UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-8874
--------
TEMPLETON DRAGON FUND, INC.
-----------------------------
(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
--------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
-----------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
--------------
Date of fiscal year end: 12/31
------
Date of reporting period: 12/31/03
-------
ITEM 1. REPORTS TO STOCKHOLDERS.
DECEMBER 31, 2003
[GRAPHIC OMITTED]
--------------------------------------------------------------------------------
ANNUAL REPORT AND SHAREHOLDER INFORMATION INTERNATIONAL
--------------------------------------------------------------------------------
Templeton Dragon Fund, Inc.
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
[LOGO OMITTED]
FRANKLIN(R) TEMPLETON(R)
INVESTMENTS
Franklin o TEMPLETON o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE
Franklin Templeton's distinct multi-manager structure
combines the specialized expertise of three
world-class investment management groups--Franklin,
Templeton and Mutual Series.
SPECIALIZED EXPERTISE Each of our portfolio management groups operates
autonomously, relying on its own research and staying
true to the unique investment disciplines that
underlie its success.
FRANKLIN. Founded in 1947, Franklin is a leader in
tax-free investing and a driving force in fixed
income investing around the globe. They also bring
expertise in growth- and value-style U.S. equity
investing.
TEMPLETON. Founded in 1940, Templeton pioneered
international investing and, in 1954, launched what
has become the industry's oldest global fund. Today,
with research offices in over 25 countries, they
offer investors the broadest global reach in the
industry.
MUTUAL SERIES. Established in 1949, Mutual Series is
dedicated to a unique style of value investing,
searching aggressively for opportunity among
undervalued stocks, arbitrage situations and
distressed companies.
TRUE DIVERSIFICATION Because our management groups work independently and
adhere to distinctly different investment approaches,
Franklin, Templeton and Mutual Series funds typically
have a low overlap of securities. That's why our
funds can be used to build truly diversified
portfolios covering every major asset class.
RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to
consistently provide investors with exceptional
risk-adjusted returns over the long term, as well as
the reliable account services that have helped us
become one of the most trusted names in financial
services.
MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
[GRAPHIC OMITTED]
Not part of the annual report
Contents
Important Notice to Shareholders ....................... 1
ANNUAL REPORT
Templeton Dragon Fund, Inc. ............................ 2
Performance Summary .................................... 6
Financial Highlights and
Statement of Investments ............................... 7
Financial Statements ................................... 11
Notes to Financial Statements .......................... 14
Independent Auditors' Report ........................... 22
Annual Meeting of Shareholders ......................... 23
Dividend Reinvestment and
Cash Purchase Plan ..................................... 24
Tax Designation ........................................ 26
Board Members and Officers ............................. 28
Proxy Voting Policies and Procedures ................... 34
--------------------------------------------------------------------------------
Annual Report
Templeton Dragon Fund, Inc.
YOUR FUND'S GOAL AND PRIMARY INVESTMENTS: Templeton Dragon Fund seeks long-term
capital appreciation by investing at least 45% of its total assets in equity
securities of "China companies," as defined in the Fund's prospectus.
[BAR GRAPH OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets as of 12/31/03
Hong Kong 41,2%
China 38.4%
Taiwan 19.7%
Singapore 0.7%
Dear Shareholder:
This annual report for Templeton Dragon Fund covers the period ended December
31, 2003.
PERFORMANCE OVERVIEW
For the year ended December 31, 2003, Templeton Dragon Fund delivered a +108.44%
cumulative total return in market price terms and +76.54% in net asset value
terms, as shown in the Performance Summary on page 6.
ECONOMIC AND MARKET OVERVIEW
Despite a temporary setback resulting from the severe acute respiratory syndrome
(SARS) outbreak early in the year, China's economy recorded robust gross
domestic product (GDP) growth of 9.1% in 2003.(1) Trade also continued to
prosper as 2003 exports and imports jumped 35% and 40% compared with 2002.(2)
The mainland's attraction to multinational companies and strong economic growth
continued to stimulate foreign direct investments (FDI) during the period. FDI
inflows totaled a record US$53.5 billion for 2003, a 1.4% increase over 2002.(3)
To ease pressure on the government to revalue the local currency, China relaxed
controls on overseas companies' investments.
Tensions between Taiwan and China heightened once again during the fourth
quarter as Taiwanese President Chen Shui-bian stressed that Taiwan was an
independent, sovereign country and proposed holding a referendum during
presidential elections in March 2004 where Chen will seek re-election. The
proposed referendum centers on the issues of support of the one-country
principle, whether Taiwan
1. Source: National Bureau of Statistics, China.
2. Source: Customs Statistics China.
3. Source: Ministry of Commerce of the People's Republic of China.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND COMPLETE LEGAL
TITLES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF
INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 8.
2 | Annual Report
should buy more anti-missile weapons if China refused to withdraw its missiles
pointed at Taiwan, and whether Taipei should open talks with Beijing. China has
repeatedly stressed that the island must unify with the mainland or face war.
Taiwan's economy, in terms of GDP, is expected to grow 3.2% in 2003 and 4.1% in
2004.(4) Taiwanese exports rose 10.4% to US$144.2 billion in 2003, while imports
increased 13.1% to US$127.3 billion over the same time.(5)
Hong Kong's economy bounced back in the latter half of 2003, leading third
quarter GDP growth to rebound to 4.0% annualized after a poor second quarter,
with the Hong Kong government forecasting 3.0% growth for calendar year 2003.(6)
Unemployment rose to a high of 8.7% in 2003, reflecting the negative impact SARS
had on tourism, retail and service sectors, primarily.(6) As the scenario
improved toward the latter half of the year, unemployment dropped to 7.5% by the
end of November.(6) On another positive note, Hong Kong and China signed a
free-trade agreement at the end of June, an indication of China's opening its
economy to international competition.
Markets in the greater China region underperformed their emerging markets
counterparts in the first part of the year due to the SARS outbreak. However,
Chinese markets rebounded strongly after the containment of the virus. Bargain
investors then returned in search of oversold stocks and, as reflected in the
Morgan Stanley Capital International (MSCI) China Free Index, these markets
returned 87.6% in U.S.-dollar terms for the year ended December 31, 2003.(7)
INVESTMENT STRATEGY
Our investment strategy employs a fundamental, value-oriented, long-term
approach. In selecting companies for investment, we will consider 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 we believe are comparable.
4. Source: Directorate General of Budget, Taiwan.
5. Source: Ministry of Finance, Taiwan.
6. Source: Census & Statistics Department, Hong Kong.
7. Source: Standard & Poor's Micropal. The MSCI China Free Index measures the
total return (gross dividends are reinvested) of equity securities available to
foreign (non-local) investors in China. The index is unmanaged and securities
are weighted according to their market capitalization. One cannot invest
directly in an index, nor is an index representative of the Fund's portfolio.
Annual Report | 3
TOP 10 HOLDINGS
12/31/03
--------------------------------------------------------------------------------
COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
--------------------------------------------------------------------------------
Dairy Farm International Holdings Ltd. 10.7%
FOOD & STAPLES RETAILING, HONG KONG
--------------------------------------------------------------------------------
China Petroleum & Chemical Corp., H 10.6%
OIL & GAS, CHINA
--------------------------------------------------------------------------------
China Mobile (Hong Kong) Ltd. 4.9%
WIRELESS TELECOMMUNICATION
SERVICES, CHINA
--------------------------------------------------------------------------------
PetroChina Co. Ltd., H 4.8%
OIL & GAS, CHINA
--------------------------------------------------------------------------------
Hang Lung Group Ltd. 4.1%
REAL ESTATE, HONG KONG
--------------------------------------------------------------------------------
Cheung Kong Infrastructure
Holdings Ltd. 4.0%
CONSTRUCTION MATERIALS, HONG KONG
--------------------------------------------------------------------------------
China Merchants Holdings
(International) Co. Ltd. 3.9%
INDUSTRIAL CONGLOMERATES, HONG KONG
--------------------------------------------------------------------------------
TCL International Holdings Inc. 3.8%
HOUSEHOLD DURABLES, HONG KONG
--------------------------------------------------------------------------------
Beijing Datang Power
Generation Co. Ltd., H 3.7%
ELECTRIC UTILITIES, CHINA
--------------------------------------------------------------------------------
Sinopec Beijing Yanhua
Petrochemical Co. Ltd., H 3.1%
CHEMICALS, CHINA
--------------------------------------------------------------------------------
Our approach to selecting investments emphasizes fundamental company-by-company
analysis (rather than broader analyses of specific industries or sectors of the
economy), to construct an "action list" from which we make our buy decisions.
Although we will consider historical value measures, such as price/earnings
ratios, operating profit margins and liquidation values, the primary factor in
selecting securities for investment by the Fund will be the company's current
price relative to its long-term earnings potential.
MANAGER'S DISCUSSION
The Fund's overweighted positions, relative to the MSCI China Free Index, in
Tsingtao Brewery, Sinopec Beijing Yanhua Petrochemical and China Petroleum &
Chemical provided a strong boost to the Fund's total return this year, as did
our position in China Mobile. However, our overweighted Taiwanese positions in
Sinopac Holdings and Altek Corporation worked against it. Consistent with our
strategy, we continued to hold Sinopac Holdings because we believe that as a
provider of a comprehensive range of financial products and services the company
could benefit from the consolidation of Taiwan's banking industry. Similarly, we
believe Altek, one of the world's largest manufacturers of digital cameras,
could benefit from growing global demand for its products.
By industry, the Fund's holdings in beverages, wireless telecommunication
services, and food and staples retailing sectors yielded the greatest
contribution relative to the MSCI China Free Index during the year. China Mobile
was the strongest contributor among our wireless telecommunication services
stocks; Hong Kong's Dairy Farm International generated positive results among
food and staples retailing stocks; and China H share Tsingtao Brewery led
performance in the beverages sector and was sold during the period as gains were
realized. On the negative side, an overweighted position in real estate stocks
and an underweighting in automobiles dampened performance, as real estate
underperformed and automobiles outperformed the MSCI China Free Index.
