UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-08394
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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: 6/30/05
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ITEM 1. REPORTS TO STOCKHOLDERS.
JUNE 30, 2005
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[PHOTO OMITTED]
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SEMIANNUAL REPORT AND SHAREHOLDER INFORMATION | INTERNATIONAL
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TEMPLETON DRAGON FUND, INC.
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[LOGO OMITTED]
FRANKLIN TEMPLETON
INVESTMENTS
Franklin o TEMPLETON o Mutual Series
Franklin Templeton Investments
GAIN FROM OUR PERSPECTIVE(R)
Franklin Templeton's distinct multi-manager structure combines the specialized
expertise of three world-class investment management groups--Franklin, Templeton
and Mutual Series.
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
offices in over 25 countries, Templeton offers investors a truly global
perspective.
MUTUAL Series. Founded in 1949, Mutual Series is dedicated to a unique style of
value investing, searching aggressively for opportunity among what it believes
are undervalued stocks, as well as arbitrage situations and distressed
securities.
SPECIALIZED EXPERTISE
Because our management groups work independently and adhere to different
investment approaches, Franklin, Templeton and Mutual Series funds typically
have distinct portfolios. That's why our funds can be used to build truly
diversified allocation plans covering every major asset class.
TRUE DIVERSIFICATION
At Franklin Templeton Investments, we seek to consistently provide investors
with exceptional risk-adjusted returns over the long term, as well as the
reliable, accurate and personal service that has helped us become one of the
most trusted names in financial services.
RELIABILITY YOU CAN TRUST
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MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS
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[PHOTO OMITTED]
Not part of the semiannual report
Contents
IMPORTANT NOTICE TO
SHAREHOLDERS............................. 1
SEMIANNUAL REPORT
Templeton Dragon
Fund, Inc. .............................. 2
Performance Summary ..................... 7
Financial Highlights and
Statement of Investments ................ 9
Financial Statements .................... 13
Notes to Financial
Statements .............................. 16
Annual Meeting of
Shareholders ............................ 25
Dividend Reinvestment and
Cash Purchase Plan ...................... 26
Shareholder
Information ............................. 29
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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 semiannual report | 1
Semiannual 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.
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GEOGRAPHIC BREAKDOWN
Based on Total Net Assets as of 6/30/05
[PIE CHART OMITTED]
China 35.3%
Hong Kong 32.5%
Taiwan 23.9%
U.K. 3.1%
South Korea 1.5%
Short-Term Investments & Other Net Assets 3.7%
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Dear Shareholder:
This semiannual report for Templeton Dragon Fund covers the period ended June
30, 2005.
PERFORMANCE OVERVIEW
Templeton Dragon Fund posted cumulative total returns of +4.42% in market price
terms and +6.08% in net asset value terms for the six months under review. You
can find the Fund's long-term performance data in the Performance Summary
beginning on page 7.
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 | Semiannual Report
ECONOMIC AND MARKET OVERVIEW
In general, China continued to record strong growth, with 9.4% first quarter
2005 gross domestic product (GDP) growth compared with a year earlier.1 Strong
consumer consumption, trade and investment contributed to GDP growth. However,
inflationary pressures eased, and there was slower growth in some areas of the
economy. The consumer price index (CPI) increased 1.8% in May compared with a
year earlier, unchanged from April and down from March's 2.7%.1 Fixed asset
investment grew 26% in May compared with a year earlier. Although marginally
higher than April's 25% increase, it was well below the 50% level seen in early
2004.1
High oil prices and lower exports hurt Taiwan's economic recovery, as GDP growth
in first quarter 2005 slowed to 2.5% year-over-year, down from 3.3% in fourth
quarter 2004.2 The government lowered its full-year growth forecast, as external
trade, a significant contributor to the island's GDP, weakened. In an effort to
widen the tax base and improve economic competitiveness, Taiwan plans to submit
new tax legislation for parliamentary approval in July.
Hong Kong recorded solid economic growth, with first quarter GDP expanding 6.0%
compared with a year earlier, mainly supported by strong exports and domestic
consumption.3 The government forecast GDP growth of between 4.5% and 5.5% in
2005.4 Exports rose 8.9% in the first quarter year-over-year, while private
consumption increased 4.6%.4 Unemployment declined, with the jobless rate
registering 5.7% for the three-month period ended May 2005, a 43-month low. 3 In
politics, Donald Tsang became Hong Kong's new chief executive after the early
resignation of Tung Chee-Hwa.
Equity markets in the greater China region declined in first quarter 2005 as
investor sentiment was adversely affected by China's passage of an
anti-secession law, which allows China to use force against Taiwan if the latter
demands independence. Rising U.S. interest rates and high oil prices also
impacted investor confidence. Hong Kong stocks, particularly those in the
property sector, suffered from rising short-term interest rates. Market
sentiment turned positive in the second quarter as government efforts to curb
growth in heated sectors showed some progress, and the Morgan Stanley Capital
International (MSCI) China Index returned 5.25% in U.S. dollar
1. Source: National Bureau of Statistics of China.
2. Source: Taiwan Directorate General of Budget, Accounting and Statistics.
3. Source: Hong Kong Census & Statistics Department.
4. Source: Hong Kong Special Administrative Region of the People's Republic of
China.
Semiannual Report | 3
terms for the six months ended June 30, 2005.5 Taiwan's market benefited from
MSCI index rebalancing, which raised the country's weighting in MSCI's indexes.
Speculation over the revaluation of the Chinese yuan led to greater fund inflows
into Hong Kong.
