer Agent") to withhold from redemption proceeds payable to holders of the Shares all contingent deferred sales charges properly payable by such holders in accordance with the terms of our then current prospectuses and statements of additional information (each such sales charge, a "CDSC"). Upon receipt of an order for redemption, the Transfer Agent shall direct our custodian to transfer such redemption proceeds to a general trust account. We shall then cause the Transfer Agent to pay over to you or your assigns from the general trust account such CDSCs properly payable by such holders as promptly as possible after the settlement date for each such redemption of Shares. CDSCs shall be payable without offset, defense or counterclaim (it being understood that nothing in this sentence shall be deemed a waiver by us of any claim we may have against you.) You may direct that the CDSCs payable to you be paid to any other person. 5. TERMS AND CONDITIONS OF SALES. Shares of the Funds shall be offered for sale only in those jurisdictions where they have been properly registered or are exempt from registration, and only to those groups of people that the Board of Trustees may from time to time determine to be eligible to purchase such Shares. 6. PAYMENT OF SHARES. At or prior to the time of delivery of any of our Shares you will pay or cause to be paid to our Custodian or its successor, for our account, an amount in cash equal to the net asset value of such Shares. In the event that you pay for Shares sold by you prior to your receipt of payment from purchasers you are authorized to reimburse yourself for the net asset value of such Shares when received by you. 7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for your own account for purposes of resale to the public, but you may purchase Shares for your own investment account upon your written assurance that the purchase is for investment purposes and that the Shares will not be resold except through redemption by us. 8. ALLOCATION OF EXPENSES. We will pay the expenses: (a) Of the preparation of the audited and certified financial statements of our Company to be included in any Post-Effective Amendments ("Amendments") to our Registration Statement under the 1933 Act or 1940 Act, including the prospectus and statement of additional information included therein; (b) Of the preparation, including legal fees, and of printing all Amendments or supplements filed with the U.S. Securities and Exchange Commission, including the copies of the prospectuses included in the Amendments and the first 10 copies of the definitive prospectuses or supplements thereto, other than those necessitated by your (including your "Parent's") activities or Rules and Regulations related to your activities where such Amendments or supplements result in expenses that we would not otherwise have incurred; (c) Of the preparation, printing and distribution of any reports or communications that we send to our existing shareholders; and (d) Of filing and other fees to Federal and State securities regulatory authorities necessary to continue offering our Shares of any of the Funds as you may require in connection with your duties as underwriter. You will pay the expenses: (a) Of printing the copies of the prospectuses and any supplements thereto and statement of additional information, which are necessary to continue to offer our Shares; (b) Of the preparation, excluding legal fees, and printing of all Amendments and supplements to our prospectuses and statement of additional information if the Amendment or supplement arises from your (including your "Parent's") activities or Rules and Regulations related to your activities and those expenses would not otherwise have been incurred by us; (c) Of printing additional copies, for use by you as sales literature, of reports or other communications that we have prepared for distribution to our existing shareholders; and (d) Incurred by you in advertising, promoting and selling our Shares. 9. FURNISHING OF INFORMATION. We will furnish to you such information with respect to the Funds and their Shares, in such form and signed by such of our officers as you may reasonably request, and we warrant that the statements therein contained when so signed will be true and correct. We will also furnish you with such information and will take such action as you may reasonably request in order to qualify our Shares for sale to the public under the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will furnish you with annual audited financial statements of our books and accounts certified by independent public accountants, with semiannual financial statements prepared by us, and, from time to time, with such additional information regarding our financial condition as you may reasonably request. 10. CONDUCT OF BUSINESS. Other than our currently effective prospectus, you will not issue any sales material or statements except literature or advertising which conforms to the requirements of Federal and State securities laws and regulations and which have been filed, where necessary, with the appropriate regulatory authorities. You will furnish us with copies of all such materials prior to their use and no such material shall be published if we shall reasonably and promptly object. You shall comply with the applicable Federal and State laws and regulations where our Shares are offered for sale and conduct your affairs with us and with dealers, brokers or investors in accordance with the Conduct Rules of the National Association of Securities Dealers, Inc. and in strict accordance with the applicable provisions of the Agreement and Declaration of Trust and By-Laws of the Company. In the absence of willful misfeasance, bad faith or gross negligence on your part, or of reckless disregard of your obligations hereunder, you shall not be subject to liability for any act or omission in the course of, or connected with, rendering services hereunder. 11. OTHER ACTIVITIES. Your services pursuant to this Agreement shall not be deemed to be exclusive, and you may render similar services and act as an underwriter, distributor or dealer for other investment companies in the offering of their shares. 12. TERM OF AGREEMENT. This Agreement shall become effective on the date of its execution, and shall remain in effect for a period of two (2) years. The Agreement is renewable annually thereafter with respect to the Company on behalf of the Funds for successive periods not to exceed one year (i) by a vote of a majority of the outstanding voting securities of the Company or by a vote of the Board of Trustees of the Company, and (ii) by a vote of a majority of the Trustees of the Company who are not parties to the Agreement or interested persons of any parties to the Agreement (other than as Trustees of the Company), cast in person at a meeting called for the purpose of voting on the Agreement. This Agreement may at any time be terminated by the Company on behalf of a Fund or the Funds without the payment of any penalty, (i) either by vote of the Board of Trustees of the Company or by vote of a majority of the outstanding voting securities of the Company on behalf of the Fund or Funds, on 60 days' written notice to you; or (ii) by you on 60 days' written notice to the Company; and shall immediately terminate with respect to the Company in the event of its assignment. 13. SUSPENSION OF SALES. We reserve the right at all times to suspend or limit the public offering of the Shares of the Funds upon two days' written notice to you. 14. MISCELLANEOUS. This Agreement shall be subject to the laws of the State of California and shall be interpreted and construed to further promote the operation of the Company as an open-end investment company. As used herein the terms "Net Asset Value", "Offering Price", "Investment Company", "Open-End Investment Company", "Assignment", "Principal Underwriter", "Interested Person", "Parents", "Affiliated Person", and "Majority of the Outstanding Voting Securities" shall have the meanings set forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder. If the foregoing meets with your approval, please acknowledge your acceptance by signing each of the enclosed copies, whereupon this will become a binding agreement as of the date set forth below. Very truly yours, TEMPLETON CHINA WORLD FUND By -------------------------------- Name: Title: Accepted: FRANKLIN/TEMPLETON DISTRIBUTORS, INC. By ___________________________________________ Name: Title: -------------------------------- DATED: , 200___ --------------------- EX-99.E 8 deal398.txt FORM OD DEALER AGREEMENT DEALER AGREEMENT Effective: March 1, 1998 Dear Securities Dealer: Franklin/Templeton Distributors, Inc. ("we" or "us") invites you to participate in the distribution of shares of the Franklin Templeton investment companies (the "Funds") for which we now or in the future serve as principal underwriter, subject to the terms of this Agreement. We will notify you from time to time of the Funds which are eligible for distribution and the terms of compensation under this Agreement. This Agreement supersedes any prior dealer agreements between us, as stated in Section 18, below. 1. LICENSING. (a) You represent that you are (i) a member in good standing of the National Association of Securities Dealers, Inc. ("NASD") and are presently licensed to the extent necessary by the appropriate regulatory agency of each jurisdiction in which you will offer and sell shares of the Funds, or (ii) a broker, dealer or other company licensed, registered or otherwise qualified to effect transactions in securities in a country (a "foreign country") other than the United States of America (the "U.S.") where you will offer or sell shares of the Funds. You agree that termination or suspension of such membership with the NASD, or of your license to do business by any regulatory agency having jurisdiction, at any time shall terminate or suspend this Agreement forthwith and shall require you to notify us in writing of such action. If you are not a member of the NASD but are a broker, dealer or other company subject to the laws of a foreign country, you agree to conform to the Conduct Rules of the NASD. This Agreement is in all respects subject to the Conduct Rules of the NASD, particularly Conduct Rule 2830 of the NASD, which shall control any provision to the contrary in this Agreement. (b) You agree to notify us immediately in writing if at any time you are not a member in good standing of the Securities Investor Protection Corporation ("SIPC"). 2. SALES OF FUND SHARES. You may offer and sell shares of each Fund and class of each Fund only at the public offering price which shall be applicable to, and in effect at the time of, each transaction. The procedures relating to all orders and the handling of them shall be subject to the terms of the applicable then current prospectus and statement of additional information (hereafter, the "prospectus") and new account application, including amendments, for each such Fund and each class of such Fund, and our written instructions from time to time. This Agreement is not exclusive, and either party may enter into similar agreements with third parties. 3. DUTIES OF DEALER: You agree: (a) To act as principal, or as agent on behalf of your customers, in all transactions in shares of the Funds except as provided in Section 4 hereof. You shall not have any authority to act as agent for the issuer (the Funds), for the Principal Underwriter, or for any other dealer in any respect, nor will you represent to any third party that you have such authority or are acting in such capacity. (b) To purchase shares only from us or from your customers. (c) To enter orders for the purchase of shares of the Funds only from us and only for the purpose of covering purchase orders you have already received from your customers or for your own bona fide investment. (d) To maintain records of all sales, redemptions and repurchases of shares made through you and to furnish us with copies of such records on request. (e) To distribute prospectuses and reports to your customers in compliance with applicable legal requirements, except to the extent that we expressly undertake to do so on your behalf. PAGE (f) That you will not withhold placing customers' orders for shares so as to profit yourself as a result of such withholding or place orders for shares in amounts just below the point at which sales charges are reduced so as to benefit from a higher sales charge applicable to an amount below the breakpoint. (g) That if any shares confirmed to you hereunder are repurchased or redeemed by any of the Funds within seven business days after such confirmation of your original order, you shall forthwith refund to us the full concession, allowed to you on such orders, including any payments we made to you from our own resources as provided in Section 6(b) hereof with respect to such orders. We shall forthwith pay to the appropriate Fund the share, if any, of the sales charge we retained on such order and shall also pay to such Fund the refund of the concession we receive from you as herein provided (other than the portion of such concession we paid to you from our own resources as provided in Section 6(b) hereof). We shall notify you of such repurchase or redemption within a reasonable time after settlement. Termination or suspension of this Agreement shall not relieve you or us from the requirements of this subsection. (h) That if payment for the shares purchased is not received within the time customary or the time required by law for such payment, the sale may be canceled without notice or demand and without any responsibility or liability on our part or on the part of the Funds, or at our option, we may sell the shares which you ordered back to the Funds, in which latter case we may hold you responsible for any loss to the Funds or loss of profit suffered by us resulting from your failure to make payment as aforesaid. We shall have no liability for any check or other item returned unpaid to you after you have paid us on behalf of a purchaser. We may refuse to liquidate the investment unless we receive the purchaser's signed authorization for the liquidation. (i) That you shall assume responsibility for any loss to the Funds caused by a correction made subsequent to trade date, provided such correction was not based on any error, omission or negligence on our part, and that you will immediately pay such loss to the Funds upon notification. (j) That if on a redemption which you have ordered, instructions in proper form, including outstanding certificates, are not received within the time customary or the time required by law, the redemption may be canceled forthwith without any responsibility or liability on our part or on the part of any Fund, or at our option, we may buy the shares redeemed on behalf of the Fund, in which latter case we may hold you responsible for any loss to the Fund or loss of profit suffered by us resulting from your failure to settle the redemption. (k) To obtain from your customers all consents required by applicable privacy laws to permit us, any of our affiliates or the Funds to provide you either directly or through a service established for that purpose with confirmations, account statements and other information about your customers' investments in the Funds. 4. DUTIES OF DEALER: RETIREMENT ACCOUNTS. In connection with orders for the purchase of shares on behalf of an Individual Retirement Account, Self-Employed Retirement Plan or other retirement accounts, by mail, telephone, or wire, you shall act as agent for the custodian or trustee of such plans (solely with respect to the time of receipt of the application and payments), and you shall not place such an order until you have received from your customer payment for such purchase and, if such purchase represents the first contribution to such a plan, the completed documents necessary to establish the plan and enrollment in the plan. You agree to indemnify us and Franklin Templeton Trust Company and/or Templeton Funds Trust Company as applicable for any claim, loss, or liability resulting from incorrect investment instructions received from you which cause a tax liability or other tax penalty. 5. CONDITIONAL ORDERS; CERTIFICATES. We will not accept from you any conditional orders for shares of any of the Funds. Delivery of certificates or confirmations for shares purchased shall be made by the Funds only against constructive receipt of the purchase price, subject to deduction for your concession and our portion of the sales charge, if any, on such sale. No certificates for shares of the Funds will be issued unless specifically requested. PAGE 6. DEALER COMPENSATION. (a) On each purchase of shares by you from us, the total sales charges and your dealer concessions shall be as stated in each Fund's then current prospectus, subject to NASD rules and applicable laws. Such sales charges and dealer concessions are subject to reductions under a variety of circumstances as described in the Funds' prospectuses. For an investor to obtain these reductions, we must be notified at the time of the sale that the sale qualifies for the reduced charge. If you fail to notify us of the applicability of a reduction in the sales charge at the time the trade is placed, neither we nor any of the Funds will be liable for amounts necessary to reimburse any investor for the reduction which should have been effected. (b) In accordance with the Funds' prospectuses, we or our affiliates may, but are not obligated to, make payments to you from our own resources as compensation for certain sales which are made at net asset value ("Qualifying Sales"). If you notify us of a Qualifying Sale, we may make a contingent advance payment up to the maximum amount available for payment on the sale. If any of the shares purchased in a Qualifying Sale are repurchased or redeemed within twelve months of the month of purchase, we shall be entitled to recover any advance payment attributable to the repurchased or redeemed shares by reducing any account payable or other monetary obligation we may owe to you or by making demand upon you for repayment in cash. We reserve the right to withhold advances to you, if for any reason we believe that we may not be able to recover unearned advances from you. Termination or suspension of this Agreement shall not relieve you or us from the requirements of this subsection. 7. REDEMPTIONS OR REPURCHASES. Redemptions or repurchases of shares of the Funds will be made at the net asset value of such shares, less any applicable deferred sales or redemption charges, in accordance with the applicable prospectuses. Except as permitted by applicable law, you agree not to purchase any shares from your customers at a price lower than the net asset value of such shares next computed by the Funds after the purchase (the "Redemption/Repurchase Price"). You shall, however, be permitted to sell shares of the Funds for the account of the record owner to the Funds at the Redemption/Repurchase Price for such shares. 8. EXCHANGES. Telephone exchange orders will be effective only for uncertificated shares or for which share certificates have been previously deposited and may be subject to any fees or other restrictions set forth in the applicable prospectuses. Exchanges from a Fund sold with no sales charge to a Fund which carries a sales charge, and exchanges from a Fund sold with a sales charge to a Fund which carries a higher sales charge may be subject to a sales charge in accordance with the terms of the applicable Fund's prospectus. You will be obligated to comply with any additional exchange policies described in the applicable Fund's prospectus, including without limitation any policy restricting or prohibiting "Timing Accounts" as therein defined. 9. TRANSACTION PROCESSING. All orders are subject to acceptance by us and by the Fund or its transfer agent, and become effective only upon confirmation by us. If required by law, each transaction shall be confirmed in writing on a fully disclosed basis and if confirmed by us, a copy of each confirmation shall be sent simultaneously to you if you so request. All sales are made subject to receipt of shares by us from the Funds. We reserve the right in our discretion, without notice, to suspend the sale of shares of the Funds or withdraw the offering of shares of the Funds entirely. Orders will be effected at the price(s) next computed on the day they are received if, as set forth in the applicable Fund's current prospectus, the orders are received by us, an agent appointed by us or the Funds prior to the time the price of the Fund's shares is calculated. Orders received after that time will be effected at the price(s) computed on the next business day. All orders must be accompanied by payment in U.S. Dollars. Orders payable by check must be drawn payable in U.S. Dollars on a U.S. bank, for the full amount of the investment. 10. MULTIPLE CLASSES. We may from time to time provide to you written compliance guidelines or standards relating to the sale or distribution of Funds offering multiple classes of shares (each, a "Class") with different sales charges and distribution related operating expenses. In addition, you will PAGE be bound by any applicable rules or regulations of government agencies or self-regulatory organizations generally affecting the sale or distribution of shares of investment companies offering multiple classes of shares. 11. RULE 12B-1 PLANS. You are invited to participate in all distribution plans (each, a "Plan") adopted for a Class of a Fund or for a Fund that has only a single Class (each, a "Plan Class") pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act"). To the extent you provide administrative and other services, including, but not limited to, furnishing personal and other services and assistance to your customers who own shares of a Plan Class, answering routine inquiries regarding a Fund or Class, assisting in changing account designations and addresses, maintaining such accounts or such other services as a Fund may require, to the extent permitted by applicable statutes, rules, or regulations, we shall pay you a Rule 12b-1 servicing fee. To the extent that you participate in the distribution of Fund shares that are eligible for a Rule 12b-1 distribution fee, we shall also pay you a Rule 12b-1 distribution fee. All Rule 12b-1 servicing and distribution fees shall be based on the value of shares attributable to customers of your firm and eligible for such payment, and shall be calculated on the basis and at the rates set forth in the compensation schedule then in effect for the applicable Plan (the "Schedule"). Without prior approval by a majority of the outstanding shares of a particular Class of a Fund which has a Plan, the aggregate annual fees paid to you pursuant to such Plan shall not exceed the amounts stated as the "annual maximums" in such Plan Class' prospectus, which amount shall be a specified percent of the value of such Plan Class' net assets held in your customers' accounts which are eligible for payment pursuant to this Agreement (determined in the same manner as such Plan Class uses to compute its net assets as set forth in its effective prospectus). You shall furnish us and each Fund that has a Plan Class (each, a "Plan Fund") with such information as shall reasonably be requested by the Board of Directors, Trustees or Managing General Partners (hereinafter referred to as "Directors") of such Plan Fund with respect to the fees paid to you pursuant to the Schedule of such Plan Fund. We shall furnish to the Boards of Directors of the Plan Funds, for their review on a quarterly basis, a written report of the amounts expended under the Plans and the purposes for which such expenditures were made. Each Plan and the provisions of any agreement relating to such Plan must be approved annually by a vote of the Directors of the Fund that has such Plan, including such persons who are not interested persons of such Plan Fund and who have no financial interest in such Plan or any related agreement ("Rule 12b-1 Directors"). Each Plan or the provisions of this Agreement relating to such Plan may be terminated at any time by the vote of a majority of the Rule 12b-1 Directors, or by a vote of a majority of the outstanding shares of the Class that has such Plan, on sixty (60) days' written notice, without payment of any penalty. A Plan or the provisions of this Agreement may also be terminated by any act that terminates the Underwriting Agreement between us and the Fund that has such Plan, and/or the management or administration agreement between Franklin Advisers, Inc. or Templeton Investment Counsel, Inc. or their affiliates and such Plan Fund. In the event of the termination of a Plan for any reason, the provisions of this Agreement relating to such Plan will also terminate. Continuation of a Plan and provisions of this Agreement relating to such Plan are conditioned on Rule 12b-1 Directors being ultimately responsible for selecting and nominating any new Rule 12b-1 Directors. Under Rule 12b-1, Directors of any of the Plan Funds have a duty to request and evaluate, and persons who are party to any agreement related to a Plan have a duty to furnish, such information as may reasonably be necessary to an informed determination of whether the Plan or any agreement should be implemented or continued. Under Rule 12b-1, a Plan Fund is permitted to implement or continue a Plan or the provisions of this Agreement relating to such Plan from year-to-year only if, based on certain legal considerations, the Board of Directors of such Plan Fund is able to conclude that such Plan will benefit the Plan Class. Absent such yearly determination, such Plan and the provisions of this Agreement relating to such Plan must be terminated as set forth above. In addition, any obligation assumed by a Fund pursuant to this Agreement shall be limited in all cases to the assets of such Fund and no person shall seek satisfaction thereof from shareholders of a Fund. You agree to waive payment of any amounts payable PAGE to you by us under a Fund's Plan until such time as we are in receipt of such fee from the Fund. The provisions of the Plans between the Plan Funds and us shall control over the provisions of this Agreement in the event of any inconsistency. 12. REGISTRATION OF SHARES. Upon request, we shall notify you of the states or other jurisdictions in which each Fund's shares are currently noticed, registered or qualified for offer or sale to the public. We shall have no obligation to make notice filings of, register or qualify, or to maintain notice filings of, registration of or qualification of, Fund shares in any state or other jurisdiction. We shall have no responsibility, under the laws regulating the sale of securities in any U.S. or foreign jurisdiction, for the registration, qualification or licensed status of persons offering or selling Fund shares or for the manner of offering or sale of Fund shares. If it is necessary to file notice of, register or qualify Fund shares in any foreign jurisdictions in which you intend to offer the shares of any Funds, it will be your responsibility to arrange for and to pay the costs of such notice filing, registration or qualification; prior to any such notice filing, registration or qualification, you will notify us of your intent and of any limitations that might be imposed on the Funds, and you agree not to proceed with such notice filing, registration or qualification without the written consent of the applicable Funds and of ourselves. Except as stated in this section, we shall not, in any event, be liable or responsible for the issue, form, validity, enforceability and value of such shares or for any matter in connection therewith, and no obligation not expressly assumed by us in this Agreement shall be implied. Nothing in this Agreement shall be deemed to be a condition, stipulation or provision binding any person acquiring any security to waive compliance with any provision of the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended (the "1934 Act"), the 1940 Act, the rules and regulations of the U.S. Securities and Exchange Commission, or any applicable laws or regulations of any government or authorized agency in the U.S. or any other country having jurisdiction over the offer or sale of shares of the Funds, or to relieve the parties hereto from any liability arising under such laws, rules and regulations. 13. CONTINUOUSLY OFFERED CLOSED-END FUNDS. This Section 13 relates solely to shares of Funds that represent a beneficial interest in the Franklin Floating Rate Trust and shares issued by any other continuously offered closed-end investment company registered under the 1940 Act for which we or an affiliate of ours serve as principal underwriter and that periodically repurchases its shares (each, a "Trust"). Shares of a Trust that are offered to the public will be registered under the 1933 Act, and are expected to be offered during an offering period that may continue indefinitely ("Continuous Offering Period"). There is no guarantee that such a continuous offering will be maintained by a Trust. The Continuous Offering Period, shares of a Trust and certain of the terms on which such shares are offered shall be as described in the prospectus of the Trust. As set forth in a Trust's then current prospectus, we may, but are not obligated to, provide you with appropriate compensation for selling shares of the Trust. In addition, you may be entitled to a fee for servicing your clients who are shareholders in a Trust, subject to applicable law and NASD Conduct Rules. You agree that any repurchases of shares of a Trust that were originally purchased as Qualifying Sales shall be subject to Subsection 6(b) hereof. You expressly acknowledge and understand that, notwithstanding anything to the contrary in this Agreement: (a) No Trust has a Rule 12b-1 Plan and in no event will a Trust pay, or have any obligation to pay, any compensation directly or indirectly to you. (b) Shares of a Trust will not be repurchased by either the Trust (other than through repurchase offers by the Trust from time to time, if any) or by us and no secondary market for such shares exists currently, or is expected to develop. Any representation as to a repurchase or tender offer by a Trust, other than that set forth in the Trust's then current prospectus, notification letters, reports or other related material provided by the Trust, is expressly prohibited. PAGE (c) An early withdrawal charge payable by shareholders of a Trust to us may be imposed on shares accepted for repurchase by the Trust that have been held for less than a stated period, as set forth in the Trust's then current Prospectus. (d) In the event your customer cancels his or her order for shares of a Trust after confirmation, such shares will not be repurchased, remarketed or otherwise disposed of by or though us. 14. FUND INFORMATION. No person is authorized to give any information or make any representations concerning shares of any Fund except those contained in the Fund's then current prospectus or in materials issued by us as information supplemental to such prospectus. We will supply reasonable quantities of prospectuses, supplemental sales literature, sales bulletins, and additional information as issued by the Fund or us. You agree not to use other advertising or sales material relating to the Funds except that which (a) conforms to the requirements of any applicable laws or regulations of any government or authorized agency in the U.S. or any other country having jurisdiction over the offering or sale of shares of the Funds, and (b) is approved in writing by us in advance of such use. Such approval may be withdrawn by us in whole or in part upon notice to you, and you shall, upon receipt of such notice, immediately discontinue the use of such sales literature, sales material and advertising. You are not authorized to modify or translate any such materials without our prior written consent. 15. INDEMNIFICATION. You agree to indemnify, defend and hold harmless us, the Funds, and the respective officers, directors and employees of the Funds and us from any and all losses, claims, liabilities and expenses arising out of (1) any alleged violation of any statute or regulation (including without limitation the securities laws and regulations of the U.S. or any state or foreign country) or any alleged tort or breach of contract, in or related to the offer or sale by you of shares of the Funds pursuant to this Agreement (except to the extent that our negligence or failure to follow correct instructions received from you is the cause of such loss, claim, liability or expense), (2) any redemption or exchange pursuant to telephone instructions received from you or your agents or employees, or (3) the breach by you of any of the terms and conditions of this Agreement. This Section 15 shall survive the termination of this Agreement. 16. TERMINATION; SUCCESSION; ASSIGNMENT; AMENDMENT. Each party to this Agreement may terminate its participation in this Agreement by giving written notice to the other parties. Such notice shall be deemed to have been given and to be effective on the date on which it was either delivered personally to the other parties or any officer or member thereof, or was mailed postpaid or delivered by electronic transmission to the other parties' chief legal officers at the addresses shown herein or in the most recent NASD Manual. This Agreement shall terminate immediately upon the appointment of a Trustee under the Securities Investor Protection Act or any other act of insolvency by you. The termination of this Agreement by any of the foregoing means shall have no effect upon transactions entered into prior to the effective date of termination. A trade placed by you subsequent to your voluntary termination of this Agreement will not serve to reinstate the Agreement. Reinstatement, except in the case of a temporary suspension of a dealer, will be effective only upon written notification by us to you. This Agreement will terminate automatically in the event of its assignment by us. For purposes of the preceding sentence, the word "assignment" shall have the meaning given to it in the 1940 Act. This Agreement may not be assigned by you without our prior written consent. This Agreement may be amended by us at any time by written notice to you and your placing of an order or acceptance of payments of any kind after the effective date and receipt of notice of any such Amendment shall constitute your acceptance of such Amendment. 17. SETOFF; DISPUTE RESOLUTION. Should any of your concession accounts with us have a debit balance, we may offset and recover the amount owed to us or the Funds from any other account you have with us, without notice or demand to you. In the event of a dispute concerning any provision of this Agreement, either party may require the dispute to be submitted to binding arbitration under the commercial arbitration rules of the NASD or the American Arbitration Association. Judgment upon any arbitration award may be entered by any court having jurisdiction. This Agreement shall be construed in accordance PAGE with the laws of the State of California, not including any provision that would require the general application of the law of another jurisdiction. 18. ACCEPTANCE; CUMULATIVE EFFECT. This Agreement is cumulative and supersedes any agreement previously in effect. It shall be binding upon the parties hereto when signed by us and accepted by you. If you have a current dealer agreement with us, your first trade or acceptance of payments from us after your receipt of this Agreement, as it may be amended pursuant to Section 16, above, shall constitute your acceptance of its terms. Otherwise, your signature below shall constitute your acceptance of its terms. FRANKLIN/TEMPLETON DISTRIBUTORS, INC. By /s/ GREG JOHNSON Greg Johnson, President 777 Mariners Island Blvd. San Mateo, CA 94404 Attention: Chief Legal Officer (for legal notices only) 415/312-2000 700 Central Avenue St. Petersburg, Florida 33701-3628 813/823-8712 Dealer: If you have NOT previously signed a Dealer Agreement with us, please complete and sign this section and return the original to us. DEALER NAME: By _________________ (Signature) Name: Title: Address: Telephone: NASD CRD # Franklin Templeton Dealer # (Internal Use Only) EX-99.E 9 dlrad598.txt AMENDMENT TO DEALER AGMT 5/15/98 May 15, 1998 Re: Amendment of Dealer Agreement - Notice Pursuant to Section 16 Dear Securities Dealer: This letter constitutes notice of amendment of the current Dealer Agreement (the "Agreement") between Franklin/Templeton Distributors, Inc. ("we" or "us") and you pursuant to Section 16 of the Agreement. The Agreement is hereby amended as follows: 1. Defined terms in this amendment have the meanings as stated in the Agreement unless otherwise indicated. 2. Section 6 is modified to add a subsection 6(c), as follows: (c) The following limitations apply with respect to shares of each Trust as described in Section 13 of this Agreement. (1) Consistent with the NASD Conduct Rules, the total compensation to be paid to us and selected dealers and their affiliates, including you and your affiliates, in connection with the distribution of shares of a Trust will not exceed the underwriting compensation limitation prescribed by NASD Conduct Rule 2710. The total underwriting compensation to be paid to us and selected dealers and their affiliates, including you and your affiliates, may include: (i) at the time of purchase of shares a payment to you or another securities dealer of 1% of the dollar amount of the purchased shares by the Distributor; and (ii) a quarterly payment at an annual rate of .50% to you or another securities dealer based on the value of such remaining shares sold by you or such securities dealer, if after twelve (12) months from the date of purchase, the shares sold by you or such securities dealer remain outstanding. (2) The maximum compensation shall be no more than as disclosed in the section "Payments to Dealers" of the prospectus of the applicable Trust. Pursuant to Section 16 of the Agreement, your placement of an order or acceptance of payments of any kind after the effective date and receipt of notice of this amendment shall constitute your acceptance of this amendment. FRANKLIN/TEMPLETON DISTRIBUTORS, INC. By /s/GREG JOHNSON Greg Johnson, President 777 Mariners Island Blvd. San Mateo, CA 94404 Attention: Chief Legal Officer (for legal notices only) 650/312-2000 100 Fountain Parkway St. Petersburg, FL 33716 813/299-8712 EX-99.G 10 custody.txt CUSTODY AGREEMENT DTD 9/7/93 CUSTODY AGREEMENT AGREEMENT dated September 7, 1993, between THE CHASE MANHATTAN BANK, N.A. ("Chase"), having its principal place of business at 1 Chase Manhattan Plaza, New York, New York 10081, and TEMPLETON CHINA WORLD FUND, INC. (the "Fund"), an investment company registered under the Investment Company Act of 1940 ("Act of 1940"), having its principal place of business at 700 Central Avenue, St. Petersburg, Florida 33701. WHEREAS, the Fund wishes to appoint Chase as custodian to its securities and assets and Chase is willing to act as custodian under the terms and conditions hereinafter set forth; NOW, THEREFORE, the Fund and its successors and assigns and Chase and its successors and assigns, hereby agree as follows: 1. APPOINTMENT AS CUSTODIAN. Chase agrees to act as custodian f or the Fund, as provided herein, in connection with (a) cash ("Cash") received from time to time from, or for the account of, the Fund for credit to the Fund's deposit account or accounts administered by Chase, Chase Branches and Domestic Securities Depositories (as hereinafter defined), and/or Foreign Banks and Foreign Securities Depositories (as hereinafter defined) (the "Deposit Account"); (b) all stocks, shares, bonds, debentures, notes, mortgages, or other obligations for the payment of money and any certificates, or representing any other rights Or interests therein and other similar property ("Securities") from time to time received by Chase and/or any Chase Branch, Domestic Securities Depository, Foreign Bank or Foreign Securities Depository for the account of the Fund (the "Custody Account"); and (C) original margin and variation margin payments in a segregated account for futures contracts (the "Segregated Account"). All cash held in the Deposit Account or in the Segregated Account in connection with which Chase agrees to act as custodian is hereby denominated as a special deposit which shall be held in trust for the benefit of the Fund and to which Chase, Chase Branches and Domestic Securities Depositories and/or Foreign Banks and Foreign Securities Depositories shall have no ownership rights, and Chase will so indicate on its books and records pertaining to the Deposit Account and the Segregated Account. All cash held in auxiliary accounts that may be carried for the Fund with Chase (including a Money Market Account, Redemption Account, Distribution Account and Imprest Account) is not so denominated as a special deposit and title thereto is held by Chase subject to the claims of creditors. 