In May, the Fund completed a tender offer and bought back a total 6,656,425
shares of its common stock. The purchase was funded primarily by decreasing
4 | Annual Report
certain stock holdings that we believed were less attractively valued. During
the year, war and its aftermath in Iraq, ongoing geopolitical upheaval and fear
of SARS brought significant price movements to many financial markets,
especially in the first half of 2003. These developments, coupled with changes
in fundamentals for some companies held by the Fund, were some of the major
factors behind the portfolio changes.
During the year under review, consistent with our strategy we decreased the
Fund's exposure to China H shares (Hong Kong-listed Chinese companies), as we
believed some valuations grew expensive after the market's recent strong
performance. Key sales included Tsingtao Brewery, China Shipping Development and
shares of Zhejiang Expressway and Jiangsu Expressway. The Fund still held 29.5%
of total net assets in China H shares as of December 31, 2003. A key purchase
during the year included Red Chip stock China Mobile, a dominant wireless
telecommunications operator in China we believed to be well positioned to
benefit from China's ongoing economic expansion.
We increased the Fund's exposure to Taiwan due to the emergence of attractive
valuations, as we believed some stocks had become oversold due to concerns over
the SARS outbreak. There were also signs of global recovery within the
technology sector, Taiwan's largest market sector. Key purchases included Acer,
a major player in the global personal computer market; Delta Electronics, the
world's largest notebook PC adapter manufacturer; and additional shares of
Sunplus Technology, an integrated circuit design company specializing in
consumer products components.
We thank you for your interest in Templeton Dragon Fund, welcome your questions
and comments and look forward to serving your investment needs in the years
ahead.
[PHOTO OMITTED]
/s/Mark Mobius
Mark Mobius
President and Chief Executive Officer -
Investment Management
Templeton Dragon Fund, Inc.
THIS DISCUSSION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF
DECEMBER 31, 2003, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR
MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE
DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY
NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY.
THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET,
COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES
CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR
WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE
IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR
INVESTMENT MANAGEMENT PHILOSOPHY.
Annual Report | 5
Performance Summary as of 12/31/03
Your dividend income will vary depending on dividends or interest paid by
securities in the Fund's portfolio, adjusted for operating expenses. Capital
gain distributions are net profits realized from the sale of portfolio
securities. Total return reflects the Fund's dividend income, capital gain
distributions, if any, and any unrealized gains or losses. All total returns
include reinvested distributions according to the terms specified in the Fund's
dividend reinvestment and cash purchase plan and do not reflect any sales
charges paid at inception or brokerage commissions paid on secondary market
purchases. The performance table does not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the sale of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
-------------------------------------------------------------------------------------------------
CHANGE 12/31/03 12/31/02
-------------------------------------------------------------------------------------------------
Net Asset Value (NAV) +$6.89 $16.62 $9.73
-------------------------------------------------------------------------------------------------
Market Price (NYSE) +$9.07 $17.99 $8.92
-------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1/1/03-12/31/03)
-------------------------------------------------------------------------------------------------
Dividend Income $0.56
-------------------------------------------------------------------------------------------------
PERFORMANCE
-------------------------------------------------------------------------------------------------
COMMENCEMENT OF
1-YEAR 5-YEAR OPERATIONS (9/20/94)
-------------------------------------------------------------------------------------------------
Cumulative Total Return(1)
-------------------------------------------------------------------------------------------------
Based on change in NAV +76.54% +156.07% +139.88%
-------------------------------------------------------------------------------------------------
Based on change in market price +108.44% +275.84% +144.07%
-------------------------------------------------------------------------------------------------
Average Annual Total Return(1)
-------------------------------------------------------------------------------------------------
Based on change in NAV +76.54% +20.69% +9.89%
-------------------------------------------------------------------------------------------------
Based on change in market price +108.44% +30.32% +10.09%
-------------------------------------------------------------------------------------------------
ENDNOTES
ONGOING MARKET VOLATILITY CAN SIGNIFICANTLY AFFECT SHORT-TERM PERFORMANCE; MORE
RECENT RETURNS MAY DIFFER FROM THOSE SHOWN. SPECIAL RISKS ARE ASSOCIATED WITH
FOREIGN INVESTING, INCLUDING CURRENCY VOLATILITY, ECONOMIC INSTABILITY AND
SOCIAL AND POLITICAL DEVELOPMENTS OF COUNTRIES WHERE THE FUND INVESTS. EMERGING
MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO
THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. ALSO, AS
A NON-DIVERSIFIED INVESTMENT COMPANY INVESTING IN "CHINA COMPANIES," THE FUND
MAY INVEST IN A RELATIVELY SMALL NUMBER OF ISSUERS AND, AS A RESULT, BE SUBJECT
TO A GREATER RISK OF LOSS WITH RESPECT TO ITS PORTFOLIO SECURITIES. SINCE
MARKETS CAN GO DOWN AS WELL AS UP, INVESTMENT RETURN AND PRINCIPAL VALUE WILL
FLUCTUATE WITH MARKET CONDITIONS, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL
YOUR SHARES.
1. Total return calculations represent the cumulative and average annual changes
in value of an investment over the periods indicated.
For more current performance figures, call Franklin Templeton Investments at
1-800/342-5236.
6 | Past performance does not guarantee future results. | Annual Report
Templeton Dragon Fund, Inc.
FINANCIAL HIGHLIGHTS
------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2003 2002 2001 2000 1999
------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ...................... $9.73 $8.82 $9.91 $12.75 $10.00
------------------------------------------------------------------------
Income from investment operations:
Net investment income(a)................................ .56 .17 .25 .12 .31
Net realized and unrealized gains (losses) ............. 6.75 .81 (.37) (2.01) 3.58
------------------------------------------------------------------------
Total from investment operations ........................ 7.31 .98 (.12) (1.89) 3.89
------------------------------------------------------------------------
Capital share repurchases ............................... .14 .10 .01 .22 --
------------------------------------------------------------------------
Less distributions from:
Net investment income .................................. (.56) (.17) (.23) (1.17) (.32)
------------------------------------------------------------------------
Tax return of capital .................................. -- -- (.75) -- (.82)
------------------------------------------------------------------------
Total distributions ..................................... (.56) (.17) (.98) (1.17) (1.14)
------------------------------------------------------------------------
Net asset value, end of year ............................ $16.62 $9.73 $8.82 $9.91 $12.75
------------------------------------------------------------------------
Market value, end of year(b)............................. $17.990 $8.920 $7.490 $7.250 $9.813
------------------------------------------------------------------------
Total return (based on market value per share)(c)........ 108.44% 21.22% 16.95% (15.31)% 50.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) ......................... $626,959 $431,779 $429,889 $485,091 $673,869
Ratios to average net assets:
Expenses ............................................... 1.64%(d) 1.62% 1.54% 1.56% 1.59%
Net investment income .................................. 4.57% 1.80% 2.58% 1.04% 2.80%
Portfolio turnover rate ................................. 29.91% 15.75% 70.94% 132.74% 66.60%
a Based on average daily shares outstanding.
b Based on the last sale on the New York Stock Exchange.
c Total return is not annualized for periods less than one year.
d Ratio of expenses to average net assets, excluding payments by affiliate were
1.78% (Note 8).