INVESTMENT STRATEGY
Our investment strategy employs a fundamental, value-oriented, long-term
approach. In selecting companies for investment, we will consider overall growth
prospects, competitive positions in export markets, technologies, research and
development, productivity, labor costs, raw material costs and sources, profit
margins, returns on investment, capital resources, government regulation,
management and other factors in comparison to other companies around the world
that 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 six months ended June 30, 2005, the MSCI China Index posted a 5.25%
total return. 5
Relative to the MSCI China Index, the Fund's largest contribution to performance
came from our position in Dairy Farm International Holdings, a group with core
interests in supermarkets, drugstores, convenience stores and restaurant
businesses in Asia. In addition to the food and staples retailing sector, the
Fund's absence of insurance holdings, as well as an underweighted position in
the transportation industry, positively affected performance.6 The fact that the
Fund did not hold China Shipping, Ping An Insurance, and PICC Property and
Casualty Company helped relative performance, as those stocks significantly
underperformed the index during the period.
TOP 10 HOLDINGS
6/30/05
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COMPANY % OF TOTAL
SECTOR/INDUSTRY, COUNTRY NET ASSETS
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Dairy Farm International Holdings Ltd. 14.8%
FOOD & STAPLES RETAILING, HONG KONG
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China Mobile (Hong Kong) Ltd., fgn. 7.0%
WIRELESS TELECOMMUNICATION SERVICES,
CHINA
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China Petroleum & Chemical Corp., H 5.5%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Cheung Kong Infrastructure
Holdings Ltd. 4.4%
ELECTRIC UTILITIES, HONG KONG
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Hang Lung Group Ltd. 4.0%
REAL ESTATE, HONG KONG
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PetroChina Co. Ltd., H 4.0%
OIL, GAS & CONSUMABLE FUELS, CHINA
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Cheung Kong Holdings Ltd. 3.4%
REAL ESTATE, HONG KONG
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Acer Inc. 3.3%
COMPUTERS & PERIPHERALS, TAIWAN
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HSBC Holdings PLC 3.1%
COMMERCIAL BANKS, U.K.
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Hong Kong & Shanghai Hotels Ltd. 3.0%
HOTELS, RESTAURANTS & LEISURE,
HONG KONG
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5. Source: Standard & Poor's Micropal. The MSCI China Index is a free
float-adjusted, market capitalization-weighted index designed to meaure equity
market performance in China. The index is unmanaged and includes reinvested
dividends. One cannot invest directly in an index, nor is an index
representative of the Fund's portfolio.
6. The transportation sector comprises air freight and logistics, airlines, and
transportation infrastructure in the SOI.
4 | Semiannual Report
Conversely, the Fund's underweighted exposure to the energy and
telecommunication services sectors, as well as an overweighted position in
commercial banks, detracted from performance.7 Underweighted positions relative
to the MSCI China Index in PetroChina and China Mobile (Hong Kong) also hurt
relative performance as both stocks significantly outperformed the index. The
Fund's positions in HSBC Holdings and Mega Financial Holdings hindered
performance as these stocks declined in value during the period. HSBC is one of
the largest banking and financial services organizations in the world, while
Mega is one of the largest financial holding companies in Taiwan. Therefore, we
believe both companies are well positioned to benefit from increasing demand for
banking services globally over the longer term, which is in line with our
investment strategy.
During the reporting period, the Fund increased its holdings in China H and Red
Chip shares as selective stocks reached our buy limits. Key stock purchases
included China's national carrier and the country's largest commercial airline,
Air China; China Mobile (Hong Kong), a dominant wireless telecommunications
operator with 220 million subscribers in China; and PetroChina, which has a
dominant market share in upstream oil and gas businesses with huge proven
reserves in China. The Fund also made an investment in South Korea's LG Corp.,
which increased exposure to the multi-holdings sector.
The Fund reduced its exposure to Taiwan and the China Shenzhen "B" market during
the period. Significant sales included shares of Sinopac Holdings and China
International Marine Containers. The Fund repositioned its Hong Kong holdings by
adding Hopewell Holdings and reducing exposure to Hang Lung Group. Hopewell
Holdings is involved in infrastructure projects, property development and
investments, hotel operations and management, restaurant operations and
catering, and construction and project management.
7. The energy sector comprises oil, gas and consumable fuels in the SOI.
Telecommunication services comprises diversified telecommunication services and
wireless telecommunication services in the SOI.
Semiannual Report | 5
This report contains new information about the Board of Directors' approval of
the Fund's investment advisory contract in the past six months. It is designed
to give you an understanding of several factors considered before the Board
approved its contract with the Investment Manager. The discosure is in the
"Shareholder Information" section beginning on page 29.
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 JUNE 30, 2005, 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 | Semiannual Report
Performance Summary as of 6/30/05
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 gain distributions, if any, or any realized gains on the sale
of Fund shares.
PRICE AND DISTRIBUTION INFORMATION
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SYMBOL:TDF CHANGE 6/30/05 12/31/04
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Net Asset Value (NAV) +$0.95 $19.65 $18.70
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Market Price (NYSE) +$0.61 $18.08 $17.47
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DISTRIBUTIONS (1/1/05-6/30/05)
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Dividend Income $0.1406
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Long-Term Capital Gain $0.0143
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TOTAL $0.1549
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PERFORMANCE
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6-MONTH 1-YEAR 5-YEAR 10-YEAR
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Cumulative Total Return 1
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Based on change in NAV +6.08% +23.15% +128.46% +183.28%
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Based on change in market price +4.42% +29.20% +179.30% +210.62%
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Average Annual Total Return 1
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Based on change in NAV +6.08% +23.15% +17.97% +10.97%
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Based on change in market price +4.42% +29.20% +22.81% +12.00%
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PERFORMANCE DATA 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 PERFORMANCE, CALL FRANKLIN TEMPLETON INVESTMENTS AT
1-800/342-5236.
Semiannual 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 NONDIVERSIFIED 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. Six-month return has not
been annualized.