2. AUTHORIZATION TO USE BOOK ENTRY SYSTEM, DOMESTIC SECURITIES DEPOSITORIES, BRANCH OFFICE, FOREIGN BANKS AND FOREIGN SECURITIES DEPOSITORIES. Chase is hereby authorized to appoint and utilize, subject to the provisions of Sections 4 and 5 hereof: A. The Book Entry System and The Depository Trust Company; and also such other Domestic Securities Depositories selected by Chase and as to which Chase has received a certified copy of a resolution of the Fund's Board of Directors authorizing deposits therein; B. Chase's foreign branch offices in the United Kingdom, Hong Kong, Singapore, and Tokyo, and such other foreign branch offices of Chase located in countries approved by the Board of Directors of the Fund as to which Chase shall have given prior notice to the Fund; C. Foreign Banks which Chase shall have selected, which are located in countries approved by the Board of Directors of the Fund, and as to which banks Chase shall have given prior notice to the Fund; and D. Foreign Securities Depositories which Chase shall have selected and as to which Chase has received a certified copy of a resolution of the Fund's Board of Directors authorizing deposits therein; to hold Securities and Cash at any time owned by the Fund, it being understood that no such appointment or utilization shall in any way relieve Chase of its responsibilities as provided for in this Agreement. Foreign branch offices of Chase appointed and utilized by Chase are herein referred to as "Chase Branches." Unless otherwise agreed to in writing, (a) each Chase Branch, each Foreign Bank and each Foreign Securities Depository shall be selected by Chase to hold only Securities as to which the principal trading market or principal location as to which such Securities are to be presented for payment is located outside the United States; and (b) Chase and each Chase Branch, Foreign Bank and Foreign Securities Depository will promptly transfer or cause to be transferred to Chase, to be held in the United States, Securities and/or Cash that are then being held outside the United States upon request of the Fund and/or of the Securities and Exchange Commission. Utilization by Chase of Chase Branches, Domestic Securities Depositories, Foreign Banks and Foreign Securities Depositories shall be in accordance with provisions as from time to time amended, of an operating agreement to be entered into between Chase and the Fund (the "Operating Agreement"). 3. DEFINITIONS. As used in this Agreement, the following terms shall have the following meanings: (a) "Authorized Persons of the Fund" shall mean such officers or employees of the Fund or any other person or persons as shall have been designated by a resolution of the Board of Directors of the Fund, a certified copy of which has been filed with Chase to act as Authorized Persons hereunder. Such persons shall continue to be Authorized Persons of the Fund, authorized to act either singly or together with one or more other of such persons as provided in such resolution, until such time as the Fund shall have filed with Chase a written notice of the Fund supplementing, amending, or revoking the authority of such persons. (b) "Book-Entry system" shall mean the Federal Reserve/Treasury book -entry system for United States and federal agency securities, its successor or successors and its nominee or nominees. (c) "Domestic Securities Depository" shall mean The Depository Trust Company, a clearing agency registered with the Securities and Exchange Commission, its successor or successors and its nominee or nominees; and (subject to the receipt by Chase of a certified copy of a resolution of the Fund's Board of Directors specifically approving deposits therein as provided in Section 2(a) of this Agreement) any other person authorized to act as a depository under the Act of 1940, its successor or successors and its nominee or nominees. (d) "Foreign Bank" shall mean any banking institution organized under the laws of a jurisdiction other than the United States or of any state thereof. (e) A "Foreign Securities Depository" shall mean any system for the central handling of securities abroad where all securities of any particular class or series of any issuer deposited within the system are treated as fungible and may be transferred or pledged by bookkeeping without physical delivery of the securities by any Chase Branch or Foreign Bank. (f) "Written Instructions" shall mean instructions in writing signed by Authorized Persons of the Fund giving such instructions, and/or such other forms of communications as from time to time shall be agreed, upon in writing between the Fund and Chase. 4. SELECTION OF COUNTRIES IN WHICH SECURITIES MAY BE HELD. Chase shall not cause Securities and Cash to be held in any country outside the United States until the Fund has directed the holding of its assets in such country. Chase will be provided with a copy of a resolution of the Fund's Board of Directors authorizing such custody in any country outside of the United States, which resolution shall be based upon, among other factors, the following: (a) comparative operational efficiencies of custody; (b) clearance and settlement and the costs thereof; and (c) political and other risks, other than those risks specifically assumed by Chase. 5. RESPONSIBILITY OF CHASE TO SELECT CUSTODIANS IN INDIVIDUAL FOREIGN COUNTRIES. The responsibility for selecting the Chase Branch, Foreign Bank or Foreign Securities Depository to hold the Fund's Securities and Cash in individual countries authorized by the Fund shall be that of Chase. Chase generally shall utilize Chase Branches where available. In locations where there are no Chase Branches providing custodial services, Chase shall select as its agent a Foreign Bank, which may be an affiliate or subsidiary of Chase. To facilitate the clearance and settlement of securities transactions, Chase represents that, subject to the approval of the Fund, it may deposit Securities in a Foreign Securities Depository in which Chase is a participant. In situations in which Chase is not a participant in a Foreign Securities Depository, Chase may, subject to the approval of the Fund, authorize a Foreign Bank acting as its subcustodian to deposit the Securities in a Foreign Securities Depository in which the Foreign Bank is a participant. Notwithstanding the foregoing, such selection by Chase of a Foreign Bank or Foreign Securities Depository shall not become effective until Chase has been advised by the Fund that a majority of its Board of Directors: (a) Has approved Chase's selection of the particular Foreign Bank or Foreign Securities Depository, as the case may be, as consistent with the best interests of the Fund and its Shareholder; (b) Has approved as consistent with the best interests of the Fund and its Shareholders a written contract prepared by Chase which will govern the manner in which such Foreign Bank will maintain the Fund's assets. 6. CONDITIONS ON SELECTION OF FOREIGN BANK OR SECURITIES DEPOSITORY. Chase shall authorize the of Securities and Cash by a Chase Branch, Foreign Securities Depository only: (a) to the extent that the Securities and Cash are not subject to any right, charge, security interest, -lien or claim of any kind in favor of any such Foreign Bank or Foreign Securities Depository, except for their safe custody or administration, and (b) to the extent that the beneficial ownership of Securities is freely transferable without the payment of money or value other than for safe custody or administration. 7. CHASE BRANCHES AND FOREIGN BANKS NOT AGENTS OF THE FUND. Chase Branches, Foreign Banks and Foreign Securities Depositories shall be subject to the instructions of Chase and/or the Foreign Bank, and not to those of the Fund. Chase warrants and represents that all such instructions shall afford protection to the Fund at least equal to that afforded for Securities held directly by Chase. Any Chase Branch, Foreign Bank or Foreign Securities Depository shall act solely as agent of Chase or of such Foreign Bank. 8. CUSTODY ACCOUNT. Securities held in the Custody Account shall be physically segregated at all times from those of any other person or persons except that (a) with respect to Securities held by Chase Branches, such Securities may be placed in an omnibus account for the customers of Chase, and Chase shall maintain separate book entry records for each such omnibus account, and such Securities shall be deemed f or the purpose of this Agreement to be held by Chase in the Custody Account; (b) with respect to Securities deposited by Chase with a Foreign Bank, a Domestic Securities Depository or. a Foreign Securities Depository, Chase shall identify on its books as belonging to the Fund the Securities shown on Chase's account on the books of the Foreign Bank, Domestic Securities Depository or Foreign Securities Depository; and (c) with respect to Securities deposited by a Foreign Bank with a Foreign Securities Depository, Chase shall cause the Foreign Bank to identify on its books as belonging to Chase, as agent, the Securities shown on the Foreign Bank's account on the books of the Foreign Securities Depository. All Securities of the Fund maintained by Chase pursuant to this Agreement shall be subject only to the instructions of Chase, Chase Branches or their agents. Chase shall only deposit Securities with a Foreign Bank in accounts that include only assets held by Chase for its customers. 8a. SEGREGATED ACCOUNT FOR FUTURES CONTRACTS. With respect to every futures contract purchased, sold or cleared for the Custody Account, Chase agrees, pursuant to Written Instructions, to: (a) deposit original margin and variation margin payments in a segregated account maintained by Chase; and (b) perform all other obligations attendant to transactions or positions in such futures contracts, as such payments or performance may be required by law or the executing broker. 8b. SEGREGATED ACCOUNT FOR REPURCHASE AGREEMENTS. With respect to purchases for the Custody Account from banks (including Chase) or broker-dealers, of United States or foreign government obligations subject to repurchase agreements, Chase agrees, pursuant to Written Instructions, to: (a) deposit such securities and repurchase agreements in a segregated account maintained by Chase; and (b) promptly show on Chase's records that such securities and repurchase agreements are being held on behalf of the Fund and deliver to the Fund a written confirmation to that effect. 8c. SEGREGATES ACCOUNTS FOR DEPOSITS OF COLLATERAL. Chase agrees, with respect to (1) cash or high quality debt securities to secure the Fund's commitments to purchase new issues of debt obligations offered on a when-issued basis; (ii) cash, U.S. government securities, or irrevocable letters of credit of borrowers of the Fund's portfolio securities to secure the loan to them of such securities; and/or (iii) cash, securities or any other property delivered to secure any other obligations; (all of such items being hereinafter referred to as "collateral"), pursuant to Written Instructions, to: (a) deposit the collateral for each such obligation in a separate segregated account maintained by Chase; and (b) promptly to show on Chase's records that such collateral is being held on behalf of the Fund and deliver to the Fund a written confirmation to that effect. 9. DEPOSIT ACCOUNT. Subject to the provisions of this Agreement, the Fund authorizes Chase to establish and maintain in each country or other jurisdiction in which the principal trading market f or any Securities is located or in which any Securities are to be presented for payment, an account or accounts, which may include nostro accounts with Chase Branches and omnibus accounts of Chase at Foreign Banks, for receipt of cash in the Deposit Account, in such currencies as directed by Written Instructions. For purposes of this Agreement, cash so held in any such account shall be evidenced by separate book entries maintained by Chase at its office in London and shall be deemed to be Cash held by Chase in the Deposit Account. Unless Chase receives Written Instructions to the contrary, cash received or credited by Chase or any other Chase Branch, Foreign Bank or Foreign Securities Depository for the Deposit Account in a currency other than United States dollars shall be converted promptly into United States dollars whenever it is practicable to do so through customary banking channels (including without limitation the effecting of such conversions at Chase's preferred rates through Chase, its affiliates or Chase Branches), and shall be automatically transmitted back to Chase in the United States. 10. SETTLEMENT PROCEDURES. Settlement procedures for transactions in Securities delivered to, held in, or to be delivered from the Custody Account in Chase Branches, Domestic Securities Depositories, Foreign Banks and Foreign Securities Depositories, including receipts and payments of cash held in any nostro account or omnibus account for the Deposit Account as described in Section 9, shall be carried out in accordance with the provisions of the Operating Agreement. It is understood that such settlement procedures may vary, as provided in the Operating Agreement, from securities market to securities market, to reflect particular settlement practices in such markets. Chase shall make or cause the appropriate Chase Branch or Foreign Bank to move payments of Cash held in the Deposit Account only: (a) in connection with the purchase of Securities for the account of the Fund and only against the receipt of such Securities by Chase or by another appropriate Chase Branch, Domestic Securities Depository, Foreign Bank or Foreign Securities Depository, or otherwise as provided in the Operating Agreement, each such payment to be made at prices confirmed by Written Instructions, or (b) in connection with any dividend, interim dividend or other distribution declared by the Fund, or (c) as directed by the Fund by Written Instructions setting forth the name and address of the person to whom the payment is to be made and the purpose f or which the payment is to be made. Upon the receipt by Chase of Written Instructions specifying the Securities to be so transferred or delivered, which instructions shall name the person or persons to whom transfers or deliveries of such Securities shall be made and shall indicate the time(s) for such transfers or deliveries, Securities held in the Custody Account shall be transferred, exchanged, or delivered by Chase, any Chase Branch, Domestic Securities Depository, Foreign Bank, or Foreign Securities Depository, as the case may be, against payment in cash or securities, or otherwise as provided in the Operating Agreement, only: (a) upon sale of such Securities for the account of the Fund and receipt of such payment in the amount shown in a broker's confirmation of sale of the Securities or other proper authorization received by Chase before such payment is made, as confirmed by Written Instructions; (b) in exchange for or upon conversion into other Securities alone or other Securities and Cash pursuant to any plan of merger, consolidation, reorganization, recapitalization, readjustment, or tender offer; (c) upon exercise of conversion, subscription, purchase, or other similar rights represented by such Securities; or (d) otherwise as directed by the Fund by Written Instructions which shall set forth the amount and purpose of such transfer or delivery. Until Chase receives Written Instructions to the contrary, Chase shall, and shall cause each Chase Branch, Domestic Securities Depository, Foreign Bank and Foreign Securities Depository holding Securities or Cash to, take the following actions in accordance with procedures established in the Operating Agreement: (a) collect and timely deposit in the Deposit Account all income due or payable with respect to any Securities and take any action which may be necessary and proper in connection with the collection and receipt of such income; (b) present timely for payment all Securities in the Custody Account which are called, redeemed or retired or otherwise become payable and all coupons and other income items which call for payment upon presentation and to receive and credit to the Deposit Account Cash so paid for the account of the Fund except that, if such Securities are convertible, such Securities shall not be presented f or payment until two business days preceding the date on which such conversion rights would expire unless Chase previously shall have received Written Instructions with respect thereto; (c) present for exchange all Securities in the Custody Account converted pursuant to their terms into other Securities; (d) in respect of securities in the Custody Account, execute in the name of the Fund such ownership and other certificates as may be required to obtain payments in respect thereto, provided that Chase shall have requested and the Fund shall have furnished to Chase any information necessary in connection with such certificates; (e) exchange interim receipts or temporary securities in the Custody Account for securities; and (f) receive and hold in the Custody Account all Securities received as a distribution on Securities held in the Custody Account as a result of a stock dividend, share split--up or reorganization, recapitalization, readjustment or other rearrangement or distribution of rights or similar Securities issued with respect to any Securities held in the Custody Account. 11. RECORDS. Chase hereby agrees that Chase and any Chase Branch or Foreign Bank shall create, maintain, and retain all records relating to their activities and obligations as custodian for the Fund under this Agreement in such manner as will meet the obligations of the Fund under the Act of 1940, particularly Section 31 thereof and Rules 31a-1 and 31a-2 thereunder, and Federal, state and foreign tax laws and other legal or administrative rules or procedures, in each case as currently in effect and applicable to the Fund. All records so maintained in connection with the performance of its duties under this Agreement shall, in the event of termination of this Agreement, be preserved and maintained by Chase as required by regulation, and shall be made available to the Fund or its agent upon request, in accordance with the provisions of Section 19. Chase hereby agrees, subject to restrictions under applicable laws, that the books and records of Chase and any Chase Branch pertaining to their actions under this Agreement shall be open to the physical, on--premises inspection and audit at reasonable times by the independent accountants ("Accountants") employed by, or other representatives of, the Fund. Chase hereby agrees that, subject to restrictions under applicable laws, access shall be afforded to the Accountants to such of the books and records of any Foreign Bank, Domestic Securities Depository or Foreign Securities Depository with respect to Securities and Cash as shall be required by the Accountants in connection with their examination of the books and records pertaining to the affairs of the Fund. Chase also agrees that as the Fund may reasonably request from time to time, Chase shall provide the Accountants with information with respect to Chase's and Chase Branches' systems of internal accounting controls as they relate to the services provided under this Agreement, and Chase shall use its best efforts to obtain and furnish similar information with respect to each Domestic Securities Depository, Foreign Bank and Foreign Securities Depository holding Securities and Cash. 12. REPORTS. Chase shall supply periodically, upon the reasonable request of the Fund, such statements, reports, and advice with respect to Cash in the Deposit Account and the Securities in the Custody Account and transactions in Securities from time to time received and/or delivered for or from the Custody Account, as the case may be, as the Fund shall require. Such statements, reports and advice shall include an identification of the Chase Branch, Domestic Securities Depository, Foreign Bank and Foreign Securities Depository having custody of the Securities and Cash, and descriptions thereof. 13. REGISTRATION OF SECURITIES. Securities in the Custody Account which are issued or issuable only in bearer form (except such securities as are held in the Book-Entry System) shall be held by Chase, Chase Branches, Domestic Securities Depositories, Foreign Banks or Foreign Securities Depositories in that form. All other Securities in the Custody Account shall be held in registered form in the name of Chase, or any Chase Branch, the Book-Entry System, Domestic Securities Depository, Foreign Bank or Foreign Securities Depository and their nominees, as custodian or nominee. 14. STANDARD OF CARE. (a) GENERAL. Chase shall assume entire responsibility for all Securities held in the Custody Account, Cash held in the Deposit Account, Cash or Securities held in the Segregated Account and any of the Securities and Cash while in the possession of Chase or any Chase Branch, Domestic Securities Depository, Foreign Bank or Foreign Securities Depository, or in the possession or control of any employees, agents or other personnel of Chase or any Chase Branch, Domestic Securities Depository, Foreign Bank or Foreign Securities Depository; and shall be liable to the Fund for any loss to the Fund occasioned by any destruction of the Securities or Cash so held or while in such possession, by any robbery, burglary, larceny, theft or embezzlement by any employees, agents or personnel of Chase or any Chase Branch, Domestic Securities Depository, Foreign Bank or Foreign Securities Depository, and/or by virtue of the disappearance of any of the Securities or Cash so held or while in such possession, with or without any fault attributable to Chase (" fault attributable to Chase" for the purposes of this Agreement being deemed to mean any negligent act or omission, robbery, burglary, larceny, theft or embezzlement by any employees or agents of Chase or any Chase Branch, Domestic Securities Depository, Foreign Bank or Foreign Securities Depository). In the event of Chase's discovery or notification of any such loss of Securities or Cash, Chase shall promptly notify the Fund and shall reimburse the Fund to the extent of the market value of the missing Securities or Cash as at the date of the discovery of such loss. The Fund shall not be obligated to establish any negligence, misfeasance or malfeasance on Chase's part from which such loss resulted, but Chase shall be obligated hereunder to make such reimbursement to the Fund after the discovery or notice of such loss, destruction or theft or such securities or cash. Chase may at its option insure itself against loss from any cause but shall be under no obligation to insure for the benefit of the Fund. (b) COLLECTIONS. All collections of funds or other property paid or distributed in respect of Securities held in the Custody Account shall be made at the risk of the Fund. Chase shall have no liability for any loss occasioned by delay in the actual receipt of notice by Chase (or by any Chase Branch or Foreign Bank in the case of Securities or Cash held outside of the United States) of any payment, redemption or other transaction regarding Securities held in the Custody Account or Cash held in the Deposit Account in respect of which Chase has agreed to take action in the absence of Written Instructions to the contrary as provided in Section 10 of this Agreement, which does not appear in any of the publications referred to in Section 16 of this Agreement. (c) EXCLUSIONS. Notwithstanding any other provision in this Agreement to the contrary, Chase shall not be responsible f or (i) losses resulting from war or from the imposition of exchange control restrictions, confiscation, expropriation, or nationalization of any securities or assets of the issuer of such securities, or (ii) losses resulting from any negligent act or omission of the Fund or any of its affiliates, or any robbery, theft, embezzlement or fraudulent act by any employee or agent of the Fund or any of its affiliates. Chase shall not be liable for any action taken in good faith upon Written Instructions of Authorized Persons of the Fund or upon any certified copy of any resolution of the Board of Directors of the Fund, and may rely on the genuineness of any such documents which it may in good faith believe to be validly executed. (d) LIMITATION ON LIABILITY UNDER SECTION 14(A). Notwithstanding any other provision in this Agreement to the contrary, it is agreed that Chase's sole responsibility with respect to losses under Section 14(a) shall be to pay the Fund the amount of any such loss as provided in Section 14(a) (subject to the limitation provided in Section 14(e) of this Agreement). This limitation does not apply to any liability of Chase under Section 14(f) of this Agreement. (e) ANNUAL ADJUSTMENT OF LIMITATION OF LIABILITY. As soon as practicable after June 1 of every year, the Fund shall provide Chase with the amount of its total net assets as of the close of business on such date (or if the New York Stock Exchange is closed on such date, then in that event as of the close of business on the next day on which the New York Stock Exchange is open for business). It is understood by the parties to this Agreement (1) that Chase has entered into substantially similar custody agreements with other Templeton Funds, including, but not necessarily limited to, Templeton Funds, Inc. on behalf of Templeton World Fund and Templeton Foreign Fund; Templeton Growth Fund, Ltd., Templeton Growth Fund, Inc.; Templeton Emerging Markets Fund, Inc.; Templeton Global Income Fund, Inc.; Templeton Income Trust on behalf of Templeton Money Fund; and Templeton Income Fund; Templeton Global Governments Income Trust; Templeton Global Utilities, Inc.; Templeton Smaller Companies. Growth Fund, Inc.; Templeton Tax Free Trust; Templeton Real Estate Securities Fund; Templeton Global Opportunities Trust; Templeton Institutional Funds, Inc.; Templeton American Trust, Inc.; Templeton Developing Markets Trust; Templeton Capital Accumulator Fund, Inc.; Templeton Variable Annuity Fund, all of which Funds have as their investment adviser either the Investment Manager of the Fund or companies which are affiliated with the Investment Manager; and (2) that Chase may enter into substantially similar custody agreements with additional mutual funds under Templeton management which may hereafter be organized. Each of such custody agreements with each of such other Templeton Funds contains (or will contain) a "Standard of Care" section similar to this Section 14, except that the limit of Chase's liability is (or will be) in varying amounts for each Fund, with the aggregate limits of liability in all of such agreements, including this Agreement, amounting to $150,000,000. On each June 1, Chase will total the net assets reported by each one of the Templeton Funds, and will calculate the percentage of the aggregate net assets of all the Templeton Funds that is represented by the net asset value of this Fund. Thereupon Chase shall allocate to this Agreement with this Fund that proportion of its total of $150,000,000 responsibility undertaking which is substantially equal to the proportion which this Fund's net assets bears to the total net assets of all such Templeton Funds subject to adjustments for claims paid as follows: all claims previously paid to this Fund shall first be deducted from .its proportionate allocable share of the $150,000,000 Chase responsibility, and if the claims paid to this Fund amount to more than its allocable share of the Chase responsibility, then the excess of such claims paid to this Fund shall diminish the balance of the $150,000,000 Chase responsibility available for the proportionate shares of all of the other Templeton Funds having similar custody agreements with Chase. Based on such calculation, and on such adjustment for claims paid, if any, Chase thereupon shall notify the Fund of such limit of liability under this Section 14 which will be available to the Fund with respect to (1) losses in excess of payment allocations for previous years and (2) losses discovered during the next year this Agreement remains in effect and until a new determination of such limit of responsibility is made on the next succeeding June 1. (f) OTHER LIABILITY. Independently of Chase's liability to the Fund as provided in Section 14(a) above (it being understood that the limitations in Sections 14(d) oand 14(e) do not apply to the provisions of this Section 14(f)), Chase shall be responsible for the performance of only such duties as are set forth in this Agreement or contained in express instructions given to Chase which are not contrary to the provisions of this Agreement. Chase will use and require the same care with respect to the safekeeping of all Securities held in the Custody Account, Cash held in the. Deposit Account, and Securities or Cash held in the Segregated Account as it uses in respect of its own similar property, but it need not maintain any insurance for the benefit of the Fund. With respect to Securities and Cash held outside of the United States, Chase will be liable to the Fund for any loss to the Fund resulting from any disappearance or destruction of such Securities or Cash while in the possession of Chase or any Chase Branch, Foreign Bank or Foreign Securities Depository, to the same extent it would be liable to the Fund if Chase had retained physical possession of such Securities and Cash in New York. It is specifically agreed that Chase's liability under this Section 14(f) is entirely independent of Chase's liability under Section 14(a). Notwithstanding any other provision in this Agreement to the contrary, in the event of any loss giving rise to liability under this Section 14(f) that would also give rise to liability under Section 14(a), the amount of such liability shall not be charged against the amount of the limitation on liability provided in Section 14 (d). (g) COUNSEL; LEGAL EXPENSES. Chase shall be entitled to the advice of counsel (who may be counsel for the Fund) at the expense of the Fund in connection with carrying out Chase's duties hereunder and in no event shall Chase be liable for any action taken or omitted to be taken by it in good faith pursuant to advice of such counsel. If, in the absence of fault attributable to Chase and in the course of or in connection with carrying out its duties and obligations hereunder, any claims or. legal proceedings are instituted against Chase or any Chase Branch by third parties, the Fund will hold Chase harmless against any claims, liabilities, costs, damages or expenses incurred in connection therewith and, if the Fund so elects, the Fund may assume the defense thereof with counsel satisfactory to Chase, and thereafter shall not be responsible for any further legal fees that may be incurred by Chase, provided, however, that all of the foregoing is conditioned upon the Fund's receipt from Chase of prompt and due notice of any such claim or proceeding. 15. EXPROPRIATION INSURANCE. Chase represents that it does not intend to obtain any insurance for the benefit of the Fund which protects against the imposition of exchange control restrictions on the transfer from any foreign jurisdiction of the proceeds of sale of any Securities or against confiscation, expropriation or nationalization of any securities or the assets of the issuer of such securities by a government of any foreign country in which the issuer of such securities is organized or in which securities are held f or safekeeping either by Chase, or any Chase Branch, Foreign Bank or Foreign Securities Depository in such country. Chase has discussed the availability of expropriation insurance with the Fund, and has advised the Fund as to its understanding of the position of the staff of the Securities and Exchange Commission that any investment company investing in securities of foreign issuers has the responsibility f or reviewing the possibility of the imposition of exchange control restrictions which would affect the liquidity of such investment company's assets and the possibility of exposure to political risk, including the appropriateness of insuring against such risk. The Fund has acknowledged that it has the responsibility to review the possibility of such risks and what, if any, action should be taken. 16. PROXY. NOTICES. REPORTS. ETC. Chase shall watch for the dates of expiration of (a) all purchase or sale rights (including warrants, puts, calls and the like) attached to or inherent in any of the Securities held in the Custody Account and (b) conversion rights and conversion price changes for each convertible Security held in the Custody Account as published in Telstat Services, Inc., Standard & Poor's Financial Inc. and/or any other publications listed in the Operating Agreement (it being understood that Chase may give notice to the Fund as provided in Section 21 as to any change, addition and/or omission in the publications watched by Chase f or these purposes). If Chase or any Chase Branch, Foreign Bank or Foreign Securities Depository shall receive any proxies, notices, reports, or other communications relative to any of the Securities held in the Custody Account, Chase shall, on its behalf or on behalf of a Chase Branch, Foreign Bank or Foreign Securities Depository, promptly transmit in writing any such communication to the Fund. In addition, Chase shall notify the Fund by person--to--person collect telephone concerning any such notices relating to any matters specified in the first sentence of this Section 16. As specifically requested by the Fund, Chase shall execute or deliver or shall cause the nominee in whose name Securities are registered to execute and deliver to such person as may be designated by the Fund proxies, consents, authorizations and any other instruments whereby the authority of the Fund as owner of any Securities in the Custody Account registered in the name of Chase or such nominee, as the case may be, may be exercised. Chase shall vote Securities in accordance with Written Instructions timely received by Chase, or such other person or persons as designated in or pursuant to the Operating Agreement. Chase and any Chase Branch shall have no liability for any loss or liability occasioned by delay in the actual receipt by them or any Foreign Bank or Foreign Securities Depository of notice of any payment or redemption which does not appear in any of the publications referred to in the first sentence of this Section 16. 17. COMPENSATION. The Fund agrees to pay to Chase from time to time such compensation for its services pursuant to this Agreement as may be mutually agreed upon in writing from time to time and Chase's out-of-pocket or incidental expenses, as from time to time shall be mutually agreed upon by Chase and the Fund. The Fund shall have no responsibility for the payment of services provided by any Domestic Securities Depository, such fees being paid directly by Chase. In the event of any advance of Cash for any purpose made by Chase pursuant to any Written Instruction, or in the event that Chase or any nominee of Chase shall incur or be assessed any taxes in connection with the performance of this Agreement, the Fund shall indemnify and reimburse Chase therefor, except such assessment of taxes as results from the negligence, fraud, or willful misconduct of Chase, any Domestic Securities Depository, Chase Branch, Foreign Bank or Foreign Securities Depository, or as constitutes a tax on income, gross receipts or the like of any one or more of them. Chase shall have a lien on Securities in the Custody Account and on Cash in the Deposit Account for any amount owing to Chase from time to time under this Agreement upon due notice to the Fund. 18. AGREEMENT SUBJECT TO APPROVAL OF THE FUND. It is understood that this Agreement and any amendments shall be subject to the approval of the Fund. 19. TERM. This Agreement shall remain in effect until terminated by either party upon 60 days' written notice to the other, sent by registered mail. Notwithstanding the preceding sentence, however, if at any time after the execution of this Agreement Chase shall provide written notice to the Fund, by registered mail, of the amount needed to meet a substantial increase in the cost of maintaining its present type and level of bonding and insurance coverage in connection with Chase's undertakings in Section 14(a), (d) and (e) of this Agreement, said Section 14(a), (d) and (e) of this Agreement shall cease to apply 60 days after the providing of such notice by Chase, unless prior to the expiration of such 60 days the Fund agrees in writing to assume the amount needed for such purpose. Chase, upon the date this Agreement terminates pursuant to notice which has been given in a timely fashion, shall, and/or shall cause each Domestic Securities Depository to, deliver the Securities in the Custody Account, pay the Cash in the Deposit Account, and deliver and pay Securities and Cash in the Segregated Account to the Fund unless Chase has received from the Fund 60 days prior to the date on which this Agreement is `to be terminated Written Instructions specifying the name(s) of the person(s) to whom the Securities in the Custody Account shall be delivered, the Cash in the Deposit Account shall be paid, and Securities and Cash in the Segregated Account shall be delivered and paid. Concurrently with the delivery of such Securities, Chase shall deliver to the Fund, or such other, person as the Fund shall instruct, the records referred to in Section 11 which are in the possession or control of Chase, any Chase Branch, or any Domestic Securities Depository, or any Foreign Bank or Foreign Securities Depository, or in the event that Chase is unable to obtain such records in their original form Chase shall deliver true copies of such records. 20. AUTHORIZATION OF CHASE TO EXECUTE NECESSARY DOCUMENTS. In connection with the performance of its duties hereunder, the Fund hereby authorizes and directs Chase and each Chase Branch acting on behalf of Chase, and Chase hereby agrees, to execute and deliver in the name of the Fund, or cause such other Chase Branch to execute and deliver in the name of the Fund, such certificates, instruments, and other documents as shall be reasonably necessary in connection with such performance, provided that the Fund shall have furnished to Chase any information necessary in connection therewith. 