UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDED FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08874
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TEMPLETON DRAGON FUND, INC.
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(Exact name of registrant as specified in charter)
500 EAST BROWARD BLVD., SUITE 2100, FORT LAUDERDALE, FL 33394-3091
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(Address of principal executive offices) (Zip code)
MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
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(Name and address of agent for service)
Registrant's telephone number, including area code: (954) 527-7500
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Date of fiscal year end: 12/31
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Date of reporting period: 12/31/04
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ITEM 1. REPORTS TO STOCKHOLDERS.
DECEMBER 31, 2004
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ANNUAL REPORT AND SHAREHOLDER INFORMATION | INTERNATIONAL
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TEMPLETON DRAGON FUND, INC.
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[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 recognized leader in fixed income
investing and also brings 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. Founded 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.
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[PHOTO OMITTED]
Not part of the annual report
Contents
IMPORTANT NOTICE TO ANNUAL REPORT
SHAREHOLDERS............ 1
Templeton Dragon
Fund, Inc. ............. 2
Performance Summary .... 7
Financial Highlights and
Statement of Investments 9
Financial Statements ... 13
Notes to Financial
Statements ............. 16
Report of Independent
Registered Public
Accounting Firm......... 26
Annual Meeting of
Shareholders............ 27
Dividend Reinvestment and
Cash Purchase Plan ..... 28
Tax Designation ........ 30
Board Members and
Officers ............... 32
Shareholder Information. 40
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Important Notice to Shareholders
REPURCHASE PROGRAM
In December 2004, the Board of Directors of the Fund authorized management to
re-implement the Fund's open-market share repurchase program, which was
originally implemented in October 1997. The Fund's Board of Directors had
discontinued the open-market share repurchase program in May 2002, in connection
with the Fund's previously conducted tender offers. Under the program, the Fund
may purchase, from time to time, shares of the Fund's common stock in
open-market transactions, at the discretion of the Fund's investment manager.
Not part of the annual report | 1
Annual Report
Templeton Dragon Fund, Inc.
YOUR FUND'S GOAL AND MAIN 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.
Dear Shareholder:
This annual report for Templeton Dragon Fund covers the year ended December 31,
2004.
PERFORMANCE OVERVIEW
For the year ended December 31, 2004, Templeton Dragon Fund posted cumulative
total returns of +0.36% in market price terms and +16.22% in net asset value
terms, as the Fund's market price declined more than the Fund's net asset value.
You can find the Fund's long-term performance data in the Performance Summary on
page 7.
ECONOMIC AND MARKET OVERVIEW
Recognizing China's growing importance in the global economy, Asian, Latin
American and European nations signed numerous trade agreements with China during
the year. The 10-member Association of Southeast Asian Nations (ASEAN) and China
also signed an accord to create the world's largest free-trade area by 2010.
Some analysts expect China's 2004 foreign direct investment inflows to surpass
US$60 billion, exceeding 2003's US$53.5 billion. 1 November's consumer price
index (CPI) rose a healthier 2.8%, compared with about 4%-5% in the preceding
few months, easing pressure on the central bank for another interest rate hike
after the 27 basis points increase in October.2 Some forecasts for 2005 gross
domestic product (GDP) growth are for a gradual slowdown from the 9.3% expected
in 2004. 3
GEOGRAPHIC DISTRIBUTION
Based on Total Net Assets as of 12/31/04
[BAR CHART OMITTED]
EDGAR REPRESENTATION OF PLOT POINTS:
China 33.0%
Taiwan 25.4%
Hong Kong 21.4%
Singapore 13.7%
U.K. 3.3%
South Korea 0.7%
Short-Term Investments & Other Net Assets 2.5%
1. Source: The Business Times Singapore, "Great strides made by China - with
still a long way to go," 12/29/04.
2. Source: AFX News Limited, "China's NDRC sees no significant rise in inflation
next year," 12/29/04.
3. Source: Financial Times Information, "Adjustment in interest rates likely,"
1/12/05.
THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL
PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE
SOI BEGINS ON PAGE 10.
2 | Annual Report
Taiwan's third quarter 2004 GDP grew 5.3% compared with 7.9% in the second
quarter mainly due to slower export growth. Some analysts expect GDP growth to
slow in 2005 as external trade, a large contributor to the island's GDP,
continued to weaken. Unemployment continued on a downward trend with December's
jobless rate dropping to 4.09%, its lowest in three and a half years.4 In
December legislative elections, the opposition KMT-led Pan-Blue alliance won a
majority, taking 114 seats out of 225, while President Chen Shui-Bian stepped
down as the Democratic Progressive Party chairman to take responsibility for his
party's loss. President Chen also proposed holding a referendum on a new
constitution in 2006, raising tensions with China during the period.
In what some view as a controversial move, Hong Kong's Housing Authority
indefinitely delayed the listing of the Link Real Estate and Investment Trust,
which if completed, would have been Hong Kong's largest initial public offering
in 2004. The decision came after the courts declined to reduce the 28-day appeal
period to a public housing tenant who lost a last-minute judicial review against
the privatization of the assets. Hong Kong continued to release strong economic
data with third quarter GDP growing 7.2% compared with the same period a year
earlier due to improving trade and tourism. The government expected 7.5% GDP
growth for 2004. 5
Greater China markets, with the exception of Hong Kong, underperformed regional
markets mainly due to concerns over a hard landing in China's economy and
continuing tension between Taiwan and China. A shift in investor focus from
technology to commodity stocks in 2004 also led to further pressure on Taiwan's
stock market, where a majority of the listed companies are technology-related.
Although the Taiwanese market did end the period up 9.83% in U.S. dollar terms,
most of that gain resulted from a weakening U.S. dollar.6 Hong Kong's market
benefited from a strong recovery in tourism, economic growth and a revival in
the property sector.
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,
4. Source: Financial Times Information, "Taiwan's jobless rate hit 42-month low
of 4.09% in Dec. 2004," 1/25/05.
5. Source: The Financial Times Limited, "A rudderless ship of state: the Hong
Kong government must get a grip on policy," 1/12/05.
6. Source: Standard & Poor's Micropal.
Annual Report | 3
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.
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, 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
For the 12 months ended December 31, 2004, the Morgan Stanley Capital
International (MSCI) China Index posted 1.89% total return. 7
In terms of performance, the Fund's overweighted positions, relative to the MSCI
China Index, in Dairy Farm International Holdings, Hang Lung Group and Cheung
Kong Infrastructure Holdings contributed to Fund returns. An underweighted
position in China Life Insurance also boosted performance. However, the Fund's
underweighted position in China Mobile and no position in CNOOC negatively
impacted relative performance. The Fund did not hold CNOOC because, in our view,
we found better value in other companies within the same sector. We increased
the Fund's China Mobile (Hong Kong) holdings during the period.
By industry, the Fund's overweighted positions in real estate and food and
staples retailing, as well as an underweighted position in auto components and
no exposure to automobiles, contributed to the Fund's returns relative to the
MSCI China Index. Conversely, the Fund's underweighted position in the
telecommunication services sector and lack of energy holdings detracted from
Fund performance.8 We had no energy sector exposure as the sector performed well
in 2004, resulting in what we considered expensive valuations. Thus, consistent
with our strategy, the Fund continued to invest in other stocks, which we
believed traded at more attractive valuations.