8 | Semiannual Report
Templeton Dragon Fund, Inc.
FINANCIAL HIGHLIGHTS
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SIX MONTHS ENDED
JUNE 30, 2005 YEAR ENDED DECEMBER 31,
(UNAUDITED) 2004 2003 2002 2001 2000
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PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the period)
Net asset value, beginning of period ......... $18.70 $16.62 $9.73 $8.82 $9.91 $12.75
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Income from investment operations:
Net investment income a ..................... 0.45 0.25 0.56 0.17 0.25 0.12
Net realized and unrealized gains (losses) .. 0.65 2.39 6.75 0.81 (0.37) (2.01)
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Total from investment operations ............. 1.10 2.64 7.31 0.98 (0.12) (1.89)
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Capital share repurchases .................... -- -- 0.14 0.10 0.01 0.22
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Less distributions from:
Net investment income ....................... (0.14) (0.16) (0.56) (0.17) (0.23) (1.17)
Tax return of capital ....................... -- -- -- -- (0.75) --
Net realized gains .......................... (0.01) (0.40) -- -- -- --
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Total distributions .......................... (0.15) (0.56) (0.56) (0.17) (0.98) (1.17)
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Net asset value, end of period ............... $19.65 $18.70 $16.62 $9.73 $8.82 $9.91
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Market value, end of period b ................ $18.08 $17.47 $17.99 $8.92 $7.49 $7.25
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Total return (based on market value per share) c 4.42% 0.36% 108.44% 21.22% 16.95% (15.31)%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000's) ............ $742,256 $706,138 $626,959 $431,779 $429,889 $485,091
Ratios to average net assets:
Expenses .................................... 1.55%d 1.52% 1.64%e 1.62% 1.54% 1.56%
Net investment income ....................... 4.73%d 1.45% 4.57% 1.80% 2.58% 1.04%
Portfolio turnover rate ...................... 2.97% 19.42% 29.91% 15.75% 70.94% 132.74%
<FN>
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 Annualized.
e Ratio of expenses to average net assets, excluding payments by affiliate were
1.78%.
</FN>
Semiannual Report | See notes to financial statements. | 9
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2005 (UNAUDITED)
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COUNTRY SHARES VALUE
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COMMON STOCKS 96.3%
AIR FREIGHT & LOGISTICS 0.1%
Sinotrans Ltd. ....................................................... China 3,017,000 $ 941,496
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AIRLINES 0.4%
a Air China Ltd., H .................................................... China 7,486,000 2,528,777
a Air China Ltd., H, 144A .............................................. China 1,364,000 460,761
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2,989,538
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AUTO COMPONENTS 1.4%
Cheng Shin Rubber Industry Co. Ltd. .................................. Taiwan 9,409,160 10,560,241
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AUTOMOBILES 0.1%
Chongqing Changan Automobile Co. Ltd. ................................ China 1,638,470 902,431
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CAPITAL MARKETS 1.2%
Yuanta Core Pacific Securities Co. ................................... Taiwan 11,591,332 8,563,131
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COMMERCIAL BANKS 6.5%
a Bank of Communications, 144A ......................................... China 1,531,000 551,651
Chinatrust Financial Holding Co. Ltd. ................................ Taiwan 6,659,477 7,253,416
HSBC Holdings PLC .................................................... United Kingdom 1,412,520 22,721,453
Mega Financial Holdings Co. Ltd. ..................................... Taiwan 27,217,000 17,915,531
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48,442,051
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COMMUNICATIONS EQUIPMENT 0.5%
D-Link Corp. ......................................................... Taiwan 2,979,309 3,508,389
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COMPUTERS & PERIPHERALS 6.2%
Acer Inc. ............................................................ Taiwan 12,232,022 24,135,797
Advantech Co. Ltd. ................................................... Taiwan 2,929,282 6,935,948
Asustek Computer Inc. ................................................ Taiwan 2,883,512 8,138,468
Lite-On Technology Corp. ............................................. Taiwan 5,776,100 6,637,728
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45,847,941
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CONSTRUCTION MATERIALS 0.2%
Anhui Conch Cement Co. Ltd., H ....................................... China 1,306,000 1,218,464
China Resources Cement ............................................... China 872,000 187,398
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1,405,862
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DISTRIBUTORS 3.1%
China Resources Enterprise Ltd. ...................................... China 12,628,000 19,500,570
Test-Rite International Co. Ltd. ..................................... Taiwan 5,126,126 3,641,289
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23,141,859
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DIVERSIFIED TELECOMMUNICATION SERVICES 0.5%
China Telecom Corp. Ltd., H .......................................... China 10,278,000 3,703,379
-------------
ELECTRIC UTILITIES 4.4%
Cheung Kong Infrastructure Holdings Ltd. ............................. Hong Kong 11,060,000 32,948,648
-------------
ELECTRICAL EQUIPMENT 0.5%
Phoenixtec Power Co. Ltd. ............................................ Taiwan 3,632,945 3,905,344
-------------
ELECTRONIC EQUIPMENT & INSTRUMENTS 2.5%
Delta Electronics Inc. ............................................... Taiwan 12,025,970 18,660,661
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10 | Semiannual Report
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2005 (UNAUDITED) (CONTINUED)
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COUNTRY SHARES VALUE
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COMMON STOCKS (CONT.)