21. NOTICES. Any notice or other communication authorized or required by this Agreement to be given to the parties shall be sufficiently given (except to the extent otherwise specifically provided) if addressed and mailed postage prepaid or delivered to it at its office at the address set forth below: If to the Fund, then to Templeton China World Fund, Inc. 700 Central Avenue, P.O. Box 33030 St. Petersburg, Florida 33733 Attention: Thomas M. Mistele, Secretary If to Chase, then to The Chase Manhattan Bank, N.A. 1211 Avenue of the Americas 33rd Floor New York, New York 10036 Attention: Global Custody Division Executive or such other person or such other address as any party shall have furnished to the other party in writing. 22. NON-ASSIGNABILITY OF AGREEMENT. This Agreement shall not be assignable by either party hereto; provided, however, that any corporation into which the Fund or Chase, as the case may be, may be merged or converted or with which it may be consolidated, or any corporation succeeding to all or substantially all of the trust business of Chase, shall succeed to the respective rights and shall assume the respective duties of the Fund or of Chase, as the case may be, hereunder. 23. GOVERNING LAW. This Agreement shall be governed by the laws of the State of New York. THE CHASE MANHATTAN BANK, N.A. By:/s/RICHARD SAMUELS -------------------------------- Vice President TEMPLETON CHINA WORLD FUND, INC. By:/s/MARTIN L. FLANAGAN --------------------------------------------- EX-99.G 11 fcm598.txt AMENDMENT TO CUSTODY AGMT 3/2/98 AMENDMENT, dated March 2, 1998 to the custody agreements (each an "Agreement"), between the Templeton funds listed on Schedule A hereto (each a "Fund"), with each having a place of business at 500 East Broward Blvd., Ft. Lauderdale, FL 33394 and The Chase Manhattan Bank ("Chase"), having a place of business at 270 Park Ave., New York, NY 10017-2070. It is hereby agreed as follows: Section 1. Except as modified hereby, the Agreement is confirmed in all respects. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Agreement. Section 2. The Agreement is amended as follows: Delete all of Section 2 of the Agreement after subsection (B.) thereof, and insert, in lieu thereof, the following: (C.) Fund's board of directors (or equivalent body) (hereinafter "Board") hereby delegates to Chase, and Chase hereby accepts the delegation to it, of the obligation to perform as Fund's "Foreign Custody Manager" (as that term is defined in SEC rule 17f-5(a)(2)), both for the purpose of selecting Eligible Foreign Custodians (as that term is defined herein) to hold Securities and Cash and of evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in SEC rule 17f-5(c)(2)); provided that, the term Eligible Foreign Custodian shall not include any "Compulsory Depository." A Compulsory Depository shall mean a Foreign Securities Depository or clearing agency the use of which is compulsory because: (1) its use is required by law or regulation, (2) securities cannot be withdrawn from the depository, or (3) maintaining securities outside the depository is not consistent with prevailing custodial practices in the country which the depository serves. Compulsory Depositories used by Chase as of the date hereof are set forth in Appendix 1-A hereto, and as the same may be amended on notice to Fund from time to time. (i) In connection with the foregoing, Chase shall: (1) provide written reports notifying Fund's Board of the placement of Securities and Cash with particular Eligible Foreign Custodians and of any material change in the arrangements with such Eligible Foreign Custodians, with such reports to be provided to Fund's Board at such times as the Board deems reasonable and appropriate based on the circumstances of Fund's foreign custody arrangements; (2) exercise such reasonable care, prudence and diligence in performing as Fund's Foreign Custody Manager as a person having responsibility for the safekeeping of Securities and Cash would exercise; (3) in selecting an Eligible Foreign Custodian, first have determined that Securities and Cash placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such Securities and Cash, including, without limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv); (4) determine that the written contract with the Eligible Foreign Custodian (or, in the case of an Eligible Foreign Custodian that is a non-Compulsory Depository or clearing agency, such contract, the rules or established practices or procedures of the Depository, or any combination of the foregoing) requires that the Eligible Foreign Custodian will provide reasonable care for Securities and Cash based on the standards applicable to custodians in the relevant market; and (5) have established a system to monitor the continued appropriateness of maintaining Securities and Cash with particular Eligible Foreign Custodians and of the governing contractual arrangements. Chase shall also monitor Compulsory Depositories and shall advise Fund of any material negative change in the performance of, or arrangements with, any Compulsory Depository as the same would adversely affect the custody of assets. Subject to (i)(1)-(5) above, Chase is hereby authorized to place and maintain Securities and Cash on behalf of Fund with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by Chase. (ii) Except as expressly provided herein, Fund shall be solely responsible to assure that the maintenance of Securities and Cash hereunder complies with the rules, regulations, interpretations and exemptive orders promulgated by or under the authority of the SEC. (iii) Chase represents to Fund that it is a U.S. Bank as defined in Rule 17f-5(a)(7). Fund represents to Chase that: (1) the Securities and Cash being placed and maintained in Chase's custody are subject to the Investment Company Act of 1940, as amended (the "1940 Act"), as the same may be amended from time to time; (2) its Board has determined that it is reasonable to rely on Chase to perform as Fund's Foreign Custody Manager; and (3) its Board or its investment adviser shall have determined that Fund may maintain Securities and Cash in each country in which Fund's Securities and Cash shall be held hereunder and determined to accept the risks arising therefrom (including, but not limited to, a country's financial infrastructure (and including any Compulsory Depository operating in such country), prevailing custody and settlement practices, laws applicable to the safekeeping and recovery of Securities and Cash held in custody, and the likelihood of nationalization, currency controls and the like) (collectively ("Country Risk")). Nothing contained herein shall require Chase to make any selection that would entail consideration of Country Risk. (iv) Chase shall assist Fund in monitoring Country Risk by furnishing such information relating to the Country Risk as is specified in Appendix 1-B hereto. Fund hereby acknowledges that: (1) such information is solely designed to inform Fund of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (2) Chase has gathered the information from sources it considers reliable, but that Chase shall have no responsibility for inaccuracies or incomplete information except to the extent negligently obtained by Chase. Section 3. Add the following at the end of Section 3(d): and which shall be limited to Eligible Foreign Custodians as defined in (i)-(ii) and (v) of the definition of Eligible Foreign Custodians contained herein; provided that, for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which Chase has not acted as Foreign Custody Manager. Section 4. Add the following at the end of Section 3(e): and which shall be limited to Eligible Foreign Custodians as defined in (iii) and (iv)-(v) of the definition of Eligible Foreign Custodians contained herein; provided that, for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17) the term Foreign Securities Depository shall not include any Compulsory Depository or any non-compulsory depository as to which Chase has not acted as Foreign Custody Manager. Section 5. Add the following definitions in appropriate alphabetic sequence to Section 3 of the Agreement: (1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule 17f-5(a)(7). (2) an "Eligible Foreign Custodian," shall mean (i) a banking institution or trust company, incorporated or organized under the laws of a country other than the United States, that is regulated as such by that country's government or an agency thereof, (ii) a majority-owned direct or indirect subsidiary of a U.S. Bank or bank holding company which subsidiary is incorporated or organized under the laws of a country other than the United States; (iii) a securities depository or clearing agency, incorporated or organized under the laws of a country other than the United States, that acts as a system for the central handling of securities or equivalent book-entries in that country and that is regulated by a foreign financial regulatory authority as defined under section 2(a)(50) of the 1940 Act, (iv) a securities depository or clearing agency organized under the laws of a country other than the United States when acting as a transnational system ("Transnational Depository") for the central handling of securities or equivalent book-entries, and (v) any other entity that shall have been so qualified by exemptive order, rule or other appropriate action of the SEC. Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu thereof, the following: At the request of Fund, Chase may, but need not, add an Eligible Foreign Custodian that is a U.S. Bank, a Foreign Bank or Foreign Securities Depository where Chase has not acted as Foreign Custody Manager with respect to the selection thereof; provided that, any such entities shall not be included for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event that it elects to add any such entity. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. TEMPLETON THE CHASE MANHATTAN BANK By:/s/BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL ----------------------- ------------------------------- Name: Barbara J. Green Name: Lenore Vanden Handel Title: Secretary Title: Vice President Appendix 1-A COMPULSORY DEPOSITORIES See Attached Appendix 1-B INFORMATION REGARDING COUNTRY RISK 1. To aid Fund's board in its determinations regarding Country Risk, Chase shall furnish board annually and upon the initial placing of Securities and Cash into a country the following information (check items applicable): A Opinions of local counsel concerning: ___ i. Whether applicable foreign law would restrict the access afforded Fund's independent public accountants to books and records kept by an eligible foreign custodian located in that country. ___ ii. Whether applicable foreign law would restrict the Fund's ability to recover its assets in the event of the bankruptcy of an Eligible Foreign Custodian located in that country. ___ iii. Whether applicable foreign law would restrict the Fund's ability to recover assets that are lost while under the control of an Eligible Foreign Custodian located in the country. B. Written information concerning: ___ i. The likelihood of expropriation, nationalization, freezes, or confiscation of Fund's assets. ___ ii. Whether difficulties in converting Fund's cash and cash equivalents to U.S. dollars are reasonably foreseeable. C. A market report with respect to the following topics: (i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation, and (vi) compulsory depositories (including depository evaluation). 2. To aid Fund's board in monitoring Country Risk, Chase shall furnish board the following additional information: As more fully described in the FCM procedures, market flashes, including with respect to changes in the information in market reports. Schedule A TEMPLETON U.S. FUNDS As of February 28, 1998 TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86 TEMPLETON FUNDS, INC. ("TFI") - 2/11/86 Templeton World Fund Templeton Foreign Fund TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96 TEMPLETON INCOME TRUST ("TIT") - 5/15/96 Templeton Global Bond Fund TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96 TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91 TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91 TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91 TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96 Templeton Foreign Equity Series Templeton Growth Series Templeton Emerging Markets Series Templeton Emerging Fixed Income Series TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90 TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95 Templeton Growth and Income Fund Templeton Global Infrastructure Fund Templeton Americas Government Securities Fund Templeton Greater European Fund Templeton Latin America Fund TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87 TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88 TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88 TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93 TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93 TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94 TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94 TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94 TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95 TEMPLETONVARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated 2/23/96) Templeton Money Market Fund Templeton Bond Fund Templeton Stock Fund Templeton Asset Allocation Fund Templeton International Fund Templeton Developing Markets Fund Mutual Discovery Investments Fund Mutual Shares Investments Fund Franklin Growth Investments Fund Franklin Small Cap Investments Fund FRANKLIN/TEMPLETON JAPAN FUND - 6/24/94 TEMPLETON VARIABLE ANNUITY FUND - 1/27/88 EX-99.G 12 fcm798.txt AMENDMENT NO. 2 TO CUSTODY AGMT 7/23/98 AMENDMENT No. 2, dated July 23, 1998 to the custody agreements (each an "Agreement"), between each of the Templeton finds listed on Schedule A hereto (each a "Fund"), with each having a place of business at 500 East Broward Blvd., Ft. Lauderdale, FL 33394, and The Chase Manhattan Bank ("Chase"), having a place of business at 270 Park Ave., New York, NY 10017-2070. It is hereby agreed as follows: Section 1. Except as modified hereby, the Agreement is confirmed in all respects. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Agreement. This Amendment supersedes in all respects the Amendment between the parties, dated March 2, 1998, which shall have no further force or effect as of the date hereof. Section 2. The Agreement is amended as follows: Delete all of Section 2 of the Agreement after subsection (B.) thereof, and insert, in lieu thereof, the following: (C.) Fund's board of directors (or equivalent body) (hereinafter "Board") hereby delegates to Chase, and Chase hereby accepts the delegation to it of, the obligation to perform as Fund's "Foreign Custody Manager" (as that term is defined in Securities and Exchange Commission ("SEC") rule 17f-5(a)(2)), both for the purpose of selecting Eligible Foreign Custodians (as that term is defined herein) to hold Securities and Cash and of evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in SEC rule 17f-5(c)(2)); provided that, the term Eligible Foreign Custodian shall not include any "Compulsory Depository." A Compulsory Depository shall mean a Foreign Securities Depository or clearing agency the use of which is compulsory because: (1) its use is required by law or regulation, (2) securities cannot be withdrawn from the depository, or (3) maintaining securities outside the depository is not consistent with prevailing custodial practices in the country which the depository serves. Compulsory Depositories used by Chase as of the date hereof are set forth in Appendix 1-A hereto, and as the same may be amended on notice to Fund from time to time. (i) In connection with the foregoing, Chase shall: (1) provide written reports notifying Fund's Board of the placement of Securities and Cash with particular Eligible Foreign Custodians and of any material change in the arrangements with such Eligible Foreign Custodians, with such reports to be provided to Fund's Board at such times as the Board deems reasonable and appropriate based on the circumstances of Fund's foreign custody arrangements; (2) exercise such reasonable care, prudence and diligence in performing as Fund's Foreign Custody Manager as a person having responsibility for the safekeeping of Securities and Cash would exercise; (3) in selecting an Eligible Foreign Custodian, first have determined that Securities and Cash placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such Securities and Cash, including, without limitation, those factors set forth in SEC rule 17f-5(c)(1)(i)-(iv); (4) determine that the written contract with the Eligible Foreign Custodian requires that the Eligible Foreign Custodian will provide reasonable care for Securities and Cash based on the standards applicable to custodians in the relevant market; provided that, in the case of an Eligible Foreign Custodian that is a non-Compulsory Depository or clearing agency, such determination shall only be made to the extent required by SEC rule 17f-5 as in effect from time to time and where so required shall be made based on such contract, the rules or established practices or procedures of the Depository, or any combination thereof; and (5) have established a system to monitor the continued appropriateness of maintaining Securities and Cash with particular Eligible Foreign Custodians and of the governing contractual arrangements. Chase shall also monitor Compulsory Depositories and shall advise Fund of any material negative change in the performance of, or arrangements with, any Compulsory Depository as the same would adversely affect the custody of assets. With respect to monitoring Compulsory Depositories, Chase shall use its reasonable efforts to obtain the information with respect to the factors set forth on Schedule 1-C hereto: (i) by November 20, 1998 with respect to any Compulsory Depository in a country in which Securities are held as of the date hereof; (ii) to the extent feasible in light of the circumstances then prevailing in a given country in which Securities are held, no later than 90 days after the establishment of, or a determination by Chase that a depository has become, a Compulsory Depository in such country; and (iii) to the extent feasible in light of the circumstances then prevailing in a given country, no later than 90 days after the first placement of Securities after the date hereof with a Subcustodian where such country has a Compulsory Depository. Chase shall advise Fund when, to Chase's knowledge based on such reasonable efforts, there is a negative answer with respect to a Compulsory Depository as to any of such factors. In connection with the foregoing: (i) Fund acknowledges and agrees that Chase's agreements with Eligible Foreign Custodians do not, as of the date hereof, comply with factor (i) on Schedule 1-C and that Chase shall not amend such agreements to so comply unless Rule 17f-5 is amended or interpreted by the Securities and Exchange Commission to incorporate such a factor into the Rule with respect to Compulsory Depositories; and (ii) to the extent that Rule 17f-5 is amended or interpreted by the Securities and Exchange Commission to incorporate materially one or more of (i)-(viii), Chase shall be obligated to obtain the relevant information on such incorporated factors rather than being limited only to using its reasonable efforts to do so. In the event that the SEC adopts standards or criteria different from those set forth in Schedule 1-C, the above provisions and Schedule 1-C shall be deemed to be amended to conform to the standards or criteria adopted by the SEC, it being understood that the time within which Chase must furnish the required information shall be a reasonable time in light of such differences. Subject to (i)(1)-(4) and the first sentence of (5) above, Chase is hereby authorized to place and maintain Securities and Cash on behalf of Fund with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by Chase. (ii) Except as expressly provided herein, Fund shall be responsible to assure that the maintenance of Securities and Cash hereunder complies with the rules, regulations, interpretations and exemptive orders promulgated by or under the authority of the SEC. (iii) Chase represents to Fund that it is a U.S. Bank as defined in Rule 17f-5(a)(7). Fund represents to Chase that: (1) the Securities and Cash being placed and maintained in Chase's custody are subject to the Investment Company Act of 1940, as amended (the "1940 Act"), as the same may be amended from time to time; (2) its Board has determined that it is reasonable to rely on Chase to perform as Fund's Foreign Custody Manager; and (3) its Board or its investment adviser shall have determined that Fund may maintain Securities and Cash in each country in which Fund's Securities and Cash shall be held hereunder and determined to accept the risks arising therefrom (including, but not limited to, a country's financial infrastructure (and including any Compulsory Depository operating in such country), prevailing custody and settlement practices, laws applicable to the safekeeping and recovery of Securities and Cash held in custody, and the likelihood of nationalization, currency controls and the like) (collectively ("Country Risk")). Nothing contained herein shall require Chase to make any selection that would entail consideration of Country Risk. (iv) Chase shall assist Fund in monitoring Country Risk by furnishing such information relating to the Country Risk as is specified in Appendix 1-B hereto. Fund hereby acknowledges that: (1) such information is solely designed to inform Fund of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (2) Chase has gathered the information from sources it considers reliable, but that Chase shall have no responsibility for inaccuracies or incomplete information except to the extent negligently obtained by Chase. Section 3. Add the following at the end of Section 3(d): and which shall be limited to Eligible Foreign Custodians as defined in (i)-(ii) and (v) of the definition of Eligible Foreign Custodians contained herein; provided that, for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which Chase has not acted as Foreign Custody Manager. Section 4. Add the following at the end of Section 3(e): and which shall be limited to Eligible Foreign Custodians as defined in (iii) and (iv)-(v) of the definition of Eligible Foreign Custodians contained herein; provided that, for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17) the term Foreign Securities Depository shall not include any Compulsory Depository or any non-compulsory depository as to which Chase has not acted as Foreign Custody Manager. Section 5. Add the following definitions in appropriate alphabetic sequence to Section 3 of the Agreement: (1) a "U.S. Bank," shall mean a U.S. bank as defined in SEC rule 17f-5(a)(7). (2) an "Eligible Foreign Custodian," shall mean (i) a banking institution or trust company, incorporated or organized under the laws of a country other than the United States, that is regulated as such by that country's government or an agency thereof, (ii) a majority-owned direct or indirect subsidiary of a U.S. Bank or bank holding company which subsidiary is incorporated or organized under the laws of a country other than the United States; (iii) a securities depository or clearing agency, incorporated or organized under the laws of a country other than the United States, that acts as a system for the central handling of securities or equivalent book-entries in that country and that is regulated by a foreign financial regulatory authority as defined under section 2(a)(50) of the 1940 Act, (iv) a securities depository or clearing agency organized under the laws of a country other than the United States when acting as a transnational system ("Transnational Depository") for the central handling of securities or equivalent book-entries, and (v) any other entity that shall have been so qualified by exemptive order, rule or other appropriate action of the SEC. Section 6. Delete existing Section 5 of the Agreement and, insert, in lieu thereof, the following: At the request of Fund, Chase may, but need not, add an Eligible Foreign Custodian that is a U.S. Bank, a Foreign Bank or Foreign Securities Depository where Chase has not acted as Foreign Custody Manager with respect to the selection thereof; provided that, any such entities shall not be included for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event that it elects to add any such entity. ********************* IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. TEMPLETON THE CHASE MANHATTAN BANK (on behalf of each of the Funds listed on Schedule A hereto) By:/s/ BARBARA J. GREEN By:/s/LENORE VANDEN HANDEL -------------------------- ------------------------------- Name: Barbara J. Green Name: Lenore Vanden Handel Title: Secretary Title: Vice President Schedule A TEMPLETON U.S. FUNDS As of June 30, 1998 TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86 TEMPLETON FUNDS, INC. ("TFI") - 2/11/86 Templeton World Fund Templeton Foreign Fund TEMPLETON GLOBAL SMALLER COMPANIES FUND, INC. ("TGSCF") - 5/15/96 TEMPLETON INCOME TRUST ("TIT") - 5/15/96 Templeton Global Bond Fund TEMPLETON GLOBAL REAL ESTATE FUND ("TGREF") - 5/15/96 TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91 TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91 TEMPLETON AMERICAN TRUST, INC. ("TAT") - 2/26/91 TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96 Templeton Foreign Equity Series Templeton Growth Series Templeton Emerging Markets Series Templeton Emerging Fixed Income Series TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90 TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95 Templeton Growth and Income Fund Templeton Global Infrastructure Fund Templeton Americas Government Securities Fund Templeton Greater European Fund Templeton Latin America Fund TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87 TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88 TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88 TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93 TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93 TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") - 4/22/94 TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94 TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94 TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95 TEMPLETON VARIABLE PRODUCTS SERIES FUND ("TVPSF") - 8/31/88 (amended & restated 2/23/96) Templeton Money Market Fund Templeton Bond Fund Templeton Stock Fund Templeton Asset Allocation Fund Templeton International Fund Templeton Developing Markets Fund Mutual Discovery Investments Fund Mutual Shares Investments Fund Franklin Growth Investments Fund Franklin Small Cap Investments Fund Appendix 1-A COMPULSORY DEPOSITORIES See Attached Appendix 1-B INFORMATION REGARDING COUNTRY RISK 1. To aid Fund's board in its determinations regarding Country Risk, Chase shall furnish board annually and upon the initial placing of Securities and Cash into a country the following information (check items applicable): A Opinions of local counsel concerning: ___ i. Whether applicable foreign law would restrict the access afforded Fund's independent public accountants to books and records kept by an eligible foreign custodian located in that country. ___ ii. Whether applicable foreign law would restrict the Fund's ability to recover its assets in the event of the bankruptcy of an Eligible Foreign Custodian located in that country. ___ iii. Whether applicable foreign law would restrict the Fund's ability to recover assets that are lost while under the control of an Eligible Foreign Custodian located in the country. B. Written information concerning: ___ i. The likelihood of expropriation, nationalization, freezes, or confiscation of Fund's assets. ___ ii. Whether difficulties in converting Fund's cash and cash equivalents to U.S. dollars are reasonably foreseeable. C. A market report with respect to the following topics: (i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation, and (vi) compulsory depositories (including depository evaluation). 2. To aid Fund in monitoring Country Risk, Chase shall furnish the following additional information: As more fully described in the Foreign Custody Manager procedures, market flashes, including with respect to changes in the information in market reports. Appendix 1-C FACTORS REGARDING COMPULSORY DEPOSITORIES (i) Whether the Eligible Foreign Custodian which is participating in the Compulsory Depository has undertaken to adhere to the roles, practices and procedures of such Compulsory Depository; (ii) Whether no regulatory authority with oversight responsibility for the Compulsory Depository has issued a public notice that the Compulsory Depository is not in compliance with any material capital, solvency, insurance or other similar financial strength requirements imposed by such authority or, in the case of such notice having been issued, that such notice has been withdrawn or the remedy of such noncompliance has been publicly announced by the Compulsory Depository; (iii) Whether no regulatory authority with oversight responsibility over the Compulsory Depository has issued a public notice that the Compulsory Depository is not in compliance with any material internal controls requirement imposed by such authority or, in the case of such notice having been issued, that such notice has been withdrawn or the remedy of such noncompliance has been publicly announced by the Compulsory Depository; (iv) Whether the Compulsory Depository maintains Fund's assets deposited with the Compulsory Depository by the Eligible Foreign Custodian participant under no less favorable safekeeping conditions than those that apply generally to other participants in the Compulsory Depository; (v) Whether the Compulsory Depository maintains records that segregate the Compulsory Depository's own assets from the assets of participants in the Compulsory Depository; (vi) Whether the Compulsory Depository maintains records that identify the assets of each of its participants; (vii) Whether the Compulsory Depository provides periodic reports to its participants with respect to the safekeeping of assets maintained by the Compulsory Depository including by way of example, notification of any transfer to or from participant accounts; and (viii) Whether the Compulsory Depository is subject to periodic review, such as audits by independent accountants or inspections by regulatory authorities. EX-99.G 13 amd3_custody.txt AMENDMENT NO. 3 TO CUSTODY AGMT 5/1/01 AMENDMENT No. 3, dated as of May 1, 2001 to the custody agreements (each an "Agreement"), between the Franklin Templeton funds listed on Schedule A hereto (each a "Fund"), having a place of business at 7500 East Broward Blvd., Ft. Lauderdale, FL 33394, and The Chase Manhattan Bank ("Bank"), having a place of business at 270 Park Ave., New York, N.Y. 10017-2070. It is hereby agreed as follows: Section 1. Except as modified hereby, the Agreement is confirmed in all respects. Capitalized terms used herein without definition shall have the meanings ascribed to them in the Agreement. This Amendment supersedes in all respects Amendment No 2 between the parties, dated July 23, 1998, which shall have no further force or effect as and after the date hereof. Section 2. Delete all of Section 2 of the Agreement after subsection (B.) thereof. h entity. Section 3. The following definitions are added to Section 3 of the Agreement in appropriate alphabetic sequence: (i) The term Subcustodian as used herein shall mean the following: (a) a "U.S. Bank," which shall mean a U.S. bank as defined in rule 17f-5(a)(7) under the Investment Company Act of 1940, as amended ("1940 Act") promulgated by the Securities and Exchange Commission ("SEC"); and (b) an "Eligible Foreign Custodian," which, as defined in 1940 Act rule 17f-5(a)(1) and (5), shall mean (i) a banking institution or trust company, incorporated or organized under the laws of a country other than the United States, that is regulated as such by that country's government or an agency thereof, and (ii) a majority-owned direct or indirect subsidiary of a U.S. Bank or bank holding company which subsidiary is incorporated or organized under the laws of a country other than the United States. In addition, an Eligible Foreign Custodian shall also mean any other entity that shall have been so qualified by exemptive order, rule or other appropriate action of the SEC. (ii) The term "securities depository" as used herein shall mean the following when referring to a securities depository located: (a) outside the U.S,. an "Eligible Securities Depository" which, in turn, shall have the same meaning asin 1940 Act rule 17f-7(b)(1)(i)-(vi) as the same may be amended from time to time, or that has otherwise been made exempt by an SEC exemptive order, rule other appropriate SEC action, except that prior to the compliance date with rule 17f-7 for a particular securities depository the term "securities depository" shall be as defined in (a)(1)(ii)-(iii) of the 1997 amendments to 1940 Act rule 17f-5. (b) in the U.S., a "securities depository" as defined in 1940 Act rule 17f-4(a). Section 4. Add the following at the end of Section 3 of the Agreement: "For purposes of clarity, it is understood and agreed that the term Subcustodian shall not include any securities depository. For purposes of the provisions of the Agreement imposing liability on Bank, the term Subcustodian shall not include any Eligible Foreign Custodian as to which Bank has not acted as Foreign Custody Manager." Section 5. Add the following at the end of Section 3(d): "and which shall be limited to Eligible Foreign Custodians as defined in (i)(b) of the definition of Eligible Foreign Custodians contained herein; provided that, for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17), Foreign Bank shall not include any Foreign Bank as to which Chase has not acted as Foreign Custody Manager." Section 6. Add the following at the end of Section 3(e): "and which shall be limited to Eligible Securities Depositories as defined in (ii)(a) of the definition of Eligible Securities Depositories contained herein; provided that, for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17) the term Foreign Securities Depository shall be deleted." Section 7. Delete the word "and" at the end of Section 4(b) of the Agreement and add the following at the end of Section 4(c) of the Agreement: "; and (d) the risk analysis furnished by Chase pursuant to Section 24(a) hereof". Section 8. Delete existing Section 5 of the Agreement and, insert, in lieu thereof, the following: "At the request of Fund, Chase may, but need not, add an Eligible Foreign Custodian where Chase has not acted as Foreign Custody Manager with respect to the selection thereof; provided that, any such entities shall not be included for purposes of the sections of this Agreement addressing Chase liability (including, but not limited to, Sections 7, 10, 14, and 16-17). Chase shall notify Fund in the event that it elects to add any such entity." Section 9. Add the following language to the end of Section 6(a) of the Agreement: "or, in the case of cash deposits, except for liens or rights in favor of creditors of the Subcustodian arising under bankruptcy, insolvency or similar laws." Section 10. Add new Section 23 to the Agreement as follows: 23. COMPLIANCE WITH 1940 ACT RULE 17F-5 ("RULE 17F-5"). (a) Fund's board of directors (or equivalent body) (hereinafter "Board") hereby delegates to Bank, and Bank hereby accepts the delegation to it of, the obligation to perform as Fund's "Foreign Custody Manager" (as that term is defined in rule 17f-5(a)(3)), including for the purposes of: (i) selecting "Eligible Foreign Custodians" (as that term is defined in rule 17f-5(a)(1), as the same may be amended from time to time, or that have otherwise been exempted by SEC exemptive order, rule other appropriate SEC action) to hold Fund's "Foreign Assets" (as that term is defined in rule 17f-5(a)(2), and (ii) evaluating the contractual arrangements with such Eligible Foreign Custodians (as set forth in rule 17f-5(c)(2)), and (iii) monitoring such foreign custody arrangements (as set forth in rule 17f-5(c)(3)). (b) In connection with the foregoing, Bank shall: (i) provide written reports notifying Fund's Board of the placement of Foreign Assets with particular Eligible Foreign Custodians and of any material change in the arrangements with such Eligible Foreign Custodians, with such reports to be provided to Fund's Board at such times as the Board deems reasonable and appropriate based on the circumstances of Fund's foreign custody arrangements but until further notice from Fund requesting a different schedule, such reports shall be provided not less than quarterly in summary form, with a more detailed report annually. (ii) exercise such reasonable care, prudence and diligence in performing as Fund's Foreign Custody Manager as a person having responsibility for the safekeeping of Foreign Assets would exercise; (iii) in selecting an Eligible Foreign Custodian, first have determined that Foreign Assets placed and maintained in the safekeeping of such Eligible Foreign Custodian shall be subject to reasonable care, based on the standards applicable to custodians in the relevant market, after having considered all factors relevant to the safekeeping of such Assets, including, without limitation, those factors set forth in rule 17f-5(c)(1)(i)-(iv); (iv) determine that the written contract with the Eligible Foreign Custodian requires that the Eligible Foreign Custodian will provide reasonable care for Foreign Assets based on the standards applicable to custodians in the relevant market as provided in rule 17f-5(c)(2); and (v) have established a system to monitor the continued appropriateness of maintaining Foreign Assets with particular Eligible Foreign Custodians and performance of the governing contractual arrangements; it being understood, however, that in the event that Bank shall have determined that the existing Eligible Foreign Custodian in a given country would no longer afford Foreign Assets reasonable care and that no other Eligible Foreign Custodian in that country would afford reasonable care, Bank shall promptly so advise Fund and shall then act in accordance with the Instructions of Fund with respect to the disposition of the affected Foreign Assets. Subject to (b)(i)-(v) above, Bank is hereby authorized to place and maintain Foreign Assets on behalf of Fund with Eligible Foreign Custodians pursuant to a written contract deemed appropriate by Bank. (c) Except as expressly provided herein and in Section 24 hereof, Fund shall be solely responsible to assure that the maintenance of Foreign Assets hereunder complies with the rules, regulations, interpretations and exemptive orders promulgated by or under the authority of the SEC. (d) Bank represents to Fund that it is a U.S. Bank as defined in rule 17f-5(a)(7). Fund represents to Bank that: (1) the Assets being placed and maintained in Bank's custody are subject to the Investment Company Act of 1940, as amended (the "1940 Act") as the same may be amended from time to time; (2) its Board (or other governing body) has determined that it is reasonable to rely on Bank to perform as Fund's Foreign Custody Manager; and (3) its Board (or other governing body) or its investment adviser shall have determined that Fund may maintain Foreign Assets in each country in which Fund's Foreign Assets shall be held hereunder and determined to accept the risks arising therefrom (including, but not limited to, a country's financial infrastructure, prevailing custody and settlement practices, laws applicable to the safekeeping and recovery of Foreign Assets held in custody, and the likelihood of nationalization, currency controls and the like) (collectively ("Country Risk")). Nothing contained herein shall require Bank to make any selection on behalf of Fund that would entail consideration of Country Risk and, except as may be provided in (e) below, to engage in any monitoring of Country Risk. (e) Bank shall provide to Fund such information relating to Country Risk as is specified in Schedule C hereto. Fund hereby acknowledges that: (i) such information is solely designed to inform Fund of market conditions and procedures and is not intended as a recommendation to invest or not invest in particular markets; and (ii) Bank has gathered the information from sources it considers reliable, but that Bank shall have no responsibility for inaccuracies or incomplete information. Section 11. Add a new Section 24 to the Agreement as follows: 24. COMPLIANCE WITH 1940 ACT RULE 17F-7 ("RULE 17F-7"). (a) Bank shall, for consideration by Fund, provide an analysis in accordance with rule 17f-7(a)(1)(i)(A) of the custody risks associated with maintaining Fund's Foreign Assets with each Eligible Securities Depository used by Bank as of the date hereof (or, in the case of an Eligible Securities Depository not used by Bank as of the date hereof, prior to the initial placement of Fund's Foreign Assets at such Depository) and at which any Foreign Assets of Fund are held or are expected to be held. The foregoing analysis will be provided to Fund and its investment adviser(s) ("Adviser") at Bank's Website. In connection with the foregoing, either Fund or Adviser shall notify Bank of any Eligible Securities Depositories at which it does not choose to have its Foreign Assets held. Bank shall monitor the custody risks associated with maintaining Fund's Foreign Assets at each such Eligible Securities Depository on a continuing basis and shall promptly notify Fund or Adviser of any material changes in such risks. (b) Bank shall exercise reasonable care, prudence and diligence in performing the requirements set forth in Section 24(a) above. (c) Based on the information available to it in the exercise of diligence, Bank shall determine the eligibility under rule 17f-7 of each depository before including it on Appendix 1-B hereto and shall promptly advise Fund and Adviser if any Eligible Securities Depository ceases to be eligible. (Eligible Securities Depositories used by Bank as of the date hereof are set forth in Appendix 1-B hereto, and as the same may be amended on notice to Fund and Adviser from time to time.) ********************* IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. FRANKLIN TEMPLETON THE CHASE MANHATTAN BANK On behalf of each of the Funds listed on Schedule A hereto By: /s/ John R. Kay By: /s/ John K. Barry -------------------------------- ---------------------- Name: John R. Kay Name: John Barry Title: Vice President Title: Vice President Date: June 26, 2001 Date: 5/3/01 Schedule A TEMPLETON U.S. FUNDS As of April 1, 2001 P96299 TEMPLETON GROWTH FUND, INC. ("TGF") - 12/31/86 TEMPLETON FUNDS, INC. ("TFI") - 2/11/86 P96116 Templeton World Fund P96117 Templeton Foreign Fund P96118 TEMPLETON GLOBAL SMALLER COMPNAIES FUND, INC. ("TGSCF") - 5/15/96 TEMPLETON INCOME TRUST ("TIT") - 5/15/96 P96271 Templeton Global Bond Fund P96766 TEMPLETON CAPITAL ACCUMULATOR FUND, INC. ("TCAF") - 1/14/91 P96847 TEMPLETON DEVELOPING MARKETS TRUST ("TDMT") - 10/16/91 TEMPLETON INSTITUTIONAL FUNDS, INC. ("TIFI") - 1/29/96 P96721 Foreign Equity Series P80289 Emerging Markets Series P81800 Emerging Fixed Income Market Series P96583 TEMPLETON GLOBAL OPPORTUNITIES TRUST ("TGOT") - 1/18/90 TEMPLETON GLOBAL INVESTMENT TRUST ("TGIT") - 5/7/95 P81021 Templeton International Fund P81020 Templeton Latin America Fund P96309 TEMPLETON EMERGING MARKETS FUND, INC. ("TEMF") - 2/1/87 P96518 TEMPLETON GLOBAL INCOME FUND, INC. ("TGIF") - 2/29/88 P96340 TEMPLETON GLOBAL GOVERNMENTS INCOME TRUST ("TGG") - 10/22/88 P80394 TEMPLETON EMERGING MARKETS INCOME FUND, INC. ("TEMIF") - 9/17/93 P96311 TEMPLETON CHINA WORLD FUND, INC. ("TCWF") - 9/7/93 Schedule A (continued) TEMPLETON U.S. FUNDS As of April 1, 2001 P49247 & P80672 TEMPLETON EMERGING MARKETS APPRECIATION FUND, INC. ("TEMAF") 4/22/94 P80816 TEMPLETON DRAGON FUND, INC. ("TDF") - 8/30/94 P80815 TEMPLETON VIETNAM AND SOUTHEAST ASIA FUND, INC. ("TVF") - 9/15/94 P80906 TEMPLETON RUSSIA FUND, INC. ("TRF") - 6/15/95 SECURITIES DEPOSITORIES AS OF September 27, 2000 Schedule B ELIGIBLE SECURITIES DEPOSITORIES