TOP 10 HOLDINGS
12/31/04
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Dairy Farm International Holdings Ltd. 13.7%
FOOD & STAPLES RETAILING, SINGAPORE
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China Mobile (Hong Kong) Ltd., fgn. 6.0%
WIRELESS TELECOMMUNICATION SERVICES,
CHINA
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China Petroleum & Chemical Corp., H 6.0%
OIL & GAS, CHINA
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Hang Lung Group Ltd. 5.2%
REAL ESTATE, HONG KONG
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Cheung Kong Infrastructure Holdings Ltd. 4.5%
ELECTRIC UTILITIES, HONG KONG
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Cheung Kong Holdings Ltd. 3.6%
REAL ESTATE, HONG KONG
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HSBC Holdings PLC 3.3%
COMMERCIAL BANKS, U.K.
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Delta Electronics Inc. 2.9%
ELECTRONIC EQUIPMENT & INSTRUMENTS,
TAIWAN
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PetroChina Co. Ltd., H 2.9%
OIL & GAS, CHINA
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Acer Inc. 2.9%
COMPUTERS & PERIPHERALS, TAIWAN
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7. Source: Standard & Poor's Micropal. The MSCI China Index is market
capitalization weighted and measures total returns of equity securities
available to foreign (non-local) investors in China.
8. The energy sector comprises oil and gas in the SOI. The telecommunication
services sector comprises diversified telecommunication services and wireless
telecommunication services in the SOI.
4 | Annual Report
In general, if the value of the U.S. dollar goes up compared with a foreign
currency, an investment traded in that foreign currency will go down in value
because it will be worth fewer U.S. dollars. This can have a negative effect on
Fund performance. Conversely, when the U.S. dollar weakens in relation to a
foreign currency, an investment traded in that foreign currency will increase in
value, which can contribute to Fund performance. For the 12 months ended
December 31, 2004, the U.S. dollar declined in value relative to most non-U.S.
currencies. At the end of the period, the Fund's portfolio was invested
predominantly in securities with non-U.S. currency exposure, which resulted in a
positive effect on Fund performance. However, one cannot expect the same result
in future periods.
During the year, we reduced the Fund's exposure to China H shares (Hong
Kong-listed Chinese companies) as valuations increased after their strong
performance. In particular, we sold oil and gas and transportation
infrastructure holdings as high commodity prices and robust infrastructure in
China boosted stock prices. Major sales included PetroChina, Jiangsu Expressway,
Sinopec Beijing Yanhua Petrochemical and China Petroleum & Chemical. As a
result, the Fund's exposure to China H shares fell to 10.6% of total net assets
on December 31, 2004, from 29.5% on December 31, 2003. The Fund also realized
gains on Red Chip share China Merchants Holdings, a conglomerate specializing in
infrastructure.
As we continued our search for value stocks in the greater China region, we
undertook significant purchases in Taiwan, increasing the Fund's exposure to
25.4% of total net assets at year-end from 19.7% a year earlier. Additions
included Taiwan Semiconductor Manufacturing, a leading global integrated circuit
producer; Mega Financial Holdings, one of Taiwan's largest financial holding
companies; and Acer, a dominant player in the global personal computer market.
Elsewhere in the region, we invested in HSBC Holdings, one of the world's
largest banking and financial services organizations; and China Mobile (Hong
Kong), a dominant wireless telecommunications operator with over 170 million
subscribers in China. These purchases enlarged the Fund's exposure to the
commercial banks, semiconductors and semiconductor equipment, and wireless
telecommunication services sectors.
Annual Report | 5
Thank you for your continued participation in Templeton Dragon Fund. We
look forward to serving your future investment needs.
Sincerely,
[PHOTO OF MARK MOBIUS]
/S/MARK MOBIUS
Mark Mobius
President and Chief Executive Officer -
Investment Management
Templeton Dragon Fund, Inc.
THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS
AS OF DECEMBER 31, 2004, 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.
6 | Annual Report
Performance Summary as of 12/31/04
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 reinvestment of the Fund's dividends and
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 any taxes due on Fund
dividends, capital gains distributions, if any, or realized gains on the sale of
Fund shares.
PRICE AND DISTRIBUTION INFORMATION
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CHANGE 12/31/04 12/31/03
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Net Asset Value (NAV) +$2.08 $18.70 $16.62
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Market Price (NYSE) -$0.52 $17.47 $17.99
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DISTRIBUTIONS (1/1/04-12/31/04)
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Dividend Income $0.1634
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Long-Term Capital Gain $0.3974
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TOTAL $0.5608
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Templeton Dragon Fund, Inc., paid distributions derived from long-term capital
gains of 39.74 cents ($0.3974) per share in January 2005 to shareholders of
record on December 31, 2004. The Fund hereby designates such distributions as
capital gain dividends per Internal Revenue Code Section 852 (b)(3).
PERFORMANCE
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1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1
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Based on change in NAV +16.22% +106.71% +187.75%
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Based on change in market price +0.36% +151.06% +213.50%
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Average Annual Total Return 1
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Based on change in NAV +16.22% +15.62% +11.15%
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Based on change in market price +0.36% +20.20% +12.10%
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PERFORMANCE DATA QUOTED REPRESENT PAST PERFORMANCE, WHICH DOES NOT GUARANTEE
FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU
MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY
DIFFER FROM FIGURES SHOWN.
FOR MORE CURRENT MONTH-END PERFORMANCE, CALL FRANKLIN TEMPLETON INVESTMENTS AT
1-800/342-5236.
Annual Report | 7
Performance Summary (CONTINUED)
ENDNOTES
SPECIAL RISKS ARE ASSOCIATED WITH FOREIGN INVESTING, INCLUDING CURRENCY
VOLATILITY, ECONOMIC INSTABILITY 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.
1. Total return calculations represent the cumulative and average annual changes
in value of an investment over the periods indicated.
8 | Annual Report
Templeton Dragon Fund, Inc.
FINANCIAL HIGHLIGHTS
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YEAR ENDED DECEMBER 31,
2004 2003 2002 2001 2000
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PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year ........................... $16.62 $9.73 $8.82 $9.91 $12.75
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Income from investment operations:
Net investment income a ..................................... .25 .56 .17 .25 .12
Net realized and unrealized gains (losses) .................. 2.39 6.75 .81 (.37) (2.01)
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Total from investment operations ............................. 2.64 7.31 .98 (.12) (1.89)
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Capital share repurchases .................................... -- .14 .10 .01 .22
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Less distributions from:
Net investment income ....................................... (.16) (.56) (.17) (.23) (1.17)
Net realized gains .......................................... (.40) -- -- -- --
Tax return of capital ....................................... -- -- -- (.75) --
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Total distributions .......................................... (.56) (.56) (.17) (.98) (1.17)
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Net asset value, end of year ................................. $18.70 $16.62 $9.73 $8.82 $9.91
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Market value, end of year b .................................. $17.47 $17.99 $8.92 $7.49 $7.25
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Total return (based on market value per share) c ............. .36% 108.44% 21.22% 16.95% (15.31)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (000's) .............................. $706,138 $626,959 $431,779 $429,889 $485,091
Ratios to average net assets:
Expenses .................................................... 1.52% 1.64%d 1.62% 1.54% 1.56%
Net investment income ....................................... 1.45% 4.57% 1.80% 2.58% 1.04%
Portfolio turnover rate ...................................... 19.42% 29.91% 15.75% 70.94% 132.74%
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%.