FOOD & STAPLES RETAILING 14.8%
Dairy Farm International Holdings Ltd. ............................... Hong Kong 39,843,978 $109,969,379
-------------
FOOD PRODUCTS 1.0%
UNI-President Enterprises Corp. ...................................... Taiwan 16,069,030 7,558,912
-------------
HOTELS, RESTAURANTS & LEISURE 3.0%
Hong Kong & Shanghai Hotels Ltd. ..................................... Hong Kong 21,388,338 22,294,284
-------------
HOUSEHOLD DURABLES 1.2%
TCL Multimedia Technology Holdings Ltd. .............................. China 48,960,000 9,135,680
-------------
INDEPENDENT POWER PRODUCERS & ENERGY TRADERS 3.8%
Datang International Power Generation Co. Ltd., H .................... China 26,502,000 20,121,583
Guangdong Electric Power Development Co. Ltd., B ..................... China 11,270,600 5,482,395
Huadian Power International Corp. Ltd., H ............................ China 3,978,000 1,126,209
Huaneng Power International Inc., H .................................. China 1,454,000 1,066,524
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27,796,711
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INDUSTRIAL CONGLOMERATES 5.1%
Beijing Enterprises Holdings Ltd. .................................... China 976,000 1,369,014
CITIC Pacific Ltd. ................................................... China 7,081,000 20,730,390
a LG Corp. ............................................................. South Korea 221,000 5,618,463
Shanghai Industrial Holdings Ltd. .................................... China 5,118,000 9,978,020
-------------
37,695,887
-------------
IT SERVICES 0.3%
Travelsky Technology Ltd., H ......................................... China 2,837,000 2,409,543
-------------
LEISURE EQUIPMENT & PRODUCTS 0.4%
Premier Image Technology Corp. ....................................... Taiwan 2,295,000 2,601,121
-------------
MACHINERY 2.0%
China International Marine Containers Co. Ltd., B .................... China 12,791,872 11,687,562
Yung Tay Engineering Co. Ltd. ........................................ Taiwan 5,686,000 3,168,363
-------------
14,855,925
-------------
METALS & MINING 0.1%
Aluminum Corp. of China Ltd., H ...................................... China 1,028,000 572,151
China Oriental Group Co. Ltd., 144A .................................. China 422,000 101,008
-------------
673,159
-------------
OFFICE ELECTRONICS 0.1%
Kinpo Electronics Inc. ............................................... Taiwan 1,454,000 697,736
-------------
OIL, GAS & CONSUMABLE FUELS 9.5%
China Petroleum & Chemical Corp., H .................................. China 103,150,000 40,485,597
PetroChina Co. Ltd., H ............................................... China 40,050,000 29,634,789
-------------
70,120,386
-------------
REAL ESTATE 10.4%
Cheung Kong Holdings Ltd. ............................................ Hong Kong 2,575,000 25,101,019
Hang Lung Group Ltd. ................................................. Hong Kong 16,884,042 29,983,821
Henderson China Holdings Ltd. ........................................ China 6,956,500 6,669,274
Henderson Investment Ltd. ............................................ Hong Kong 7,485,000 10,306,401
Hong Kong Land Holdings Ltd. ......................................... Hong Kong 1,904,000 5,312,160
-------------
77,372,675
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Semiannual Report | 11
Templeton Dragon Fund, Inc.
STATEMENT OF INVESTMENTS, JUNE 30, 2005 (UNAUDITED) (CONTINUED)
- ---------------------------------------------------------------------------------------------------------------------------
COUNTRY SHARES VALUE
- ---------------------------------------------------------------------------------------------------------------------------
COMMON STOCKS (CONT.)
SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT 5.3%
Elan Microelectronics Corp. .......................................... Taiwan 3,385,396 $ 1,726,098
Faraday Technology Corp. ............................................. Taiwan 432,259 829,719
Samsung Electronics Co. Ltd. ......................................... South Korea 10,780 5,147,724
Siliconware Precision Industries Co. Ltd. ............................ Taiwan 4,340,000 4,274,917
Sunplus Technology Co. Ltd. .......................................... Taiwan 6,264,390 8,820,577
Taiwan Semiconductor Manufacturing Co. ............................... Taiwan 10,645,920 18,519,027
-------------
39,318,062
-------------
TEXTILES APPAREL & LUXURY GOODS 0.8%
Tack Fat Group International Ltd. .................................... Hong Kong 26,080,000 3,322,571
Tainan Enterprises Co. Ltd. .......................................... Taiwan 1,846,000 2,421,509
-------------
5,744,080
-------------
TRANSPORTATION INFRASTRUCTURE 3.0%
China Merchants Holdings (International) Co. Ltd. .................... China 3,648,874 7,090,344
Cosco Pacific Ltd. ................................................... China 6,678,000 12,976,418
Hainan Meilan International Airport Co. Ltd., H ...................... Hong Kong 570,000 326,412
Hopewell Holdings Ltd. ............................................... Hong Kong 623,000 1,599,420
-------------
21,992,594
-------------
WIRELESS TELECOMMUNICATION SERVICES 7.9%
China Mobile (Hong Kong) Ltd., fgn. .................................. China 13,876,000 51,694,499
Taiwan Mobile Co. Ltd. ............................................... Taiwan 7,047,764 7,253,579
-------------
58,948,078
-------------
TOTAL COMMON STOCKS (COST $447,665,508)............................... 714,705,183
-------------
SHORT TERM INVESTMENTS (COST $25,844,720) 3.5%
MONEY FUND 3.5%
b Franklin Institutional Fiduciary Trust Money Market Portfolio ........ United States 25,844,720 25,844,720
-------------
TOTAL INVESTMENTS (COST $473,510,228) 99.8%........................... 740,549,903
OTHER ASSETS, LESS LIABILITIES 0.2% .................................. 1,705,909
-------------
NET ASSETS 100.0%..................................................... $742,255,812
-------------
SELECTED PORTFOLIO ABBREVIATIONS:
PLC - Public Limited Co
a Non-income producing.
b See Note 8 regarding investments in Franklin Institutional Fiduciary Trust
Money Market Portfolio.