- --------------------------------------------------------------------------------------------------------- COUNTRY DEPOSITORY INSTRUMENTS - --------------------------------------------------------------------------------------------------------- Argentina CVSA Equity, Corporate + Government Debt (Caja de Valores S.A.) - --------------------------------------------------------------------------------------------------------- Argentina CRYL Government Debt (Central de Registration y Liquidacion de Instrumentos de Endeudamiento Publico) - --------------------------------------------------------------------------------------------------------- Australia Austraclear Limited Corporate Debt, Money Market + Semi- Government Debt - --------------------------------------------------------------------------------------------------------- Australia CHESS Equity (Clearing House Electronic Sub-register System) - --------------------------------------------------------------------------------------------------------- Australia RITS Government Debt (Reserve Bank of Australia/Reserve Bank Information and Transfer System) - --------------------------------------------------------------------------------------------------------- Austria OeKB Equity, Corporate + Government Debt (Oesterreichische Kontrollbank AG) - --------------------------------------------------------------------------------------------------------- Belgium CIK Equity + Corporate Debt (Caisse Interprofessionnelle de Depots et de Virements de Titres S.A.) - --------------------------------------------------------------------------------------------------------- Belgium NBB Government Debt (National Bank of Belgium) - --------------------------------------------------------------------------------------------------------- Brazil CBLC Equity (Companhia Brasileira de Liquidacao e Custodia) - --------------------------------------------------------------------------------------------------------- Brazil CETIP Corporate Debt (Central de Custodia e Liquidacao Financiera de Titulos Privados) - --------------------------------------------------------------------------------------------------------- Brazil SELIC Government Debt (Sistema Especial de Liquidacao e Custodia) - --------------------------------------------------------------------------------------------------------- Bulgaria BNB Government Debt (Bulgaria National Bank) - --------------------------------------------------------------------------------------------------------- Bulgaria CDAD Equity (Central Depository A.D.) - --------------------------------------------------------------------------------------------------------- Canada CDS Equity, Corporate + Government Debt (The Canadian Depository for Securities Limited) - --------------------------------------------------------------------------------------------------------- Chile DCV Equity, Corporate + Government Debt (Deposito Central de Valores S.A.) - --------------------------------------------------------------------------------------------------------- China, Shanghai SSCCRC Equity (Shanghai Securities Central Clearing and Registration Corporation) - --------------------------------------------------------------------------------------------------------- China, Shenzhen SSCC Equity (Shenzhen Securities Clearing Company, Limited) - --------------------------------------------------------------------------------------------------------- Colombia DCV Government Debt (Deposito Central de Valores) - --------------------------------------------------------------------------------------------------------- Colombia DECEVAL Equity, Corporate + Government Debt (Deposito Centralizado de Valores de Colombia S.A.) - --------------------------------------------------------------------------------------------------------- Croatia SDA Equity + Government Debt (Central Depository Agency Inc. - Stredisnja depozitarna agencija d.d.) - --------------------------------------------------------------------------------------------------------- Croatia Ministry of Finance of the Republic of Croatia Short-term debt issued by the Ministry of Finance. - --------------------------------------------------------------------------------------------------------- Croatia CNB Short-term debt issued by the (Croatian National Bank) National Bank of Croatia. - --------------------------------------------------------------------------------------------------------- Czech Republic SCP Equity, Corporate + Government Debt (Stredisko cennych papiru) - --------------------------------------------------------------------------------------------------------- Czech Republic CNB Government Debt (Czech National Bank) - --------------------------------------------------------------------------------------------------------- Denmark VP Equity, Corporate + Government Debt (Vaerdipapircentralen A/S) - --------------------------------------------------------------------------------------------------------- Egypt MCSD Equity + Corporate Debt (Misr for Clearing, Settlement and Depository, S.A.E.) - --------------------------------------------------------------------------------------------------------- Estonia ECDS Equity (Estonian Central Depository for Securities Limited - Eesti Vaatpaberite Keskdepositoorium) - --------------------------------------------------------------------------------------------------------- Euromarket DCC Euro-CDs (The Depository and Clearing Centre) - --------------------------------------------------------------------------------------------------------- Euromarket Clearstream Euro-Debt (Clearstream Banking, S.A.) - --------------------------------------------------------------------------------------------------------- Euromarket Euroclear Euro-Debt - --------------------------------------------------------------------------------------------------------- Finland APK Equity, Corporate + Government Debt (Finnish Central Securities Depository Limited) - --------------------------------------------------------------------------------------------------------- France SICOVAM Equity, Corporate + Government Debt (Societe Interprofessionnelle pour la Compensation des Valeurs Mobilieres, S.A.) - --------------------------------------------------------------------------------------------------------- Germany Clearstream Equity, Corporate + Government Debt (Clearstream Banking AG) - --------------------------------------------------------------------------------------------------------- Greece CSD Equity + Corporate Debt (Central Securities Depository S.A.) - --------------------------------------------------------------------------------------------------------- Greece BoG Government Debt (Bank of Greece) - --------------------------------------------------------------------------------------------------------- Hong Kong HKSCC Equity (Hong Kong Securities Clearing Company Limited) - --------------------------------------------------------------------------------------------------------- Hong Kong CMU Corporate + Government Debt (Central Moneymarkets Unit) - --------------------------------------------------------------------------------------------------------- Hungary KELER Equity, Corporate + Government Debt (Central Depository and Clearing House - Kosponti Elszamolohaz es Ertektar (Budapest) Rt.) - --------------------------------------------------------------------------------------------------------- India NSDL Equity (National Securities Depository Limited) - --------------------------------------------------------------------------------------------------------- India CDSL Equity (Central Depository Services (India) Limited) - --------------------------------------------------------------------------------------------------------- India RBI Government Debt (Reserve Bank of India) - --------------------------------------------------------------------------------------------------------- Indonesia KSEI Equity (PT Kustodian Sentral Efek Indonesia) - --------------------------------------------------------------------------------------------------------- Ireland CREST Equity + Corporate Debt (CRESTCo Limited) - --------------------------------------------------------------------------------------------------------- Ireland CBISSO Government Debt (Central Bank of Ireland Securities Settlements Office) - --------------------------------------------------------------------------------------------------------- Israel TASE Clearing House Equity, Corporate + Government Debt (Tel Aviv Stock Exchange Clearing House) - --------------------------------------------------------------------------------------------------------- Italy Monte Titoli S.p.A. Equity + Corporate Debt - --------------------------------------------------------------------------------------------------------- Italy Banca d'Italia Government Debt - --------------------------------------------------------------------------------------------------------- Ivory Coast DC/BR Equity (Le Depositaire Central / Banque de Reglement) - --------------------------------------------------------------------------------------------------------- Japan JASDEC Equity + Convertible Debt (Japan Securities Depository Center) - --------------------------------------------------------------------------------------------------------- Japan BoJ Registered Government Debt (Bank of Japan) - --------------------------------------------------------------------------------------------------------- Kazakhstan CSD Equity (Central Securities Depository CJSC) - --------------------------------------------------------------------------------------------------------- Latvia LCD Equity, Corporate + Government Debt (Latvian Central Depository) - --------------------------------------------------------------------------------------------------------- Lebanon Midclear S.A.L. Equity (Custodian and Clearing Center of Financial Instruments for Lebanon and the Middle East S.A.L.) - --------------------------------------------------------------------------------------------------------- Lithuania CSDL Equity + Government Debt (Central Securities Depository of Lithuania) - --------------------------------------------------------------------------------------------------------- Luxembourg Clearstream Equity (Clearstream Banking S.A.) - --------------------------------------------------------------------------------------------------------- Malaysia MCD Equity + Corporate Debt (Malaysian Central Depository Sdn. Bhd.) - --------------------------------------------------------------------------------------------------------- Mauritius CDS Equity + Corporate Debt (Central Depository and Settlement Company Limited) - --------------------------------------------------------------------------------------------------------- Mexico INDEVAL Equity, Corporate + Government Debt (S.D. INDEVAL S.A. de C.V.) - --------------------------------------------------------------------------------------------------------- Morocco Maroclear Equity, Corporate + Government Debt - --------------------------------------------------------------------------------------------------------- Netherlands NECIGEF Equity, Corporate + Government Debt (Nederlands Centraal Insituut voor Giraal Effectenverkeer B.V.) - --------------------------------------------------------------------------------------------------------- New Zealand NZCSD Equity, Corporate + Government Debt (New Zealand Central Securities Depository) - --------------------------------------------------------------------------------------------------------- Nigeria CSCS Equity, Corporate + Government Debt (Central Securities Clearing System Limited) - --------------------------------------------------------------------------------------------------------- Norway VPS Equity, Corporate + Government Debt (Verdipapirsentralen) - --------------------------------------------------------------------------------------------------------- Oman MDSRC Equity (The Muscat Depository and Securities Registration Company, S.A.O.C.) - --------------------------------------------------------------------------------------------------------- Pakistan CDC Equity + Corporate Debt (Central Depository Company of Pakistan Limited) - --------------------------------------------------------------------------------------------------------- Pakistan SBP Government Debt (State Bank of Pakistan) - --------------------------------------------------------------------------------------------------------- Peru CAVALI Equity, Corporate + Government Debt (CAVALI ICLV S.A.) - --------------------------------------------------------------------------------------------------------- Philippines PCD Equity (Philippine Central Depository Inc.) - --------------------------------------------------------------------------------------------------------- Philippines ROSS Government Debt (Bangko Sentral ng Pilipinas / Register of Scripless Securities) - --------------------------------------------------------------------------------------------------------- Poland NDS Equity + Long-Term Government Debt (National Depository for Securities S.A.) - --------------------------------------------------------------------------------------------------------- Poland CRT Short-Term Government Debt (Central Registry of Treasury-Bills) - --------------------------------------------------------------------------------------------------------- Portugal CVM Equity, Corporate + Government Debt (Central de Valores Mobiliarios e Sistema de Liquidacao e Compensacao) - --------------------------------------------------------------------------------------------------------- Romania SNCDD Equity (National Company for Clearing, Settlement and Depository for Securities) - --------------------------------------------------------------------------------------------------------- Romania BSE Equity (Bucharest Stock Exchange Registry) - --------------------------------------------------------------------------------------------------------- Russia VTB Government Debt (Ministry of Finance (Vneshtorgbank) Bonds) - --------------------------------------------------------------------------------------------------------- Russia NDC Equity, Corporate + Government Debt (National Depository Centre) - --------------------------------------------------------------------------------------------------------- Russia DCC Equity (Depository Clearing Company) - --------------------------------------------------------------------------------------------------------- Singapore CDP Equity + Corporate Debt (The Central Depository (Pte) Limited) - --------------------------------------------------------------------------------------------------------- Singapore SGS Government Debt (Monetary Authority of Singapore / Singapore Government Securities Book-Entry System) - --------------------------------------------------------------------------------------------------------- Slovak Republic SCP Equity, Corporate + Government Debt (Stredisko cennych papierov SR Bratislava, a.s.) - --------------------------------------------------------------------------------------------------------- Slovak Republic NBS Government Debt (National Bank of Slovakia) - --------------------------------------------------------------------------------------------------------- Slovenia KDD Equity + Corporate Debt (Centralna klirinsko depotna druzba d.d.) - --------------------------------------------------------------------------------------------------------- South Africa CDL Corporate + Government Debt (Central Depository (Pty) Limited) - --------------------------------------------------------------------------------------------------------- South Africa STRATE Equity (Share Transactions Totally Electronic) - --------------------------------------------------------------------------------------------------------- South Korea KSD Equity, Corporate + Government Debt (Korea Securities Depository) - --------------------------------------------------------------------------------------------------------- Spain SCLV Equity + Corporate Debt (Servicio de Compensacion y Liquidacion de Valores, S.A.) - --------------------------------------------------------------------------------------------------------- Spain CBEO Government Debt (Banco de Espana / Central Book Entry Office) - --------------------------------------------------------------------------------------------------------- Sri Lanka CDS Equity (Central Depository System (Private) Limited) - --------------------------------------------------------------------------------------------------------- Sweden VPC Equity, Corporate + Government Debt (Vardepapperscentralen AB) - --------------------------------------------------------------------------------------------------------- Switzerland SIS Equity, Corporate + Government Debt (SIS SegaInterSettle AG) - --------------------------------------------------------------------------------------------------------- Taiwan TSCD Equity + Government Debt (Taiwan Securities Central Depository Co., Ltd.) - --------------------------------------------------------------------------------------------------------- Thailand TSD Equity, Corporate + Government Debt (Thailand Securities Depository Company Limited) - --------------------------------------------------------------------------------------------------------- Tunisia STICODEVAM Equity + Corporate Debt (Societe Tunisienne Interprofessionnelle pour la Compensation et le Depot des Valeurs Mobilieres) - --------------------------------------------------------------------------------------------------------- Turkey TAKASBANK Equity + Corporate Debt (IMKB Takas ve Saklama Bankasi A.S.) - --------------------------------------------------------------------------------------------------------- Turkey CBT Government Debt (Central Bank of Turkey) - --------------------------------------------------------------------------------------------------------- United Kingdom CREST Equity + Corporate Debt (CRESTCo Limited) - --------------------------------------------------------------------------------------------------------- United Kingdom CMO Sterling & Euro CDs + CP (Central Moneymarkets Office) - --------------------------------------------------------------------------------------------------------- United States DTC Equity + Corporate Debt (Depository Trust Company) - --------------------------------------------------------------------------------------------------------- United States PTC Mortgage Back Debt (Participants Trust Company) - --------------------------------------------------------------------------------------------------------- United States FED Government Debt (The Federal Reserve Book-Entry System) - --------------------------------------------------------------------------------------------------------- Uruguay BCU Government Debt (Banco Central del Uruguay) - --------------------------------------------------------------------------------------------------------- Venezuela BCV Government Debt (Banco Central de Venezuela) - --------------------------------------------------------------------------------------------------------- Zambia CSD Equity + Government Debt (LuSE Central Shares Depository Limited) - --------------------------------------------------------------------------------------------------------- Zambia BoZ Government Debt (Bank of Zambia) - ---------------------------------------------------------------------------------------------------------
Schedule C Information Regarding Country Risk ---------------------------------- 1. To aid Fund in its determinations regarding Country Risk, Bank shall furnish annually and upon the initial placing of Foreign Assets into a country the following information (check items applicable): A Opinions of local counsel concerning: i. Whether applicable foreign law would restrict the access afforded Fund's independent public accountants to books and records kept by an Eligible Foreign Custodian located in that country. ii. Whether applicable foreign law would restrict the Fund's ability to recover its assets in the event of the bankruptcy of an Eligible Foreign Custodian located in that country. iii. Whether applicable foreign law would restrict the Fund's ability to recover assets that are lost while under the control of an Eligible Foreign Custodian located in the country. B. Written information concerning: i. The likelihood of expropriation, nationalization, freezes, or confiscation of Fund's assets. ii. Whether difficulties in converting Fund's cash and cash equivalents to U.S. dollars are reasonably foreseeable. C. A market report with respect to the following topics: (i) securities regulatory environment, (ii) foreign ownership restrictions, (iii) foreign exchange, (iv) securities settlement and registration, (v) taxation, (vi) market settlement risk, (vii) Eligible Securities Depositories (including Depository evaluation), if any. 2. Bank shall furnish the following additional information: Market flashes, including with respect to changes in the information in market reports. EX-99.H 14 taagmt.txt FORM OF TRANSFER AGENT AGREEMENT FORM OF TRANSFER AGENT AGREEMENT BETWEEN TEMPLETON CHINA WORLD FUND AND FRANKLIN TEMPLETON INVESTOR SERVICES, LLC AGREEMENT dated as of __________________, 2003, between TEMPLETON CHINA WORLD FUND, a registered open-end investment company with offices at 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33394 (the "Fund") and FRANKLIN TEMPLETON INVESTOR SERVICES, LLC, a registered transfer agent with offices at 100 Fountain Parkway, St. Petersburg, Florida 33716 ("FTIS"). W I T N E S S E T H: That for and in consideration of the mutual promises hereinafter set forth, the Fund and FTIS agree as follows: 1. DEFINITIONS. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: (a) "Declaration of Trust" shall mean the Declaration of Trust of the Fund as the same may be amended from time to time; (b) "Authorized Person" shall be deemed to include any person, whether or not such person is an officer or employee of the Fund, duly authorized to give Oral Instructions or Written Instructions on behalf of the Fund as indicated in a certificate furnished to FTIS pursuant to Section 4(c) hereof as may be received by FTIS from time to time; (c) "Custodian" refers to the custodian and any sub-custodian of all securities and other property which the Fund may from time to time deposit, or cause to be deposited or held under the name or account of such custodian pursuant to the Custody Agreement; (d) "Oral Instructions" shall mean instructions, other than written instructions, actually received by FTIS from a person reasonably believed by FTIS to be an Authorized Person; (e) "Shares" refers to shares of beneficial interest par value $.01 of the Fund; and (f) "Written Instructions" shall mean a written communication signed by a person reasonably believed by FTIS to be an Authorized Person and actually received by FTIS. 2. APPOINTMENT OF FTIS. The Fund hereby appoints and constitutes FTIS as transfer agent for Shares of the Fund and as shareholder servicing agent for the Fund, and FTIS accepts such appointment and agrees to perform the duties hereinafter set forth. 3. COMPENSATION. (a) The Fund will compensate or cause FTIS to be compensated for the performance of its obligations hereunder in accordance with the fees set forth in the written schedule of fees annexed hereto as Schedule A and incorporated herein. Schedule A does not include out-of-pocket disbursements of FTIS for which FTIS shall be entitled to bill the Fund separately. FTIS will bill the Fund as soon as practicable after the end of each calendar month, and said billings will be detailed in accordance with Schedule A. The Fund will promptly pay to FTIS the amount of such billing. Out-of-pocket disbursements shall include, but shall not be limited to, the items specified in the written schedule of out-of-pocket expenses annexed hereto as Schedule B and incorporated herein. Schedule B may be modified by FTIS upon not less than 30 days' prior written notice to the Fund. Unspecified out-of-pocket expenses shall be limited to those out-of-pocket expenses reasonably incurred by FTIS in the performance of its obligations hereunder. Reimbursement by the Fund for expenses incurred by FTIS in any month shall be made as soon as practicable after the receipt of an itemized bill from FTIS. Out-of-Pocket disbursements may also include payments made by FTIS to entities including affiliated entities which provide sub-shareholder services, recordkeeping and/or transfer agency services to beneficial owners of the Fund, where such services are substantially similar to the services provided by FTIS to account holders of record. The amount of these disbursements per benefit plan participant fund account per year shall not exceed the per account transfer agency fees payable by the Fund to FTIS in connection with maintaining actual shareholder accounts. On an annual basis, FTIS shall provide a report to the Board showing, with respect to each entity receiving such fees, the number of beneficial owners serviced by such entity and the value of the assets in the Fund represented by such accounts. (b) Any compensation agreed to hereunder may be adjusted from time to time by attaching to Schedule A of this Agreement a revised Fee Schedule. 4. DOCUMENTS. In connection with the appointment of FTIS, the Fund shall, on or before the date this Agreement goes into effect, but in any case, within a reasonable period of time for FTIS to prepare to perform its duties hereunder, deliver or cause to be delivered to FTIS the following documents: (a) If applicable, a specimen of the certificate for Shares of the Fund; (b) All account application forms and other documents relating to Shareholder accounts or to any plan, program or service offered by the Fund; (c) A certificate identifying the Authorized Persons and specimen signatures of Authorized Persons who will sign Written Instructions; and (d) All documents and papers necessary under the laws of Florida, under the Fund's Declaration of Trust, and as may be required for the due performance of FTIS's duties under this Agreement or for the due performance of additional duties as may from time to time be agreed upon between the Fund and FTIS. 5. DISTRIBUTIONS PAYABLE IN SHARES. In the event that the Board of Trustees of the Fund shall declare a distribution payable in Shares, the Fund shall deliver or cause to be delivered to FTIS written notice of such declaration signed on behalf of the Fund by an officer thereof, upon which FTIS shall be entitled to rely for all purposes, certifying (i) the number of Shares involved, and (ii) that all appropriate action has been taken. 6. DUTIES OF THE TRANSFER AGENT. FTIS shall be responsible for administering and/or performing transfer agent functions; for acting as service agent in connection with dividend and distribution functions; and for performing shareholder account and administrative agent functions in connection with the issuance, transfer and redemption or repurchase (including coordination with the Custodian) of Shares. The operating standards and procedures to be followed shall be determined from time to time by agreement between the Fund and FTIS. Without limiting the generality of the foregoing, FTIS agrees to perform the specific duties listed on Schedule C. 7. RECORDKEEPING AND OTHER INFORMATION. FTIS shall create and maintain all necessary records in accordance with all applicable laws, rules and regulations. 8. OTHER DUTIES. In addition, FTIS shall perform such other duties and functions, and shall be paid such amounts therefor, as may from time to time be agreed upon in writing between the Fund and FTIS. Such other duties and functions shall be reflected in a written amendment to Schedule C, and the compensation for such other duties and functions shall be reflected in a written amendment to Schedule A. 9. RELIANCE BY TRANSFER AGENT; INSTRUCTIONS. (a) FTIS will be protected in acting upon Written or Oral Instructions reasonably believed to have been executed or orally communicated by an Authorized Person and will not be held to have any notice of any change of authority of any person until receipt of a Written Instruction thereof from an officer of the Fund. FTIS will also be protected in processing Share certificates which it reasonably believes to bear the proper manual or facsimile signatures of the officers of the Fund and the proper countersignature of FTIS. (b) At any time FTIS may apply to any Authorized Person of the Fund for Written Instructions and may seek advice at the Fund's expense from legal counsel for the Fund or from its own legal counsel, with respect to any matter arising in connection with this Agreement, and it shall not be liable for any action taken or not taken or suffered by it in good faith in accordance with such Written Instructions or in accordance with the opinion of counsel for the Fund or for FTIS. Written Instructions requested by FTIS will be provided by the Fund within a reasonable period of time. In addition, FTIS, or its officers, agents or employees, shall accept Oral Instructions or Written Instructions given to them by any person representing or acting on behalf of the Fund only if said representative is known by FTIS, or its officers, agents or employees, to be an Authorized Person. 10. ACTS OF GOD, ETC. FTIS will not be liable or responsible for delays or errors by reason of circumstances beyond its control, including acts of civil or military authority, national emergencies, labor difficulties, fire, mechanical breakdown beyond its control, flood or catastrophe, acts of God, insurrection, war, riots or failure beyond its control of transportation, communication or power supply. 11. DUTY OF CARE AND INDEMNIFICATION. The Fund will indemnify FTIS against and hold it harmless from any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) resulting from any claim, demand, action or suit not resulting from willful misfeasance, bad faith or gross negligence on the part of FTIS, and arising out of, or in connection with, its duties hereunder. In addition, the Fund will indemnify FTIS against and hold it harmless from any and all losses, claims, damages, liabilities or expenses (including reasonable counsel fees and expenses) resulting from any claim, demand, action or suit as a result of: (i) any action taken in accordance with Written or Oral Instructions, or any other instructions or Share certificates reasonably believed by FTIS to be genuine and to be signed, countersigned or executed, or orally communicated by an Authorized Person; (ii) any action taken in accordance with written or oral advice reasonably believed by FTIS to have been given by counsel for the Fund or by its own counsel; (iii) any action taken as a result of any error or omission in any record (including but not limited to magnetic tapes, computer printouts, hard copies and microfilm copies) delivered, or caused to be delivered by the Fund to FTIS in connection with this Agreement; or (iv) any action taken in accordance with oral instructions given under the Telephone Exchange and Redemption Privileges, as described in the Fund's current prospectus, when believed by FTIS to be genuine. In any case in which the Fund may be asked to indemnify or hold FTIS harmless, the Fund shall be advised of all pertinent facts concerning the situation in question and FTIS will use reasonable care to identify and notify the Fund promptly concerning any situation which presents or appears likely to present a claim for indemnification against the Fund. The Fund shall have the option to defend FTIS against any claim which may be the subject of this indemnification, and, in the event that the Fund so elects, such defense shall be conducted by counsel chosen by the Fund and satisfactory to FTIS, and thereupon the Fund shall take over complete defense of the claim and FTIS shall sustain no further legal or other expenses in such situation for which it seeks indemnification under this Section 11. FTIS will not confess any claim or make any compromise in any case in which the Fund will be asked to provide indemnification, except with the Fund's prior written consent. The obligations of the parties hereto under this Section shall survive the termination of this Agreement. 12. TERM AND TERMINATION. (a) This Agreement shall be effective as of the date first written above and shall continue through April 30, 1994 and thereafter shall continue automatically for successive annual periods ending on April 30 of each year, provided such continuance is specifically approved at least annually by (i) the Fund's Board of Trustees or (ii) a vote of a "majority" (as defined in the Investment Company Act of 1940 (the "1940 Act")) of the Fund's outstanding voting securities, provided that in either event the continuance is also approved by a majority of the Board of Trustees who are not "interested persons" (as defined in the 1940 Act) of any party to this Agreement, by vote cast in person at a meeting called for the purpose of voting such approval; (b) Either party hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than 60 days after the date of receipt of such notice. In the event such notice is given by the Fund, it shall be accompanied by a resolution of the Board of Trustees of the Fund, certified by the Secretary of the Fund, designating a successor transfer agent or transfer agents. Upon such termination and at the expense of the Fund, FTIS will deliver to such successor a certified list of shareholders of the Fund (with names and addresses), an historical record of the account of each Shareholder and the status thereof, and all other relevant books, records, correspondence, and other data established or maintained by FTIS under this Agreement in a form reasonably acceptable to the Fund, and will cooperate in the transfer of such duties and responsibilities, including provisions for assistance from FTIS's personnel in the establishment of books, records and other data by such successor or successors. 13. AMENDMENT. This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties. 14. SUBCONTRACTING. The Fund agrees that FTIS may, in its discretion, subcontract for certain of the services described under this Agreement or the Schedules hereto; provided that the appointment of any such agent shall not relieve FTIS of its responsibilities hereunder. 15. MISCELLANEOUS. (a) Any notice or other instrument authorized or required by this Agreement to be given in writing to the Fund or FTIS shall be sufficiently given if addressed to that party and received by it at its office set forth below or at such other place as it may from time to time designate in writing. To the Fund: Templeton China World Fund 500 East Broward Boulevard, Suite 2100 Fort Lauderdale, Florida 33394-3091 To FTIS: Franklin Templeton Investor Services, LLC 100 Fountain Parkway St. Petersburg, Florida 33716 (b) This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable without the written consent of the other party. (c) This Agreement shall be construed in accordance with the laws of the State of California. (d) This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original; but such counterparts shall, together, constitute only one instrument. (e) The captions of this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect. (f) It is understood and expressly stipulated that neither the holders of Shares of the Fund nor any Trustee, officer, agent or employee of the Fund shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Fund only shall be liable. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective corporate officers thereunder duly authorized as of the day and year first above written. TEMPLETON CHINA WORLD FUND BY: --------------------------- FRANKLIN TEMPLETON INVESTOR SERVICES, LLC BY: ------------------------------ Schedule A Schedule of Transfer Agent and Shareholder Service Fees Effective Date January 1, 2003 Shareholder Account Fees: Full Service Account: Fixed Income $28.00 per account per annum Equity $24.00 per account per annum Networking Account: Fixed Income $14.00 per account per annum Equity $12.00 per account per annum Omnibus Sub-account: All Fund Types $6.00 per account per annum Closed Account: All Fund Types $3.50 per account per annum, will be charged for a closed account in the month of its closure and will remain in effect until the account is purged from the system of record annually. Schedule B OUT-OF-POCKET EXPENSES The Fund shall reimburse FTIS monthly for the following out-of-pocket expenses: o postage and mailing o forms o outgoing wire charges o telephone o Federal Reserve charges for check clearance o if applicable, magnetic tape and freight o retention of records o microfilm/microfiche o stationary o insurance o if applicable, terminals, transmitting lines and any expenses incurred in connection with such terminals and lines o all other miscellaneous expenses reasonably incurred by FTIS The Fund agrees that postage and mailing expenses will be paid on the day of or prior to mailing as agreed with FTIS. In addition, the Fund will promptly reimburse FTIS for any other expenses incurred by FTIS as to which the Fund and FTIS mutually agree that such expenses are not otherwise properly borne by FTIS as part of its duties and obligations under the Agreement. Out of Pocket expenses will include the fees that the transfer agent will negotiate from time to time for third party administrators and/or broker dealers to undertake sub-accounting work related to networking or Omnibus-sub accounts. Schedule C DUTIES AS TRANSFER AGENT FOR INVESTORS IN THE FUND, FTIS WILL: o Record in its transfer record, countersign as transfer agent, and deliver certificates signed manually or by facsimile, by the President or a Vice-President and by the Secretary or the Assistant Secretary of the Fund, in such names and for such number of authorized but hitherto unissued Shares of the Fund as to which FTIS shall receive instructions; and o Transfer on its records from time to time, when presented to it for that purpose, certificates of said Shares, whether now outstanding or hereafter issued, when countersigned by a duly authorized transfer agent, and upon the cancellation of the old certificates, record and countersign new certificates for a corresponding aggregate number of Shares and deliver said new certificates. AS SHAREHOLDER SERVICE AGENT FOR INVESTORS IN THE FUND, FTIS WILL: o Receive from the Fund, from the Fund's Principal Underwriter or from a Shareholder, on a form acceptable to FTIS, information necessary to record sales and redemptions and to generate sale and/or redemption confirmations; o Mail sale and/or redemption confirmations using standard forms; o Accept and process cash payments from investors, clear checks which represent payments for the purchase of Shares; o Requisition Shares in accordance with instructions of the Principal Underwriter of the Shares of the Fund; o Produce periodic reports reflecting the accounts receivable and the paid pending (free stock) items; o Open, maintain and close Shareholder accounts; o Establish registration of ownership of Shares in accordance with generally accepted form; o Maintain monthly records of (i) issued Shares and (ii) number of Shareholders and their aggregate Shareholdings classified according to their residence in each State of the United States or foreign country; o Accept and process telephone exchanges and redemptions for Shares in accordance with the Fund's Telephone Exchange and Redemption Privileges as described in the Fund's current prospectus. o Maintain and safeguard records for each Shareholder showing name(s), address, number of any certificates issued, and number of Shares registered in such name(s), together with continuous proof of the outstanding Shares, and dealer identification, and reflecting all current changes. On request, provide information as to an investor's qualification for Cumulative Quantity Discount. Provide all accounts with confirmation statements reflecting the most recent transactions, and also provide year-end historical confirmation statements; o Provide on request a duplicate set of records for file maintenance in the Fund's office in St. Petersburg, Florida; o Out of money received in payment for Share sales, pay to the Fund's Custodian Account with the Custodian, the net asset value per Share and pay to the Principal Underwriter its commission; o Redeem Shares and prepare and mail (or wire) liquidation proceeds; o Pass upon the adequacy of documents submitted by a Shareholder or his legal representative to substantiate the transfer of ownership of Shares from the registered owner to transferees; o From time to time, make transfers upon the books of the Fund in accordance with properly executed transfer instructions furnished to FTIS and make transfers of certificates for such Shares as may be surrendered for transfer properly endorsed, and countersign new certificates issued in lieu thereof; o Upon receipt of proper documentation, place stop transfers, obtain necessary insurance forms, and reissue replacement certificates against lost, stolen or destroyed Share certificates; o Check surrendered certificates for stop transfer restrictions. Although FTIS cannot insure the genuineness of certificates surrendered for cancellation, it will employ all due reasonable care in deciding the genuineness of such certificates and the guarantor of the signature(s) thereon; o Cancel surrendered certificates and record and countersign new certificates; o Certify outstanding Shares to auditors; o In connection with any meeting of Shareholders, upon receiving appropriate detailed instructions and written materials prepared by the Fund and proxy proofs checked by the Fund, print proxy cards; deliver to Shareholders all reports, prospectuses, proxy cards and related proxy materials of suitable design for enclosing; receive and tabulate executed proxies; and furnish a list of Shareholders for the meeting; o Answer routine correspondence and telephone inquiries about individual accounts. Prepare monthly reports for correspondence volume and correspondence data necessary for the Fund's Semi-Annual Report on Form N-SAR; o Prepare and mail dealer commission statements and checks; o Maintain and furnish the Fund and its Shareholders with such information as the Fund may reasonably request for the purpose of compliance by the Fund with the applicable tax and securities laws of applicable jurisdictions; o Mail confirmations of transactions to investors and dealers in a timely fashion; o Pay or reinvest income dividends and/or capital gains distributions to Shareholders of record, in accordance with the Fund's and/or Shareholder's instructions, provided that: (a) The Fund shall notify FTIS in writing promptly upon declaration of any such dividend and/or distribution, and in any event at least forty-eight (48) hours before the record date; (b) Such notification shall include the declaration date, the record date, the payable date, the rate, and, if applicable, the reinvestment date and the reinvestment price to be used; and (c) Prior to the payable date, the Fund shall furnish FTIS with sufficient fully and finally collected funds to make such distribution; o Prepare and file annual United States information returns of dividends and capital gains distributions (Form 1099) and mail payee copies to Shareholders; report and pay United States income taxes withheld from distributions made to nonresidents of the United States, and prepare and mail to Shareholders the notice required by the U.S. Internal Revenue Code as to realized capital gains distributed and/or retained, and their proportionate share of any foreign taxes paid by the Fund; o Prepare transfer journals; o Set up wire order trades on file; o Receive payment for trades and update the trade file; o Produce delinquency and other trade file reports; o Provide dealer commission statements and payments thereof for the Principal Underwriter; o Sort and print shareholder information by state, social code, price break, etc.; and o Mail promptly the Statement of Additional Information of the Fund to each Shareholder who requests it, at no cost to the Shareholder. In connection with the Fund's Cash Withdrawal Program, FTIS will: o Make payment of amounts withdrawn periodically by the Shareholder pursuant to the Program by redeeming Shares, and confirm such redemptions to the Shareholder; and o Provide confirmations of all redemptions, reinvestment of dividends and distributions, and any additional investments in the Program, including a summary confirmation at the year-end. In connection with Tax Deferred Retirement Plans involving the Fund, FTIS will: o Receive and process applications, accept contributions, record Shares issued and dividends reinvested; o Make distributions when properly requested; and o Furnish reports to regulatory authorities as required. EX-99.H 15 fadagmt.txt FORM OF FUND ADMINISTRATION AGREEMENT FORM OF FUND ADMINISTRATION AGREEMENT BETWEEN TEMPLETON CHINA WORLD FUND AND FRANKLIN TEMPLETON SERVICES, LLC AGREEMENT dated as of _______________________ , 2003, between Templeton China World Fund (the "Fund"), an investment company registered under the Investment Company Act of 1940 ("1940 Act"), and Franklin Templeton Services, LLC ("FTS" or "Administrator"). In consideration of the mutual promises herein made, the parties hereby agree as follows: (1) The Administrator agrees, during the life of this Agreement, to provide the following services to the Fund: (a) providing office space, telephone, office equipment and supplies for the Fund; (b) providing trading desk facilities for the Fund, unless these facilities are provided by the Fund's investment adviser; (c) authorizing expenditures and approving bills for payment on behalf of the Fund; (d) supervising preparation of periodic reports to shareholders, notices of dividends, capital gains distributions and tax credits; and attending to routine correspondence and other communications with individual shareholders when asked to do so by the Fund's shareholder servicing agent or other agents of the Fund; (e) coordinating the daily pricing of the Fund's investment portfolio, including collecting quotations from pricing services engaged by the Fund; providing fund accounting services, including preparing and supervising publication of daily net asset value quotations, periodic earnings reports and other financial data; and coordinating trade settlements; (f) monitoring relationships with organizations serving the Fund, including custodians, transfer agents, public accounting firms, law firms, printers and other third party service providers; (g) supervising compliance by the Fund with recordkeeping requirements under the federal securities laws, including the 1940 Act and the rules and regulations thereunder, and under other applicable state and federal laws; and maintaining books and records for the Fund (other than those maintained by the custodian and transfer agent); (h) preparing and filing of tax reports including the Fund's income tax returns, and monitoring the Fund's compliance with subchapter M of the Internal Revenue Code, as amended, and other applicable tax laws and regulations; (i) monitoring the Fund's compliance with: 1940 Act and other federal securities laws, and rules and regulations thereunder; state and foreign laws and regulations applicable to the operation of investment companies; the Fund's investment objectives, policies and restrictions; and the Code of Ethics and other policies adopted by the Fund's Board of Trustees ("Board") or by the Fund's investment adviser and applicable to the Fund; (j) providing executive, clerical and secretarial personnel needed to carry out the above responsibilities; (k) preparing and filing regulatory reports, including without limitation Forms N-1A and N-SAR, proxy statements, information statements and U.S. and foreign ownership reports; and (l) providing support services incidental to carrying out these duties. Nothing in this Agreement shall obligate the Fund to pay any compensation to the officers of the Fund. Nothing in this Agreement shall obligate FTS to pay for the services of third parties, including attorneys, auditors, printers, pricing services or others, engaged directly by the Fund to perform services on behalf of the Fund. (2) The Fund agrees, during the life of this Agreement, to pay to FTS as compensation for the foregoing a monthly fee equal on an annual basis to 0.20% of the Fund's average daily net assets, payable at the end of each calendar month. From time to time, FTS may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in the purchase price of its services. FTS shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of each affected Fund's expenses, as if such waiver or limitation were fully set forth herein. (3) This Agreement shall remain in full force and effect through for one year after its execution and thereafter from year to year to the extent continuance is approved annually by the Board of the Fund. (4) This Agreement may be terminated by the Fund at any time on sixty (60) days' written notice without payment of penalty, provided that such termination by the Fund shall be directed or approved by the vote of a majority of the Board of the Fund in office at the time or by the vote of a majority of the outstanding voting securities of the Fund (as defined by the 1940 Act); and shall automatically and immediately terminate in the event of its assignment (as defined by the 1940 Act). (5) In the absence of willful misfeasance, bad faith or gross negligence on the part of FTS, or of reckless disregard of its duties and obligations hereunder, FTS shall not be subject to liability for any act or omission in the course of, or connected with, rendering services hereunder. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers. FRANKLIN TEMPLETON SERVICES, LLC By: -------------------------------------------------- TEMPLETON CHINA WORLD FUND By: -------------------------------------------------- EX-99.J 16 pwccons.txt PWC - AUDITORS CONSENTS CONSENT OF INDEPENDENT AUDITORS We hereby consent to the incorporation by reference in this Registration Statement of Templeton China World Fund on Form N-1A, of our report dated September 25, 2002, relating to the financial statements and financial highlights which appears in the August 31, 2002 Annual Report to shareholders of Templeton China World Fund, Inc., which is also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights" and "Auditor" in such Registration Statement. PricewaterhouseCoopers LLP San Francisco, California April 17, 2003 EX-99.M 17 classaplan.txt FORM OF DISTRIBUTION PLAN - CLASS A TEMPLETON CHINA WORLD FUND Form of Preamble to Distribution Plan The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), by TEMPLETON CHINA WORLD FUND ("Trust") for the use of the Class A shares of its series named TEMPLETON CHINA WORLD FUND (the "Fund"), which Plan shall take effect on the date the shares of the Fund are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Trust (the "Board"), including a majority of the trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Plan (the "non-interested trustees"), cast in person at a meeting called for the purpose of voting on such Plan. In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Trust on behalf of the Fund and Templeton Asset Management Ltd. ("TAML") and the terms of the Distribution Agreement between the Trust on behalf of the Fund and Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of TAML under the Investment Management Agreement was fair and not excessive; however, the Board also recognized that uncertainty may exist from time to time with respect to whether payments to be made by the Fund to TAML, Distributors, or others or by TAML or Distributors to others may be deemed to constitute distribution expenses. Accordingly, the Board determined that the Plan should provide for such payments and that adoption of the Plan would be prudent and in the best interests of the Fund and its shareholders. Such approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. DISTRIBUTION PLAN 1. The Fund shall pay to Distributors or others for expenses incurred by Distributors or others in the promotion and distribution of the shares of the Fund, as well as for shareholder services provided for existing shareholders of the Fund. Distribution expenses may include, but are not limited to, the expenses of the printing of prospectuses and reports used for sales purposes, preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Fund shares; or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels. Shareholder service expenses may include, but are not limited to, the expenses of assisting in establishing and maintaining customer accounts and records, assisting with purchase and redemption requests, arranging for bank wires, monitoring dividend payments from the Fund on behalf of customers, forwarding certain shareholder communications from the Fund to customers, receiving and answering correspondence, and aiding in maintaining the investment of their respective customers in the Fund. These expenses may also include any distribution or service fees paid to securities dealers or their firms or others. Agreements for the payment of distribution and service fees to securities dealers or their firms or others shall be in a form which has been approved from time to time by the Board, including the non-interested trustees. 2. The maximum amount which shall be paid by the Fund to Distributors or others pursuant to Paragraph 1 herein shall be 0.35% per annum of the average daily net assets of the Fund. Said payment shall be made quarterly by the Fund to Distributors or others. 3. In addition to the payments which the Fund shall make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, TAML, Distributors or other parties on behalf of the Fund, TAML or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan. In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to the Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc. 4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued. 5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by a vote of the Board, including the non-interested trustees, cast in person at a meeting called for the purpose of voting on the Plan. 6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding voting securities of the Fund or by vote of a majority of the non-interested trustees, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Investment Management Agreement between the Trust on behalf of the Fund and TAML. 7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 2 hereof without approval by a majority of the Fund's outstanding voting securities. 8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by a vote of the non-interested trustees cast in person at a meeting called for the purpose of voting on any such amendment. 9. So long as the Plan is in effect, the selection and nomination of the Trust's non-interested trustees shall be committed to the discretion of such non-interested trustees. This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Trust and Distributors as evidenced by their execution hereof. Templeton China World Fund on behalf of the Templeton China World Fund By __________________________________ Name: Title: Vice President FRANKLIN TEMPLETON DISTRIBUTORS, INC. By:____________________________________ Name: Title: Vice President Dated: ____________________ ___, 200____ EX-99.M 18 classbplan.txt FORM OF DISTRIBUTION PLAN - CLASS B FORM OF CLASS B DISTRIBUTION PLAN I. Investment Company: TEMPLETON CHINA WORLD FUND II. Fund: TEMPLETON CHINA WORLD FUND - CLASS B III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares (as a percentage of average daily net assets of the class) A. Distribution Fee: 0.75% B. Service Fee: 0.25% PREAMBLE TO CLASS B DISTRIBUTION PLAN The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act"), by the Investment Company named above ("Investment Company") for the class B shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date Class B shares are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "non-interested Board members"), cast in person at a meeting called for the purpose of voting on such Plan. In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Templeton Asset Management Ltd. ("TAML") and the terms of the Distribution Agreement between the Investment Company and Franklin Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of TAML, under the Investment Management Agreement, and of Distributors, under the Distribution Agreement, was fair and not excessive. The approval of the Plan included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. The Board recognizes that Distributors has entered into an arrangement with a third party in order to finance the distribution activities of the Class pursuant to which Distributors may assign its rights to the fees payable hereunder to such third party. The Board further recognizes that it has an obligation to act in good faith and in the best interests of each Fund and its shareholders when considering the continuation or termination of the Plan and any payments to be made thereunder. DISTRIBUTION PLAN 1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed the above-stated maximum distribution fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Board from time to time. (b) In addition to the amounts described in (a) above, the Fund shall pay (i) to Distributors for payment to dealers or others, or (ii) directly to others, an amount not to exceed the above-stated maximum service fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Investment Company's Board from time to time, as a service fee pursuant to servicing agreements which have been approved from time to time by the Board, including the non-interested Board members. 2. (a) The monies paid to Distributors pursuant to Paragraph 1 (a) above shall be treated as compensation for Distributors' distribution-related services including compensation for amounts advanced to securities dealers or their firms or others selling shares of the Class who have executed an agreement with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Board, including the non-interested Board members, with respect to the sale of Class shares. In addition, such monies may be used to compensate Distributors for other expenses incurred to assist in the distribution and promotion of shares of the Class. Payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a pro-rated portion of Distributors' overhead expenses attributable to the distribution of Class shares, as well as for additional distribution fees paid to securities dealers or their firms or others who have executed agreements with the Investment Company, Distributors or its affiliates, or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels. None of such payments are the legal obligation of Distributors or its designee. (b) The monies to be paid pursuant to paragraph 1(b) above shall be used to pay dealers or others for, among other things, furnishing personal services and maintaining shareholder accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board. None of such payments are the legal obligation of Distributors or its designee. 3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, TAML, Distributors or other parties on behalf of the Fund, TAML or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan. In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc. 4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued. 5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or more designees (each an "Assignee"), its rights to all or a designated portion of the fees to which it is entitled under paragraph 1 of this Plan from time to time (but not Distributors' duties and obligations pursuant hereto or pursuant to any distribution agreement in effect from time to time, if any, between Distributors and the Fund), free and clear of any offsets or claims the Fund may have against Distributors. Each such Assignee's ownership interest in a Transfer of a specific designated portion of the fees to which Distributors is entitled is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant to this Section 5(a) shall not reduce or extinguish any claims of the Fund against Distributors. (b) Distributors shall promptly notify the Fund in writing of each such Transfer by providing the Fund with the name and address of each such Assignee. (c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion directly to each Assignee. In such event, Distributors shall provide the Fund with a monthly calculation of the amount to which each Assignee is entitled (the "Monthly Calculation"). In such event, the Fund shall, upon receipt of such notice and Monthly Calculation from Distributors, make all payments required directly to the Assignee in accordance with the information provided in such notice and Monthly Calculation upon the same terms and conditions as if such payments were to be paid to Distributors. (d) Alternatively, in connection with a Transfer, Distributors may direct the Fund to pay all or a portion of the fees to which Distributors is entitled from time to time to a depository or collection agent designated by any Assignee, which depository or collection agent may be delegated the duty of dividing such fees between the Assignee's 12b-1 Portion and the balance (such balance, when distributed to Distributors by the depository or collection agent, the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1 Portion may be subject to offsets or claims the Fund may have against Distributors. 6. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the non-interested Board members, cast in person at a meeting called for the purpose of voting on the Plan. In determining whether there is a reasonable likelihood that the continuation of the Plan will benefit the Fund and its shareholders, the Board may, but is not obligated to, consider that Distributors has incurred substantial cost and has entered into an arrangement with a third party in order to finance the distribution activities for the Class. 7. This Plan and any agreements entered into pursuant to this Plan may be terminated with respect to the shares of the Class, without penalty, at any time by vote of a majority of the non-interested Board members of the Investment Company, or by vote of a majority of outstanding Shares of such Class. Upon termination of this Plan with respect to the Class, the obligation of the Fund to make payments pursuant to this Plan with respect to such Class shall terminate, and the Fund shall not be required to make payments hereunder beyond such termination date with respect to expenses incurred in connection with Class shares sold prior to such termination date, provided, in each case that each of the requirements of a Complete Termination of this Plan in respect of such Class, as defined below, are met. For purposes of this Section 7, a "Complete Termination" of this Plan in respect of the Class shall mean a termination of this Plan in respect of such Class, provided that: (i) the non-interested Board members of the Investment Company shall have acted in good faith and shall have determined that such termination is in the best interest of the Investment Company and the shareholders of the Fund and the Class; (ii) and the Investment Company does not alter the terms of the contingent deferred sales charges applicable to Class shares outstanding at the time of such termination; and (iii) unless Distributors at the time of such termination was in material breach under the distribution agreement in respect of the Fund, the Fund shall not, in respect of such Fund, pay to any person or entity, other than Distributors or its designee, either the payments described in paragraph 1(a) or 1(b) or in respect of the Class shares sold by Distributors prior to such termination. 8. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the outstanding voting securities of the Class of the Fund. 9. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by the non-interested Board members cast in person at a meeting called for the purpose of voting on any such amendment. 10. So long as the Plan is in effect, the selection and nomination of the Fund's non-interested Board members shall be committed to the discretion of such non-interested Board members. This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof. Date: , 200___ ---------------------- TEMPLETON CHINA WORLD FUND on behalf of TEMPLETON CHINA WORLD FUND By ----------------------------------------- Name: Vice President Franklin Templeton Distributors, Inc. By --------------------------------------------------- Name: Vice President EX-99.M 19 classcplan.txt FORM OF DISTRIBUTION PLAN - CLASS C FORM OF CLASS C DISTRIBUTION PLAN I. Investment Company: TEMPLETON CHINA WORLD FUND II. Fund: TEMPLETON CHINA WORLD FUND - CLASS C III. Maximum Per Annum Rule 12b-1 Fees for Class C Shares (as a percentage of average daily net assets of the class) A. Distribution Fee: 0.75% B. Service Fee: 0.25% PREAMBLE TO CLASS C DISTRIBUTION PLAN The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment Company named above ("Investment Company") for the Class C shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date Class C shares are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "non-interested Board members"), cast in person at a meeting called for the purpose of voting on such Plan. In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Templeton Asset Management Ltd. ("TAML") and the terms of the Distribution Agreement between the Investment Company and Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of TAML, under the Investment Management Agreement, and of Distributors, under the Distribution Agreement, was fair and not excessive. The approval of the Plan included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. DISTRIBUTION PLAN 1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the above-stated maximum distribution fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Board from time to time. (b) In addition to the amounts described in (a) above, the Fund shall pay (i) to Distributors for payment to dealers or others, or (ii) directly to others, an amount not to exceed the above-stated maximum service fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Fund's Board from time to time, as a service fee pursuant to servicing agreements which have been approved from time to time by the Board, including the non-interested Board members. 2. (a) Distributors shall use the monies paid to it pursuant to Paragraph 1(a) above to assist in the distribution and promotion of shares of the Class. Payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a pro-rated portion of Distributors' overhead expenses attributable to the distribution of Class shares, as well as for additional distribution fees paid to securities dealers or their firms or others who have executed agreements with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Trustees, including the non-interested Trustees. In addition, such fees may be used to pay for advancing the commission costs to dealers or others with respect to the sale of Class shares. (b) The monies to be paid pursuant to paragraph 1(b) above shall be used to pay dealers or others for, among other things, furnishing personal services and maintaining shareholder accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board. 3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, TAML, Distributors or other parties on behalf of the Fund, TAML or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan. In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc. 4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies reimbursed to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued. 5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the non-interested Board members, cast in person at a meeting called for the purpose of voting on the Plan. 6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding voting securities of the Fund or by vote of a majority of the non-interested Board members, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Investment Management Agreement between the Fund and TAML. 7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the Fund's outstanding voting securities. 8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by the non-interested Board members cast in person at a meeting called for the purpose of voting on any such amendment. 9. So long as the Plan is in effect, the selection and nomination of the Fund's non-interested Board members shall be committed to the discretion of such non-interested Board members. This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof. Date: ________________ ___, 200___ TEMPLETON CHINA WORLD FUND on behalf of TEMPLETON CHINA WORLD FUND By: _________________________ Name: Vice President Franklin Templeton Distributors, Inc. By: _________________________ Name: Vice President EX-99.M 20 classrplan.txt FORM OF DISTRIBUTION PLAN - CLASS R FORM OF CLASS R DISTRIBUTION PLAN I. Investment Company: TEMPLETON CHINA WORLD FUND II. Fund: TEMPLETON CHINA WORLD FUND - CLASS R III. Maximum Per Annum Rule 12b-1 Fees for Class R Shares: 0.50% (as a percentage of average daily net assets of the class) PREAMBLE TO CLASS R DISTRIBUTION PLAN The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") by the Investment Company named above ("Investment Company") for the Class R shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date shares of the Class are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "non-interested Board members"), cast in person at a meeting called for the purpose of voting on such Plan. In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Templeton Asset Management Ltd. ("TAML") and the terms of the Distribution Agreement between the Investment Company and Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of TAML, under the Management Agreement, and of Distributors, under the Distribution Agreement, was fair and not excessive. The approval of the Plan included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders. DISTRIBUTION PLAN 1. The Fund shall pay to Distributors as compensation for its services or for payment by Distributors to dealers or others, or the Fund shall pay directly to others, a quarterly fee not to exceed the above-stated maximum fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Investment Company's Board from time to time, as distribution and/or service fees pursuant to distribution and servicing agreements which have been approved from time to time by the Board, including the non-interested Board members. 2. (a) The monies paid to Distributors pursuant to Paragraph 1 above may be treated as compensation for Distributors' distribution-related services including compensation for amounts advanced to securities dealers or their firms or others (including retirement plan recordkeepers) selling shares of the Class who have executed an agreement with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Board, including the non-interested Board members, with respect to the sale of Class shares. In addition, Distributors may use such monies paid to it pursuant to Paragraph 1 above to assist in the distribution and promotion of shares of the Class. Such payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a pro-rated portion of Distributors' overhead expenses attributable to the distribution of Class shares, as well as for additional distribution fees paid to securities dealers or their firms or others (including retirement plan recordkeepers) who have executed agreements with the Investment Company, Distributors or its affiliates, or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels. (b) The monies paid to Distributors or others pursuant to paragraph 1 above may also be used to pay Distributors, dealers or others (including retirement plan recordkeepers) for, among other things, furnishing personal services and maintaining shareholder or beneficial owner accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board. 3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, TAML, Distributors or other parties on behalf of the Fund, TAML or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan. In no event shall the aggregate payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc. 4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued. 5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the non-interested Board members, cast in person at a meeting called for the purpose of voting on the Plan. In determining whether there is a reasonable likelihood that the continuation of the Plan will benefit the Fund and its shareholders, the Board may, but is not obligated to, consider that Distributors has incurred substantial costs and has entered into an arrangement with a third party which third party has agreed to purchase from Distributors the entitlement of Distributors to receive the payments described in Paragraph 1(a) above, which purchase will generate the cash flow needed to pay for the distribution activities for the Class. 6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated with respect to the shares of the Class at any time, without penalty, by vote of a majority of the outstanding voting securities of such Class or by vote of a majority of the non-interested Board members of the Investment Company, on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Management Agreement between the Fund and TAML. Upon termination of this Plan with respect to the Class, the obligation of the Fund to make payments pursuant to this Plan with respect to such Class shall terminate, and the Fund shall not be required to make payments hereunder beyond such termination date with respect to expenses incurred in connection with Class shares sold prior to such termination date. 7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the outstanding voting securities of the Class of the Fund. 8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by the non-interested Board members cast in person at a meeting called for the purpose of voting on any such amendment. 9. So long as the Plan is in effect, the selection and nomination of the Fund's non-interested Board members shall be committed to the discretion of such non-interested Board members. This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof. Date: _________________, 200__ TEMPLETON CHINA WORLD FUND on behalf of TEMPLETON CHINA WORLD FUND By_________________________ Name: Vice President Franklin Templeton Distributors, Inc. By_________________________ Name: Vice President EX-99.N 21 multiplan.txt FORM OF MULTI-CLASS PLAN TEMPLETON CHINA WORLD FUND FORM OF MULTIPLE CLASS PLAN This Multiple Class Plan (the "Plan") has been adopted unanimously by the Board of Trustees of TEMPLETON CHINA WORLD FUND (the "Investment Company" or the "Fund"). The Board has determined that the Plan, including the expense allocation methods among the classes, is in the best interests of each class of the Fund and the Investment Company as a whole. The Plan sets forth the provisions relating to the establishment of multiple classes of shares of the Fund, and supersedes any Plan previously adopted for the Fund. 1. The Fund shall offer five classes of shares, to be known as Class A Shares, Class B Shares, Class C Shares, Class R Shares and Advisor Class/Class Z Shares. 