Annual Report | See notes to financial statements. | 7
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003
----------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS 100.0%
AIRLINES 1.3%
Cathay Pacific Airways Ltd. .......................................... Hong Kong 2,060,000 $ 3,913,777
Singapore Airlines Ltd. .............................................. Singapore 654,000 4,313,019
--------------
8,226,796
--------------
AUTO COMPONENTS 1.1%
(a)Cheng Shin Rubber Industry Co. Ltd. .................................. Taiwan 5,178,000 6,604,047
--------------
AUTOMOBILES .8%
Qingling Motors Co. Ltd., H .......................................... China 26,257,496 5,174,657
--------------
CHEMICALS 3.1%
Sinopec Beijing Yanhua Petrochemical Co. Ltd., H ..................... China 49,271,887 19,198,240
--------------
COMMERCIAL BANKS 3.7%
Chinatrust Financial Holding Co. Ltd. ................................ Taiwan 7,674,540 7,708,448
Mega Financial Holdings Co. Ltd. ..................................... Taiwan 10,307,000 6,193,308
(a)Sinopac Holdings ..................................................... Taiwan 18,042,423 9,140,786
--------------
23,042,542
--------------
COMMUNICATIONS EQUIPMENT .4%
D-Link Corp. ......................................................... Taiwan 1,953,000 2,605,918
--------------
COMPUTERS & PERIPHERALS 5.0%
Acer Inc. ............................................................ Taiwan 7,633,000 11,353,947
Advantech Co. Ltd. ................................................... Taiwan 2,790,865 4,809,001
Asustek Computer Inc. ................................................ Taiwan 2,621,375 5,790,961
Compal Electronics Inc. .............................................. Taiwan 1,488,100 2,038,193
Legend Group Ltd. .................................................... Hong Kong 7,604,000 3,256,646
Lite-on Technology Corp. ............................................. Taiwan 4,081,000 4,327,423
--------------
31,576,171
--------------
CONSTRUCTION MATERIALS 4.0%
Cheung Kong Infrastructure Holdings Ltd. ............................. Hong Kong 11,060,000 24,787,985
(a)China Resources Cement ............................................... Hong Kong 872,000 280,798
--------------
25,068,783
--------------
DISTRIBUTORS 2.3%
China Resources Enterprise Ltd. ...................................... Hong Kong 12,628,000 14,313,772
--------------
DIVERSIFIED FINANCIAL SERVICES 1.0%
Yuanta Core Pacific Securities Co. ................................... Taiwan 10,435,067 6,239,525
--------------
DIVERSIFIED TELECOMMUNICATION SERVICES .9%
China Telecom Corp. Ltd., H .......................................... China 14,280,000 5,885,929
--------------
ELECTRIC UTILITIES 5.7%
Beijing Datang Power Generation Co. Ltd., H .......................... China 32,020,000 22,890,283
Guangdong Electric Power Development Co Ltd., B ...................... China 5,467,100 4,725,159
Huaneng Power International Inc., H .................................. China 4,628,000 8,017,749
--------------
35,633,191
--------------
ELECTRICAL EQUIPMENT 1.3%
Phoenixtec Power Co. Ltd. ............................................ Taiwan 7,224,945 8,469,891
--------------
8 | Annual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONTINUED)
----------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRONIC EQUIPMENT & INSTRUMENTS 1.7%
Delta Electronics Inc. ............................................... Taiwan 8,501,050 $ 10,892,362
--------------
FOOD & STAPLES RETAILING 10.7%
Dairy Farm International Holdings Ltd. ............................... Hong Kong 39,911,478 66,851,726
--------------
FOOD PRODUCTS 1.1%
UNI-President Enterprises Corp. ...................................... Taiwan 16,069,030 6,602,738
--------------
HOTELS RESTAURANTS & LEISURE 2.0%
Hong Kong & Shanghai Hotels Ltd. ..................................... Hong Kong 21,534,000 12,551,052
--------------
HOUSEHOLD DURABLES 5.7%
Altek Corporation .................................................... Taiwan 2,143,200 3,598,303
TCL International Holdings Inc. ...................................... Hong Kong 54,052,000 23,845,652
Tsann Kuen Enterprise Co. Ltd. ....................................... Taiwan 5,572,000 8,107,711
--------------
35,551,666
--------------
INDUSTRIAL CONGLOMERATES 9.4%
Beijing Enterprises Holdings Ltd. .................................... Hong Kong 3,082,000 3,612,525
China Merchants Holdings (International) Co. Ltd. .................... Hong Kong 18,734,000 24,733,822
Citic Pacific Ltd. ................................................... Hong Kong 7,408,000 18,893,091
Hutchison Whampoa Ltd. ............................................... Hong Kong 398,000 2,934,914
Shanghai Industrial Holdings Ltd. .................................... China 3,743,000 8,557,660
--------------
58,732,012
--------------
INSURANCE .7%
(a)China Life Insurance Co. Ltd., H ..................................... China 5,092,000 4,164,846
--------------
IT SERVICES .4%
Travelsky Technology Ltd., H ......................................... China 2,558,000 2,751,211
--------------
MACHINERY .5%
China International Marine Containers ................................ China 1,657,541 3,172,634
--------------
METALS & MINING .2%
Yanzhou Coal Mining Co. Ltd., H ...................................... China 1,458,000 1,474,226
--------------
OIL & GAS 15.4%
China Petroleum & Chemical Corp., H .................................. China 148,606,000 66,516,288
PetroChina Co. Ltd., H ............................................... China 52,754,000 30,237,944
--------------
96,754,232
--------------
REAL ESTATE 9.0%
Cheung Kong Holdings Ltd. ............................................ Hong Kong 1,807,000 14,372,488
Hang Lung Group Ltd. ................................................. Hong Kong 20,415,000 25,506,917
Henderson China Holdings Ltd. ........................................ Hong Kong 9,215,000 4,599,429
Henderson Investment Ltd. ............................................ Hong Kong 7,485,000 8,628,825
Hong Kong Land Holdings Ltd. ......................................... Hong Kong 1,904,000 3,236,800
--------------
56,344,459
--------------
ROAD & RAIL .5%
Guangshen Railway Co. Ltd., H ........................................ China 11,998,000 3,399,918
--------------
Annual Report | 9
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2003 (CONTINUED)
----------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
----------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 2.3%
Elan Microelectronics Corp. .......................................... Taiwan 3,408,000 $ 3,061,679
Sunplus Technology Co. Ltd. .......................................... Taiwan 6,073,900 11,360,608
--------------
14,422,287
--------------
TEXTILES APPAREL & LUXURY GOODS .7%
Tack Fat Group International Ltd. .................................... Hong Kong 18,064,000 1,838,137
Tainan Enterprises Co., Ltd. ......................................... Taiwan 1,846,000 2,506,645
--------------
4,344,782
--------------
TRANSPORTATION INFRASTRUCTURE 3.9%
Cosco Pacific Ltd. ................................................... China 6,678,000 8,902,738
Jiangsu Expressway Co. Ltd., H ....................................... China 22,976,000 12,207,739
Zhejiang Expressway Co. Ltd., H ...................................... China 4,422,000 3,104,217
--------------
24,214,694
--------------
WIRELESS TELECOMMUNICATION SERVICES 5.2%
China Mobile (Hong Kong) Ltd. ........................................ China 9,986,000 30,677,276
Taiwan Cellular Corp. ................................................ Taiwan 2,070,764 1,799,338
--------------
32,476,614
--------------
TOTAL COMMON STOCKS (COST $409,936,100) ............................... 626,740,921
--------------
SHORT TERM INVESTMENTS (COST $15,811,087) 2.5%
(b)Franklin Institutional Fiduciary Trust Money Market Portfolio ........ United States 15,811,087 15,811,087
--------------
TOTAL INVESTMENTS (COST $425,747,187) 102.5% .......................... 642,552,008
OTHER ASSETS, LESS LIABILITIES (2.5)% ................................. (15,592,645)
--------------
NET ASSETS 100.0% ..................................................... $626,959,363
--------------
a Non-income producing.
b See Note 7 regarding investments in the Franklin Institutional Fiduciary Trust
Money Market Portfolio.
10 | See notes to financial statements. | Annual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2003
Assets:
Investments in securities:
Cost .................................................................................................. $425,747,187
--------------
Value ................................................................................................. 642,552,008
Foreign Currency, at value (cost $4,480,531) ........................................................... 4,484,931
Receivables:
Investment securities sold ............................................................................ 1,484,541
--------------
Total assets ...................................................................................... 648,521,480
--------------
Liabilities:
Payables:
Affiliates ............................................................................................ 703,020
Distributions to Shareholders .......................................................................... 20,470,504
Other liabilities ...................................................................................... 388,593
--------------
Total liabilities ................................................................................. 21,562,117
--------------
Net assets, at value ............................................................................ $626,959,363
--------------
Net assets consist of:
Undistributed net investment income .................................................................... $ 1,976,800
Net unrealized appreciation (depreciation) ............................................................. 216,809,397
Accumulated net realized gain (loss) ................................................................... (47,082,739)
Capital shares ......................................................................................... 455,255,905
--------------
Net assets, at value .............................................................................. $626,959,363
--------------
Net asset value per share ($626,959,363 / 37,719,742 shares outstanding) ................................ $16.62
--------------
Annual Report | See notes to financial statements. | 11
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2003
Investment Income:
(net of foreign taxes of $676,941)
Dividends .............................................................................................. $ 30,870,045
Interest ............................................................................................... 1,354
--------------
Total investment income ........................................................................... 30,871,399
--------------
Expenses:
Management fees (Note 3) ............................................................................... 6,096,012
Administrative fees (Note 3) ........................................................................... 743,222
Transfer agent fees .................................................................................... 297,200
Custodian fees ......................................................................................... 283,400
Reports to shareholders ................................................................................ 229,439
Registration and filing fees ........................................................................... 38,900
Professional fees ...................................................................................... 1,084,700
Directors' fees and expenses ........................................................................... 58,800
Other .................................................................................................. 12,800
--------------
Total expenses .................................................................................... 8,844,473
--------------
Expenses paid by affiliate (Note 8) .............................................................. (688,892)
--------------
Net expenses .................................................................................... 8,155,581
--------------
Net investment income .......................................................................... 22,715,818
--------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments:
Unaffiliated issuers ................................................................................. 62,985,440
Non-controlled affiliated issuers (Note 6) ........................................................... (8,931,314)
Foreign currency transactions ......................................................................... (73,228)
--------------
Net realized gain (loss) ........................................................................ 53,980,898
--------------
Net unrealized appreciation (depreciation) on:
Investments: .......................................................................................... 206,146,847
Translation of assets and liabilities denominated in foreign currencies ............................... 4,576
--------------
Net unrealized appreciation (depreciation) ...................................................... 206,151,423
--------------
Net realized and unrealized gain (loss) ................................................................. 260,132,321
--------------
Net increase (decrease) in net assets resulting from operations ......................................... $282,848,139
--------------
12 | See notes to financial statements. | Annual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
for the years ended December 31, 2003 and 2002
--------------------------------
2003 2002
--------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income ...................................................... $ 22,715,818 $ 8,191,719
Net realized gain (loss) from investments and foreign currency
transactions .............................................................. 53,980,898 3,663,821
Net unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies ............... 206,151,423 39,095,638
--------------------------------
Net increase (decrease) in net assets resulting from operations ........ 282,848,139 50,951,178
Distributions to shareholders from net investment income .................... (21,136,146) (7,570,574)
Capital share transactions (Note 2) ......................................... (66,531,693) (41,490,771)
--------------------------------
Net increase (decrease) in net assets .................................. 195,180,300 1,889,833
Net assets:
Beginning of year ........................................................... 431,779,063 429,889,230
--------------------------------
End of year ................................................................. $626,959,363 $431,779,063
--------------------------------
Undistributed net investment income included in net assets:
End of year ................................................................. $ 1,976,800 $ 470,356
--------------------------------
Annual Report | See notes to financial statements. | 13
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (the Fund), is registered under the Investment
Company Act of 1940 as a closed-end, non-diversified investment company. The
Fund seeks long-term capital appreciation by investing at least 45% of its total
assets in the equity securities of "China companies," as defined in the Fund's
prospectus.
On May 29, 2002, the Fund's shareholders approved an Agreement and Plan of
Reorganization (the "Plan") that provides for the reorganization of the Fund
from a Maryland corporation to a Delaware statutory trust. The completion of the
reorganization is pending guidance from the National Tax Agency in Japan
relating to the tax treatment of the Plan under Japanese laws with respect to
the Fund's Japanese shareholders. If and when the reorganization is completed,
the Delaware statutory trust will be the successor to the Fund.
The following summarizes the Fund's significant accounting policies.
A. SECURITY VALUATION
Securities listed or traded on a recognized national exchange or NASDAQ are
valued at the last reported sales price. Over-the-counter securities and listed
securities for which no sale is reported are valued within the range of the
latest quoted bid and asked prices. Investments in open-end mutual funds are
valued at the closing net asset value. Foreign securities are valued at the
close of trading of the foreign exchange or the NYSE, whichever is earlier. If
events occur that materially affect the values of securities after the prices or
foreign exchange rates are determined, or if market quotations are not readily
available, the securities will be valued at fair value as determined following
procedures approved by the Board of Directors.