12 | See notes to financial statements. | Semiannual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS
STATEMENT OF ASSETS AND LIABILITIES
June 30, 2005 (unaudited)
Assets:
Investments in securities:
Cost - Unaffiliated issuers............................................................................. $447,665,508
Cost - Sweep Money Fund (Note 8)........................................................................ 25,844,720
-------------
Total cost of investments............................................................................... $473,510,228
-------------
Value - Unaffiliated issuers ........................................................................... $714,705,183
Value - Sweep Money Fund (Note 8)....................................................................... 25,844,720
-------------
Total value of investments.............................................................................. 740,549,903
Cash..................................................................................................... 255,375
Foreign currency, at value (cost $677,993)............................................................... 675,325
Receivables:
Investment securities sold.............................................................................. 418,702
Dividends and interest.................................................................................. 1,584,937
-------------
Total assets........................................................................................ 743,484,242
-------------
Liabilities:
Payables:
Investment securities purchased......................................................................... 225,871
Affiliates ............................................................................................. 851,560
Other liabilities........................................................................................ 150,999
-------------
Total liabilities................................................................................... 1,228,430
-------------
Net assets, at value.............................................................................. $742,255,812
-------------
Net assets consist of:
Undistributed net investment income...................................................................... $ 16,885,754
Net unrealized appreciation (depreciation)............................................................... 267,024,039
Accumulated net realized gain (loss)..................................................................... 2,232,260
Paid-in capital.......................................................................................... 456,113,759
-------------
Net assets at value............................................................................... $742,255,812
-------------
Shares outstanding....................................................................................... 37,770,115
-------------
Net asset value per share................................................................................ $19.65
-------------
Semiannual Report | See notes to financial statements. | 13
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENT OF OPERATIONS
for the six months ended June 30, 2005 (unaudited)
Investment income:
Dividends:
Unaffiliated issuers (net of foreign taxes of $419,816).................................................. $22,214,717
Sweep Money Fund (Note 8)................................................................................ 210,737
Interest (net of foreign taxes of $24).................................................................... 117
------------
Total investment income.............................................................................. 22,425,571
------------
Expenses:
Management fees (Note 3a)................................................................................. 4,461,600
Administrative fees (Note 3b)............................................................................. 551,659
Transfer agent fees ...................................................................................... 102,300
Custodian fees (Note 4)................................................................................... 262,535
Reports to shareholders................................................................................... 16,900
Registration and filing fees.............................................................................. 33,700
Professional fees......................................................................................... 83,599
Directors' fees and expenses.............................................................................. 15,150
Other..................................................................................................... 10,700
------------
Total expenses....................................................................................... 5,538,143
Expense reductions (Note 4).......................................................................... (12)
------------
Net expenses........................................................................................ 5,538,131
------------
Net investment income............................................................................. 16,887,440
------------
Realized and unrealized gains (losses):
Net realized gain (loss) from:
Investments.............................................................................................. 5,974,977
Foreign currency transactions............................................................................ (22,498)
------------
Net realized gain (loss)............................................................................ 5,952,479
------------
Net change in unrealized appreciation (depreciation) on:
Investments.............................................................................................. 19,145,829
Translation of assets and liabilities denominated in foreign currencies.................................. (17,490)
------------
Net change in unrealized appreciation (depreciation)................................................ 19,128,339
------------
Net realized and unrealized gain (loss).................................................................... 25,080,818
------------
Net increase (decrease) in net assets resulting from operations............................................ $41,968,258
------------
14 | See notes to financial statements. | Semiannual Report
Templeton Dragon Fund, Inc.
FINANCIAL STATEMENTS (CONTINUED)
STATEMENTS OF CHANGES IN NET ASSETS
--------------------------------------
SIX MONTHS ENDED
JUNE 30, 2005 YEAR ENDED
(UNAUDITED) DECEMBER 31, 2004
--------------------------------------
Increase (decrease) in net assets:
Operations:
Net investment income .......................................................... $ 16,887,440 $ 9,481,435
Net realized gain (loss) from investments and foreign currency transactions .... 5,952,479 58,934,673
Net change in unrealized appreciation (depreciation) on investments and translation of
assets and liabilities denominated in foreign currencies ...................... 19,128,339 31,086,303
--------------------------------------
Net increase (decrease) in net assets resulting from operations ............ 41,968,258 99,502,411
--------------------------------------
Distributions to shareholders from:
Net investment income .......................................................... (5,310,478) (6,171,637)
Net realized gains ............................................................. (540,113) (15,009,844)
--------------------------------------
Total distributions to shareholders ............................................. (5,850,591) (21,181,481)
--------------------------------------
Capital share transactions (Note 2) ............................................. -- 857,852
--------------------------------------
Net increase (decrease) in net assets ...................................... 36,117,667 79,178,782
Net assets:
Beginning of period ............................................................. 706,138,145 626,959,363
--------------------------------------
End of period ................................................................... $742,255,812 $706,138,145
--------------------------------------
Undistributed net investment income included in net assets:
End of period $ 16,885,754 $ 5,308,792
--------------------------------------
Semiannual Report | See notes to financial statements. | 15
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Templeton Dragon Fund, Inc. (the Fund), is registered under the Investment
Company Act of 1940 as a non-diversified, closed-end management investment
company.
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. 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 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.
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. Due to the inherent uncertainty of
valuations of such securities, the fair values may differ significantly from the
values that would have been used had a ready market for such investments
existed. 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 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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
continue to qualify as a regulated investment company under Subchapter 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.
Semiannual Report | 17
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (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 liabilities 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 June 30, 2005, there were 100 million shares authorized ($0.01 par value).
During the period ended June 30, 2005, there were no share transactions; all
reinvested distributions were satisfied with previously issued shares purchased
in the open market. During the year ended December 31, 2004, 50,373 shares were
issued for $857,852 from reinvested distributions.