2. Class A Shares shall carry a front-end sales charge ranging from [___% - ____ %], and Class C Shares shall carry a front-end sales charge of 1.00%. Class B Shares, Class R Shares and the Advisor Class/Class Z Shares shall not be subject to any front-end sales charges. 3. Class A Shares shall not be subject to a contingent deferred sales charge ("CDSC"), except in the following limited circumstances. On investments of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser of the then-current net asset value or the original net asset value at the time of purchase applies to redemptions of those investments within the contingency period of 18 months from the calendar month following their purchase. The CDSC is waived in certain circumstances, as described in the Fund's prospectus. Class B Shares shall be subject to a CDSC with the following CDSC schedule: (a) Class B Shares redeemed within 2 years of their purchase shall be assessed a CDSC of 4% on the lesser of the then-current net asset value or the original net asset value at the time of purchase; (b) Class B Shares redeemed within the third and fourth years of their purchase shall be assessed a CDSC of 3% on the lesser of the then-current net asset value or the original net asset value at the time of purchase; (c) Class B Shares redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on the lesser of the then-current net asset value or the original net asset value at the time of purchase; and (d) Class B Shares redeemed within 6 years of their purchase shall be assessed a CDSC of 1% on the lesser of the then-current net asset value or the original net asset value at the time of purchase. The CDSC is waived in certain circumstances described in the Fund's prospectus. Class C Shares and Class R Shares redeemed within 18 months of their purchase shall be assessed a CDSC of 1.00% on the lesser of the then-current net asset value or the original net asset value at the time of purchase. The CDSC is waived in certain circumstances as described in the Fund's prospectus. Advisor Class/Class Z Shares shall not be subject to any CDSC. 4. The distribution plan adopted by the Investment Company pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1 Plan") associated with the Class A Shares may be used to compensate Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses incurred in the promotion and distribution of the Class A Shares. Such expenses include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of the Distributor's overhead expenses attributable to the distribution of the Class A Shares, as well as any distribution or shareholder servicing fees paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Investment Company for the Class A Shares, the Distributor or its affiliates. The Rule 12b-1 Plan associated with the Class B Shares has two components. The first component is an asset-based sales charge to be retained by the Distributor to compensate Distributor for amounts advanced to securities dealers or their firms or others with respect to the sale of Class B Shares. In addition, such payments may be retained by the Distributor to be used in the promotion and distribution of Class B Shares in a manner similar to that described above for Class A Shares. The second component is a shareholder servicing fee to be paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Investment Company for the Class B Shares, the Distributor or its affiliates. The Rule 12b-1 Plan associated with the Class C has two components. The first component is a shareholder servicing fee, to be paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Investment Company for the Class C Shares, the Distributor or its affiliates. The second component is an asset-based sales charge to be retained by the Distributor during the first year after the sale of shares and, in subsequent years, to be paid to dealers or retained by the Distributor to be used in the promotion and distribution of Class C, in a manner similar to that described above for Class A Shares. The Rule 12b-1 Plan associated with the Class R Shares may be used to compensate the Distributor or others for distribution activities and/or for providing shareholder services. Distribution fees paid under the Rule 12b-1 Plan may be retained by the Distributor to compensate the Distributor for amounts advanced to securities dealers or their firms or others (including retirement plan recordkeepers) with respect to the sale of Class R Shares. In addition, such distribution fee payments may be retained by the Distributor to be used in the promotion and distribution of Class R Shares in a manner similar to that described above for Class A Shares, or may be paid out to dealers or others (including retirement plan recordkeepers) that perform similar distribution activities. Shareholder servicing fees may be paid to the Distributor or to securities firms or others (including retirement plan recordkeepers) who have executed a servicing agreement for Class R Shares with the Investment Company, the Distributor or its affiliates as compensation for providing personal assistance to shareholders or beneficial owners in servicing their accounts. No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class/Class Z Shares and, therefore, the Advisor Class/Class Z Shares shall not be subject to deductions relating to Rule 12b-1 fees. The Rule 12b-1 Plans for the Class A, Class B, Class C and Class R Shares shall operate in accordance with Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc. 5. The only difference in expenses as between Class A, Class B, Class C, Class R and Advisor Class/Class Z shall relate to differences in Rule 12b-1 plan expenses, as described in the applicable Rule 12b-1 Plans; however, to the extent that the Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan expenses of another Class, such classes shall be subject to the same expenses. 6. There shall be no CONVERSION FEATURES ASSOCIATED with the Class A, Class C, Class R and Advisor Class/Class Z. Each Class B Share, however, shall be converted automatically, and without any action or choice on the part of the holder of the Class B Shares, into Class A Shares on the conversion date specified, and in accordance with the terms and conditions approved by the Templeton China World Fund's Board of Trustees and as described, in the Fund's prospectus relating to the Class B Shares, as such prospectus may be amended from time to time; provided, however, that the Class B Shares shall be converted automatically into Class A Shares to the extent and on the terms permitted by the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations adopted thereunder. 7. Shares of Class A, Class B, Class C, Class R and Advisor Class/Class Z may be exchanged for shares of another investment company within Franklin Templeton Investments according to the terms and conditions stated in each fund's prospectus, as it may be amended from time to time, to the extent permitted by the 1940 Act and the rules and regulations adopted thereunder. 8. Each class will vote separately with respect to any Rule 12b-1 Plan related to, or which now or in the future may affect, that class. 9. On an ongoing basis, the Board members of the Investment Company, pursuant to their fiduciary responsibilities under the 1940 Act and otherwise, will monitor the Fund for the existence of any material conflicts between the interests of the various classes of shares. The Board members of the Investment Company, including a majority of the independent Board members, shall take such action as is reasonably necessary to eliminate any such conflict that may develop. Franklin Advisers, Inc. and Franklin Templeton Distributors, Inc. shall be responsible for alerting the Board to any material conflicts that arise. 10. All material amendments to this Plan must be approved by a majority of the Board members of the Investment Company, including a majority of the Board members who are not interested persons of the Investment Company. 11. I, Barbara J. Green, Secretary of the Templeton China World Fund, do hereby certify that this Multiple Class Plan was adopted on behalf of the Investment Company, by a majority of the Trustees of the Investment Company, including a majority of the Board members who are not interested persons of the Investment Company, on this 3rd day of December, 2002. -------------------------- Barbara J. Green Secretary EX-99.P 22 code1201.txt CODE OF ETHICS 12/01 THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING TABLE OF CONTENTS ----------------- THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS 1 - ------------------------------------------- PART 1 - STATEMENT OF PRINCIPLES 1 PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE 2 PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS 3 PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS 10 PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS 13 PART 6 - PRE-CLEARANCE REQUIREMENTS 17 PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE 22 PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY 23 FOREIGN COUNTRY SUPPLEMENTS 24 - --------------------------- PART 1 - SUPPLEMENTARY STATEMENT OF REQUIREMENTS FOR CANADIAN EMPLOYEES 24 APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS 26 - ----------- --------------------------------------------------- I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER 27 II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS 33 III.SECURITIES EXEMPT FROM THE PROHIBITED, REPORTING, AND PRE-CLEARANCE PROVISIONS 34 IV. LEGAL REQUIREMENT 35 APPENDIX B: FORMS AND SCHEDULES 36 - ----------- ------------------- ACKNOWLEDGMENT FORM 37 SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE & FAX NUMBERS 38 SCHEDULE B: SECURITIES TRANSACTION REPORT 39 SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS SECURITIES HOLDINGS 40 SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING 4 SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST 42 SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS 43 SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY 44 SCHEDULE H: CHECKLIST FOR PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS 45 APPENDIX C: Investment Advisor and Broker-Dealer and Other Subsidiaries of - ----------- --------------------------------------------------------------- Franklin Resources, Inc. - February 2001 47 - ----------------------------------------- THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING 1 - ---------------------------------------------------------------- A. LEGAL REQUIREMENT 1 B. WHO IS AN INSIDER? 2 C. WHAT IS MATERIAL INFORMATION? 2 D. WHAT IS NON-PUBLIC INFORMATION? 2 E. BASIS FOR LIABILITY 3 F. PENALTIES FOR INSIDER TRADING 3 G. INSIDER TRADING PROCEDURES 4 THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS - ------------------------------------------- Franklin Resources, Inc. and all of its subsidiaries, and the funds in the Franklin Templeton Group of Funds (the "Funds") (collectively, the "Franklin Templeton Group") will follow this Code of Ethics (the "Code") and Policy Statement on Insider Trading (the "Insider Trading Policy"). Additionally, the subsidiaries listed in Appendix C of this Code, together with Franklin Resources, Inc., the Funds, the Fund's investment advisers and principal underwriter, have adopted the Code and Insider Trading Policy. PART 1 - Statement of Principles The Franklin Templeton Group's policy is that the interests of shareholders and clients are paramount and come before the interests of any director, officer or employee of the Franklin Templeton Group.1 Personal investing activities of all directors, officers and employees of the Franklin Templeton Group should be conducted in a manner to avoid actual or potential conflicts of interest with the Franklin Templeton Group, Fund shareholders, and other clients of any Franklin Templeton adviser. Directors, officers and employees of the Franklin Templeton Group shall use their positions with the Franklin Templeton Group, and any investment opportunities they learn of because of their positions with the Franklin Templeton Group, in a manner consistent with their fiduciary duties for the benefit of Fund shareholders, and clients. - --------------------- 1 "Director" includes trustee. PART 2 - Purposes, and Consequences of Non-compliance It is important that you read and understand this document, because its overall purpose is to help all of us comply with the law and to preserve and protect the outstanding reputation of the Franklin Templeton Group. This document was adopted to comply with Securities and Exchange Commission rules under the Investment Company Act of 1940 ("1940 Act"), the Investment Advisers Act of 1940 ("Advisers Act"), the Insider Trading and Securities Fraud Enforcement Act of 1988 ("ITSFEA"), industry practice and the recommendations contained in the ICI's Report of the Advisory Group on Personal Investing. Any violation of the Code or Insider Trading Policy, including engaging in a prohibited transaction or failing to file required reports, may result in disciplinary action, and, when appropriate, termination of employment and/or referral to appropriate governmental agencies. PART 3 - Compliance Requirements for All Access Persons 3.1 Who Is Covered by the Code and How Does It Work? The principles contained in the Code must be observed by all directors, officers and employees2 of the Franklin Templeton Group. However, there are different categories of restrictions on personal investing activities. The category in which you have been placed generally depends on your job function, although unique circumstances may result in you being placed in a different category. The Code covers the following categories of employees who are described below: (1) Access Persons: Access Persons are those employees who have "access to information" concerning recommendations made to a Fund or client with regard to the purchase or sale of a security. Examples of "access to information" would include having access to trading systems, portfolio accounting systems, research data bases or settlement information. Access Persons would typically include employees, including Management Trainees, in the following departments: fund accounting; investment operations; information services & technology; product management; legal and legal compliance and anyone else designated by the Director of Compliance In addition, you are an Access Person if you are any of the following: an officer or and directors of funds; an officer or director of an investment advisor or broker-dealer subsidiary in the Franklin Templeton Group; a person that controls those entities; and any Franklin Resources' Proprietary Account ("Proprietary Account")3 (2) Portfolio Persons: Portfolio Persons are a subset of Access Persons and are those employees of the Franklin Templeton Group, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund in the Franklin Templeton Group, or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include: - ------------------------ 2 The term "employee or employees" includes management trainees, as well as regular employees of the Franklin Templeton Group. 3 See Appendix A. II., for definition of "Proprietary Accounts." portfolio managers; research analysts; traders; employees serving in equivalent capacities (such as Management Trainees); employees supervising the activities of Portfolio Persons; and anyone else designated by the Director of Compliance (3) Non-Access Persons: If you are an employee in the Franklin Templeton Group AND you do not fit into any of the above categories, you are a Non-Access Person. Because you do not normally receive confidential information about Fund portfolios, you are subject only to the prohibited transaction provisions described in 3.4 of this Code and the Franklin Resources, Inc.'s Standards of Business Conduct contained in the Employee Handbook. Please contact the Legal Compliance Department if you are unsure as to what category you fall in or whether you should be considered to be an Access Person or Portfolio Person. The Code works by prohibiting some transactions and requiring pre-clearance and reporting of most others. Non-Access Persons do not have to pre-clear their security transactions, and, in most cases, do not have to report their transactions. "Independent directors" need not report any securities transaction unless you knew, or should have known that, during the 15-day period before or after the transaction, the security was purchased or sold or considered for purchase or sale by a Fund or Franklin Resources for a Fund. (See Section 5.2.B below.) However, personal investing activities of all employees and independent directors are to be conducted in compliance with the prohibited transactions provisions contained in 3.4 below. If you have any questions regarding your personal securities activity, contact the Legal Compliance Department. 3.2 What Accounts and Transactions Are Covered? The Code covers all of your personal securities accounts and transactions, as well as transactions by any of Franklin Resource's Proprietary Accounts. It also covers all securities and accounts in which you have "beneficial ownership." 4 A transaction by or for the account of your spouse, or any other family member living in your home is considered to be the same as a transaction by you. Also, a transaction for any account in which you have any economic interest (other than the account of an unrelated client for which advisory fees are received) and have or share investment control is generally considered the same as a transaction by you. For example, if you invest in a corporation that invests in securities and you have or share control over its investments, that corporation's securities transactions are considered yours. - ------------------------ 4 Generally, a person has "beneficial ownership" in a security if he or she, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the security. There is a presumption of a pecuniary interest in a security held or acquired by a member of a person's immediate family sharing the same household. However, you are not deemed to have a pecuniary interest in any securities held by a partnership, corporation, trust or similar entity unless you control, or share control of such entity, or have, or share control over its investments. For example, securities transactions of a trust or foundation in which you do not have an economic interest (i.e., you are not the trustor or beneficiary) but of which you are a trustee are not considered yours unless you have voting or investment control of its assets. Accordingly, each time the words "you" or "your" are used in this document, they apply not only to your personal transactions and accounts, but also to all transactions and accounts in which you have any direct or indirect beneficial interest. If it is not clear whether a particular account or transaction is covered, ask a Preclearance Officer for guidance. 3.3 What Securities Are Exempt From the Code of Ethics? You do not need to pre-clear or report transactions of the following securities: (1) securities that are direct obligations of the U. S. Government (i.e., issued or guaranteed by the U.S. Government, such as Treasury bills, notes and bonds, including U.S. Savings Bonds and derivatives thereof); (2) high quality short-term instruments, including but not limited to bankers' acceptances, bank certificates of deposit, commercial paper and repurchase agreements; (3) shares of registered open-end investment companies ("mutual funds"); and (4) commodity futures, currencies, currency forwards and derivatives thereof. Such transactions are also exempt from: (i) the prohibited transaction provisions contained in Part 3.4 such as front-running; (ii) the additional compliance requirements applicable to portfolio persons contained in Part 4; and (iii) the applicable reporting requirements contained in Part 5. 3.4 Prohibited Transactions for All Access Persons A. "Intent" Is Important -------------------- Certain transactions described below have been determined by the courts and the SEC to be prohibited by law. The Code reiterates that these types of transactions are a violation of the Statement of Principals and are prohibited. Preclearance, which is a cornerstone of our compliance efforts, cannot detect transactions which are dependent upon intent, or which by their nature, occur before any order has been placed for a fund or client. A Preclearance Officer, who is there to assist you with compliance with the Code, cannot guarantee any transaction or transactions comply with the Code or the law. The fact that your transaction receives preclearance, shows evidence of good faith, but depending upon all the facts, may not provide a full and complete defense to any accusation of violation of the Code or of the law. For example, if you executed a transaction for which you received approval, or if the transaction was exempt from preclearance (e.g., a transaction for 100 shares or less), would not preclude a subsequent finding that front-running or scalping occurred because such activity are dependent upon your intent. Intent cannot be detected during preclearance, but only after a review of all the facts. In the final analysis, compliance remains the responsibility of each individual effecting personal securities transactions. B. Front-running: Trading Ahead of a Fund or Client ------------------------------------------------- You cannot front-run any trade of a Fund or client. The term "front-run" means knowingly trading before a contemplated transaction by a Fund or client of any Franklin Templeton adviser, whether or not your trade and the Fund's or client's trade take place in the same market. Thus, you may not: (1) purchase a security if you intend, or know of Franklin Templeton Group's intention, to purchase that security or a related security on behalf of a Fund or client, or (2) sell a security if you intend, or know of Franklin Templeton Group's intention, to sell that security or a related security on behalf of a Fund or client. C. Scalping. -------- You cannot purchase a security (or its economic equivalent) with the intention of recommending that the security be purchased for a Fund, or client, or sell short a security (or its economic equivalent) with the intention of recommending that the security be sold for a Fund or client. Scalping is prohibited whether or not you realize a profit from such transaction. D. Trading Parallel to a Fund or Client ------------------------------------ You cannot buy a security if you know that the same or a related security is being bought contemporaneously by a Fund or client, or sell a security if you know that the same or a related security is being sold contemporaneously by a Fund or client. E. Trading Against a Fund or Client -------------------------------- You cannot: (1) buy a security if you know that a Fund or client is selling the same or a related security, or has sold the security, until seven (7) calendar days after the Fund's or client's order has either been executed or withdrawn, or (2) sell a security if you know that a Fund or client is buying the same or a related security, or has bought the security until seven (7) calendar days after the Fund's or client's order has either been executed or withdrawn. Refer to Section I.A., "Pre-Clearance Standards," of Appendix A of the Code for more details regarding the preclearance of personal securities transactions. F. Using Proprietary Information for Personal Transactions ------------------------------------------------------- You cannot buy or sell a security based on Proprietary Information 5 without disclosing the information and receiving written authorization. If you wish to purchase or sell a security about which you obtained such information, you must report all of the information you obtained regarding the security to the Appropriate Analyst(s)6, or to the Director of Compliance for dissemination to the Appropriate Analyst(s). - --------------------------- 5 Proprietary Information: Information that is obtained or developed during the ordinary course of employment with the Franklin Templeton Group, whether by you or someone else, and is not available to persons outside the Franklin Templeton Group. Examples of such Proprietary Information include, among other things, internal research reports, research materials supplied to the Franklin Templeton Group by vendors and broker-dealers not generally available to the public, minutes of departmental/research meetings and conference calls, and communications with company officers (including confidentiality agreements). Examples of non-Proprietary Information include mass media publications (e.g., The Wall Street Journal, Forbes, and Fortune), certain specialized publications available to the public (e.g., Morningstar, Value Line, Standard and Poors), and research reports available to the general public. 6 The Director of Compliance is designated on Schedule A. The "Appropriate Analyst" means any securities analyst or portfolio manager, other than you, making recommendations or investing funds on behalf of any associated client, who may be reasonably expected to recommend or consider the purchase or sale of the security in question. You will be permitted to purchase or sell such security if the Appropriate Analyst(s) confirms to the Preclearance Desk that there is no intention to engage in a transaction regarding the security within seven (7) calendar days on behalf of an Associated Client7 and you subsequently preclear such security in accordance with Part 6 below. G. Certain Transactions in Securities of Franklin Resources, Inc., and Affiliated Closed-end Funds, and Real Estate Investment Trusts ---------------------------------------------------------------------- If you are an employee of Franklin Resources, Inc. or any of its affiliates, including the Franklin Templeton Group, you cannot effect a short sale of the securities, including "short sales against the box" of Franklin Resources, Inc., or any of the Franklin or Templeton closed-end funds, Franklin real estate investment trusts or any other security issued by Franklin Resources, Inc. or its affiliates. This prohibition would also apply to effecting economically equivalent transactions, including, but not limited to sales of any option to buy (i.e., a call option) or purchases of any option to sell (i.e., a put option) and "swap" transactions or other derivatives. Officers and directors of the Franklin Templeton Group who may be covered by Section 16 of the Securities Exchange Act of 1934, are reminded that their obligations under that section are in addition to their obligations under this Code. - -------------------------- 7 Associated Client: A Fund or client whose trading information would be available to the access person during the course of his or her regular functions or duties. PART 4 - Additional Compliance Requirements Applicable to Portfolio Persons8 4.1 Requirement to Disclose Interest and Method of Disclosure As a Portfolio Person, you must promptly disclose your direct or indirect beneficial interest in a security whenever you learn that the security is under consideration for purchase or sale by an Associated Client in the Franklin Templeton Group and you; (1) Have or share investment control of the Associated Client; (2) Make any recommendation or participate in the determination of which recommendation shall be made on behalf of the Associated Client; or (3) Have functions or duties that relate to the determination of which recommendation shall be made to the Associated Client. In such instances, you must initially disclose that beneficial interest orally to the primary portfolio manager (or other Appropriate Analyst) of the Associated Client(s) considering the security, the Director of Research and Trading or the Director of Compliance. Following that oral disclosure, you must send a written acknowledgment of that interest on Schedule E (or on a form containing substantially similar information) to the primary portfolio manager (or other Appropriate Analyst), with a copy to the Legal Compliance Department. 4.2 Short Sales of Securities You cannot sell short any security held by your Associated Clients, including "short sales against the box". Additionally, Portfolio Persons associated with the Templeton Group of Funds and clients cannot sell short any security on the Templeton "Bargain List". This prohibition would also apply to effecting economically equivalent transactions, including, but not limited to, sales of uncovered call options, purchases of put options while not owning the underlying security and short sales of bonds that are convertible into equity positions. - --------------------------------- 8 You are a "Portfolio Person" if you are an employee of the Franklin Templeton Group, and, in connection with your regular functions or duties, make or participate in the decision to purchase or sell a security by a Fund in the Franklin Templeton Group, or any other client or if your functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include portfolio managers, research analysts, traders, persons serving in equivalent capacities (such as Management Trainees), persons supervising the activities of Portfolio Persons, and anyone else so designated by the Compliance Officer. 4.3 Short Swing Trading Portfolio Persons cannot profit from the purchase and sale or sale and purchase within sixty calendar days of any security, including derivatives. Portfolio Persons are responsible for transactions that may occur in margin and option accounts and all such transactions must comply with this restriction.9 This restriction does not apply to: (1) trading within a shorter period if you do not realize a profit and if you do not violate any other provisions of this Code; and (2) profiting on the purchase and sale or sale and purchase within sixty calendar days of the following securities: |X| securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; |X| high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements; |X| shares of registered open-end investment companies; and |X| commodity futures, currencies, currency forwards and derivatives thereof. Calculation of profits during the 60 calendar day holding period generally will be based on "last-in, first-out" ("LIFO"). Portfolio Persons may elect to calculate their 60 calendar day profits on either a LIFO or FIFO ("first-in, first-out") basis when there has not been any activity in such security by their Associated Clients during the previous 60 calendar days. - ---------------------------- 9 This restriction applies equally to transactions occurring in margin and option accounts which may not be due to direct actions by the Portfolio Person. For example, a stock held less than 60 days that is sold to meet a margin call or the underlying stock of a covered call option held less than 60 days that is called away, would be a violation of this restriction if these transactions resulted in a profit for the Portfolio Person. 4.4 Service as a Director As a Portfolio Person, you cannot serve as a director, trustee, or in a similar capacity for any company (excluding not-for-profit companies, charitable groups, and eleemosynary organizations) unless you receive approval from the Chief Executive Officer of the principal investment adviser to the Fund(s) of which you are a Portfolio Person and he/she determines that your service is consistent with the interests of the Fund(s) and its shareholders. 4.5 Securities Sold in a Public Offering Portfolio Persons cannot buy securities in any initial public offering, or a secondary offering by an issuer, including initial public offerings of securities made by closed-end funds and real estate investment trusts advised by the Franklin Templeton Group. Purchases of open-end mutual funds are excluded from this prohibition. 4.6 Interests in Partnerships and Securities Issued in Private Placements Portfolio Persons cannot acquire limited partnership interests or other securities in private placements unless they: (1) complete the Private Placement Checklist (Schedule H); (2) provide supporting documentation (e.g., a copy of the offering memorandum); and (3) obtain approval of the appropriate Chief Investment Officer; and (4) submit all documents to the Legal Compliance Department Approval will only be granted after the Director of Compliance consults with an executive officer of Franklin Resources, Inc. PART 5 - Reporting Requirements for All Access Persons 5.1 Reporting of Beneficial Ownership and Securities Transactions Compliance with the following personal securities transaction reporting procedures is essential to enable us to meet our responsibilities to Funds and other clients and to comply with regulatory requirements. You are expected to comply with both the letter and spirit of these requirements, including completing and filing all reports required under the Code in a timely manner. 5.2 Initial Holdings and Brokerage Account Reports A. All Access Persons (except Independent Directors) ------------------ Every employee (new or transfer) of the Franklin Templeton Group who becomes an Access Person, must file: (1) An Acknowledgement Form; (2) Schedule C: Initial, Annual & Updated Disclosure of Securities Holdings; and (3) Schedule F: Initial, Annual & Updated Disclosure of Securities Accounts The Acknowledgement Form, Schedule C and Schedule F must be completed and returned to the Legal Compliance Department within 10 calendar days of the date the employee becomes an access person. 5.3 Quarterly Transaction Reports A. All Access Persons (except Independent Directors) ------------------ You must report all securities transactions by; (i) providing the Legal Compliance Department with copies of all broker's confirmations and statements within 10 calendar days after the end of the calendar quarter (which may be sent under separate cover by the broker) showing all transactions and holdings in securities and (ii) certifying by January 30th of each year that you have disclosed all such brokerage accounts on Schedule F to the Legal Compliance Department. The brokerage statements and confirmations must include all transactions in securities in which you have, or by reason of the transaction acquire any direct or indirect beneficial ownership, including transactions in a discretionary account and transactions for any account in which you have any economic interest and have or share investment control. Also, if you acquire securities by any other method which is not being reported to the Legal Compliance Department by a duplicate confirmation statement at or near the time of the acquisition, you must report that acquisition to the Legal Compliance Department on Schedule B within 10 calendar days after you are notified of the acquisition. Such acquisitions include, among other things, securities acquired by gift, inheritance, vesting,10 stock splits, merger or reorganization of the issuer of the security. You must file these documents with the Legal Compliance Department not later than 10 calendar days after the end of each quarter, but you need not show or report transactions for any account over which you had no direct or indirect influence or control.11 Failure to timely report transactions is a violation of Rule 17j-1 as well as the Code, and may be reported to the Fund's Board of Directors and may also result, among other things, in denial of future personal security transaction requests. B. Independent Directors --------------------- If you are a director of the Franklin Templeton Group but you are not an "interested person" of the Fund, you are not required to file transaction reports unless you knew or should have known that, during the 15-day period before or after a transaction, the security was purchased or sold, or considered for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund. - -------------------------- 10 You are not required to separately report the vesting of shares or options of Franklin Resources, Inc., received pursuant to a deferred compensation plan as such information is already maintained. 11 See Sections 3.2 and 4.6 of the Code. Also, confirmations and statements of transactions in open-end mutual funds, including mutual funds sponsored by the Franklin Templeton Group are not required. See Section 3.3 above for a list of other securities that need not be reported. If you have any beneficial ownership in a discretionary account, transactions in that account are treated as yours and must be reported by the manager of that account (see Section 6.1.C below). 