Annual Report | See notes to financial statements. | 9
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004
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COUNTRY SHARES VALUE
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COMMON STOCKS 97.5%
AIR FREIGHT & LOGISTICS
Sinotrans Ltd. ....................................................... China 1,008,000 $ 295,029
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AIRLINES .1%
a Air China Ltd., 144A ................................................. China 1,364,000 526,451
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AUTO COMPONENTS 1.7%
Cheng Shin Rubber Industry Co. Ltd. .................................. Taiwan 9,409,160 11,987,134
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CAPITAL MARKETS 1.2%
Yuanta Core Pacific Securities Co. ................................... Taiwan 11,591,332 8,787,389
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COMMERCIAL BANKS 7.6%
Chinatrust Financial Holding Co. Ltd. ................................ Taiwan 6,659,477 7,939,420
HSBC Holdings PLC .................................................... United Kingdom 1,376,759 23,557,656
Mega Financial Holdings Co. Ltd. ..................................... Taiwan 27,217,000 18,749,679
Sinopac Holdings ..................................................... Taiwan 6,304,737 3,708,669
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53,955,424
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COMMUNICATIONS EQUIPMENT .5%
D-Link Corp. ......................................................... Taiwan 2,979,309 3,467,582
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COMPUTERS & PERIPHERALS 6.1%
Acer Inc. ............................................................ Taiwan 12,232,022 20,200,728
Advantech Co. Ltd. ................................................... Taiwan 2,929,282 7,095,147
Asustek Computer Inc. ................................................ Taiwan 2,883,512 7,664,573
Lenovo Group Ltd. .................................................... China 6,304,000 1,885,653
Lite-on Technology Corp. ............................................. Taiwan 5,776,100 6,159,477
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43,005,578
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CONSTRUCTION MATERIALS .2%
Anhui Conch Cement Co. Ltd. .......................................... China 1,306,000 1,419,784
a China Resources Cement ............................................... China 872,000 188,473
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1,608,257
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DISTRIBUTORS 3.3%
China Resources Enterprise Ltd. ...................................... China 12,628,000 19,739,373
Test-Rite International Co. Ltd. ..................................... Taiwan 5,126,125 3,224,992
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22,964,365
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DIVERSIFIED TELECOMMUNICATION SERVICES .7%
China Telecom Corp. Ltd., H .......................................... China 14,280,000 5,235,951
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ELECTRIC UTILITIES 8.6%
Cheung Kong Infrastructure Holdings Ltd. ............................. Hong Kong 11,060,000 31,944,344
Datang International Power Generation Co. Ltd. ....................... China 26,502,000 19,946,056
Guangdong Electric Power Development Co Ltd., B ...................... China 11,135,658 4,999,929
Huadian Power International Corp. Ltd., H ............................ China 3,978,000 1,177,105
Huaneng Power International Inc., H .................................. China 3,388,000 2,528,098
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60,595,532
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ELECTRICAL EQUIPMENT .6%
Phoenixtec Power Co. Ltd. ............................................ Taiwan 3,632,945 4,376,905
-------------
10 | Annual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
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COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
ELECTRONIC EQUIPMENT & INSTRUMENTS 2.9%
Delta Electronics Inc. ............................................... Taiwan 11,788,952 $ 20,766,949
-------------
FOOD & STAPLES RETAILING 13.7%
Dairy Farm International Holdings Ltd. ............................... Singapore 39,857,478 96,455,097
-------------
FOOD PRODUCTS 1.2%
UNI-President Enterprises Corp. ...................................... Taiwan 16,069,030 8,390,875
-------------
HOTELS RESTAURANTS & LEISURE 2.7%
Hong Kong & Shanghai Hotels Ltd. ..................................... Hong Kong 21,534,000 19,254,490
-------------
HOUSEHOLD DURABLES 1.8%
TCL International Holdings Inc. ...................................... China 48,960,000 12,597,777
-------------
INDUSTRIAL CONGLOMERATES 4.7%
Beijing Enterprises Holdings Ltd. .................................... China 1,682,000 2,499,369
CITIC Pacific Ltd. ................................................... China 7,081,000 20,133,041
Shanghai Industrial Holdings Ltd. .................................... China 4,954,000 10,580,023
-------------
33,212,433
-------------
IT SERVICES .3%
Travelsky Technology Ltd., H ......................................... China 2,837,000 2,299,442
-------------
LEISURE EQUIPMENT & PRODUCTS .2%
Premier Image Technology Corp. ....................................... Taiwan 1,256,000 1,236,640
-------------
MACHINERY 2.5%
China International Marine Containers Co. Ltd., B .................... China 7,773,186 14,300,710
Yung Tay Engineering Co. Ltd. ........................................ Taiwan 5,686,000 3,434,137
-------------
17,734,847
-------------
METALS & MINING .1%
Aluminum Corp. of China Ltd., H ...................................... China 1,028,000 608,378
China Oriental Group Co. Ltd. ........................................ China 422,000 83,067
-------------
691,445
-------------
OFFICE ELECTRONICS .1%
Kinpo Electronics Inc. ............................................... Taiwan 1,454,000 633,466
-------------
OIL & GAS 8.9%
China Petroleum & Chemical Corp., H .................................. China 103,150,000 42,466,035
PetroChina Co. Ltd., H ............................................... China 38,312,000 20,455,280
-------------
62,921,315
-------------
REAL ESTATE 11.8%
Cheung Kong Holdings Ltd. ............................................ Hong Kong 2,575,000 25,674,467
Hang Lung Group Ltd. ................................................. Hong Kong 18,638,042 36,687,171
Henderson China Holdings Ltd. ........................................ Hong Kong 9,215,000 4,920,009
Henderson Investment Ltd. ............................................ Hong Kong 7,485,000 10,929,749
Hong Kong Land Holdings Ltd. ......................................... Hong Kong 1,904,000 5,045,600
-------------
83,256,996
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Annual Report | 11
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, DECEMBER 31, 2004 (CONTINUED)
---------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 5.1%
Elan Microelectronics Corp. .......................................... Taiwan 3,517,396 $ 1,980,541
Faraday Technology Corp. ............................................. Taiwan 432,259 754,651
Samsung Electronics Co. Ltd. ......................................... South Korea 10,780 4,691,258
Siliconware Precision Industries Co. Ltd. ............................ Taiwan 4,340,000 3,576,848
Sunplus Technology Co. Ltd. .......................................... Taiwan 6,264,390 8,788,669
Taiwan Semiconductor Manufacturing Co. ............................... Taiwan 10,139,000 16,106,307
-------------
35,898,274
-------------
TEXTILES APPAREL & LUXURY GOODS .8%
Tack Fat Group International Ltd. .................................... Hong Kong 26,080,000 2,885,549
Tainan Enterprises Co. Ltd. .......................................... Taiwan 1,846,000 2,456,301
-------------
5,341,850
-------------
TRANSPORTATION INFRASTRUCTURE 2.9%
China Merchants Holdings (International) Co. Ltd. .................... China 3,574,000 6,736,195
Cosco Pacific Ltd. ................................................... Hong Kong 6,678,000 13,832,313
-------------
20,568,508
-------------
WIRELESS TELECOMMUNICATION SERVICES 7.2%
China Mobile (Hong Kong) Ltd., fgn. .................................. China 12,576,000 42,632,976
Taiwan Cellular Corp. ................................................ Taiwan 7,047,764 7,870,262
-------------
50,503,238
-------------
TOTAL COMMON STOCKS (COST $440,675,393) .............................. 688,569,239
-------------
SHORT TERM INVESTMENTS (COST $37,171,519) 5.3%
MONEY FUND 5.3%
b Franklin Institutional Fiduciary Trust Money Market Portfolio ........ United States 37,171,519 37,171,519
-------------
TOTAL INVESTMENTS (COST $477,846,912) 102.8% ......................... 725,740,758
OTHER ASSETS, LESS LIABILITIES (2.8)% ................................ (19,602,613)
-------------
NET ASSETS 100.0% .................................................... $706,138,145
-------------
a Non-income producing.