18 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. TRANSACTIONS WITH AFFILIATES
Franklin Resources, Inc. is the holding company for various subsidiaries that
together are referred to as Franklin Templeton Investments. Certain officers and
directors of the Fund are also officers and/or directors of the following
subsidiaries:
- --------------------------------------------------------------------------------
SUBSIDIARY AFFILIATION
- --------------------------------------------------------------------------------
Templeton Asset Management Ltd. (TAML) Investment manager
Franklin Templeton Services LLC (FT Services) Administrative manager
A. MANAGEMENT FEES
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% In excess of $20 billion
B. ADMINISTRATIVE FEES
The Fund pays an administrative fee to FT Services 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.
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 period ended June 30, 2005, 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.
Semiannual Report | 19
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
5. INCOME TAXES (CONTINUED)
Net realized gains (losses) differ for financial statement and tax purposes
primarily due to differing treatments of wash sales and foreign currency
transactions.
At June 30, 2005, the cost of investments and net unrealized appreciation
(depreciation) for income tax purposes were as follows:
Cost of investments ................................. $474,798,343
-------------
Unrealized appreciation ............................. $271,948,738
Unrealized depreciation ............................. (6,197,178)
-------------
Net unrealized appreciation (depreciation) .......... $265,751,560
-------------
6. INVESTMENT TRANSACTIONS
Purchases and sales of investments (excluding short-term securities) for the
period ended June 30, 2005 aggregated $21,747,459 and $20,732,322, respectively.
7. CREDIT RISK
Investing in foreign securities may include certain risks and considerations not
typically associated with investing in U.S. securities, such as fluctuating
currency values, changing local and regional economic, political and social
conditions, which may result in greater market volatility. In addition, certain
foreign securities may not be as liquid as U.S. securities.
8. 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.
20 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. 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 at the
time (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 for the period ended June
30, 2005.
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.
Semiannual Report | 21
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. 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, Inc., 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.
10. REGULATORY MATTERS
INVESTIGATIONS AND SETTLEMENTS
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, provided documents and information in response to
subpoenas and/or requests for documents, information and/or testimony. Beginning
in August 2004, the Company entered into settlements with certain of the
regulators and a governmental entity investigating the mutual fund industry
practices noted above. The Company believes that settlement of each of the
matters is in the best interest of the Company and shareholders of the Franklin,
Templeton, and Mutual Series mutual funds (the "funds").
Two of the settlement agreements, those with the SEC and the CAGO concerning
marketing support payments, provide that the distribution of settlement monies
are to be made to the relevant funds, not to individual shareholders. The CAGO
has approved the distribution plan pertaining to the distribution of the monies
owed under the CAGO settlement agreement and, in accordance with the terms and
conditions of that settlement, the monies were disbursed to the participating
funds. The Fund did not participate in the CAGO settlement. The SEC has not yet
approved the distribution plan pertaining to the SEC settlement. When approved,
disbursements of settlement monies under the SEC's settlement will be made
promptly in accordance with the terms and conditions of that order.
22 | Semiannual Report
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS
On April 12, 2005, the Attorney General of West Virginia filed a complaint in
the Circuit Court of Marshall County, West Virginia against a number of
companies engaged in the mutual fund industry, including Franklin Resources,
Inc. and its subsidiary, Franklin Advisers, Inc., and certain other parties
alleging violations of the West Virginia Consumer Credit and Protection Act and
seeking, among other things, civil penalties and attorneys' fees and costs.
Defendants have since removed the matter to the United States District Court for
the Northern District of West Virginia. To the extent applicable to the Company,
the complaint arises from activity that occurred in 2001 and duplicates, in
whole or in part, the allegations asserted in the February 4, 2004 Massachusetts
Administrative Complaint concerning one instance of market timing (the
"Administrative Complaint") and the SEC's findings regarding market timing in
its August 2, 2004 Order (the "SEC Order"), both of which matters were
previously reported.
The Company, in addition to certain Franklin, Templeton, and Mutual Series
mutual funds, current and former officers, employees, and directors have been
named in multiple lawsuits in different courts 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
Administrative Complaint and the SEC's findings regarding market timing in the
SEC Order. The lawsuits are styled as class actions, or derivative actions on
behalf of either the named funds or Franklin Resources, Inc.
The Company, in addition to certain Franklin, Templeton, and Mutual Series
mutual funds, 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 marketing support
payments and/or payment of allegedly excessive commissions and/or advisory or
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 the named funds.
Semiannual Report | 23
Templeton Dragon Fund, Inc.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
10. REGULATORY MATTERS (CONTINUED)
OTHER LEGAL PROCEEDINGS (CONTINUED)
The Company and fund management strongly believe that the claims made in each of
the lawsuits described above are without merit and intends to defend against
them vigorously. The Company cannot predict with certainty the eventual outcome
of these 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 future financial results. If it is determined that the
Company 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.
24 | Semiannual Report
Templeton Dragon Fund, Inc.
ANNUAL MEETING OF SHAREHOLDERS, MAY 20, 2005
The Annual Meeting of Shareholders of the Fund was held at the Fund's offices,
500 E. Broward Blvd., Fort Lauderdale, Florida on May 20, 2005. 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: Harris J. Ashton, Frank J. Crothers, S. Joseph Fortunato and Constantine
D. Tseretopoulos.* 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 2008: FOR SHARES SHARES WITHHELD SHARES SHARES
- --------------------------------------------------------------------------------------------------------
Harris J. Ashton .........32,024,179.7486 84.79% 97.75% 738,218.5057 1.95% 2.25%
Frank J. Crothers ........32,090,123.7486 84.96% 97.95% 672,274.5057 1.78% 2.05%
S. Joseph Fortunato ......32,051,973.7486 84.86% 97.83% 710,424.5057 1.88% 2.17%
Constantine D.