B. FOREIGN CURRENCY TRANSLATION
Portfolio securities and other assets and liabilities denominated in foreign
currencies are translated into U.S. dollars based on the exchange rate of such
currencies against U.S. dollars on the date of valuation. Purchases and sales of
securities and income items denominated in foreign currencies are translated
into U.S. dollars at the exchange rate in effect on the transaction date.
The Fund does not separately report the effect of changes in foreign exchange
rates from changes in market prices on securities held. Such changes are
included in net realized and unrealized gain or loss from investments.
Realized foreign exchange gains or losses arise from sales of foreign
currencies, currency gains or losses realized between the trade and settlement
dates on securities transactions and the difference between the recorded amounts
of dividends, interest, and foreign withholding taxes, and the U.S. dollar
equivalent of the amounts actually received or paid. Net unrealized foreign
exchange gains and losses arise from changes in foreign exchange rates on
foreign denominated assets and liabilities other than investments in securities
held at the end of the reporting period.
14 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. FOREIGN CURRENCY CONTRACTS
When the Fund purchases or sells foreign securities it may enter into foreign
exchange contracts to minimize foreign exchange risk from the trade date to the
settlement date of the transactions. A foreign exchange contract is an agreement
between two parties to exchange different currencies at an agreed upon exchange
rate on a specified date. Realized and unrealized gains and losses are included
in the Statement of Operations.
The risks of these contracts include movement in the values of the foreign
currencies relative to the U.S. dollar and the possible inability of the
counterparties to fulfill their obligations under the contracts.
D. INCOME TAXES
No provision has been made for income taxes because the Fund's policy is to
qualify as a regulated investment company under the Internal Revenue Code and to
distribute substantially all of its taxable income.
E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS
Security transactions are accounted for on trade date. Realized gains and losses
on security transactions are determined on a specific identification basis.
Certain income from foreign securities is recorded as soon as information is
available to the Fund. Interest income and estimated expenses are accrued daily.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
F. ACCOUNTING ESTIMATES
The preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the amounts of income
and expense during the reporting period. Actual results could differ from those
estimates.
G. GUARANTEES AND INDEMNIFICATIONS
Under the Fund's organizational documents, its officers and directors are
indemnified against certain liability arising out of the performance of their
duties to the Fund. Additionally, in the normal course of business, the Fund
enters into contracts with service providers that contain general
indemnification clauses. The Fund's maximum exposure under these arrangements is
unknown as this would involve future claims that may be made against the Fund
that have not yet occurred. However, based on experience, the Fund expects the
risk of loss to be remote.
Annual Report | 15
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK
On October 18, 1997, the Board of Directors of the Fund authorized management to
implement an open-market share repurchase program pursuant to which the Fund may
purchase, from time to time, up to 5.4 million shares of the Fund's common stock
in open-market transactions, at the discretion of management (approximately 10%
of the shares outstanding at the time the program was initially implemented). In
May 2000, the Board of Directors removed the 10% limitation on share repurchases
in order to give management greater flexibility to engage in an aggressive share
repurchase program. Effective May 10, 2002, the Board of Directors discontinued
the repurchase program.
At December 31, 2003, there were 100 million shares authorized ($.01 par value).
On July 11, 2002 and May 22, 2003, the Fund purchased and retired certain
amounts of its outstanding common stock. The Fund incurred tender costs, which
were charged to additional paid-in-capital. Tender offer transactions were as
follows:
---------------------------------
MAY 22, 2003* JULY 11, 2002
---------------------------------
Shares repurchased and retired ......... 6,656,425 4,364,926
Purchase price ......................... $9.97 $9.45
Percentage of net asset value .......... 92.5% 90%
Tender costs incurred .................. $167,136 $242,221
*See Note 8 regarding Recent Litigation
3. TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also officers or directors of Templeton Asset
Management Ltd. (TAML) and Franklin Templeton Services, LLC (FT Services), the
Fund's investment manager and administrative manager, respectively.
The Fund pays an investment management fee to TAML of 1.25% per year of the
average weekly net assets of the Fund. The Fund pays FT Services an
administrative fee of 0.15% per year of the Fund's average weekly net assets, of
which 0.10% is paid to Nomura Asset Management, Inc., for sub-administrative
services.
4. INCOME TAXES
At December 31, 2003, the cost of investments, net unrealized appreciation
(depreciation), and undistributed ordinary income for income tax purposes were
as follows:
Cost of investments ..................................... $427,257,882
--------------
Unrealized appreciation ................................. 225,925,227
Unrealized depreciation ................................. (10,631,101)
--------------
Net unrealized appreciation (depreciation) .............. $215,294,126
--------------
Distributable earnings - ordinary income ................ $ 1,976,800
--------------
16 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES (CONTINUED)
The tax character of distributions paid during the years ended December 31, 2003
and 2002, was as follows:
-------------------------
2003 2002
-------------------------
Distributions paid from:
Ordinary income ................. $21,136,146 $7,570,574
Net investment income differs for financial statement and tax purposes primarily
due to differing treatments of foreign currency transactions.
Net realized gains and losses differ for financial statement and tax purposes
primarily due to differing treatment of wash sales and foreign currency
transactions.
At December 31, 2003, the Fund had tax basis capital losses of $45,572,045 which
may be carried over to offset future capital gains. Such losses expire in 2009.
5. INVESTMENT TRANSACTIONS
Purchases and sales of securities (excluding short-term securities) for the year
ended December 31, 2003 aggregated $139,926,322 and $190,359,489, respectively.
6. HOLDINGS OF 5% VOTING SECURITIES OF PORTFOLIO COMPANIES
The Investment Company Act of 1940 defines "affiliated companies" to include
investments in portfolio companies in which the Fund owns 5% or more of the
outstanding voting securities. Investments in "affiliated companies" at December
31, 2003 were as shown below.
--------------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF REALIZED
SHARES HELD SHARES HELD VALUE CAPITAL
AT BEGINNING GROSS GROSS AT END AT END DIVIDEND GAINS/
NAME OF ISSUER OF YEAR ADDITIONS REDUCTIONS OF YEAR OF YEAR INCOME (LOSSES)
--------------------------------------------------------------------------------------------------------------------------
Non-Controlled Affiliates
Angang New Steel
Company Ltd., H ............. 58,332,000 -- (58,332,000) -- * -- $ (967,791)
Sinopec Beijing Yanhua
Petrochemical Co.
Ltd., H ..................... 72,215,887 -- (22,944,000) 49,271,887 * -- 516,857
Tsingtao Brewery Co.
Ltd., H ..................... 39,944,000 -- (39,944,000) -- * -- (8,480,380)
----------------------------------
TOTAL NON-CONTROLLED AFFILIATES $-- $-- $(8,931,314)
----------------------------------
*As of December 31, 2003 no longer an affiliate.
Annual Report | 17
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO
The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market
Portfolio (the Sweep Money Fund), an open-end investment company managed by
Franklin Advisers Inc. (an affiliate of the Fund's investment manager).
Management fees paid by the Fund are reduced on assets invested in the Sweep
Money Fund, in an amount not to exceed the management fees paid by the Sweep
Money Fund. The Fund earned $260,414 of dividend income from investments in the
Sweep Money Fund for the year ended December 31, 2003.
8. RECENT LITIGATION
On January 29, 2003, the Fund, together with Templeton China World Fund, Inc.
("China Fund"), another closed-end management investment company in Franklin
Templeton Investments, and TAML, the investment adviser to the Fund and China
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 related to
Harvard's ownership of Fund shares and actions as a shareholder. On February 7,
2003, Harvard counterclaimed, alleging that the Fund, China Fund, TAML 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 TAML and each fund's directors. On March 20, 2003,
the parties announced a settlement of their claims.
DISMISSAL OF LAWSUIT. Pursuant to the Settlement Agreement between the Fund and
Harvard, the complaint brought by the Fund, China Fund and TAML against Harvard,
as well as the counterclaims brought by Harvard against the Fund, China Fund,
each fund's directors and TAML were dismissed without prejudice. 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.
SHAREHOLDER PROPOSALS. As part of the settlement, Harvard College agreed to
withdraw all of its shareholder proposals for the Fund's 2003 Annual
Shareholders' meeting (the "Meeting.")
18 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RECENT LITIGATION (CONTINUED)
TENDER OFFERS. The Fund announced that as part of its settlement with Harvard,
it agreed to take, and the Board approved, the following actions:
o APRIL 2003 CASH TENDER OFFER--The Fund agreed to commence a cash tender
offer, which was required to be commenced on or prior to April 30, 2003, for
15% of the Fund's outstanding shares at 92.5% of net asset value per share as
of the date the offer expires. Previously, the Board had approved an April
2003 cash tender offer for not less than 10% of the Fund's outstanding shares
at not less than 90% of net asset value per share. On April 24, 2003, the
Fund commenced a tender offer for up to 6,656,425 shares, or 15%, of the
Fund's outstanding shares at a price per share equal to 92.5% of net asset
value per share as of May 22, 2003, the expiration date of the tender offer.
In accordance with the terms of the tender offer, 6,656,425 shares were
accepted by the Fund for a purchase price of $9.97 per share.
o IN-KIND TENDER OFFERS--The Fund has applied to the SEC for an exemptive order
allowing the Fund to make occasional, non-periodic tender offers, each for up
to 20% of the Fund's outstanding shares at a price equal to 95% of net asset
value per share as of the date the offer expires, to be paid entirely in kind
through a pro rata distribution of marketable portfolio securities and
available cash. Subject to certain conditions, the settlement requires the
Fund to commence such an in-kind tender offer for 20% of the Fund's shares
within three months after obtaining the SEC exemption. The Fund may also be
required under the settlement to conduct, on substantially identical terms,
up to two additional in-kind tender offers under certain circumstances. There
is no assurance that the SEC will issue the exemptive order, nor is it
possible to predict the date when an exemptive order might be granted.
o ADDITIONAL CASH TENDER OFFERS--If the SEC does not issue the exemptive order
for in-kind tender offers by March 26, 2004, the settlement provides that the
Fund may, but is not obligated to, conduct an additional cash tender offer,
and possibly later follow-on cash tender offers, each for 15% of the Fund's
outstanding shares at a price of 92.5% of net asset value per share as of the
date the offer expires. Under certain circumstances, if the Fund does not
conduct these tender offers, Harvard will be relieved of its obligation to
refrain from making shareholder proposals and taking other actions with
respect to the Fund.