b See Note 7 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
12 | See notes to financial statements. | Annual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
December 31, 2004
Assets:
Investments in securities:
Cost - Unaffiliated issuers ...................................... $440,675,393
Cost - Sweep Money Fund (Note 7) ................................. 37,171,519
-------------
Total cost of investments ........................................ 477,846,912
-------------
Value - Unaffiliated issuers ..................................... 688,569,239
Value - Sweep Money Fund (Note 7) ................................ 37,171,519
-------------
Total value of investments ....................................... 725,740,758
Foreign currency, at value (cost $511,584) ........................ 511,598
Receivables:
Dividends ........................................................ 137,203
-------------
Total assets ................................................. 726,389,559
-------------
Liabilities:
Payables:
Investment securities purchased .................................. 218,075
Affiliates ....................................................... 823,079
Distributions to shareholders .................................... 19,013,476
Other liabilities ................................................. 196,784
-------------
Total liabilities ............................................ 20,251,414
-------------
Net assets, at value ....................................... $706,138,145
-------------
Net assets consist of:
Undistributed net investment income ............................... $ 5,308,792
Net unrealized appreciation (depreciation) ........................ 247,895,700
Accumulated net realized gain (loss) .............................. (3,180,106)
Capital shares .................................................... 456,113,759
-------------
Net assets, at value ............................................... $706,138,145
-------------
Shares outstanding ................................................. 37,770,115
-------------
Net asset value per share .......................................... $18.70
-------------
Annual Report | See notes to financial statements. | 13
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the year ended December 31, 2004
Investment income:
Dividends (net of foreign taxes of $1,526,066)
Unaffiliated issuers............................................................ $19,149,278
Sweep Money Fund (Note 7)....................................................... 280,052
Interest (net of foreign taxes of $87)........................................... 897
------------
Total investment income..................................................... 19,430,227
------------
Expenses:
Management fees (Note 3)......................................................... 8,084,275
Administrative fees (Note 3)..................................................... 980,433
Transfer agent fees ............................................................. 130,000
Custodian fees (Note 4).......................................................... 465,161
Reports to shareholders.......................................................... 58,300
Registration and filing fees..................................................... 35,800
Professional fees................................................................ 134,800
Directors' fees and expenses..................................................... 40,500
Other............................................................................ 20,399
------------
Total expenses.............................................................. 9,949,668
Expense reductions (Note 4)................................................. (876)
------------
Net expenses.............................................................. 9,948,792
------------
Net investment income.................................................... 9,481,435
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments..................................................................... 58,912,479
Foreign currency transactions................................................... 22,194
------------
Net realized gain (loss).................................................. 58,934,673
Net change in unrealized appreciation (depreciation) on:
Investments..................................................................... 31,089,025
Translation of assets and liabilities denominated in foreign currencies......... (2,722)
------------
Net change in unrealized appreciation (depreciation)...................... 31,086,303
------------
Net realized and unrealized gain (loss)........................................... 90,020,976
------------
Net increase (decrease) in net assets resulting from operations................... $99,502,411
------------
14 | 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, 2004 and 2003
----------------------------------
2004 2003
----------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .......................................................... $ 9,481,435 $ 22,715,818
Net realized gain (loss) from investments and foreign currency transactions .... 58,934,673 53,980,898
Net change in unrealized appreciation (depreciation) on investments and translation
of assets and liabilities denominated in foreign currencies ................... 31,086,303 206,151,423
----------------------------------
Net increase (decrease) in net assets resulting from operations ............ 99,502,411 282,848,139
Distributions to shareholders from:
Net investment income .......................................................... (6,171,637) (21,136,146)
Net realized gains ............................................................. (15,009,844) --
----------------------------------
Total distributions to shareholders ............................................. (21,181,481) (21,136,146)
Capital share transactions (Note 2) ............................................. 857,852 (66,531,693)
----------------------------------
Net increase (decrease) in net assets ...................................... 79,178,782 195,180,300
Net assets:
Beginning of year ............................................................... 626,959,363 431,779,063
----------------------------------
End of year ..................................................................... $706,138,145 $626,959,363
----------------------------------
Undistributed net investment income included in net assets:
End of year...................................................................... $ 5,308,792 $ 1,976,800
----------------------------------
Annual Report | See notes to financial statements. | 15
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 on a securities exchange or on the NASDAQ National Market
System, are valued at the last quoted sale price or the official closing price
of the day, respectively. Over-the-counter securities and listed securities for
which there is no reported sale are valued within the range of the most recent
quoted bid and ask prices. Securities that trade in multiple markets or on
multiple exchanges are valued according to the broadest and most representative
market. Investments in open-end mutual funds are valued at the closing net asset
value.
Foreign securities are valued as of the close of trading on the foreign stock
exchange on which the security is primarily traded, or the NYSE, whichever is
earlier. The value is then converted into its U.S. dollar equivalent at the
foreign exchange rate in effect at the close of the NYSE on the day that the
value of the foreign security is determined. If no sale is reported at that
time, the foreign security will be valued within the range of the most recent
quoted bid and ask prices.
The Fund has procedures to determine the fair value of individual securities and
other assets for which market prices are not readily available or which may not
be reliably priced. Some methods for valuing these securities may include:
fundamental analysis, matrix pricing, discounts from market prices of similar
securities, or discounts applied due to the nature and duration of restrictions
on the disposition of the securities. Occasionally, events occur between the
time at which trading in a security is completed and the close of the NYSE that
might call into question the availability (including the reliability) of the
value of a portfolio security held by the Fund. If such an event occurs, the
securities may be valued using fair value procedures, which may include the use
of independent pricing services. All security valuation procedures are approved
by the Fund's Board of Directors.
16 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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, income and expense items denominated in foreign currencies are
translated into U.S. dollars at the exchange rate in effect on the transaction
date. Occasionally, events may impact the availability or reliability of foreign
exchange rates used to convert the U.S. dollar equivalent value. If such an
event occurs, the foreign exchange rate will be valued at fair value using
procedures established and approved by the Fund's Board of Directors.
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 on the
Statement of Operations.
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.
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 on these
contracts 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 U.S. income taxes because the Fund's policy is to
qualify as a regulated investment company under Sub Chapter M of the Internal
Revenue Code and to distribute substantially all of its taxable income. Fund
distributions to shareholders are determined on an income tax basis and may
differ from net investment income and realized gains for financial reporting
purposes.
Annual Report | 17
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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 expenses 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 by the Fund 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.
2. CAPITAL STOCK
In December 2004, the Board of Directors of the Fund authorized management to
re-implement the Fund's open-market share repurchase program. Originally
implemented in October 1997, the Fund's Board of Directors had discontinued the
open-market share repurchase program in May 2002, in connection with the Fund's
previously conducted tender offers. Under the program, the Fund may purchase,
from time to time, shares of the Fund's common stock in open-market
transactions, at the discretion of the Fund's investment manager.