5.4 Annual Reports - All Access Persons A. Securities Accounts Reports (except Independent Directors) As an access person, you must file a report of all personal securities accounts on Schedule F, with the Legal Compliance Department, annually by January 30th. You must report the name and description of each securities account in which you have a direct or indirect beneficial interest, including securities accounts of a spouse and minor children. You must also report any account in which you have any economic interest and have or share investment control (e.g., trusts, foundations, etc.) other than an account for a Fund in, or a client of, the Franklin Templeton Group. B. Securities Holdings Reports (except Independent Directors) You must file a report of personal securities holdings on Schedule C, with the Legal Compliance Department, by January 30th of each year. This report should include all of your securities holdings, including any security acquired by a transaction, gift, inheritance, vesting, merger or reorganization of the issuer of the security, in which you have any direct or indirect beneficial ownership, including securities holdings in a discretionary account and for any account in which you have any economic interest and have or share investment control. Your securities holding information must be current as of a date no more than 30 days before the report is submitted. You may attach copies of year-end brokerage statements to the Schedule C in lieu of listing each security position on the schedule. C. Certification of Compliance With the Code of Ethics (including Independent Directors) All access persons, including independent directors, will be asked to certify that they will comply with the Franklin Templeton Group's Code of Ethics and Policy Statement on Insider Trading by filing the Acknowledgment Form with the Legal Compliance Department within 10 business days of receipt of the Code. Thereafter, you will be asked to certify that you have complied with the Code during the preceding year by filing a similar Acknowledgment Form by January 30 of each year. 5.5 Brokerage Accounts and Confirmations of Securities Transactions (except Independent Directors) If you are an access person , in the Franklin Templeton Group, before or at a time contemporaneous with opening a brokerage account with a registered broker-dealer, or a bank, or placing an initial order for the purchase or sale of securities with that broker-dealer or bank, you must: (1) notify the Legal Compliance Department, in writing, by completing Schedule D or by providing substantially similar information; and (2) notify the institution with which the account is opened, in writing, of your association with the Franklin Templeton Group. The Compliance Department will request the institution in writing to send to it duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their mailing to you. If you have an existing account on the effective date of this Code or upon becoming an access person, you must comply within 10 days with conditions (1) and (2) above. PART 6 - Pre-clearance Requirements 6.1 Prior Approval of Securities Transactions A. Length of Approval ------------------ Unless you are covered by Paragraph D below, you cannot buy or sell any security, without first contacting a Preclearance Officer by fax, phone, or e-mail and obtaining his or her approval. A clearance is good until the close of the business day following the day clearance is granted but may be extended in special circumstances, shortened or rescinded, as explained in Appendix A. B. Securities Not Requiring Preclearance ------------------------------------- The securities enumerated below do not require preclearance under the Code. However, all other provisions of the Code apply, including, but not limited to: (i) the prohibited transaction provisions contained in Part 3.4 such as front-running; (ii) the additional compliance requirements applicable to portfolio persons contained in Part 4, (iii) the applicable reporting requirements contained in Part 5; and (iv) insider trading prohibitions. You need not pre-clear transactions in the following securities: (1) Mutual Funds. Transactions in shares of any registered open-end mutual fund; (2) Franklin Resources, Inc., and its Affiliates. Purchases and sales of securities of Franklin Resources, Inc., closed-end funds of the Franklin Templeton Group, or real estate investment trusts advised by Franklin Properties Inc., as these securities cannot be purchased on behalf of our advisory clients.12 (3) Small Quantities. o Transactions that do not result in purchases or sales of more than 100 shares of any one security, regardless of where it is traded, in any 30 day period; or o Transactions of 500 shares or less of any security listed on the NYSE or NASDAQ NMS in any 30 day period; or o Transactions of 1000 shares or less of the top 50 securities by volume during the previous calendar quarter on the NYSE or NASDAQ NMS in any 30 day period. - ----------------------- 12 Officers, directors and certain other key management personnel who perform significant policy-making functions of Franklin Resources, Inc., the closed-end funds, and/or real estate investment trusts may have ownership reporting requirements in addition to these reporting requirements. Contact the Legal Compliance Department for additional information. See also the "Insider Trading Policy" attached. However, you may not execute any transaction, regardless of quantity, if you learn that the Funds are active in the security. It will be presumed that you have knowledge of Fund activity in the security if, among other things, you are denied approval to go forward with a transaction request. Transactions made pursuant to dividend reinvestment plans ("DRIPs") do not require preclearance regardless of quantity or Fund activity. (4) Government Obligations. Transactions in securities issued or guaranteed by the governments of the United States, Canada, the United Kingdom, France, Germany, Switzerland, Italy and Japan, or their agencies or instrumentalities, or derivatives thereof; (5) Payroll Deduction Plans. Securities purchased by an employee's spouse pursuant to a payroll deduction program, provided the Compliance Department has been previously notified in writing by the access person that the spouse will be participating in the payroll deduction program. (6) Employer Stock Option Programs. Transactions involving the exercise and/or purchase by an access person or an access person's spouse of securities pursuant to a program sponsored by a corporation employing the access person or spouse. (7) Pro Rata Distributions. Purchases effected by the exercise of rights issued pro rata to all holders of a class of securities or the sale of rights so received. (8) Tender Offers. Transactions in securities pursuant to a bona fide tender offer made for any and all such securities to all similarly situated shareholders in conjunction with mergers, acquisitions, reorganizations and/or similar corporate actions. However, tenders pursuant to offers for less than all outstanding securities of a class of securities of an issuer must be precleared. (9) Not Eligible for Funds and Clients. Transactions in any securities that are prohibited investments for all Funds and clients advised by the entity employing the access person. (10) No Investment Control. Transactions effected for an account or entity over which you do not have or share investment control (i.e., an account where someone else exercises complete investment control). (11) No Beneficial Ownership. Transactions in which you do not acquire or dispose of direct or indirect beneficial ownership (i.e., an account where in you have no financial interest). Although an access person's securities transaction may be exempt from pre-clearing, such transactions must comply with the prohibited transaction provisions of Section 3.4 above. Additionally, you may not trade any securities as to which you have "inside information" (see attached The Franklin Templeton Group Policy Statement on Insider Trading). If you have any questions, contact a Preclearance Officer before engaging in the transaction. If you have any doubt whether you have or might acquire direct or indirect beneficial ownership or have or share investment control over an account or entity in a particular transaction, or whether a transaction involves a security covered by the Code, you should consult with a Preclearance Officer before engaging in the transaction. C. Discretionary Accounts ---------------------- You need not pre-clear transactions in any discretionary account for which a registered broker-dealer, a registered investment adviser, or other investment manager acting in a similar fiduciary capacity, which is not affiliated with the Franklin Templeton Group, exercises sole investment discretion, if the following conditions are met:13 (1) The terms of each account relationship ("Agreement") must be in writing and filed with a Preclearance Officer prior to any transactions. (2) Any amendment to each Agreement must be filed with aPreclearance Officer prior to its effective date. (3) The Portfolio Person certifies to the Compliance Department at the time such account relationship commences, and annually thereafter, as contained in Schedule G of the Code that such Portfolio Person does not have direct or indirect influence or control over the account, other than the right to terminate the account. (4) Additionally, any discretionary account that you open or maintain with a registered broker-dealer, a registered investment adviser, or other investment manager acting in a similar fiduciary capacity must provide duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their delivery to you., If your discretionary account acquires securities which are not reported to a Preclearance Officer by a duplicate confirmation, such transaction must be reported to a Preclearance Officer on Schedule B within 10 days after you are notified of the acquisition.14 However, if you make any request that the discretionary account manager enter into or refrain from a specific transaction or class of transactions, you must first consult with a Preclearance Officer and obtain approval prior to making such request. - ----------------------- 13 Please note that these conditions apply to any discretionary account in existence prior to the effective date of this Code or prior to your becoming an access person. Also, the conditions apply to transactions in any discretionary account, including pre-existing accounts, in which you have any direct or indirect beneficial ownership, even if it is not in your name. 14 Any pre-existing agreement must be promptly amended to comply with this condition. The required reports may be made in the form of an account statement if they are filed by the applicable deadline. D. Directors Who Are Not Advisory Persons or Advisory Representatives ------------------------------------------------------------------ You need not pre-clear any securities if: (1) You are a director of a Fund in the Franklin Templeton Group and a director of the fund's advisor; (2) You are not an "advisory person"15 of a Fund in the Franklin Templeton Group; and (3) You are not an employee of any Fund, or (1) You are a director of a Fund in the Franklin Templeton Group; (2) You are not an "advisory representative"16 of Franklin Resources or any subsidiary; and (3) You are not an employee of any Fund, unless you know or should know that, during the 15-day period before the transaction, the security was purchased or sold, or considered for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund or other client. Directors, other than independent Directors, qualifying under this paragraph are required to comply with all applicable provisions of the Code including reporting their initial holdings and brokerage accounts in accordance with 5.2, personal securities transactions and accounts in accordance with 5.3 and 5.5, and annual reports in accordance with 5.4 of the Code. - ------------------------ 15 An "advisory person" of a registered investment company or an investment adviser is any employee, who in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by an advisory client , or whose functions relate to the making of any recommendations with respect to such purchases or sales. Advisory person also includes any natural person in a control relationship to such company or investment adviser who obtains information concerning recommendations made to such company with regard to the purchase or sale of a security. 16 Generally, an "advisory representative" is any person who makes any recommendation, who participates in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which recommendation shall be made, or who, in connection with his duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of such recommendations or of the information concerning such recommendations. See Section II of Appendix A for the legal definition of "Advisory Representative." E. Limited Exception for Certain Proprietary Accounts -------------------------------------------------- Franklin Resources and/or its affiliates may sponsor private partnerships and other pooled investment accounts intended for distribution to persons unaffiliated with the Franklin Templeton Group ("affiliated accounts"). At the outset of operations of such affiliated accounts, Franklin Resources or its affiliates will likely have a significant ownership interest, thereby causing the affiliated account to be a Proprietary Account. Though considered a Proprietary Account for all other purposes of this Code, an affiliated account need not pre-clear any securities transaction during the first full 12 month period after its commencement of operations. PART 7 - Penalties for Violations of the Code The Code is designed to assure compliance with applicable law and to maintain shareholder confidence in the Franklin Templeton Group. In adopting this Code, it is the intention of the Boards of Directors/Trustees, to attempt to achieve 100% compliance with all requirements of the Code - but it is recognized that this may not be possible. Incidental failures to comply with the Code are not necessarily a violation of the law or the Franklin Templeton Group's Statement of Principles. Such isolated or inadvertent violations of the Code not resulting in a violation of law or the Statement of Principles will be referred to the Director of Compliance and/or management personnel, and disciplinary action commensurate with the violation, if warranted, will be imposed. However, if you violate any of the enumerated prohibited transactions contained in Parts 3 and 4 of the Code, you will be expected to give up any profits realized from these transactions to Franklin Resources for the benefit of the affected Funds or other clients. If Franklin Resources cannot determine which Fund(s) or client(s) were affected, the proceeds will be donated to a charity chosen by Franklin Resources. Failure to disgorge profits when requested may result in additional disciplinary action, including termination of employment. Further, a pattern of violations that individually do not violate the law or Statement of Principles, but which taken together demonstrate a lack of respect for the Code of Ethics, may result in disciplinary action including termination of employment. A violation of the Code resulting in a violation of the law will be severely sanctioned, with disciplinary action including, but not limited to, referral of the matter to the board of directors of the affected Fund, termination of employment or referral of the matter to the appropriate regulatory agency for civil and/or criminal investigation. PART 8 - A Reminder About the Franklin Templeton Group Insider Trading Policy The Code of Ethics is primarily concerned with transactions in securities held or to be acquired by any of the Funds or Franklin Resources' clients, regardless of whether those transactions are based on inside information or actually harm a Fund or a client. The Insider Trading Policy (attached to this document) deals with the problem of insider trading in securities that could result in harm to a Fund, a client, or members of the public, and applies to all directors, officers and employees of any entity in the Franklin Templeton Group. Although the requirements of the Code and the Insider Trading Policy are similar, you must comply with both. FOREIGN COUNTRY SUPPLEMENTS - ---------------------------- PART 1 - Supplementary Statement of Requirements for Canadian Employees The Investment Funds Institute of Canada ("IFIC") has implemented a new Model Code of Ethics for Personal Investing (the "IFIC Code") to be adopted by all IFIC members. Certain provisions in the IFIC Code differ from the provisions of the Franklin Templeton Group Code of Ethics (the "FT Code"). This Supplementary Statement of Requirements for Canadian Employees (the "Canadian Supplement") describes certain further specific requirements that govern the activities of Franklin Templeton Investments Corp. ("FTIC"). It is important to note that the Canadian Supplement does not replace the FT Code but adds certain restrictions on trading activities which must be read in conjunction with the Code. All capitalized terms in this Canadian Supplement, unless defined in this Canadian Supplement, have the meaning set forth in the FT Code. Initial Public and Secondary Offerings Access Persons cannot buy securities in any initial public offering, or a secondary offering by an issuer. Public offerings of securities made by the Franklin Templeton Group, including open-end and closed-end mutual funds, real estate investment trusts and securities of Franklin Resources, Inc, are excluded from this prohibition. Note: the FT Code presently prohibits Portfolio Persons from buying securities in any initial public offering, or a secondary offering by an issuer (See Section 4.5 of the FT Code). This provision extends Section 4.5 of the FT Code to all Access Persons. Interests in Partnerships and Securities issued in Private Placements Access Persons and Portfolio Persons cannot acquire limited partnership interests or other securities in private placements unless they obtain approval of the Compliance Officer after he or she consults with an executive officer of Franklin Resources, Inc. Purchases of limited partnership interests or other securities in private placements will not be approved, unless in addition to the requirements for the approval of other trades and such other requirements as the executive officer of Franklin Resources, Inc. may require, the Compliance Officer is satisfied that the issuer is a "private company" as defined in the Securities Act (Ontario) and the Access Person has no reason to believe that the issuer will make a public offering of its securities in the foreseeable future. Note: the FT Code presently prohibits as a general rule Portfolio Persons from buying limited partnership interests or other securities in private placements (See Section 4.6 of the FT Code). This section extends the ambit of the prohibition to Access Persons and limits the exception to the general rule contained in section 4.6 of the FT Code. Additional Requirements to Obtain Approval for Personal Trades Prior to an Access Person obtaining approval for a personal trade he or she must advise the Compliance Officer that he or she: o Does not possess material non-public information relating to the security; o Is not aware of any proposed trade or investment program relating to that security by any of the Franklin Templeton Group of Funds; o Believes that the proposed trade has not been offered because of the Access Person's position in the Franklin Templeton Group and is available to any market participant on the same terms; o Believes that the proposed trade does not contravene any of the prohibited activities set out in Section 3.4 of the FT Code, and in the case of Portfolio Persons does not violate any of the additional requirements set out in Part 4 of the FT Code; and o Will provide any other information requested by the Compliance Officer concerning the proposed personal trade. An Access Person may contact the Compliance Officer by fax, phone or e-mail to obtain his or her approval. Note: the method of obtaining approval is presently set out in Section 6.1A of the FT Code and provides that an Access Person may contact the Compliance Officer by fax, phone or e-mail. The additional requirement described above makes it clear that an Access Person may continue to contact the Compliance Officer in the same manner as before. The Access Person will have deemed to have confirmed compliance with the above requirements prior to obtaining approval from the Compliance Officer. Appointment of Independent Review Person FTIC shall appoint an independent review person who will be responsible for approval of all personal trading rules and other provisions of the FT Code with respect to FTIC and for monitoring the administration of the FT Code from time to time with respect to FTIC employees. The Compliance Officer will provide a written report to the Independent Review Person, at least annually, summarizing: o Compliance with the FT Code for the period under review o Violations of the FT Code for the period under review o Sanctions imposed by the Franklin Templeton Group for the period under review o Changes in procedures recommended by the FT Code o Any other information requested by the Independent Review Person APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS This appendix sets forth the additional responsibilities and obligations of Compliance Officers, and the Legal/Administration and Legal/Compliance Departments, under the Franklin Templeton Group Code of Ethics and Policy Statement on Insider Trading. I. Responsibilities of Each Designated Compliance Officer A. Pre-Clearance Standards 1. General Principles The Director of Compliance, or a Preclearance Officer, shall only permit an access person to go forward with a proposed security17 transaction if he or she determines that, considering all of the facts and circumstances, the transaction does not violate the provisions of Rule 17j-1, or of this Code and there is no likelihood of harm to a client. 2. Associated Clients Unless there are special circumstances that make it appropriate to disapprove a personal securities transaction request, a Preclearance Officer shall consider only those securities transactions of the "Associated Clients" of the access person, including open and executed orders and recommendations, in determining whether to approve such a request. "Associated Clients" are those Funds or clients whose trading information would be available to the access person during the course of his or her regular functions or duties. Currently, there are three groups of Associated Clients: (i) the Franklin Mutual Series Funds and clients advised by Franklin Mutual Advisers, LLC ("Mutual Clients"); (ii) the Franklin Group of Funds and the clients advised by the various Franklin investment advisers ("Franklin Clients"); and (iii) the Templeton Group of Funds and the clients advised by the various Templeton investment advisers ("Templeton Clients"). Thus, persons who have access to the trading information of Mutual Clients generally will be precleared solely against the securities transactions of the Mutual Clients, including open and executed orders and recommendations. Similarly, persons who have access to the trading information of Franklin Clients or Templeton Clients generally will be precleared solely against the securities transactions of Franklin Clients or Templeton Clients, as appropriate. Certain officers of Franklin Resources, as well as legal, compliance, fund accounting, investment operations and other personnel who generally have access to trading information of the funds and clients of the Franklin Templeton Group during the course of their regular functions and duties, will have their personal securities transactions precleared against executed transactions, open orders and recommendations of the entire Franklin Templeton Group. 17 Security includes any option to purchase or sell, and any security that is exchangeable for or convertible into, any security that is held or to be acquired by a fund. 3. Specific Standards (a) Securities Transactions by Funds or clients No clearance shall be given for any transaction in any security on any day during which an Associated Client of the access person has executed a buy or sell order in that security, until seven (7) calendar days after the order has been executed. Notwithstanding a transaction in the previous seven days, clearance may be granted to sell if the security has been disposed of by all Associated Clients. (b) Securities under Consideration Open Orders No clearance shall be given for any transaction in any security on any day which an Associated Client of the access person has a pending buy or sell order for such security, until seven (7) calendar days after the order has been executed. Recommendations No clearance shall be given for any transaction in any security on any day on which a recommendation for such security was made by a Portfolio Person, until seven (7) calendar days after the recommendation was made and no orders have subsequently been executed or are pending. (c) Private Placements In considering requests by Portfolio Personnel for approval of limited partnerships and other private placement securities transactions, the Director of Compliance shall consult with an executive officer of Franklin Resources, Inc. In deciding whether to approve the transaction, the Director of Compliance and the executive officer shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund or other client, and whether the investment opportunity is being offered to the Portfolio Person by virtue of his or her position with the Franklin Templeton Group. If the Portfolio Person receives clearance for the transaction, an investment in the same issuer may only be made for a Fund or client if an executive officer of Franklin Resources, Inc., who has been informed of the Portfolio Person's pre-existing investment and who has no interest in the issuer, approves the transaction. (d) Duration of Clearance If a Preclearance Officer approves a proposed securities transaction, the order for the transaction must be placed and effected by the close of the next business day following the day approval was granted. The Director of Compliance may, in his or her discretion, extend the clearance period up to seven calendar days, beginning on the date of the approval, for a securities transaction of any access person who demonstrates that special circumstances make the extended clearance period necessary and appropriate.18 The Director of Compliance may,in his or her discretion, after consultation with a member of senior management for Franklin Resources, Inc., renew the approval for a particular transaction for up to an additional seven calendar days upon a similar showing of special circumstances by the access person. The Director of Compliance may shorten or rescind any approval or renewal of approval under this paragraph if he or she determines it is appropriate to do so. 18 Special circumstances include but are not limited to, for example, differences in time zones, delays due to travel, and the unusual size of proposed trades or limit orders. Limit orders must expire within the applicable clearance period. B. Waivers by the Director of Compliance The Director of Compliance may, in his or her discretion, after consultation with an executive officer of Franklin Resources, Inc., waive compliance by any access person with the provisions of the Code, if he or she finds that such a waiver: (1) is necessary to alleviate undue hardship or in view of unforeseen circumstances or is otherwise appropriate under all the relevant facts and circumstances; (2) will not be inconsistent with the purposes and objectives of the Code; (3) will not adversely affect the interests of advisory clients of the Franklin Templeton Group, the interests of the Franklin Templeton Group or its affiliates; and (4) will not result in a transaction or conduct that would violate provisions of applicable laws or regulations. Any waiver shall be in writing, shall contain a statement of the basis for it, and a copy shall be promptly sent by the Director of Compliance to the General Counsel of Franklin Resources, Inc. C. Continuing Responsibilities of the Legal Compliance Department A Preclearance Officer shall make a record of all requests for pre-clearance regarding the purchase or sale of a security, including the date of the request, the name of the access person, the details of the proposed transaction, and whether the request was approved or denied. APreclearance Officer shall keep a record of any waivers given, including the reasons for each exception and a description of any potentially conflicting Fund or client transactions. A Preclearance Officer shall also collect the signed initial acknowledgments of receipt and the annual acknowledgments from each access person of receipt of a copy of the Code and Insider Trading Policy, as well as reports, as applicable, on Schedules B, C, D, E and F of the Code. In addition, a Preclearance Officer shall request copies of all confirmations, and other information with respect to an account opened and maintained with the broker-dealer by any access person of the Franklin Templeton Group. A Preclearance Officer shall preserve those acknowledgments and reports, the records of consultations and waivers, and the confirmations, and other information for the period required by applicable regulation. A Preclearance Officer shall review brokerage transaction confirmations, account statements, Schedules B, C, D, E, F and Private Placement Checklists of Access Persons for compliance with the Code. The reviews shall include, but are not limited to; (1) Comparison of brokerage confirmations, Schedule Bs, and/or brokerage statements to preclearance request worksheets or, if a private placement, the Private Placement Checklist; (2) Comparison of brokerage statements and/or Schedule Fs to current securities holding information; (3) Comparison of Schedule C to current securities account information; (4) Conducting periodic "back-testing" of access person transactions, Schedule Es and/or Schedule Gs in comparison to fund and client transactions; A Preclearance Officer shall evidence review by initialing and dating the appropriate document. Any apparent violations of the Code detected by a Preclearance Officer during his or her review shall be promptly brought to the attention of the Director of Compliance. D. Periodic Responsibilities of the Legal Compliance Department The Legal Compliance Department shall consult with the General Counsel and the Human Resources Department, as the case may be, to assure that: (1) Adequate reviews and audits are conducted to monitor compliance with the reporting, pre-clearance, prohibited transaction and other requirements of the Code. (2) Adequate reviews and audits are conducted to monitor compliance with the reporting, pre-clearance, prohibited transaction and other requirements of the Code. (3) All access persons and new employees of the Franklin Templeton Group are adequately informed and receive appropriate education and training as to their duties and obligations under the Code. (4) There are adequate educational, informational and monitoring efforts to ensure that reasonable steps are taken to prevent and detect unlawful insider trading by access persons and to control access to inside information. (5) Written compliance reports are submitted to the Board of Directors of Franklin Resources, Inc., and the Board of each relevant Fund at least annually. Such reports will describe any issues arising under the Code or procedures since the last report, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations. (6) The Legal Compliance Department will certify at least annually to the Fund's board of directors that the Franklin Templeton Group has adopted procedures reasonably necessary to prevent Access Persons from violating the Code, and (7) Appropriate records are kept for the periods required by law. E. Approval by Fund's Board of Directors (1) Basis for Approval The Board of Directors/Trustees must base its approval of the Code on a determination that the Code contains provisions reasonably necessary to prevent access persons from engaging in any conduct prohibited by rule 17j-1. (2) New Funds At the time a new fund is organized, the Legal Compliance Department will provide the Fund's board of directors, a certification that the investment adviser and principal underwriter have adopted procedures reasonably necessary to prevent Access Persons from violating the Code. Such certification will state that the Code contains provisions reasonably necessary to prevent Access Persons from violating the Code. (3) Material Changes to the Code of Ethics The Legal Compliance Department will provide the Fund's board of directors a written description of all material changes to the Code no later than six months after adoption of the material change by the Franklin Templeton Group. II. Compilation of Definitions of Important Terms For purposes of the Code of Ethics and Insider Trading Policy, the terms below have the following meanings: 1934 Act - The Securities Exchange Act of 1934, as amended. 1940 Act - The Investment Company Act of 1940, as amended. Access Person - Each director, trustee, general partner or officer, and any other person that directly or indirectly controls (within the meaning of Section 2(a)(9) of the 1940 Act) the Franklin Templeton Group or a person, including an Advisory Representative, who has access to information concerning recommendations made to a Fund or client with regard to the purchase or sale of a security. Advisory Representative - Any officer or director of Franklin Resources; any employee who makes any recommendation, who participates in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which recommendation shall be made; any employee who, in connection with his or her duties, obtains any information concerning which securities are being recommended prior to the effective dissemination of such recommendations or of the information concerning such recommendations; and any of the following persons who obtain information concerning securities recommendations being made by Franklin Resources prior to the effective dissemination of such recommendations or of the information concerning such recommendations: (i) any person in a control relationship to Franklin Resources, (ii) any affiliated person of such controlling person, and (iii) any affiliated person of such affiliated person. Affiliated Person - same meaning as Section 2(a)(3) of the Investment Company Act of 1940. An "affiliated person" of an investment company includes directors, officers, employees, and the investment adviser. In addition, it includes any person owning 5% of the company's voting securities, any person in which the investment company owns 5% or more of the voting securities, and any person directly or indirectly controlling, controlled by, or under common control with the company. Appropriate Analyst - With respect to any access person, any securities analyst or portfolio manager making investment recommendations or investing funds on behalf of an Associated Client and who may be reasonably expected to recommend or consider the purchase or sale of a security. Associated Client - A Fund or client whose trading information would be available to the access person during the course of his or her regular functions or duties. Beneficial Ownership - Has the same meaning as in Rule 16a-1(a)(2) under the 1934 Act. Generally, a person has a beneficial ownership in a security if he or she, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the security. There is a presumption of a pecuniary interest in a security held or acquired by a member of a person's immediate family sharing the same household. Funds - Investment companies in the Franklin Templeton Group of Funds. Held or to be Acquired - A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund. Portfolio Person - Any employee of the Franklin Templeton Group, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund in the Franklin Templeton Group, or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include portfolio managers, research analysts, traders, persons serving in equivalent capacities (such as Management Trainees), persons supervising the activities of Portfolio Persons, and anyone else designated by the Director of Compliance Proprietary Accounts - Any corporate account or other account including, but not limited to, a limited partnership, a corporate hedge fund, a limited liability company or any other pooled investment vehicle in which Franklin Resources or its affiliates, owns 25 percent or more of the outstanding capital or is entitled to 25% or more of the profits or losses in the account (excluding any asset based investment management fees based on average periodic net assets in accounts). Security - Any stock, note, bond, evidence of indebtedness, participation or interest in any profit-sharing plan or limited or general partnership, investment contract, certificate of deposit for a security, fractional undivided interest in oil or gas or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit), guarantee of, or warrant or right to subscribe for or purchase any of the foregoing, and in general any interest or instrument commonly known as a security, except commodity futures, currency and currency forwards. For the purpose of this Code, "security" does not include: (1) Direct obligations of the Government of the United States; (2) Bankers' acceptances, bank certificates of deposit, commercial paper and high quality short-term debt instruments, including repurchase agreements; and (3) Shares issued by open-end funds. See Section III of Appendix A for a summary of different requirements for different types of securities. III. Securities Exempt from the Prohibited , Reporting, and Pre-Clearance Provisions A. Prohibited Transactions Securities that are EXEMPT from the prohibited transaction provisions of Section 3.4 include: (1) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (2) high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements; (3) shares of registered open-end investment companies; (4) commodity futures, currencies, currency forwards and derivatives thereof; (5) securities that are prohibited investments for all Funds and clients advised by the entity employing the access person; and (6) transactions in securities issued or guaranteed by the governments or their agencies or instrumentalities of Canada, the United Kingdom, France, Germany, Switzerland, Italy and Japan and derivatives thereof. B. Reporting and Preclearance Securities that are EXEMPT from both the reporting requirements of Section 5 and preclearance requirements of Section 6 of the Code include: (1) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (2) high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements; (3) shares of registered open-end investment companies; and (4) commodity futures, currencies, currency forwards and derivatives thereof. IV. Legal Requirement Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act") makes it unlawful for any affiliated person of the Franklin Templeton Group in connection with the purchase or sale of a security, including any option to purchase or sell, and any security convertible into or exchangeable for, any security that is "held or to be acquired" by a Fund in the Franklin Templeton Group: A. To employ any device, scheme or artifice to defraud a Fund; B. To make to a Fund any untrue statement of a material fact or omit to state to a Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading; C. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a Fund; or D. To engage in any manipulative practice with respect to a Fund. A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund. . APPENDIX B: FORMS AND SCHEDULES ACKNOWLEDGMENT FORM CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING To: Director of Compliance, Legal Compliance Department I hereby acknowledge receipt of a copy of the Franklin Templeton Group's CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING, Amended and Restated, December 2001, which I have read and understand. I will comply fully with all provisions of the Code and the Insider Trading Policy to the extent they apply to me during the period of my employment. Additionally, I authorize any broker-dealer, bank or investment adviser with whom I have securities accounts and accounts in which I have beneficial ownership, to provide brokerage confirmations and statements as required for compliance with the Code. I further understand and acknowledge that any violation of the Code or Insider Trading Policy, including engaging in a prohibited transaction or failure to file reports as required (see Schedules B, C, D, E, F and G), may subject me to disciplinary action, including termination of employment. - ------------------------------------------------- Signature: - ------------------------------------------------- - ------------------------------------------------- Print Name: - ------------------------------------------------- - ------------------------------------------------- Title: - ------------------------------------------------- - ------------------------------------------------- Department: - ------------------------------------------------- - ------------------------------------------------- Location: - ------------------------------------------------- - ------------------------------------------------- Date Acknowledgment was Signed: - ------------------------------------------------- RETURN TO: Legal Compliance Department, One Franklin Parkway, San Mateo. SCHEDULE A: Legal and Compliance Officers and Preclearance Desk Telephone & Fax Numbers19 Legal Officer Murray Simpson Executive Vice President & General Counsel Franklin Templeton Investments One Franklin Parkway San Mateo, CA 94403-1906 (650) 525 -7331 Compliance Officers Director, Global Compliance Preclearance Officers James M. Davis Stephanie Harwood, Supervisor Franklin Templeton Investments Lisa Del Carlo One Franklin Parkway Darlene Nisby San Mateo, CA 94403-1906 Legal Compliance Department (650) 312-2832 Franklin Templeton Investments One Franklin Parkway San Mateo, CA 94403-1906 (650) 312-3693 (telephone) (650) 312-5646 (facsimile) Preclear, Legal (internal e-mail address) Lpreclear@frk.com (external e-mail address) 19 As of August 2001 SCHEDULE B: SECURITIES TRANSACTION REPORT This report of personal securities transactions NOT reported by duplicate confirmations and brokerage statements pursuant to Section 5.3 of the Code is required pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940 or Rule 17j-1(c) of the Investment Company Act of 1940. The report must be completed and submitted to the Compliance Department no later than 10 calendar days after the end of the calendar quarter. Refer to Section 5.3 of the Code of Ethics for further instructions.