Harvard announced that it intends to tender all of the shares it then owns into
each tender offer described above that is commenced.
The Settlement Agreement provides that the Fund will not be obligated to
commence in-kind tender offers or additional cash tender offers under certain
circumstances or conditions. These relate to, among other things, the number of
shares tendered by shareholders into preceding tender offers as well as the
beneficial ownership percentages of the Fund's shareholders.
Annual Report | 19
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. RECENT LITIGATION (CONTINUED)
STANDSTILL. As part of the settlement, Harvard agreed not to submit any
proposals for consideration by shareholders of the Fund, or any other closed-end
fund or similar investment vehicle managed by TAML or its affiliates, or for
consideration by shareholders of Franklin Resources, nor to encourage others to
do so, for a period of four years. Harvard also has agreed not at any time to
acquire additional shares of the Fund or any other closed-end fund or similar
investment vehicle managed by TAML or its affiliates.
FEES, COSTS AND EXPENSES. The Fund agreed that TAML would be responsible for the
legal fees and expenses incurred by the Fund and its directors with respect to
the Settlement Agreement and the litigation. The Fund agreed that TAML would
also be responsible for the legal fees and expenses incurred by the Fund through
March 20, 2003, with respect to its proxy contest relating to the Meeting.
9. REGULATORY MATTERS
On February 4, 2004, the Securities Division of the Office of the Secretary of
the Commonwealth of Massachusetts filed an administrative complaint against
Franklin Resources, Inc. and certain of its subsidiaries (the "Company"),
alleging violations of the Massachusetts Uniform Securities Act. The complaint
arises from activity that occurred in 2001 during which time an officer of a
Company subsidiary was negotiating an agreement with an investor relating to
investments in a mutual fund and a hedge fund.
The Fund, in addition to other entities within Franklin Templeton Investments,
including the Company and other funds, has been named in shareholder class
actions related to the matter described above. The Fund's management believes
that the claims made in the lawsuit are without merit and it intends to defend
vigorously against the allegations. It is anticipated that the Fund may be named
in additional similar civil actions related to the matter described above.
In addition, as part of ongoing investigations by the U.S. Securities and
Exchange Commission (the "SEC"), the U.S. Attorney for the Northern District of
California, the New York Attorney General, the California Attorney General, the
U.S. Attorney for the District of Massachusetts, the Florida Department of
Financial Services, and the Commissioner of Securities and the Attorney General
of the State of West Virginia, relating to certain practices in the mutual fund
industry, including late trading, market timing and sales compensation
arrangements, the Company and its subsidiaries, as well as certain current or
former executives and employees of the Company, have received requests for
information and/or subpoenas to testify or produce documents. The Company and
its current employees are providing documents and information in response to
these requests and subpoenas. In addition, the Company has responded to requests
for similar kinds of information from regulatory authorities in some of the
foreign countries where the Company conducts its global asset management
business.
20 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY MATTERS (CONTINUED)
The Staff of the SEC has informed the Company that it intends to recommend that
the Commission authorize an action against an affiliate of the Fund's adviser
and a senior executive officer relating to the frequent trading issues that are
the subject of the SEC's investigation. These issues were previously disclosed
as being under investigation by government authorities and the subject of an
internal inquiry by the Company in its Annual Report on Form 10-K and on its
public website. The Company currently is in discussions with the SEC Staff in an
effort to resolve the issues raised in their investigation. Such discussions are
preliminary and the Fund management has been advised that the Company cannot
predict the likelihood of whether those discussions will result in a settlement
and, if so, the terms of such settlement. The impact, if any, of these matters
on the Fund is uncertain at this time. If the Company finds that it bears
responsibility for any unlawful or improper conduct, it has committed to making
the Fund or its shareholders whole, as appropriate.
Annual Report | 21
Templeton Dragon Fund, Inc.
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF TEMPLETON DRAGON FUND, INC.
In our opinion, the accompanying statement of assets and liabilities, including
the statement of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Templeton Dragon Fund, Inc. (the
"Fund") at December 31, 2003, the results of its operations for the year then
ended, the changes in its net assets for each of the two years in the period
then ended and the financial highlights for each of the five years in the period
then ended, in conformity with accounting principles generally accepted in the
United States of America. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 2003 by
correspondence with the custodian, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
January 30, 2004, except for Note 9, as to which the date is February 12, 2004.
22 | Annual Report
Templeton Dragon Fund, Inc.
ANNUAL MEETING OF SHAREHOLDERS, MAY 29, 2003
An Annual Meeting of Shareholders of the Fund was held at the Tower Club, 28th
Floor, Union Planters Bank Building, 100 South East 3rd Avenue, Fort Lauderdale,
Florida, on May 29, 2003. The purpose of the meeting was to elect three
Directors of the Fund. At the meeting held on May 29, 2003, the following
persons were elected by the shareholders to serve as Directors of the Fund:
Betty P. Krahmer, Gordon S. Macklin and Fred R. Millsaps.* No other business was
transacted at the meeting.
The results of the voting at the meeting are as follows:
Proposal 1. The election of three (3) Directors:
------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
OUTSTANDING VOTED OUTSTANDING VOTED
TERM EXPIRING 2006 FOR SHARES SHARES WITHHELD SHARES SHARES
------------------------------------------------------------------------------------------------------
INDEPENDENT DIRECTORS
Betty P. Krahmer ..... 40,415,163 91.07% 98.05% 802,238 1.81% 1.95%
Gordon S. Macklin .... 40,402,652 91.05% 98.02% 814,749 1.84% 1.98%
Fred R. Millsaps ..... 40,251,905 90.71% 97.66% 965,496 2.18% 2.34%
* Harris J. Ashton, Frank J. Crothers, S. Joseph Fortunato, Edith E. Holiday,
Frank A. Olson and Constantine D. Tseretopoulos currently serve as Independent
Directors and Nicholas F. Brady, Martin L. Flanagan and Charles B. Johnson
currently serve as Interested Directors. Their terms of office continued after
the Annual Meeting of Shareholders.
Annual Report | 23
Templeton Dragon Fund, Inc.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
The Fund offers a Dividend Reinvestment and Cash Purchase Plan (the "Plan") with
the following features:
If shares of the Fund are held in the shareholder's name, the shareholder will
automatically be a participant in the Plan (other than shareholders holding
their shares through Japan Securities Clearing Corporation, who will not be
enrolled in the Plan unless certain conditions are met and they elect to
participate), unless he elects to withdraw. If the shares are registered in the
name of a broker-dealer or other nominee (i.e., in "street name"), the
broker-dealer or nominee will elect to participate in the Plan on the
shareholder's behalf unless the shareholder instructs them otherwise, or unless
the reinvestment service is not provided by the broker-dealer or nominee.
Participants should contact Mellon Investor Services LLC, P.O. Box 3338, South
Hackensack, NJ 07606-1938, to receive the Plan brochure.
To receive dividends or distributions in cash, the shareholder must notify
Mellon Securities Trust Company (the "Plan Agent") at the address above or the
institution in whose name the shares are held. The Plan Agent must receive
written notice within 10 business days before the record date for the
distribution.
Whenever the Fund declares dividends in either cash or common stock of the Fund,
if the market price is equal to or exceeds net asset value at the valuation
date, the participant will receive the dividends entirely in stock at a price
equal to the net asset value, but not less than 95% of the then current market
price of the Fund's shares. If the market price is lower than net asset value or
if dividends and/or capital gains distributions are payable only in cash, the
participant will receive shares purchased on the New York Stock Exchange or
otherwise on the open market.
A participant has the option of submitting additional payments to the Plan
Agent, in any amounts of at least $100, up to a maximum of $5,000 per month, for
the purchase of Fund shares for his or her account. These payments shall be made
by check or money order payable to "Mellon Securities Trust Company" and sent to
Mellon Investor Services LLC, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attn:
Templeton Dragon Fund, Inc. The Plan Agent shall apply such payments (less a
$5.00 service charge and less a pro rata share of trading fees) to purchases of
the Fund's shares in the open market.
The automatic reinvestment of dividends and/or capital gains does not relieve
the participant of any income tax which may be payable on dividends or
distributions.
The participant may withdraw from the Plan without penalty at any time by
written notice to the Plan Agent sent to Mellon Investor Services LLC, P.O. Box
3338, South Hackensack, NJ 07606-1938. Upon withdrawal, the participant will
receive, without charge, stock certificates issued in the participant's name for
all full shares held by the Plan Agent; or, if the participant wishes, the Plan
Agent will sell the participant's shares and send the proceeds, less a service
charge of $5.00 and less trading fees.
Whenever shares are purchased on the New York Stock Exchange or otherwise on the
open market, each participant will pay a pro rata portion of trading fees.
Trading fees will be deducted from amounts to be invested.
Effective April 23, 2004, the fees for the sale of shares through the Plan will
be $15.00 per transaction plus a $0.12 per share trading fee. All other terms
and conditions of the Plan remain in effect and have not been modified or
amended.
24 | Annual Report
Templeton Dragon Fund, Inc.
TRANSFER AGENT
Mellon Investor Services LLC
85 Challenger Road
Ridgefield Park, NJ 07660
1-800-416-5585
www.melloninvestor.com
SHAREHOLDER INFORMATION
Shares of Templeton Dragon Fund, Inc. are traded daily on the New York Stock
Exchange under the symbol "TDF". The Fund's shares are also listed and traded in
Japan on the Osaka Securities Exchange. Information about the net asset value
and the market price is published each Monday in the Wall Street Journal, weekly
in Barron's and each Saturday in The New York Times and other newspapers. Daily
market prices for the Fund's shares are published in the New York Stock Exchange
Composite Transactions section of newspapers.