At December 31, 2004, there were 100 million shares authorized ($.01 par value).
18 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. CAPITAL STOCK (CONTINUED)
On May 22, 2003, the Fund, purchased pursuant to a tender offer, 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*
--------------
Shares repurchased and retired ..... 6,656,425
Purchase price ..................... $9.97
Percentage of net asset value ...... 92.5%
Tender costs incurred .............. $167,136
*See Note 8 regarding Recent Litigation
During the year ended December 31, 2004, 50,373 shares were issued for $857,852
from reinvested distributions.
3. TRANSACTIONS WITH AFFILIATES
Certain officers of the Fund are also officers or directors of the following
entities:
--------------------------------------------------------------------------------
ENTITY AFFILIATION
--------------------------------------------------------------------------------
Templeton Asset Management Ltd. (TAML) Investment manager
Franklin Templeton Services, LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
Effective May 1, 2004, the Fund pays an investment management fee to TAML based
on the average weekly net assets of the Fund as follows:
--------------------------------------------------------------------------------
ANNUALIZED FEE RATE NET ASSETS
--------------------------------------------------------------------------------
1.250% Up to and including $1 billion
1.200% Over $1 billion, up to and including $5 billion
1.150% Over $5 billion, up to and including $10 billion
1.100% Over $10 billion, up to and including $15 billion
1.050% Over $15 billion, up to and including $20 billion
1.000% Over $20 billion
Prior to May 1, 2004, the Fund paid fees of 1.25% per year of the average weekly
net assets of the Fund.
B. ADMINISTRATIVE FEES
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
U.S.A., Inc., for sub-administrative services.
Annual Report | 19
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. EXPENSE OFFSET ARRANGEMENT
The Fund has entered into an arrangement with its custodian whereby credits
realized as a result of uninvested cash balances are used to reduce a portion of
the Fund's custodian expenses. During the year ended December 31, 2004, the
custodian fees were reduced as noted in the Statement of Operations.
5. INCOME TAXES
At December 31, 2004, the Fund had deferred capital losses occurring subsequent
to October 31, 2004, of $2,401,388. For tax purposes, such losses will be
reflected in the year ending December 31, 2005.
Net investment income (loss) differs for financial statement and tax purposes
primarily due to differing treatments of foreign currency transactions.
Net realized losses differ for financial statement and tax purposes primarily
due to differing treatments of wash sales and foreign currency transactions.
At December 31, 2004, the cost of investments, net unrealized appreciation
(depreciation), undistributed ordinary income and undistributed long term
capital gains for income tax purposes were as follows:
Cost of investments ................................. $479,162,382
-------------
Unrealized appreciation ............................. $252,941,203
Unrealized depreciation ............................. (6,362,827)
-------------
Net unrealized appreciation (depreciation) .......... $246,578,376
-------------
Undistributed ordinary income........................ $ 5,308,792
Undistributed long term capital gains................ 536,752
-------------
Distributable earnings............................... $ 5,845,544
-------------
The tax character of distributions paid during the years ended December 31, 2004
and 2003, was as follows:
--------------------------
2004 2003
--------------------------
Distributions paid from:
Ordinary income...................... $ 6,171,637 $21,136,146
Long term capital gain............... 15,009,844 --
--------------------------
$21,181,481 $21,136,146
--------------------------
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
year ended December 31, 2004 aggregated $122,547,465 and $150,720,652,
respectively.
20 | Annual Report
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.
8. RECENT LITIGATION
Pursuant to a settlement agreement which was announced on March 20, 2003,
between the Fund and Harvard College, a former shareholder of the Fund, 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 Fund agreed to take, and the Board
approved, the following actions, among other actions, which have already been
carried out.
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 required 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 has also been
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 did not issue the exemptive order
for in-kind tender offers by March 26, 2004, the settlement provided that the
Fund could, but was 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 did
not conduct these tender offers, Harvard would be relieved of its obligation
to refrain from making shareholder proposals and taking other actions with
respect to the Fund. The exemptive application was not received by March 26,
2004 and the Fund did not conduct any tender offers in 2004.
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 | 21
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.
9. REGULATORY MATTERS
INVESTIGATIONS
As part of various investigations by a number of federal, state, and foreign
regulators and governmental entities, including the Securities and Exchange
Commission ("SEC"), the California Attorney General's Office ("CAGO"), and the
National Association of Securities Dealers, Inc. ("NASD"), relating to certain
practices in the mutual fund industry, including late trading, market timing and
marketing support payments to securities dealers who sell fund shares, Franklin
Resources, Inc. and certain of its subsidiaries (as used in this section,
together, the "Company"), as well as certain current or former executives and
employees of the Company, received subpoenas and/or requests for documents,
information and/or testimony. The Company and its current employees provided
documents and information in response to those requests and subpoenas.
SETTLEMENTS
Beginning in August 2004, the Company entered into settlements with certain
regulators investigating the mutual fund industry practices noted above. The
Company believes that settlement of each of the matters described in this
section is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
On August 2, 2004, Franklin Resources, Inc. announced that its subsidiary,
Franklin Advisers, Inc., reached an agreement with the SEC that resolved the
issues resulting from the SEC investigation into market timing activity. In
connection with that agreement, the SEC issued an "Order Instituting
Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and
203(k) of the Investment Advisers Act of 1940 and Sections 9(b) and 9(f) of the
Investment Company Act of 1940, Making Findings and Imposing Remedial Sanctions
and a Cease-and-Desist Order" (the "Order"). The SEC's Order concerned the
activities of a limited number of third parties that ended in 2000 and those
that were the subject of the first Massachusetts administrative complaint
described below.
22 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
Under the terms of the SEC's Order, pursuant to which Franklin Advisers, Inc.
neither admitted nor denied any of the findings contained therein, Franklin
Advisers, Inc. agreed to pay $50 million, of which $20 million is a civil
penalty, to be distributed to shareholders of certain funds in accordance with a
plan to be developed by an independent distribution consultant. At this time, it
is unclear which funds or which shareholders of any particular fund will receive
distributions. The Order also required Franklin Advisers, Inc. to, among other
things, enhance and periodically review compliance policies and procedures.
On September 20, 2004, Franklin Resources, Inc. announced that two of its
subsidiaries, Franklin Advisers, Inc. and Franklin Templeton Alternative
Strategies, Inc. ("FTAS"), reached an agreement with the Securities Division of
the Office of the Secretary of the Commonwealth of Massachusetts (the "State of
Massachusetts") related to its administrative complaint filed on February 4,
2004, concerning one instance of market timing that was also a subject of the
August 2, 2004 settlement that Franklin Advisers, Inc. reached with the SEC, as
described above.
Under the terms of the settlement consent order issued by the State of
Massachusetts, Franklin Advisers, Inc. and FTAS consented to the entry of a
cease-and-desist order and agreed to pay a $5 million administrative fine to the
State of Massachusetts (the "Massachusetts Consent Order"). The Massachusetts
Consent Order included two different sections: "Statements of Fact" and
"Violations of Massachusetts Securities Laws." Franklin Advisers, Inc. and FTAS
admitted the facts in the Statements of Fact.
