-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Nxsl5ppkVrNThFKLqPD/3rsRtuqWoY8rUw+zPAtwDLMBGuF8azoenXQSoMSlOO2a orKx6/ysF8iESjhJgqmdLA== 0000919893-98-000004.txt : 19980602 0000919893-98-000004.hdr.sgml : 19980602 ACCESSION NUMBER: 0000919893-98-000004 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980601 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON DRAGON FUND INC CENTRAL INDEX KEY: 0000919893 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 650473580 STATE OF INCORPORATION: MD FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: N-30D SEC ACT: SEC FILE NUMBER: 811-08394 FILM NUMBER: 98640023 BUSINESS ADDRESS: STREET 1: 700 CENTRAL AVE CITY: ST PETERSBURG STATE: FL ZIP: 33701 BUSINESS PHONE: 8138238712 N-30D 1 ANNUAL REPORT DTD 3/31/98 TEMPLETON DRAGON FUND, INC. Annual report March 31, 1998 [LOGO] FRANKLIN TEMPLETON PAGE TECHNOLOGY UPDATE: FRANKLIN TEMPLETON COMBATS THE YEAR 2000 PROBLEM By Charles B. Johnson, President of Franklin Resources, Inc. As we near the 21st century, Franklin Templeton is taking important steps to tackle the computer glitch dubbed the Year 2000 Problem, Y2K, or the Millennium Bug. The problem originated from the software designers' attempt to save memory by recording years in a two-digit format -- "98" instead of "1998," for example - -- but didn't take into account that the year 2000, or "00," could also be interpreted as 1900. Uncorrected, this problem could prevent computers from accurately processing date-sensitive data after 1999. Franklin Templeton's Information Services & Technology division established a Year 2000 Project Team that has already begun making the necessary software changes to help our computer systems, which service the funds and their shareholders, be Year 2000 Compliant. As changes reach completion, we plan to conduct comprehensive tests to verify their effectiveness. We will also seek reasonable assurances from all of our major software or data-services suppliers that they will be Year 2000 Compliant. In addition, with an estimated 80% of businesses facing the Year 2000 Problem, mutual fund managers appreciate the impact it potentially could have on companies. That's why Franklin Templeton managers are aware of this issue when managing fund portfolios. [PHOTO OF J. MARK MOBIUS APPEARS HERE] J. MARK MOBIUS, PH.D. President Templeton Dragon Fund, Inc. Dr. Mobius, a German citizen, has been living in emerging market countries since earning his Ph.D. in economics and political science at Massachusetts Institute of Technology in 1964. During his extensive travels, he has acquired a thorough knowledge of business practices and customs unique to developing nations. PAGE SHAREHOLDER LETTER Your Fund's Objective: The Templeton Dragon Fund seeks long-term capital appreciation by investing at least 45% of its total assets in the equity securities of "China companies," as defined in the Fund's prospectus. Dear Shareholder: This fourth annual report of the Templeton Dragon Fund covers the one-year period ended March 31, 1998. During the first half of the reporting period, share prices in Hong Kong and China moved higher, but during the second half, the Asian currency crisis took its toll on China's equity markets, and many stock prices on its exchanges suffered substantial declines. Hong Kong was especially hard hit, and its government raised overnight interbank interest rates above 20% in October, before easing them back down to approximately 7% in December. These higher rates helped the authorities maintain the Hong Kong dollar's peg to the U.S. dollar, but also damaged many of Hong Kong's key industries as property values dropped dramatically and corporations paid sharply higher interest expenses. Because You will find a complete listing of the Fund's portfolio holdings, including dollar value and number of shares or principal amount, beginning on page 9 of this report. CONTENTS Shareholder Letter ......... 1 Performance Summary ........ 6 Financial Highlights & Statement of Investments ... 8 Financial Statements ....... 15 Notes to Financial Statements ................. 18 Independent Auditor's Report ........... 21 Tax Designation ............ 25 [GRAPH] PYRAMID PAGE GEOGRAPHIC DISTRIBUTION Based on Total Net Assets 3/31/98 This chart shows, in pie format, the geographic distribution of total net assets for the Templeton Dragon Fund, Inc., as of March 31, 1998. [PIE CHART] Hong Kong Shares 73.9% China B-Shares 12.0% Other Shares 5.7% Short-Term Investments & Other Net Assets 8.4%