For current information about distributions and shareholder accounts, call
1-800-416-5585. Registered shareholders can now access their Fund account
on-line with Investor Service Direct(R). For information go to Mellon Investor
Services' web site at http://melloninvestor.com and follow the instructions.
The daily closing net asset value as of the previous business day may be
obtained when available by calling Franklin Templeton Fund Information after 7
a.m. pacific time any business day at 1-800/DIAL BEN(R) (1-800/342-5236). The
Fund's net asset value and dividends are also listed on the NASDAQ Stock Market,
Inc.'s Mutual Fund Quotation Service ("NASDAQ MFQS").
Shareholders not receiving copies of the reports to shareholders because their
shares are registered in the name of a broker or a custodian can request that
they be added to the Fund's mailing list by writing Templeton Dragon Fund, Inc.,
100 Fountain Parkway, P.O. Box 33030, St. Petersburg, FL 33733-8030.
Annual Report | 25
Templeton Dragon Fund, Inc.
TAX DESIGNATION (UNAUDITED)
Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby
designates up to maximum of $4,789,102 as qualified dividends for purposes of
the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended
December 31, 2003. In January 2004, shareholders will receive Form 1099-DIV
which will include their share of qualified dividends distributed during the
calendar year 2003. Shareholders are advised to check with their tax advisors
for information on the treatment of these amounts on their individual income tax
returns.
At December 31, 2003, more than 50% of the Templeton Dragon Fund, Inc.'s total
assets were invested in securities of foreign issuers. In most instances,
foreign taxes were withheld from dividends paid to the Fund on these
investments. As shown in the table below, the Fund hereby designates to
shareholders the foreign source income and foreign taxes paid, pursuant to
Section 853 of the Internal Revenue Code. This designation will allow
shareholders of record on December 31, 2003, to treat their proportionate share
of foreign taxes paid by the Fund as having been paid directly by them. The
shareholder shall consider these amounts as foreign taxes paid in the tax year
in which they receive the Fund distribution.
The following table provides a detailed analysis, by country, of Foreign Tax
Paid, Foreign Source Income, Foreign Qualified Dividends and Adjusted Foreign
Source Income as designated by the Fund, to shareholders of record. As a service
to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per
Share" in column 4 below reports foreign source income with the required
adjustments to foreign source qualified dividends. This information is provided
to simplify your reporting of foreign source income for line 1 of Form 1116.
--------------------------------------------------------------------------------
ADJUSTED
FOREIGN TAX FOREIGN FOREIGN FOREIGN
PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME
COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE
--------------------------------------------------------------------------------
China ........... 0.0000 0.1411 0.0932 0.0878
Hong Kong ....... 0.0000 0.4159 0.0000 0.4159
Singapore ....... 0.0003 0.0019 0.0000 0.0019
Taiwan .......... 0.0176 0.0502 0.0000 0.0502
-----------------------------------------------------------
TOTAL ........... $0.0179 $0.6091 $0.0932 $0.5558
-----------------------------------------------------------
Foreign Tax Paid per Share (Column 1) is the amount per share available to you,
as a tax credit or deduction (assuming you held your shares in the Fund for a
minimum of 16 days during the 30-day period beginning 15 days before the
ex-dividend date of the Fund's distribution to which the foreign taxes relate).
Foreign Source Income per Share (Column 2) is the amount per share of income
dividends paid to you that is attributable to foreign securities held by the
Fund, plus any foreign taxes withheld on these dividends. The amounts reported
include foreign source qualified dividends without adjustment for the lower U.S.
tax rates. Generally, this is the foreign source income to be reported by
certain trusts and corporate shareholders.
26 | Annual Report
Templeton Dragon Fund, Inc.
TAX DESIGNATION (UNAUDITED) (CONTINUED)
Foreign Qualified Dividends per Share (Column 3) is the amount per share of
foreign source qualified dividends the Fund paid to you, plus any foreign taxes
withheld on these dividends. These amounts represent the portion of the Foreign
Source Income reported to you in column 2 that were derived from qualified
foreign securities held by the Fund. If you are an individual shareholder who
does not meet the qualified dividend holding period requirements, you may find
this information helpful to calculate the foreign source income adjustment
needed to complete line 1 of Form 1116.
Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per
share of foreign source income the Fund paid to you. These amounts reflect the
Foreign Source Income reported in column 2 adjusted for the tax rate
differential on foreign source qualified dividends that may be required for
certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B).
If you are an individual shareholder who meets the qualified dividend holding
period requirements, generally, these Adjusted Foreign Source Income amounts may
be reported directly on line 1 of Form 1116 without additional adjustment.
In January 2004, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2003. The Foreign Source Income reported on Form 1099-DIV has been
reduced to take into account the tax rate differential on foreign source
qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B).
Shareholders are advised to check with their tax advisors for information on the
treatment of these amounts on their 2003 individual income tax returns.
Annual Report | 27
Board Members and Officers
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Fund, principal occupations during the
past five years and number of U.S. registered portfolios overseen in the
Franklin Templeton Investments fund complex are shown below. Each board member
will serve until that person's successor is elected and qualified.
INDEPENDENT BOARD MEMBERS
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
HARRIS J. ASHTON (71) Director Since 1994 142 Director, Bar-S Foods (meat packing
500 East Broward Blvd. company).
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 (59) Director Since 1998 20 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Ventures Resources Corporation (Vice Chairman 1996-2003); Vice Chairman, Caribbean Utilities Co. Ltd.; Director and
President, Provo Power Company Ltd.; Director, Caribbean Electric Utility Services Corporation (Chairman until 2002); director of
various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003).
------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (71) Director Since 1994 143 None
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.
------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (51) Director Since 1996 96 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas); Beverly Enterprises, Inc. (health
Fort Lauderdale, FL 33394-3091 care); H.J. Heinz Company
(processed foods and allied products);
RTI International Metals, Inc. (manu-
facture 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).
------------------------------------------------------------------------------------------------------------------------------------
28 | Annual Report
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
BETTY P. KRAHMER (74) Director Since 1994 21 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) Director Since 1994 142 Director, White Mountains Insurance
500 East Broward Blvd. Group, Ltd. (holding company);
Suite 2100 Martek Biosciences Corporation;
Fort Lauderdale, FL 33394-3091 MedImmune, Inc. (biotechnology);
and Overstock.com (Internet
services); and FORMERLY, Director,
MCI Communication Corporation
(subsequently known as MCI WorldCom,
Inc. and WorldCom, Inc.)
(communications services) (1988-2002)
and Spacehab, Inc. (aerospace services)
(1994-2003).
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation
(financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association
of Securities Dealers, Inc. (1970-1987).
------------------------------------------------------------------------------------------------------------------------------------
FRED R. MILLSAPS (74) Director Since 1994 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).
------------------------------------------------------------------------------------------------------------------------------------
FRANK A. OLSON (71) Director Since 2003 20 Director, Becton, Dickinson and Co.
500 East Broward Blvd. (medical technology); White
Suite 2100 Mountains Insurance Group Ltd.
Fort Lauderdale, FL 33394-3091 (holding company); and Amerada
Hess Corporation (exploration and
refining of oil and gas).
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief Executive Officer 1977-1999); and FORMERLY, Chairman
of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 29
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
CONSTANTINE D. TSERETOPOULOS (49) Director Since 1998 20 None
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
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
**NICHOLAS F. BRADY (73) Director Since 1994 21 Director, Amerada Hess Corporation
500 East Broward Blvd. (exploration and refining of oil and
Suite 2100 gas); and C2, Inc. (operating and
Fort Lauderdale, FL 33394-3091 investment business); and FORMERLY,
Director, H.J. Heinz Company
(processed foods and allied products)
(1987-1988;1993-2003).
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, 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,
Chairman, Templeton Emerging Markets Investment Trust PLC (until 2003); 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).
------------------------------------------------------------------------------------------------------------------------------------
**MARTIN L. FLANAGAN (43) Director and Since 1994 5 None
One Franklin Parkway Vice President
San Mateo, CA 94403-1906
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Co-President and Chief Executive 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 or
trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies
in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
30 | Annual Report
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
**CHARLES B. JOHNSON (70) Director, Vice Director and Vice 142 None
One Franklin Parkway President and President since
San Mateo, CA 94403-1906 Chairman of 1994 and
the Board and Chairman of the
Board since 1995
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton
Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of
some of the other subsidiaries of Franklin Resources, Inc. and of 46 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 49 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (39) Vice President Since 2001 Not Applicable None
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).
------------------------------------------------------------------------------------------------------------------------------------
JIMMY D. GAMBILL (56) Senior Vice Since 2002 Not Applicable None
500 East Broward Blvd. President and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Executive
Officer -
Finance and
Administration
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 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 51 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).
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (56) Vice President Vice President Not Applicable None
One Franklin Parkway and Secretary since 2000 and
San Mateo, CA 94403-1906 Secretary since
1996
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton
Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc.,
Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin
Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin
Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 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, JR. (63) 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.; 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 49 of the investment companies in Franklin Templeton Investments.
------------------------------------------------------------------------------------------------------------------------------------
JOHN R. KAY (63) 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 some of the other subsidiaries of Franklin Resources, Inc. and of 35 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 Chemicals, Inc. and Lingnan
Rockefeller Center Compliance Foundation.
New York, NY 10048-0772
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director, 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.
------------------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (67) President and President since Not Applicable None
17th Floor, Chief 1994 and Chief
The Chater House Executive Executive Officer -
8 Connaught Road Officer - Investment
Central Hong Kong Investment Management
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; and officer and/or director, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of six of the investment companies in Franklin Templeton Investments; 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).