On October 25, 2004, the State of Massachusetts filed a second administrative
complaint, alleging that Franklin Resources, Inc.'s Form 8-K filing (in which it
described the Massachusetts Consent Order and stated that "Franklin did not
admit or deny engaging in any wrongdoing") failed to state that Franklin
Advisers, Inc. and FTAS admitted the Statements of Fact portion of the
Massachusetts Consent Order (the "Second Complaint"). Franklin Resources, Inc.
reached a second agreement with the State of Massachusetts on November 19, 2004,
resolving the Second Complaint. As a result of the November 19, 2004 settlement,
Franklin Resources, Inc. filed a new Form 8-K. The terms of the Massachusetts
Consent Order did not change and there was no monetary fine associated with this
second settlement.
On November 17, 2004, Franklin Resources, Inc. announced that Franklin/Templeton
Distributors, Inc. ("FTDI") reached an agreement with the CAGO, resolving the
issues resulting from the CAGO's investigation concerning sales and marketing
support payments. Under the terms of the settlement, FTDI neither admitted nor
denied the allegations in the CAGO's complaint and agreed to pay $2 million to
the State of California as a civil penalty, $14 million to the funds, to be
allocated by an independent distribution consultant to be paid for by FTDI, and
$2 million to the CAGO for its investigative costs.
Annual Report | 23
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY MATTERS (CONTINUED)
SETTLEMENTS (CONTINUED)
On December 13, 2004, Franklin Resources, Inc. announced that its subsidiaries
FTDI and Franklin Advisers, Inc. reached an agreement with the SEC, resolving
the issues resulting from the SEC's investigation concerning marketing support
payments to securities dealers who sell fund shares. In connection with that
agreement, the SEC issued an "Order Instituting Administrative and
Cease-and-Desist Proceedings, Making Findings, and Imposing Remedial Sanctions
Pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940,
Sections 9(b) and 9(f) of the Investment Company Act of 1940, and Section 15(b)
of the Securities Exchange Act of 1934" (the "Second Order").
Under the terms of the Second Order, in which FTDI and Franklin Advisers, Inc.
neither admitted nor denied the findings contained therein, they agreed to pay
the funds a penalty of $20 million and disgorgement of $1 (one dollar). FTDI and
Franklin Advisers, Inc. also agreed to implement certain measures and
undertakings relating to marketing support payments to broker-dealers for the
promotion or sale of fund shares, including making additional disclosures in the
funds' Prospectuses and Statements of Additional Information. The Second Order
further requires the appointment of an independent distribution consultant, at
the Company's expense, who shall develop a plan for the distribution of the
penalty and disgorgement to the funds.
OTHER LEGAL PROCEEDINGS
The Company and other funds, and certain current and former officers, employees,
and directors have been named in multiple lawsuits in different federal courts
in Nevada, California, Illinois, New York and Florida, alleging violations of
various federal securities laws and seeking, among other relief, monetary
damages, restitution, removal of fund trustees, directors, advisers,
administrators, and distributors, rescission of management contracts and 12b-1
Plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach
of duty with respect to alleged arrangements to permit market timing and/or late
trading activity, or breach of duty with respect to the valuation of the
portfolio securities of certain Templeton funds managed by Franklin Resources,
Inc. subsidiaries, resulting in alleged market timing activity. The majority of
these lawsuits duplicate, in whole or in part, the allegations asserted in the
February 4, 2004 Massachusetts administrative complaint and the findings in the
SEC's August 2, 2004 Order, as described above. The lawsuits are styled as class
actions, or derivative actions on behalf of either the named funds or Franklin
Resources, Inc.
In addition, the Company, as well as certain current and former officers,
employees, and directors, have been named in multiple lawsuits alleging
violations of various securities laws and pendent state law claims relating to
the disclosure of directed brokerage payments and/or payment of allegedly
excessive advisory, commission, and distribution fees, and seeking, among other
relief, monetary damages, restitution, rescission of advisory contracts,
including recovery of all fees paid pursuant to those contracts, an accounting
of all monies paid to the named advisers, declaratory relief, injunctive relief,
and/or attorneys' fees and costs. These lawsuits are styled as class actions or
derivative actions brought on behalf of certain funds.
24 | Annual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Company and fund management strongly believes that the claims made in each
of the lawsuits identified above are without merit and intends to vigorously
defend against them. The Company cannot predict with certainty, however, the
eventual outcome of the remaining governmental investigations or private
lawsuits, nor whether they will have a material negative impact on the Company.
Public trust and confidence are critical to the Company's business and any
material loss of investor and/or client confidence could result in a significant
decline in assets under management by the Company, which would have an adverse
effect on the Company's future financial results. If the Company finds that it
bears responsibility for any unlawful or inappropriate conduct that caused
losses to the Fund, it is committed to making the Fund or its shareholders
whole, as appropriate. The Company is committed to taking all appropriate
actions to protect the interests of its funds' shareholders.
Annual Report | 25
Templeton Dragon Fund, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004, 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards 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, 2004 by correspondence with the custodian and brokers, provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
San Francisco, California
February 9, 2005
26 | Annual Report
Templeton Dragon Fund, Inc.
ANNUAL MEETING OF SHAREHOLDERS, MAY 25, 2004
The Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Boulevard, Fort Lauderdale, Florida on May 25, 2004. The purpose
of the meeting was to elect four Directors of the Fund. At the meeting, the
following persons were elected by the shareholders to serve as Directors of the
Fund: Martin L. Flanagan, Edith E. Holiday, Charles B. Johnson and Frank A.
Olson.* No other business was transacted at the meeting.
The results of the voting at the Annual meeting are as follows:
The election of four (4) Directors:
-------------------------------------------------------------------------------------------------------
% OF % OF % OF % OF
OUTSTANDING VOTED OUTSTANDING VOTED
TERM EXPIRING 2006: FOR SHARES SHARES WITHHELD SHARES SHARES
-------------------------------------------------------------------------------------------------------
Frank A. Olson ....... 32,884,878.0431 87.07% 97.78% 747,259.2115 1.98% 2.22%
TERM EXPIRING 2007:
Martin L. Flanagan.... 33,092,417.0431 87.62% 98.40% 539,720.2115 1.43% 1.60%
Edith E. Holiday...... 32,973,566.0431 87.30% 98.04% 658,571.2115 1.74% 1.96%
Charles B. Johnson.... 33,024,331.0431 87.44% 98.19% 607,806.2115 1.61% 1.81%
* Harris J. Ashton, Nicholas F. Brady, Frank J. Crothers, S. Joseph Fortunato,
Gordon S. Macklin, Fred R. Millsaps and Constantine D. Tseretopoulos are
Directors of the Fund who are currently serving and whose terms of office
continued after the Annual Meeting of Shareholders.
Annual Report | 27
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 Bank, N.A. (the "Plan Administrator") 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
Administrator, 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 Bank, N.A." and sent to
Mellon Investor Services, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attn:
Templeton Dragon Fund, Inc. The Plan Administrator 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.
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.
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.
28 | Annual Report
Templeton Dragon Fund, Inc.
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN (CONTINUED)
The participant may withdraw from the Plan without penalty at any time by
written notice to the Plan Administrator 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 Administrator; or, if the participant
wishes, the Plan Administrator will sell the participant's shares and send the
proceeds, less a service charge and less trading fees. Effective April 23, 2004,
the fees for the sale of shares through the Plan are $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.
Annual Report | 29
Templeton Dragon Fund, Inc.
TAX DESIGNATION (UNAUDITED)
Under Section 852(b)(3)(C) of the Internal Revenue Code (Code), the Fund hereby
designates $15,546,596 as a capital gain dividend for the fiscal year ended
December 31, 2004.