Trade Buy, Sell Security Description, including Type of Quantity or Price Broker-Dealer Date Date or Other interest rate and maturity Security Principal or Bank Preclearance (if appropriate) (Stock, Amount obtained Bond, from Option, Compliance etc) Dept. - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------
THE REPORT OR RECORDING OF ANY TRANSACTION ABOVE SHALL NOT BE CONSTRUED AS AN ADMISSION THAT I HAVE ANY DIRECT OR INDIRECT OWNERSHIP IN THE SECURITIES. - ------------- ------------------ ---------- ------------------- (PRINT NAME) (SIGNATURE) (DATE) (QUARTER ENDING) RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS SECURITIES HOLDINGS This report shall set forth the security name or description and security class of each security holding in which you have a direct or indirect beneficial interest, including holdings by a spouse, minor children, trusts, foundations, and any account for which trading authority has been delegated to you, other than authority to trade for a Fund in or a client of the Franklin Templeton Group. In lieu of listing each security position below, you may instead attach copies of brokerage statements, sign below and return Schedule C and brokerage statements to the Legal Compliance Department within 10 days if an initial report or by January 30th of each year if an annual report. Refer to Sections 5.2.A and 5.4.A of the Code for additional filing instructions.
Security Description including interest Type of Security Quantity or Name of rate and maturity (Stock, Bond, Principal Broker-Dealer (if appropriate) Option, etc.) Amount or Bank Account Number - -------------------------------------------------------------------------------------------------------
[ ] I DID NOT HAVE ANY PERSONAL SECURITIES HOLDINGS FOR YEAR ENDED____________ [ ] I HAVE ATTACHED STATEMENTS CONTAINING ALL MY PERSONAL SECURITIES HOLDINGS FOR THE YEAR ENDED _____________ TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED PARTY. - -------------- ----------------- ----------- ------------ PRINT NAME SIGNATURE DATE YEAR ENDED * Securities that are EXEMPT from being reported on Schedule C include: (i) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (ii) high quality short-term instruments ("money market instruments") including but not limited to bankers' acceptances, U.S. bank certificates of deposit; commercial paper; and repurchase agreements; (iii) shares of registered open-end investment companies; and (iv) commodity futures, currencies, currency forwards and derivatives thereof. SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING DATE: _____________________ TO: Preclearance Desk Legal Compliance Department One Franklin Parkway San Mateo, CA 94403-1906 (650) 312-3693 FAX: (650) 312-5646 FROM: NAME: ________________________ DEPARTMENT: ________________________ LOCATION: ________________________ EXTENSION: ________________________ ARE YOU A REG. REPRESENTATIVE? YES [ ] NO [ ] ARE YOU AN ACCESS PERSON? YES [ ] NO [ ] This is to advise you that I will be opening or have opened a securities account with the following firm: PLEASE FILL OUT COMPLETELY TO EXPEDITE PROCESSING NAME ON ACCOUNT: _________________________________________________________ (If other than employee, please state relationship i.e., spouse, son, daughter, trust, etc.) ACCT # OR SSN #: _________________________________________________________ NAME OF FIRM: _________________________________________________________ ATTN: _________________________________________________________ ADDRESS OF FIRM: _________________________________________________________ CITY/STATE/ZIP: _________________________________________________________ * All Franklin registered representatives and Access Persons, PRIOR TO OPENING A BROKERAGE ACCOUNT OR PLACING AN INITIAL ORDER, are required to notify the Legal Compliance Department and the executing broker-dealer in writing. This includes accounts in which the registered representative or access person has or will have a financial interest (e.g., a spouse's account) or discretionary authority (e.g., a trust account for a minor child). Upon receipt of the NOTIFICATION OF SECURITIES ACCOUNT OPENING form, the Legal Compliance Department will contact the broker-dealer identified above and request that it receive duplicate confirmations and statements of your brokerage account. SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST If you have any beneficial ownership in a security and you recommend to the Appropriate Analyst that the security be considered for purchase or sale by an Associated Client, or if you carry out a purchase or sale of that security for an Associated Client, you must disclose your beneficial ownership to the Legal Compliance Department and the Appropriate Analyst in writing on Schedule E (or an equivalent form containing similar information) before the purchase or sale, or before or simultaneously with the recommendation.
Date and Method Primary Method of Learned that Portfolio Ownership Acquisition Security Under Manager or Date of Security Type (Direct Year (Purch/ Consideration Approriate Name of Person Verbal Description or Indirect) Acquired Gift/Other) by Funds Analyst Notified Notification - ----------------------------------------------------------------------------------------------------------------------------------
- --------------------- ----------------------------- -------------- (PRINT NAME) (SIGNATURE) (DATE) RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS ----------------------------------------------------------- This report shall set forth the name and description of each securities account in which you have a direct or indirect beneficial interest, including securities accounts of a spouse, minor children, trusts, foundations, and any account for which trading authority has been delegated to you, other than authority to trade for a Fund in, or a client of, the Franklin Templeton Group. In lieu of listing each securities account below, you may instead attach copies of the brokerage statements, sign below and return Schedule F and brokerage statements to the Compliance Department.
NAME OF BROKERAGE ADDRESS OF BROKERAGE FIRM, NAME OF NAME(S) ON ACCOUNT FIRM, BANK OR BANK OR INVEST. ADVISER ACCOUNT (REGISTRATION SHOWN INVESTMENT (STREET, CITY, STATE ACCOUNT EXECUTIVE/ ON STATEMENT) ADVISER AND ZIP CODE) NUMBER REPRESENTATIVE - -------------------------------------------------------------------------------------------------------
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED TO ME. - --------------- ----------------------- ----------- ------------ PRINT NAME SIGNATURE DATE YEAR ENDED RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY This report shall set forth the account name or description in which you have a direct or indirect beneficial interest, including holdings by a spouse, minor children, trusts, foundations, and as to which trading authority has been delegated by you to an unaffiliated registered broker-dealer, registered investment adviser, or other investment manager acting in a similar fiduciary capacity, who exercises sole investment discretion.
NAME(S) AS NAME/DESCRIPTION DIRECT TYPE OF SHOWN ON OF BROKERAGE FIRM, OWNERSHIP (DO) OWNERSHIP ACCOUNT OR BANK, INVESTMENT INDIRECT ACCOUNT NUMBER INVESTMENT ADVISER OR INVESTMENT OWNERSHIP (IO) (IF APPLICABLE) - ---------------------------------------------------------------------------------
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED PARTY. FURTHER, I CERTIFY THAT I DO NOT HAVE ANY DIRECT OR INDIRECT INFLUENCE OR CONTROL OVER THE ACCOUNTS LISTED ABOVE. - ------------- ---------------------- ----------- ---------------- PRINT NAME SIGNATURE DATE YEAR ENDED RETURN TO: LEGAL COMPLIANCE DEPARTMENT, FRANKLIN TEMPLETON INVESTMENTS ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-190 SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS GENERAL INSTRUCTIONS: In considering requests by Access Persons for approval of limited partnerships and other private placement securities transactions, the Director of Compliance shall consult with an executive officer of Franklin Resources, Inc. In deciding whether to approve the transaction, the Director of Compliance and the executive officer shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund or other client, and whether the investment opportunity is being offered to the access person by virtue of his or her position with the Franklin Templeton Group. IF THE ACCESS PERSON RECEIVES CLEARANCE FOR THE TRANSACTION, AN INVESTMENT IN THE SAME ISSUER MAY ONLY BE MADE FOR A FUND OR CLIENT IF AN EXECUTIVE OFFICER OF FRANKLIN RESOURCES, INC., WHO HAS BEEN INFORMED OF THE ACCESS PERSON'S PRE-EXISTING INVESTMENT AND WHO HAS NO INTEREST IN THE ISSUER, APPROVES THE TRANSACTION. IN ORDER TO PROCESS YOUR REQUEST, PLEASE PROVIDE THE FOLLOWING INFORMATION: 1) Name/Description of proposed investment: 2) Proposed Investment Amount: 3) Please attach pages f the offering memorandum (or other documents) summarizing the investment opportunity, including: a) Name of the partnership/hedge fund/issuer; b) Name of the general partner, location & telephone number; c) Summary of the offering; including the total amount the offering/issuer; d) Percentage your investment will represent of the total offering; e) Plan of distribution; and f) Investment objective and strategy, PLEASE RESPOND TO THE FOLLOWING QUESTIONS: 4) Was this investment opportunity presented to you in your capacity as a portfolio manager, trader or research analyst? If no, please explain the relationship, if any, you have to the issuer or principals of the issuer. 5) Is this investment opportunity suitable for any fund/client that you advise? If yes, why isn't the investment being made on behalf of the fund/client? If no, why isn't the investment opportunity suitable for the fund/clients? 6) Do any of the fund/clients that you advise presently hold securities of the issuer of this proposed investment (e.g., common stock, preferred stock, corporate debt, loan participations, partnership interests, etc)? If yes, please provide the names of the funds/clients and security description. 7) Do you presently have or will you have any managerial role with the company/issuer as a result of your investment? If yes, please explain in detail your responsibilities, including any compensation you will receive. 8) Will you have any investment control or input to the investment decision making process? 9) If applicable, will you receive reports of portfolio holdings? If yes, when and how frequently will these be provided? Reminder: Personal securities transactions that do not generate brokerage confirmations must be reported to the Legal Compliance Department on Schedule B within 10 calendar days after you are notified. ------------------------------- Name of Access Person ------------------------------- ------------------------ Access Person Signature Date Approved by: __________________________________ ________________________ Chief Investment Officer Signature Date - ------------------------------------------------------------------------------ LEGAL COMPLIANCE USE ONLY - ------------------------------------------------------------------------------ DATE RECEIVED: ___________________ DATE ENTERED IN LOTUS NOTES: ___________________ DATE FORWARDED FRI EXECUTIVE OFFICER: _____________________ PRECLEARED: YES [ ] NO [ ] (ATTACHED E-MAIL) DATE: _____________ DATE ENTERED IN APII: ____________________ - ------------------------------------------------------------------------------ APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF FRANKLIN RESOURCES, INC. - FEBRUARY 2001 Franklin Advisers, Inc. IA Franklin Templeton Investment Corp. (Canada) IA Franklin Advisory Services, LLC IA Templeton/Franklin Investment Services, Inc. IA/BD Franklin Investment Advisory Services, Inc. IA Templeton Investment Counsel, LLC IA Franklin Private Client Group, Inc., Inc. IA Templeton Asset Management, Ltd. IA/FIA Franklin Mutual Advisers, LLC IA Franklin Templeton Investments Japan Ltd. FIA Franklin Properties, Inc. REA Closed Joint-Stock Company Tempelton (Russia) FIA Franklin/Templeton Distributors, Inc. BD Templeton Unit Trust Management Ltd. (UK) FBD Franklin Assets Management (Propriety Ltd.) IA Orion Fund Management Ltd. FIA Templeton (Switzerland), Ltd. FBD Templeton Global Advisors Ltd. (Bahamas) IA Franklin Templeton Investments (Asia) Ltd. FBD Tempelton Asset Management (India) Pvt. Ltd. FIA/FBD Franklin Templeton Investments Corp. (UK) IA/FIA Templeton Italia SIM S.p.A. (Italy) FBD Franklin Templeton International Services S.A. (Luxembourg) FBD Franklin Templeton Investment Services GmbH Franklin Templeton Investments (Australia) Limited FIA (Germany) FBD Franklin/Templeton Investor Services, LLC TA Templeton Funds Annuity Company INS Franklin Templeton Alternative Strategies, LLC IA FTTrust Company Trust Co. Franklin Templeton Services, LLC BM
Codes: IA: US registered investment adviser BD: US registered broker-dealer FIA: Foreign equivalent investment adviser FBD: Foreign equivalent broker-dealer TA: US registered transfer agent BM: Business manager to the funds REA: Real estate adviser INS: Insurance company Trust: Trust company THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING A. LEGAL REQUIREMENT Pursuant to the Insider Trading and Securities Fraud Enforcement Act of 1988, it is the policy of the Franklin Templeton Group to forbid any officer, director, employee, consultant acting in a similar capacity, or other person associated with the Franklin Templeton Group from trading, either personally or on behalf of clients, including all client assets managed by the entities in the Franklin Templeton Group, on material non-public information or communicating material non-public information to others in violation of the law. This conduct is frequently referred to as "insider trading." The Franklin Templeton Group's Policy Statement on Insider Trading applies to every officer, director, employee or other person associated with the Franklin Templeton Group and extends to activities within and outside their duties with the Franklin Templeton Group. Every officer, director and employee must read and retain this policy statement. Any questions regarding the Franklin Templeton Group's Policy Statement on Insider Trading or the Compliance Procedures should be referred to the Legal Department. The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an "insider") or to communications of material non-public information to others. While the law concerning insider trading is not static, it is generally understood that the law prohibits: (1) trading by an insider, while in possession of material non-public information; or (2) trading by a non-insider, while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated; or (3) communicating material non-public information to others. The elements of insider trading and the penalties for such unlawful conduct are discussed below. If, after reviewing this policy statement, you have any questions, you should consult the Legal Department. POLICY STATEMENT ON INSIDER TRADING B. WHO IS AN INSIDER? The concept of "insider" is broad. It includes officers, directors and employees of a company. In addition, a person can be a "temporary insider" if he or she enters into a special confidential relationship in the conduct of a company's affairs and as a result is given access to information solely for the company's purposes. A temporary insider can include, among others, a company's outside attorneys, accountants, consultants, bank lending officers, and the employees of such organizations. In addition, an investment adviser may become a temporary insider of a company it advises or for which it performs other services. According to the U.S. Supreme Court, the company must expect the outsider to keep the disclosed non-public information confidential and the relationship must at least imply such a duty before the outsider will be considered an insider. C. WHAT IS MATERIAL INFORMATION? Trading on inside information is not a basis for liability unless the information is material. "Material information" generally is defined as information for which there is a substantial likelihood that a reasonable investor would consider it important in making his or her investment decisions, or information that is reasonably certain to have a substantial effect on the price of the company's securities. Information that officers, directors and employees should consider material includes, but is not limited to: dividend changes, earnings estimates, changes in previously released earnings estimates, significant merger or acquisition proposals or agreements, major litigation, liquidation problems, and extraordinary management developments. Material information does not have to relate to a company's business. For example, in Carpenter v. U.S., 108 U.S. 316 (1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a Wall Street Journal reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in the Wall Street Journal and whether those reports would be favorable or not. D. WHAT IS NON-PUBLIC INFORMATION? Information is non-public until it has been effectively communicated to the marketplace. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the Securities and Exchange Commission ("SEC"), or appearing in Dow Jones, Reuters Economic Services, The Wall Street Journal or other publications of general circulation would be considered public. E. BASIS FOR LIABILITY 1. FIDUCIARY DUTY THEORY In 1980, the Supreme Court found that there is no general duty to disclose before trading on material non-public information, but that such a duty arises only where there is a fiduciary relationship. That is, there must be a relationship between the parties to the transaction such that one party has a right to expect that the other party will not disclose any material non-public information or refrain from trading. Chiarella v. U.S., 445 U.S. 22 (1980). In Dirks v. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate theories under which non-insiders can acquire the fiduciary duties of insiders. They can enter into a confidential relationship with the company through which they gain information (e.g., attorneys, accountants), or they can acquire a fiduciary duty to the company's shareholders as "tippees" if they are aware or should have been aware that they have been given confidential information by an insider who has violated his fiduciary duty to the company's shareholders. However, in the "tippee" situation, a breach of duty occurs only if the insider personally benefits, directly or indirectly, from the disclosure. The benefit does not have to be pecuniary but can be a gift, a reputational benefit that will translate into future earnings, or even evidence of a relationship that suggests a quid pro quo. 2. MISAPPROPRIATION THEORY Another basis for insider trading liability is the "misappropriation" theory, under which liability is established when trading occurs on material non-public information that was stolen or misappropriated from any other person. In U.S. v. Carpenter, supra, the Court found, in 1987, a columnist defrauded The Wall Street Journal when he stole information from the Wall Street Journal and used it for trading in the securities markets. It should be noted that the misappropriation theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory. F. PENALTIES FOR INSIDER TRADING Penalties for trading on or communicating material non-public information are severe, both for individuals involved in such unlawful conduct and their employers. A person can be subject to some or all of the penalties below even if he or she does not personally benefit from the violation. Penalties include: o civil injunctions; o treble damages; o disgorgement of profits; o jail sentences; o fines for the person who committed the violation of up to three times the profit gained or loss avoided, whether or not the person actually benefited; and o fines for the employer or other controlling person of up to the greater of $1,000,000 or three times the amount of the profit gained or loss avoided. In addition, any violation of this policy statement can result in serious sanctions by the Franklin Templeton Group, including dismissal of any person involved. G. INSIDER TRADING PROCEDURES Each access person, Compliance Officer, the Risk Management Department, and the Legal Department, as the case may be, shall comply with the following procedures. 1. IDENTIFYING INSIDE INFORMATION Before trading for yourself or others, including investment companies or private accounts managed by the Franklin Templeton Group, in the securities of a company about which you may have potential inside information, ask yourself the following questions: o Is the information material? o Is this information that an investor would consider important in making his or her investment decisions? o Is this information that would substantially affect the market price of the securities if generally disclosed? o Is the information non-public? o To whom has this information been provided? o Has the information been effectively communicated to the marketplace (e.g., published in Reuters, The Wall Street Journal or other publications of general circulation)? If, after consideration of these questions, you believe that the information may be material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps: (i) Report the matter immediately to the designated Compliance Officer, or if he or she is not available, to the Legal Department. (ii) Do not purchase or sell the securities on behalf of yourself or others, including investment companies or private accounts managed by the Franklin Templeton Group. (iii)Do not communicate the information inside or outside the Franklin Templeton Group, other than to the Compliance Officer or the Legal Department. (iv) The Compliance Officer shall immediately contact the Legal Department for advice concerning any possible material, non-public information. (v) After the Legal Department has reviewed the issue and consulted with the Compliance Officer, you will be instructed either to continue the prohibitions against trading and communication noted in (ii) and (iii), or you will be allowed to trade and communicate the information. (vi) In the event the information in your possession is determined by the Legal Department or the Compliance Officer to be material and non-public, it may not be communicated to anyone, including persons within the Franklin Templeton Group, except as provided in (i) above. In addition, care should be taken so that the information is secure. For example, files containing the information should be sealed and access to computer files containing material non-public information should be restricted to the extent practicable. 2. RESTRICTING ACCESS TO OTHER SENSITIVE INFORMATION All Franklin Templeton Group personnel also are reminded of the need to be careful to protect from disclosure other types of sensitive information that they may obtain or have access to as a result of their employment or association with the Franklin Templeton Group. (i) GENERAL ACCESS CONTROL PROCEDURES The Franklin Templeton Group has established a process by which access to company files that may contain sensitive or non-public information such as the Bargain List and the Source of Funds List is carefully limited. Since most of the Franklin Templeton Group files which contain sensitive information are stored in computers, personal identification numbers, passwords and/or code access numbers are distributed to Franklin Templeton Group computer access persons only. This activity is monitored on an ongoing basis. In addition, access to certain areas likely to contain sensitive information is normally restricted by access codes. EX-99 23 poa.txt POWER OF ATTORNEY 12/3/02 POWER OF ATTORNEY The undersigned Officers and Trustees of TEMPLETON CHINA WORLD FUND (the "Registrant") and the Registrant hereby appoint Murray L. Simpson, Barbara J. Green, David P. Goss, Steven Gray, Robert C. Rosselot, Bruce G. Leto, Lisa A. Duda, Larry P. Stadulis, and Kristin H. Ives (with full power to each of them to act alone) his/her attorney-in-fact and agent, in all capacities, to execute, file or withdraw the Registrant's registration statement on Form N-1A under the Investment Company Act of 1940, as amended, and the Securities Act of 1933, as amended, (the "1933 Act"), and/or Registrant's registration statements on Form N-14 under the 1933 Act, or any amendments to such registration statements covering the sale of shares by the Registrant under prospectuses becoming effective after this date, including any amendment or amendments increasing or decreasing the amount of securities for which registration is being sought, with all exhibits and any and all documents required to be filed with respect thereto with any regulatory authority, and/or any documents relating to either of such registration statements referred to above. Each of the undersigned grants to each of said attorneys, full authority to do every act necessary to be done in order to effectuate the same as fully, to all intents and purposes as he/she could do if personally present, thereby ratifying all that said attorneys-in-fact and agents, may lawfully do or cause to be done by virtue hereof. This Power of Attorney may be executed in one or more counterparts, each of which shall be deemed to be an original, and all of which shall be deemed to be a single document. The undersigned Registrant, Officers and Trustees hereby execute this Power of Attorney as of the 3rd day of December, 2002. /s/MARK MOBIUS /s/CHARLES B. JOHNSON - ------------------------------------- ------------------------------------- Mark Mobius, Charles B. Johnson, Trustee Chief Executive Officer - Investment Management /s/HARRIS J. ASHTON /s/BETTY P. KRAHMER - ------------------------------------- ------------------------------------- Harris J. Ashton, Trustee Betty P. Krahmer /s/NICHOLAS F. BRADY /s/GORDON S. MACKLIN - ------------------------------------- ------------------------------------- Nicholas F. Brady, Trustee Gordon S. Macklin, Trustee /s/FRANK J. CROTHERS /s/FRED R. MILLSAPS - ------------------------------------- ------------------------------------- Frank J. Crothers, Trustee Fred R. Millsaps, Trustee /s/S. JOSEPH FORTUNATO /s/CONSTANTINE D. TSERETOPOULOS - ------------------------------------- ------------------------------------- S. Joseph Fortunato, Trustee Constantine D. Tseretopoulos, Trustee /s/ANDREW H. HINES, JR. /s/JIMMY D. GAMBILL - ------------------------------------- ------------------------------------- Andrew H. Hines, Jr., Trustee Jimmy D. Gambill, Chief Executive Officer - Finance and Administration /s/EDITH E. HOLIDAY /s/BRUCE S. ROSENBERG - ------------------------------------- ------------------------------------- Edith E. Holiday, Trustee Bruce S. Rosenberg, Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----