------------------------------------------------------------------------------------------------------------------------------------
KIMBERLEY H. MONASTERIO (40) Treasurer and Treasurer and Not Applicable None
One Franklin Parkway Chief Financial Chief Financial
San Mateo, CA 94403-1906 Officer Officer since 2003
------------------------------------------------------------------------------------------------------------------------------------
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior Vice President, Franklin Templeton Services, LLC; and officer of 51 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, as the case may be, of some of the
subsidiaries of Franklin Resources, Inc. and of 51 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 Fund 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. Martin L. Flanagan is considered an interested person of
the Fund under the federal securities laws due to his position as officer of
Resources. Nicholas F. Brady is considered an interested person of the Fund
under the federal securities laws due to his business affiliations with
Resources and Templeton Global Advisors Limited. On October 1, 2003, Resources
acquired all of the shares of Darby Overseas Investments, Ltd. (Darby
Investments) and the remaining portion of the limited partner interests not
currently owned by Resources of Darby Overseas Partners, L.P. (Darby Partners).
Mr. Brady, formerly a shareholder of Darby Investments and a partner of Darby
Partners, will continue as Chairman of Darby Investments, which is the corporate
general partner of Darby Partners. In addition, Darby Partners and Templeton
Global Advisors Limited are limited partners of Darby Emerging Markets Fund,
L.P. (DEMF). Mr. Brady will also continue to serve as Chairman of the corporate
general partner of DEMF, and Darby Partners and Darby Investments 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 Partners is a significant
investor and for which Darby Partners 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 Partners is a significant investor, and the general partner
of which Darby Partners 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 SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE
COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE
INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN
THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF DIRECTORS HAS DETERMINED
THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS
DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE
FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS
SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE.
MR. MILLSAPS WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT
ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE
SINCE INCEPTION AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF
LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND
LIGHT. MR. OLSON WHO CURRENTLY SERVES AS CHAIRMAN OF THE BOARD OF THE HERTZ
CORPORATION AND WAS ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999; IS A DIRECTOR
AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS
INSURANCE GROUP, LTD. AND A FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF
UNITED AIRLINES. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF
DIRECTORS BELIEVES THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN
UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL
STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE
ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING
FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF
ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN
UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN
UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE
INDEPENDENT DIRECTORS AS THAT TERM IS DEFINED UNDER THE APPLICABLE STOCK
EXCHANGE RULES AND SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES.
Annual Report | 33
Templeton Dragon Fund, Inc.
PROXY VOTING POLICIES AND PROCEDURES
The Fund has established Proxy Voting Policies and Procedures ("Policies") that
the Fund uses to determine how to vote proxies relating to portfolio securities.
Shareholders may view the Fund's complete Policies online at
franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group.
34 | Annual Report
This page intentionally left blank.
This page intentionally left blank.
Literature Request
For a brochure and prospectus, which contains more complete information,
including charges and expenses, call Franklin Templeton Investments at
1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before
investing or sending money. To ensure the highest quality of service, we may
monitor, record and access telephone calls to or from our service departments.
These calls can be identified by the presence of a regular beeping tone.
FRANKLIN TEMPLETON INVESTMENTS
INTERNATIONAL
Mutual European Fund
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton International (Ex EM) Fund
GLOBAL
Franklin Global Aggressive Growth Fund
Franklin Global Growth Fund
Mutual Discovery Fund
Templeton Capital Accumulator Fund
Templeton Global Long-Short Fund
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton World Fund
GROWTH
Franklin Aggressive Growth Fund
Franklin Capital Growth Fund
Franklin Flex Cap Growth Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II(1)
VALUE
Franklin Balance Sheet Investment Fund(2)
Franklin Equity Income Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund(3)
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund(4)
Mutual Shares Fund
BLEND
Franklin Blue Chip Fund
Franklin Convertible Securities Fund
Franklin Growth Fund
Franklin Rising Dividends Fund
Franklin U.S. Long-Short Fund(5)
SECTOR
Franklin Biotechnology Discovery Fund
Franklin DynaTech Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Gold and Precious Metals Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Utilities Fund
Franklin Technology Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
TARGET FUNDS
Franklin Templeton Conservative Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
INCOME
Franklin Adjustable U.S. Government Securities Fund(6)
Franklin's AGE High Income Fund
Franklin Federal Money Fund(6,7)
Franklin Floating Rate Daily Access Fund
Franklin Floating Rate Trust(4)
Franklin Income Fund
Franklin Money Fund(6,7)
Franklin Short-Intermediate U.S. Government Securities Fund(6)
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio(6)
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund(6)
Templeton Global Bond Fund
TAX-FREE INCOME(8)
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund(9)
Tax-Exempt Money Fund(6,7)
LIMITED-TERM FUNDS
California Limited-Term Tax-Free Income Fund
Federal Limited-Term Tax-Free Income Fund
New York Limited-Term Tax-Free Income Fund
INTERMEDIATE-TERM FUNDS
California Intermediate-Term Tax-Free Income Fund
Federal Intermediate-Term Tax-Free Income Fund
New York Intermediate-Term Tax-Free Income Fund
STATE-SPECIFIC(8)
Alabama
Arizona
California(10)
Colorado
Connecticut
Florida(10)
Georgia
Kentucky
Louisiana
Maryland
Massachusetts(9)
Michigan(9)
Minnesota(9)
Missouri
New Jersey
New York(10)
North Carolina
Ohio(9)
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust(11)
1. The fund is closed to new investors. Existing shareholders can continue
adding to their accounts.
2. The fund is only open to existing shareholders as well as select retirement
plans.
3. Effective June 30, 2003, the fund reopened to all new investors.
4. The fund is a continuously offered, closed-end fund. Shares may be purchased
daily; there is no daily redemption. However, each quarter, pending board
approval, the fund will authorize the repurchase of 5%-25% of the outstanding
number of shares. Investors may tender all or a portion of their shares during
the tender period.
5. Upon reaching approximately $350 million in assets, the fund intends to close
to all investors.
6. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
7. No assurance exists that the fund's $1.00 per share price will be maintained.
It is possible to lose money by investing in the fund.
8. For investors subject to the alternative minimum tax, a small portion of
these dividends may be taxable. Distributions of capital gains are generally
taxable.
9. Portfolio of insured municipal securities.
10. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
money market portfolios (CA and NY).
11. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
11/03 Not part of the annual report
[LOGO OMITTED] 100 Fountain Parkway
FRANKLIN(R) TEMPLETON(R) P.O. Box 33030
INVESTMENTS St. Petersburg, FL 33733-8030
ANNUAL REPORT AND SHAREHOLDER INFORMATION
Templeton Dragon Fund, Inc.
AUDITORS
PricewaterhouseCoopers LLP
333 Market Street
San Francisco, CA 94105
TRANSFER AGENT
Mellon Investor Services LLC
85 Challenger Road
Ridgefield Park, NJ 07660
1-800/416-5585
www.melloninvestor.com
FUND INFORMATION
1-800/342-5236
Investors should be aware that the value of investments made for the Fund may go
down as well as up. Like any investment in securities, the value of the Fund's
portfolio will be subject to the risk of loss from market, currency, economic,
political and other factors. The Fund and its investors are not protected from
such losses by the Investment Manager. Therefore, investors who cannot accept
this risk should not invest in shares of the Fund.
To ensure the highest quality of service, telephone calls to or from our service
departments may be monitored, recorded and accessed. These calls can be
identified by the presence of a regular beeping tone.
TLTDF A2003 02/04
ITEM 2. CODE OF ETHICS.
(a) The Registrant has adopted a code of ethics that applies to its principal
executive officers and principal financial and accounting officer.
(c) N/A
(d) N/A
(f) Pursuant to Item 10(a), the Registrant is attaching as an exhibit a copy of
its code of ethics that applies to its principal executive officers and
principal financial and accounting officer.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
(a)(1) The Registrant has an audit committee financial expert serving on its
audit committee.
(2) The audit committee financial experts are Fred R. Millsaps and Frank A.
Olson and they are "independent" as defined under the relevant Securities and
Exchange Commission Rules and Releases.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES
(a) Audit Fees
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant for the audit of the registrant's annual
financial statements or for services that are normally provided by the principal
accountant in connection with statutory and regulatory filings or engagements
were $32,549 for the fiscal year ended December 31, 2003 and $33,650 for the
fiscal year ended December 31, 2002.
(b) Audit-Related Fees
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant that are
reasonably related to the performance of the audit of the registrant's financial
statements and are not reported under paragraph (a) of Item 4 were $0 for the
fiscal year ended December 31, 2003 and $378 for the fiscal year ended December
31, 2002. The services for which these fees were paid included payments for
internal control examination pursuant to the Statement of Auditing Standards No.
70 and other attestation services.
The aggregate fees paid to the principal accountant for assurance and related
services rendered by the principal accountant to the registrant's investment
adviser and any entity controlling, controlled by or under common control with
the investment adviser that provides ongoing services to the registrant that are
reasonably related to the performance of the audit of the their financial
statements were $3,134 for the fiscal year ended December 31, 2003 and $195,862
for the fiscal year ended December 31, 2002. The services for which these fees
were paid included payments for internal control examination pursuant to the
Statement of Auditing Standards No. 70 and other attestation services.
(c) Tax Fees
There were no fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant for tax compliance, tax
advice and tax planning.
The aggregate fees paid to the principal accountant for professional services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant for tax
compliance, tax advice and tax planning were $0 for the fiscal year ended
December 31, 2003 and $84,424 for the fiscal year ended December 31, 2002. The
services for which these fees were paid included payments for tax compliance and
advice.
(d) All Other Fees
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant, other than the services
reported in paragraphs (a)-(c) of Item 4.
There were no fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant's investment adviser and
any entity controlling, controlled by or under common control with the
investment adviser that provides ongoing services to the registrant, other than
the services reported in paragraphs (a)-(c) of Item 4.
(e) (1) The Fund's audit committee is directly responsible for approving the
services to be provided by the auditors, including:
(i) pre-approval of all audit and audit related services;
(ii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors;
(iii) pre-approval of all non-audit related services to be provided to
the Fund by the auditors to the Fund's investment adviser or to any entity that
controls, is controlled by or is under common control with the Fund's investment
adviser and that provides ongoing services to the Fund where the non-audit
services relate directly to the operations or financial reporting of the Fund;
and
(iv) establishment by the audit committee, if deemed necessary or
appropriate, as an alternative to committee pre-approval of services to be
provided by the auditors, as required by paragraphs (ii) and (iii) above, of
policies and procedures to permit such services to be pre-approved by other
means, such as through establishment of guidelines or by action of a designated
member or members of the committee; provided the policies and procedures are
detailed as to the particular service and the committee is informed of each
service and such policies and procedures do not include delegation of audit
committee responsibilities, as contemplated under the Securities Exchange Act of
1934, to management; subject, in the case of (ii) through (iv), to any waivers,
exceptions or exemptions that may be available under applicable law or rules.