Under Section 854(b)(2) of the Code, the Fund hereby designates up to a maximum
of $3,173,745 as qualified dividends for purposes of the maximum rate under
Section 1(h)(11) of the Code for the fiscal year ended December 31, 2004. In
January 2005, shareholders will receive Form 1099-DIV which will include their
share of qualified dividends distributed during the calendar year 2004.
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, 2004, 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 Code. This designation will allow shareholders of record on
December 31, 2004, 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 Class A 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 0.0733 0.0440 0.0482
Hong Kong.................................. 0.0000 0.1230 0.0000 0.1230
Taiwan..................................... 0.0404 0.0905 0.0000 0.0905
---------------------------------------------------------
TOTAL...................................... $0.0404 $0.2868 $0.0440 $0.2617
---------------------------------------------------------
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.
30 | 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 2005, shareholders will receive Form 1099-DIV which will include
their share of taxes paid and foreign source income distributed during the
calendar year 2004. 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 2004 individual income tax returns.
Annual Report | 31
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 (72) Director Since 1994 142 Director, Bar-S Foods
500 East Broward Blvd. (meat packing 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 (60) Director Since 1998 21 None
500 East Broward Blvd.
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman, Island Corporate Holding Ltd.; Director and Vice Chairman, Caribbean Utilities Co. Limited; Director, Provo
Power Company Ltd.; director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic
Equipment & Power Ltd. (1977-2003).
------------------------------------------------------------------------------------------------------------------------------------
S. JOSEPH FORTUNATO (72) 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 (until 2002) (Consultant (2003)).
------------------------------------------------------------------------------------------------------------------------------------
EDITH E. HOLIDAY (52) Director Since 1996 98 Director, Amerada Hess
500 East Broward Blvd. Corporation (exploration and
Suite 2100 refining of oil and gas); H.J.
Fort Lauderdale, FL 33394-3091 Heinz Company (processed foods
and allied products); RTI
International Metals, Inc.
(manufacture and distribution
of titanium); Canadian
National Railway (railroad);
and White Mountains Insurance
Group, Ltd. (holding company).
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).
------------------------------------------------------------------------------------------------------------------------------------
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
------------------------------------------------------------------------------------------------------------------------------------
GORDON S. MACKLIN (76) Director Since 1994 142 Director, Martek Biosciences
500 East Broward Blvd. Corporation; MedImmune, Inc.
Suite 2100 (biotechnology); and
Fort Lauderdale, FL 33394-3091 Overstock.com (Internet
services); and FORMERLY,
Director, MCI Communication
Corporation (subsequently
known as MCI WorldCom, Inc.
and WorldCom, Inc.)
(communications services)
(1988-2002), White Mountains
Insurance Group Ltd. (holding
company) (1987-2004) and
Spacehab, Inc. (aerospace
services) (1994-2003).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Director of various companies; and FORMERLY, Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company)
(2001-2004); 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 (75) 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 (72) Director Since 2003 21 Director, White Mountains
500 East Broward Blvd. Insurance Group Ltd. (holding
Suite 2100 company); Amerada Hess
Fort Lauderdale, FL 33394-3091 Corporation (exploration and
refining of oil and gas); and
Sentient Jet (private jet
service); and FORMERLY,
Director, Becton Dickinson and
Co. (medical technology), Cooper
Industries (electrical products
and tools and hardware), Health
Net (FORMERLY, Foundation
Health), The Hertz Corporation,
Pacific Southwest Airlines, The
RCA Corporation, Unicom
(FORMERLY, Commonwealth Edison)
and UAL Corporation (airlines).
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Chairman Emeritus, The Hertz Corporation (car rental) (since 2000) (Chairman of the Board (1980-2000) and Chief Executive
Officer (1977-1999); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines).
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
------------------------------------------------------------------------------------------------------------------------------------
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 Director Since 1998 21 None
(50)
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 (74) Director Since 1994 18 Director, Amerada Hess
500 East Broward Blvd. Corporation (exploration and
Suite 2100 refining of oil and gas); Total
Fort Lauderdale, FL 33394-3091 Logistics, Inc. (formerly C2,
Inc.) (operating and investment
business); and Weatherford
International, Ltd (oilfield
products and servicing)
(2004-present); 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 Technology Ventures Group, LLC (investment firms) and Franklin Templeton
Investment Funds (1994-present); Director, Templeton Capital Advisors Ltd.; and FORMERLY, Chairman, Darby Emerging Markets
Investments LDC (until 2004) and 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 (44) 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.
------------------------------------------------------------------------------------------------------------------------------------
34 | 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 (71) Director, Director and Vice 142 None
One Franklin Parkway Chairman of President since
San Mateo, CA 94403-1906 the Board and 1994
Vice President 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 (59) Vice President Since 1996 Not Applicable Not Applicable
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.
------------------------------------------------------------------------------------------------------------------------------------
JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable Not Applicable
One Franklin Parkway Compliance
San Mateo, CA 94403-1906 Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin
Resources, Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001).
------------------------------------------------------------------------------------------------------------------------------------
JEFFREY A. EVERETT (40) Vice President Since 2001 Not Applicable Not Applicable
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 (57) Senior Vice Since 2002 Not Applicable Not Applicable
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.
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 35
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
DAVID P. GOSS (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Senior 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).
------------------------------------------------------------------------------------------------------------------------------------
BARBARA J. GREEN (57) Vice President Since 2000 Not Applicable Not Applicable
One Franklin Parkway
San Mateo, CA 94403-1906
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. (64) Vice President Since 1996 Not Applicable Not Applicable
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 (64) Vice President Since 1994 Not Applicable Not Applicable
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.
------------------------------------------------------------------------------------------------------------------------------------
36 | Annual Report
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Not Applicable
600 Fifth Avenue - AML
Rockefeller Center Compliance
New York, NY 10020-2302
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; Director, FTI Banque, Arch
Chemicals, Inc. and Lingnan Foundation; 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.
------------------------------------------------------------------------------------------------------------------------------------
MARK MOBIUS (68) President and President since Not Applicable Not Applicable
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).
-----------------------------------------------------------------------------------------------------------------------------------
ROBERT C. ROSSELOT (44) Secretary Since December Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale,FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Associate General Counsel and Assistant Secretary, Franklin Resources, Inc.; Vice President and Assistant Secretary,
Templeton Investment Counsel, LLC and Fiduciary Trust International of the South; officer of 15 of the investment companies
in Franklin Templeton Investments; and FORMERLY, Assistant General Counsel, The Prudential Insurance Company of America
(1997-2001).
------------------------------------------------------------------------------------------------------------------------------------
GREGORY R. SEWARD (48) Treasurer Since October Not Applicable Not Applicable
500 East Broward Blvd. 2004
Suite 2100
Fort Lauderdale, FL 33394-3091
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Vice President, Franklin Templeton Services, LLC; officer of 15 of the investment companies in Franklin Templeton
Investments; and FORMERLY, Vice President, JPMorgan Chase (2000-2004) and American General Financial Group (1991-2000).
------------------------------------------------------------------------------------------------------------------------------------
Annual Report | 37
------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF PORTFOLIOS IN
LENGTH OF FUND COMPLEX OVERSEEN
NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD
------------------------------------------------------------------------------------------------------------------------------------
MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable Not Applicable
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).