the Hong Kong dollar did not depreciate, the tourism industry suffered from reduced competitiveness versus other Southeast Asian countries, and some large retailers that depended on tourist dollars were forced to close. Due to the lack of convertibility of mainland China's currency, its economy was not directly affected by currency speculation. However, the government's decision to maintain stable exchange rates had a negative effect on the export and tourism industries, similar to that experienced in Hong Kong. Between September 30, 1997, and March 31, 1998, the Shanghai and Shenzhen B-share markets dropped 29% and 27%, respectively. In contrast, the Shanghai and Shenzhen A-share markets rose 15% and 16%, respectively, during the same period.(1) One reason for the dichotomy between the performance of these shares is that A-share ownership is restricted to domestic residents who are less likely than foreign investors to sell their holdings during periods of market turbulence. Perhaps the best reason, however, for the lack of a collapse in A-share prices is that the currency's lack of convertibility helped protect the market from speculative attacks by foreign investors. However, the Chinese market is quite speculative and A-shares have exhibited high volatility despite their isolation from foreign influences. Zhu Rongji, who has managed China's economic affairs since 1993, was elected Prime Minister at the National Peoples' Congress (NPC) in March 1998. He is respected by many as a tough economic pragmatist with a solid grasp of economic matters. One of his first acts 1. Source: Bloomberg. Market returns are measured in U.S. dollars and include reinvested dividends. 2 PAGE was to have the NPC endorse measures to abolish 14 of nearly 50 government ministries and consolidate others. While this could help make the government more efficient, Zhu must also worry about the destabilizing effects of several million newly unemployed government workers. Within this environment, the Fund posted a one-year cumulative total return of - -11.82% in market-price terms, and -16.39% in net asset value terms, as discussed in the Performance Summary on page 6. On March 31, 1998, 73.9% of the Fund's total net assets were invested in Hong Kong, with 12.0% invested in mainland China, 5.7% in other markets, and 8.4% in cash and other short-term assets. The Fund's largest single position remained HSBC Holdings Plc., the holding company for one of the world's largest banking companies. We also maintained significant positions in New World Development Co. Ltd. and Sun Hung Kai Properties Ltd., companies with large real estate holdings and commercial interests in Hong Kong and China. Looking forward, China's government has announced plans to keep the annual economic growth rate near 8%, build the country's physical infrastructure, and spend up to US$1 trillion over the next few years to compensate for slowing exports. Other items on the agenda include creating home mortgage financing and solving the problems of ailing state-owned enterprises, which are saddled with huge debts, outmoded technology, excess workers and heavy social burdens. TOP 10 HOLDINGS 3/31/98 This chart shows the top ten holdings of the Templeton Dragon Fund, Inc., including company name, industry and country, as of March 31, 1998, based on total net assets.
COMPANY, % OF TOTAL INDUSTRY, COUNTRY NET ASSETS - ----------------- ---------- HSBC Holdings Plc., Banking, Hong Kong 17.4% Cheung Kong Holdings Ltd., Multi-Industry, Hong Kong 9.9% New World Development Co. Ltd., Real Estate, Hong Kong 7.4% Sun Hung Kai Properties Ltd., Real Estate, Hong Kong 5.2% Hang Lung Development Co. Ltd., Real Estate, Hong Kong 4.5% Hongkong Electric Holdings Ltd., Utilities Electrical & Gas, Hong Kong 4.1% Dairy Farm International Holdings Ltd., Merchandising, Hong Kong 4.0% Wheelock & Company Ltd., Multi-Industry, Hong Kong 3.1% Jardine Strategic Holdings Ltd., Multi-Industry, Hong Kong 3.0% Swire Pacific Ltd., A & B, Multi-Industry, Hong Kong 2.3%
3 PAGE In Hong Kong, authorities face a perplexing dilemma. Keeping their currency pegged to the U.S. dollar could invite speculative attacks by foreign investors. This could cause upward pressure on interest rates, falling property values, a weak banking sector, and stock price declines. On the other hand, floating the Hong Kong dollar could result in spiraling inflation and eventual recession. This is a difficult choice, but given the economy's underlying health, we believe keeping the currency pegged to the U.S. dollar would be the wise course. Of course, investing in any emerging market means accepting a certain amount of volatility and, in some cases, severe market corrections. Investing in "China companies" is no exception and entails special considerations, including risks related to market and currency volatility, adverse economic, social and political developments, and the relatively small size and lesser liquidity of the markets involved. While short-term volatility can be disconcerting, declines of as much as 40% to 50% are not unusual in emerging markets. For example, the Hong Kong market has increased 1,056% in the last 15 years, but has suffered five declines of more than 20% during that time(2). Please remember, this discussion reflects our views, opinions and portfolio holdings as of March 31, 1998, the end of the reporting period. However, market and economic conditions are changing constantly, which can be expected to affect our strategies and the Fund's portfolio composition. Although historic performance is no guarantee of future results, these insights may help you understand our investment and management philosophy. (2). Source: Bloomberg. Based on quarterly percentage price change over the 15 years ended March 31, 1998. 