Tseretopoulos ............32,073,358.7486 84.92% 97.90% 689,039.5057 1.82% 2.10%
* MARTIN L. FLANAGAN, EDITH E. HOLIDAY, CHARLES B. JOHNSON, GORDON S. MACKLIN,
FRED R. MILLSAPS AND FRANK A. OLSON ARE DIRECTORS OF THE FUND WHO ARE CURRENTLY
SERVING AND WHOSE TERMS OF OFFICE CONTINUED AFTER THE ANNUAL MEETING OF
SHAREHOLDERS.
Semiannual Report | 25
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 Administrator 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.
26 | Semiannual 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. The fees for the sale of
shares through the Plan are $15.00 per transaction plus a $0.12 per share
trading fee.
Semiannual Report | 27
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.
28 | Semiannual Report
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT
At a meeting held March 1, 2005, the Board of Directors ("Board"), including a
majority of non-interested or independent Directors, approved renewal of the
investment advisory contract for Templeton Dragon Fund, Inc. (the "Fund"). In
reaching this decision, the Board took into account information furnished
throughout the year at regular Board meetings, as well as information prepared
specifically in connection with the annual renewal review process. Information
furnished and discussed throughout the year included reports on the Fund, the
share price premium or discount to net asset value, the results of investment
performance and related financial information for the Fund, as well as periodic
reports on legal compliance, pricing, brokerage commissions and execution and
other services provided by the Investment Manager ("Manager") and its
affiliates. Information furnished specifically in connection with the renewal
process included a report prepared by Lipper Financial Services ("Lipper"), an
independent organization, as well as a Fund profitability analysis report
prepared by management. The Lipper report compared the Fund's investment
performance and expenses with those of other funds deemed comparable to the Fund
as selected by Lipper. The Fund profitability analysis report discussed the
profitability to Franklin Templeton Investments from its overall U.S. fund
operations, as well as on an individual fund-by-fund basis. Included with such
profitability analysis report was information on a fund-by-fund basis listing
portfolio managers and other accounts they manage, as well as information on
management fees charged by the Manager including management's explanation of
differences where relevant, and a three-year expense analysis with an
explanation for any increase in expense ratios. Additional information
accompanying such report was a memorandum prepared by management describing
enhancements to the services provided to the funds by the Franklin Templeton
Investments organization, as well as a memorandum relating to economies of
scale.
In considering such materials, the independent Directors received assistance and
advice from and met separately with independent counsel. In approving
continuance of the investment advisory contract for the Fund, the Board,
including a majority of independent Directors, determined that the existing
management fee structure was fair and reasonable and that continuance of the
investment advisory contract was in the best interests of the Fund and its
shareholders. While attention was given to all information furnished, the
following discusses the primary factors relevant to the Board's decision.
NATURE, EXTENT AND QUALITY OF SERVICE. The Board was satisfied with the nature
and quality of the overall services provided by the Manager and its affiliates
to the Fund and its shareholders. In addition to investment performance and
expenses discussed below, the Board's opinion was based, in part, upon periodic
reports furnished them showing that the investment policies and restrictions for
the Fund were consistently complied with as well as other reports periodically
furnished the Board covering matters such as the compliance of portfolio
managers and other management personnel with the code of ethics adopted
throughout the Franklin Templeton fund complex, the adherence to fair value
pricing procedures established by the Board, and the accuracy of net asset value
calculations. Favorable consideration was given to management's efforts and
Semiannual Report | 29
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
expenditures in establishing back-up systems and recovery procedures to function
in the event of a natural disaster, it being noted by the Board that such
systems and procedures had functioned smoothly during the hurricanes and
blackout experienced last year in Florida. Other factors taken into account by
the Board were the Manager's best execution trading policies, including a
favorable third-party report on portfolio execution, as well as the compliance
procedures and qualifications of the Chief Compliance Officer established in
accordance with recently adopted SEC requirements. Consideration was also given
to the experience of the Fund's portfolio management team, the number of
accounts managed and general method of compensation. In this latter respect, the
Board noted that a primary factor in management's determination of the level of
a portfolio manager's bonus compensation was the relative investment performance
of the funds he or she managed so as to be aligned with the interests of Fund
shareholders.
INVESTMENT PERFORMANCE. The Board placed significant emphasis on the investment
performance of the Fund in view of its importance to shareholders. While
consideration was given to performance reports and discussions with portfolio
managers at Board meetings during the year, particular attention in assessing
performance was given to the Lipper reports furnished for the contract renewals.
The Lipper report prepared for the Fund showed its investment performance in
comparison with a performance group consisting of the Fund and five other
closed-end Pacific region funds as selected by Lipper during 2004, as well as
during the previous ten-year period. Such report considers total return on a net
asset value basis without regard to market discounts or premiums in order to
accurately reflect investment performance. The Lipper report showed that while
the Fund's total return for 2004 was the fourth lowest of such group, its total
return on an annualized basis was the highest in such group during each of the
previous three-, five- and ten-year periods. In discussing this performance,
management pointed out that the Fund's total return in net asset value terms
during 2004 exceeded that of the MSCI China Index, which it believed was an
appropriate basis of comparison in view of the Fund's focus on China related
stocks. The Board was satisfied with the Fund's performance, noting that the
Fund's 2004 total return exceeded 15% as shown in such Lipper report.