------------------------------------------------------------------------------------------------------------------------------------
GALEN G. VETTER (53) Chief Financial Since May 2004 Not Applicable Not Applicable
500 East Broward Blvd. Officer and
Suite 2100 Chief
Fort Lauderdale, FL 33394-3091 Accounting
Officer
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton
Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP.
------------------------------------------------------------------------------------------------------------------------------------
*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 to be 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 to be an interested person
of the Fund under the federal securities laws due to his ownership interest in a
subsidiary of Resources, as well as his director positions with such company and
certain other related companies.
Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE U.S. 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 HAS SERVED AS A MEMBER OF THE FUND AUDIT
COMMITTEE SINCE 2003, CURRENTLY SERVES AS CHAIRMAN EMERITUS OF THE HERTZ
CORPORATION AND WAS FORMERLY CHAIRMAN FROM 1980-2000 AND 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 WAS FORMERLY,
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UAL CORPORATION. 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 U.S. SECURITIES AND EXCHANGE COMMISSION
RULES AND RELEASES.
38 | 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 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://vault.melloninvestor.com/isd 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 | 39
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION
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. Copies of the Fund's proxy voting records are also made available online
at franklintempleton.com and posted on the U.S. Securities and Exchange
Commission's website at sec.gov and reflect the 12-month period beginning July
1, 2003, and ending June 30, 2004.
QUARTERLY STATEMENT OF INVESTMENTS
The Fund files a complete statement of investments with the U.S. Securities and
Exchange Commission for the first and third quarters for each fiscal year on
Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's
website at sec.gov. The filed form may also be viewed and copied at the
Commission's Public Reference Room in Washington, DC. Information regarding the
operations of the Public Reference Room may be obtained by calling
1-800/SEC-0330.
CERTIFICATIONS
The Fund's Chief Executive Officer - Finance and Administration is required by
the New York Stock Exchange's Listing Standards to file annually with the
Exchange a certification that he is not aware of any violation by the Fund of
the Exchange's Corporate Governance Standards applicable to the Fund. The Fund
has filed such certification.
In addition, the Fund's Chief Executive Officer - Finance and Administration and
Chief Financial Officer and Chief Accounting Officer are required by the rules
of the Commission to provide certain certifications with respect to the Fund's
Form N-CSR and Form N-CSRS (which include the Fund's annual and semi-annual
reports to shareholders) that are filed semi-annually with the Commission. The
Fund has filed such certifications with its Form N-CSRS for the six months ended
June 30, 2004. Additionally, the Fund expects to file, on or about February 28,
2005, such certifications with its Form N-CSR for the year ended December 31,
2004.
40 | Annual Report
Literature Request
LITERATURE REQUEST. TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT
1-800/DIAL BEN[R] (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS
SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES
BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE
CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. 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
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 2
Franklin Small Cap Value Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Recovery Fund 3
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 4
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 Technology Fund
Franklin Utilities Fund
Mutual Financial Services Fund
ASSET ALLOCATION
Franklin Templeton Corefolio
Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Perspectives 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 5
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Floating Rate Trust 3
Franklin Income Fund
Franklin Limited Maturity
U.S. Government Securities Fund 5, 6
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Strategic Income Fund
Franklin Strategic Mortgage Portfolio
Franklin Templeton Hard Currency Fund
Franklin Total Return Fund
Franklin U.S. Government Securities Fund 5
Templeton Global Bond Fund
TAX-FREE INCOME 7
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 8
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
Alabama
Arizona
California 9
Colorado
Connecticut
Florida 9
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 8
Michigan 8
Minnesota 8
Missouri
New Jersey
New York 9
North Carolina
Ohio 8
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 10
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 and select retirement plans.
3. 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.
4. Upon reaching approximately $350 million in assets, the fund intends to close
to all investors.
5. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
6. Formerly Franklin Short-Intermediate U.S. Government Securities Fund.
Effective 9/1/04, the fund's name changed; its investment goal and strategy
remained the same.
7. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
8. Portfolio of insured municipal securities.
9. These funds are available in two or more variations, including long-term
portfolios, portfolios of insured securities, a high-yield portfolio (CA) and
limited-term, intermediate-term and money market portfolios (CA and NY).
10. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
11/04 Not part of the annual report
[LOGO OMITTED]
FRANKLIN[R] TEMPLETON[R] 100 Fountain Parkway
INVESTMENTS P.O. Box 33030
St. Petersburg, FL 33733-8030
ANNUAL REPORT AND SHAREHOLDER INFORMATION
TEMPLETON DRAGON FUND, INC.
INVESTMENT MANAGER
Templeton Asset Management Ltd.
TRANSFER AGENT
Mellon Investor Services LLC
P.O. Box 3315
South Hackensack, NJ 07606-1915
Toll free number: 1-800-416-5585
Hearing Impaired phone number: 1-800-231-5469
Foreign Shareholders phone number: 201-329-8660
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 A2004 02/05
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 11(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 $14,747 for the fiscal year ended December 31, 2004 and $32,549 for the
fiscal year ended December 31, 2003.
(b) Audit-Related Fees
There were no 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.
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 their financial statements
were $48,949 for the fiscal year ended December 31, 2004 and $3,134 for the
fiscal year ended December 31, 2003. The services for which these fees were paid
included 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.
There were no 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.
(d) All Other Fees
The aggregate fees paid to the principal accountant for products and services
rendered by the principal accountant to the registrant not reported in
paragraphs (a)-(c) of Item 4 were $270 for the fiscal year ended December 31,
2004 and $0 for the fiscal year ended December 31, 2003. The services for which
these fees were paid included review of materials provided to the fund Board in
connection with the investment management contract renewal process.
The aggregate 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 not reported
in paragraphs (a)-(c) of Item 4 were $99,730 for the fiscal year ended December
31, 2004 and $0 for the fiscal year ended December 31, 2003. The services for
which these fees were paid included review of materials provided to the fund
Board in connection with the investment management contract renewal process.
(e) (1) The registrant'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
registrant by the auditors to the registrant's investment adviser or to any
entity that controls, is controlled by or is under common control with the
registrant's investment adviser and that provides ongoing services to the
registrant where the non-audit services relate directly to the operations
or financial reporting of the registrant; 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 by this 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 $148,949 for the fiscal year ended December 31, 2004 and $3,134
for the fiscal year ended December 31, 2003.
(h) No disclosures are required by this Item 4(h).
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS
Members of the Audit Committee are: Frank J. Crothers, Fred R. Millsaps; Frank
A. Olson and Constantine D. Tseretopoulos
ITEM 6. SCHEDULE OF INVESTMENTS. 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/trustees 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.
RATIFICATION OF AUDITORS OF PORTFOLIO COMPANIES. In light of several high
profile accounting scandals, the manager will closely scrutinize the role and
performance of auditors. On a case-by-case basis, the manager will examine
proposals relating to non-audit relationships and non-audit fees. The manager
will also consider, on a case-by-case basis, proposals to rotate auditors, and
will vote against the ratification of auditors when there is clear and
compelling evidence of accounting irregularities or negligence.
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 it aligns 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 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 are available on-line at franklintempleton.com and posted
on the SEC website at www.sec.gov and 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.
There have been no changes to the procedures by which shareholders may recommend
nominees to the Registrant's Board of Directors that would require disclosure
herein.
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
(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
Galen G. Vetter, 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
Galen G. Vetter, 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: April 25, 2005
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: April 25, 2005
By /s/GALEN G. VETTER
-----------------------------
Galen G. Vetter
Chief Financial Officer
Date: April 25, 2005