(e) (2) None of the services provided to the registrant described in paragraphs
(b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph
(c)(7)(i)(C) of Rule 2-01 of regulation S-X.
(f) No disclosures are required for Item 4(f).
(g) The aggregate non-audit fees paid to the principal accountant for services
rendered by the principal accountant to the registrant and the registrant's
investment adviser and any entity controlling, controlled by or under common
control with the investment adviser that provides ongoing services to the
registrant were $3,134 for the fiscal year ended December 31, 2003 and $280,664
for the fiscal year ended December 31, 2002.
(h) No disclosures are required for Item 4(h).
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS N/A
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The board of directors of the Fund has delegated the authority to vote proxies
related to the portfolio securities held by the Fund to the Fund's manager
Templeton Asset Management Ltd. in accordance with the Proxy Voting Policies and
Procedures (Policies) adopted by the manager.
The manager has delegated its administrative duties with respect to the voting
of proxies to the Proxy Group within Franklin Templeton Companies, LLC (Proxy
Group), an affiliate and wholly owned subsidiary of Franklin Resources, Inc. All
proxies received by the Proxy Group will be voted based upon the manager's
instructions and/or policies.
To assist it in analyzing proxies, the manager subscribes to Institutional
Shareholder Services (ISS), an unaffiliated third party corporate governance
research service that provides in-depth analyses of shareholder meeting agendas,
vote recommendations, recordkeeping and vote disclosure services. In addition,
the manager subscribes to Glass Lewis & Co., LLC (Glass Lewis), an unaffiliated
third party analytical research firm, to receive analyses and vote
recommendations on the shareholder meetings of publicly held U.S. companies.
Although ISS' and/or Glass Lewis' analyses are thoroughly reviewed and
considered in making a final voting decision, the manager does not consider
recommendations from ISS, Glass Lewis or any other third party to be
determinative of the manager's ultimate decision. The manager votes proxies
solely in the interests of the Fund and its shareholders. As a matter of policy,
the officers, directors and employees of the Fund, the manager and the Proxy
Group will not be influenced by outside sources whose interests conflict with
the interests of the Fund and its shareholders. All conflicts are resolved in
the interests of the manager's clients. In situations where the manager
perceives a material conflict of interest, the manager may: disclose the
conflict to the Fund's board of directors; defer to the voting recommendation of
the Fund's board of directors, ISS, Glass Lewis or those of another independent
third party provider of proxy services; or take such other action in good faith
(in consultation with counsel) which would protect the interests of the Fund and
its shareholders.
The recommendation of management on any issue is a factor which the manager
considers in determining how proxies should be voted, but is not determinative
of the manager's ultimate decision. As a matter of practice, the votes with
respect to most issues are cast in accordance with the position of the company's
management. Each issue, however, is considered on its own merits, and the
manager will not support the position of the company's management in any
situation where it deems that the ratification of management's position would
adversely affect the investment merits of owning that company's shares.
MANAGER'S PROXY VOTING POLICIES AND PRINCIPLES The manager has adopted general
proxy voting guidelines, which are summarized below. These guidelines are not an
exhaustive list of all the issues that may arise and the manager cannot
anticipate all future situations. In all cases, each proxy will be considered
based on the relevant facts and circumstances.
BOARD OF DIRECTORS. The manager supports an independent board of directors, and
prefers that key committees such as audit, nominating, and compensation
committees be comprised of independent directors. The manager will generally
vote against management efforts to classify a board and will generally support
proposals to declassify the board of directors. The manager may withhold votes
from directors who have attended less than 75% of meetings without a valid
reason. While generally in favor of separating Chairman and CEO positions, the
manager will review this issue as well as proposals to restore or provide for
cumulative voting on a case-by-case basis, taking into consideration factors
such as the company's corporate governance guidelines or provisions and
performance.
MANAGEMENT & DIRECTOR COMPENSATION. A company's equity-based compensation plan
should be in alignment with its shareholders' long-term interests. The manager
evaluates plans on a case-by-case basis by considering several factors to
determine whether the plan is fair and reasonable, including the ISS
quantitative model utilized to assess such plans and/or the Glass Lewis
evaluation of the plans. The manager will generally oppose plans that have the
potential to be excessively dilutive, and will almost always oppose plans that
are structured to allow the repricing of underwater options, or plans that have
an automatic share replenishment "evergreen" feature. The manager will generally
support employee stock option plans in which the purchase price is at least 85%
of fair market value, and when potential dilution is 10% or less.
Severance compensation arrangements will be reviewed on a case-by-case basis,
although the manager will generally oppose "golden parachutes" that are
considered to be excessive. The manager will normally support proposals that
require a percentage of directors' compensation to be in the form of common
stock, as they align their interests with those of shareholders. The manager
will review on a case-by-case basis any shareholder proposals to adopt policies
on expensing stock option plans.
ANTI-TAKEOVER MECHANISMS AND RELATED ISSUES. The manager generally opposes
anti-takeover measures since they tend to reduce shareholder rights. On
occasion, the manager may vote with management when the research analyst has
concluded that the proposal is not onerous and would not harm the Fund or its
shareholders' interests. The manager generally supports proposals that require
shareholder rights' plans ("poison pills") to be subject to a shareholder vote
and will closely evaluate such plans on a case-by-case basis to determine
whether or not they warrant support. The manager will generally vote against any
proposal to issue stock that has unequal or subordinate voting rights. The
manager generally opposes any supermajority voting requirements as well as the
payment of "greenmail." The manager generally supports "fair price" provisions
and confidential voting.
CHANGES TO CAPITAL STRUCTURE. The manager will review, on a case-by-case basis,
proposals by companies to increase authorized shares and the purpose for the
increase and proposals seeking preemptive rights. The manager will generally not
vote in favor of dual-class capital structures to increase the number of
authorized shares where that class of stock would have superior voting rights.
The manager will generally vote in favor of the issuance of preferred stock in
cases where the company specifies the voting, dividend, conversion and other
rights of such stock and the terms of the preferred stock issuance are deemed
reasonable.
MERGERS AND CORPORATE RESTRUCTURING. Mergers and acquisitions will be subject to
careful review by the research analyst to determine whether each will be
beneficial to shareholders. The manager will analyze various economic and
strategic factors in making the final decision on a merger or acquisition.
Corporate restructuring and reincorporation proposals are also subject to a
thorough examination on a case-by-case basis.
SOCIAL AND CORPORATE POLICY ISSUES. The manager will generally give management
discretion with regard to social, environmental and ethical issues, although the
manager may vote in favor of those that are believed to have significant
economic benefits or implications for the Fund and its shareholders.
GLOBAL CORPORATE GOVERNANCE. Many of the tenets discussed above are applied to
proxy voting decisions for international companies. However, the manager must be
more flexible in these instances and must be mindful of the varied market
practices of each region.
The manager will attempt to process every proxy it receives for all domestic and
foreign proxies. However, there may be situations in which the manager cannot
process proxies, for example, where a meeting notice was received too late, or
sell orders preclude the ability to vote. The manager may abstain from voting
under certain circumstances or vote against items such as "Other Business" when
the manager is not given adequate information from the company.
Shareholders may view the complete Policies on-line at
www.franklintempleton.com. Alternatively, shareholders may request copies of the
Policies free of charge by calling the Proxy Group collect at 1-954-847-2268 or
by sending a written request to: Franklin Templeton Companies, LLC, 500 East
Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy
Group. Copies of the Fund's proxy voting records will also be made available
on-line at www.franklintempleton.com and posted on the SEC website at
www.sec.gov no later than August 31, 2004 and will reflect the twelve-month
period beginning July 1, 2003, and ending June 30, 2004.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. N/A
ITEM 10. CONTROLS AND PROCEDURES.
(A) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in the Registrant's filings under the Securities
Exchange Act of 1934 and the Investment Company Act of 1940 is recorded,
processed, summarized and reported within the periods specified in the rules and
forms of the Securities and Exchange Commission. Such information is accumulated
and communicated to the Registrant's management, including its principal
executive officer and principal financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The Registrant's management,
including the principal executive officer and the principal financial officer,
recognizes that any set of controls and procedures, no matter how well designed
and operated, can provide only reasonable assurance of achieving the desired
control objectives.
Within 90 days prior to the filing date of this Shareholder Report on Form
N-CSR, the Registrant had carried out an evaluation, under the supervision and
with the participation of the Registrant's management, including the
Registrant's principal executive officer and the Registrant's principal
financial officer, of the effectiveness of the design and operation of the
Registrant's disclosure controls and procedures. Based on such evaluation, the
Registrant's principal executive officer and principal financial officer
concluded that the Registrant's disclosure controls and procedures are
effective.
(B) CHANGES IN INTERNAL CONTROLS. There have been no significant changes
in the Registrant's internal controls or in other factors that could
significantly affect the internal controls subsequent to the date of their
evaluation in connection with the preparation of this Shareholder Report on Form
N-CSR.
ITEM 11. EXHIBITS.
(A) Code of Ethics for Principal Executive and Senior Financial Officers
(B) (1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Kimberley H. Monasterio, Chief Financial Officer
(B) (2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and
Kimberley H. Monasterio, Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
TEMPLETON DRAGON FUND, INC.
By /s/JIMMY D. GAMBILL
-----------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date: February 23, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By /s/JIMMY D. GAMBILL
-----------------------------
Jimmy D. Gambill
Chief Executive Officer - Finance and Administration
Date: February 23, 2004
By /s/KIMBERLEY H. MONASTERIO
-----------------------------
Kimberley H. Monasterio
Chief Financial Officer
Date: February 23, 2004