COMPARATIVE EXPENSES. Consideration was given to a Lipper report analysis of the
management fees and total expense ratios of the Fund compared with an expense
group consisting of the Fund, five other non-leveraged closed-end Pacific region
funds, and four non-leveraged closed-end Pacific ex-Japan funds, as selected by
Lipper. Prior to making such comparison, the Board relied upon a survey showing
that the scope of management advisory services covered under the Fund's
investment advisory contract was similar to those provided by fund managers to
other mutual fund groups that would be used as a basis of comparison in the
Lipper report. In reviewing comparative costs, emphasis was given to the Fund's
management fee in comparison with the effective management fee that would have
been charged by other funds within its Lipper expense group assuming they were
the same size as the Fund, as well as the actual total expenses of the Fund in
comparison with those of such expense group. The Lipper effective management fee
analysis considers administrative fees to be part of management fees and the
results of such expense
30 | Semiannual Report
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
comparisons showed the Fund's effective management fee rate to be the highest in
its expense group, but the Fund's actual total expenses to be the fourth lowest
in such Lipper expense group. The Board found such expenses to be acceptable.
MANAGEMENT PROFITABILITY. The Board also considered the level of profits
realized by the Manager and its affiliates in connection with the operation of
the Fund. In this respect, the Board reviewed the Fund profitability analysis
that addresses the overall profitability of Franklin Templeton's U.S. fund
business, as well as its profits in providing management and other services to
each of the individual funds. The Board also considered the extent to which the
Manager and its affiliates might derive ancillary benefits from fund operations,
as well as potential benefits resulting from allocation of fund brokerage and
the use of "soft" commission dollars to pay for research. Specific attention was
given to the methodology followed in allocating costs to each fund, it being
recognized that allocation methodologies are inherently subjective and various
allocation methodologies may each be reasonable while producing different
results. In this respect, the Board noted that the cost allocation methodology
was consistent with that followed in profitability report presentations made in
prior years and that it had engaged on a biennial basis the Fund's independent
accountants to perform certain procedures specified by the Board solely for its
purpose and use. It was also noted that legal costs and payments incurred by
Franklin Templeton in resolving various legal proceedings arising from its U.S.
fund operations had not been allocated to the Fund for purposes of determining
profitability. Included in the analysis were the revenue and related costs
involved in managing the Fund, as well as its relative contribution to the
profitability of the Manager's parent. In reviewing and discussing such
analysis, management discussed with the Board its belief that costs incurred in
establishing the infrastructure necessary to the type of fund operations
conducted by the Manager and its corporate affiliates may not be fully reflected
in the expenses allocated to each fund in determining its profitability, as well
as the fact that the level of profits, to a certain extent, reflected
operational cost savings and efficiencies initiated by management. In addition,
the Board considered a third-party study comparing the profitability of the
Manager's parent on an overall basis as compared to other publicly held managers
broken down to show profitability from management operations exclusive of
distribution expenses, as well as profitability including distribution expenses.
Based upon their consideration of all these factors, the Board determined that
the level of profits realized by the Manager under its investment advisory
contract with the Fund was not excessive in view of the nature, quality and
extent of services provided.
ECONOMIES OF SCALE. The Board also considered whether the Manager realizes
economies of scale as the Fund grows larger and the extent to which any such
benefit is shared with the Fund and its shareholders. The Board believed that a
Manager's ability to realize economies of scale and the sharing of such benefit
is a more relevant consideration in the case of an open-end fund whose size
increases as a result of the continuous sale of its shares. A closed-end
investment company such as the Fund does not continuously offer shares and
growth following its initial public offering will primarily result from market
appreciation which benefits its shareholders. While believing economies of scale
to be less of a factor in the context of a closed-end fund, the Board believes
at
Semiannual Report | 31
Templeton Dragon Fund, Inc.
SHAREHOLDER INFORMATION (CONTINUED)
BOARD REVIEW OF INVESTMENT ADVISORY CONTRACT (CONTINUED)
some point an increase in size may lead to economies of scale which should be
shared with the Fund and its shareholders and intends to monitor future growth
of the Fund accordingly. The Board noted that in the previous year it had added
a breakpoint to the Fund's investment advisory fee at the $1 billion level.
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 most recent 12-month period
ended June 30.
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 semiannual
reports to shareholders) that are filed semiannually with the Commission. The
Fund has filed such certifications with its Form N-CSR for the year ended
December 31, 2004. Additionally, the Fund expects to file, on or about August
31, 2005, such certifications with its Form N-CSRS for the six months ended June
30, 2005.
32 | Semiannual 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 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 MidCap Value Fund
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
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 4
Franklin's AGE High Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Income Fund
Franklin Limited Maturity U.S. Government Securities Fund 4
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 4
Templeton Global Bond Fund
Templeton Income Fund
TAX-FREE INCOME 5
NATIONAL FUNDS
Double Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund 6
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 7
Colorado
Connecticut
Florida 7
Georgia
Kentucky
Louisiana
Maryland
Massachusetts 6
Michigan 6
Minnesota 6
Missouri
New Jersey
New York 7
North Carolina
Ohio 7
Oregon
Pennsylvania
Tennessee
Virginia
INSURANCE FUNDS
Franklin Templeton Variable Insurance Products Trust 8
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. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
5. For investors subject to the alternative minimum tax, a small portion of fund
dividends may be taxable. Distributions of capital gains are generally taxable.
6. Portfolio of insured municipal securities.
7. 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).
8. The funds of the Franklin Templeton Variable Insurance Products Trust are
generally available only through insurance company variable contracts.
06/05 Not part of the semiannual Report
[LOGO OMITTED]
FRANKLIN TEMPLETON 100 Fountain Parkway
INVESTMENTS P.O. Box 33030
St. Petersburg, FL 33733-8030
SEMIANNUAL 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 S2005 08/05
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 12(a)(1), 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. N/A
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 AND 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 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 available online 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. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT. N/A
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS. N/A
ITEM 10. 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 11. 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 12. EXHIBITS.
(A)(1) Code of Ethics
(A) (2) 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) 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: August 19, 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: August 19, 2005
By /s/GALEN G. VETTER
-----------------------------
Galen G. Vetter
Chief Financial Officer
Date: August 19, 2005