4 PAGE Although China and Hong Kong face significant challenges for the years ahead, we are optimistic for the long-term prospects of these markets and the Fund. Thank you for investing in the Templeton Dragon Fund. We appreciate your confidence and look forward to any comments you may have. Sincerely, /s/ J. Mark Mobius - --------------------- J. Mark Mobius, Ph.D. President Templeton Dragon Fund, Inc. On October 23, 1997, the Board of Directors of the Fund authorized management to implement an open-market share repurchase program pursuant to which the Fund, from time to time, at the discretion of management may purchase up to an aggregate of 5.4 million shares of the Fund's Common Stock (approximately 10% of the shares outstanding on October 17, 1997) in open-market transactions. In addition, the Fund's Board of Directors has adopted a non-fundamental policy permitting investments in Russian securities up to 5% of its total assets. Russia securities involve additional significant risks, including political and social uncertainty (for example, regional conflicts and risk of war), currency exchange rate volatility, pervasiveness of corruption and crime in the Russian economic system, delays in settling portfolio transactions and risk of loss arising out of Russia's system of share registration and custody. 5 PAGE PERFORMANCE SUMMARY In market-price terms, Templeton Dragon Fund produced a -11.82% cumulative total return for the one-year period ended March 31, 1998. Based on the change in net asset value (in contrast to market price), the Fund delivered a -16.39% cumulative total return for the same period. Both total return figures assume reinvestment of dividends and capital gains, if any, in accordance with the dividend reinvestment and cash purchase plan. During the reporting period, the Fund's closing price on the New York Stock Exchange decreased $3.125 per share, from $14.50 on March 31, 1997, to $11.375 on March 31, 1998, while the net asset value decreased $4.67 per share, from $18.25 to $13.58. Shareholders received per-share distributions of 34.5 cents ($0.345) in income dividends, 91.5 cents ($0.915) in long-term capital gains, and 19.5 cents ($0.195) in short-term capital gains. Distributions will vary depending on income earned by the Fund and any profits realized from the sale of securities in the Fund's portfolio, as well as the level of the Fund's operating expenses. Past performance is not predictive of future results. 6 PAGE TEMPLETON DRAGON FUND Periods ended 3/31/98
SINCE INCEPTION 1-YEAR 3-YEAR (9/8/94) ------ ------ -------- Cumulative Total Return(1) Based on change in net asset value -16.39% 18.02% 17.89% Based on change in market price -11.82% 15.12% -7.14% Average Annual Total Return(2) Based on change in net asset value -16.39% 5.67% 4.73% Based on change in market price -11.82% 4.08% -2.06%
1. Cumulative total return represents the change in value of an investment over the periods indicated. 2. Average annual total return represents the average annual change in value of an investment over the periods indicated. All calculations assume reinvestment of dividends and capital gains, either at net asset value or at market price on the reinvestment date, in accordance with the dividend reinvestment and cash purchase plan and do not reflect sales charges that would have been paid at inception or brokerage commissions that would have been paid on secondary market purchases. Since markets can go down as well as up, investment return and principal value will fluctuate with market conditions, currency volatility, and the economic, social and political climates of the countries where investments are made. Emerging markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity. You may have a gain or loss when you sell your shares. Past performance is not predictive of future results. 7 PAGE TEMPLETON DRAGON FUND, INC. Financial Highlights
YEAR ENDED MARCH 31, -------------------------------------------- 1998 1997 1996 1995+ -------------------------------------------- PER SHARE OPERATING PERFORMANCE (For a share outstanding throughout the year) Net asset value, beginning of year.......................... $18.25 $15.73 $13.97 $14.10 -------------------------------------------- Income from investment operations: Net investment income...................................... .37 .34 .37 .22 Net realized and unrealized gain (loss).................... (3.58) 2.82 1.92 (.22) -------------------------------------------- Total from investment operations............................ (3.21) 3.16 2.29 -- -------------------------------------------- Underwriting expenses deducted from capital................. -- -- -- (.04) -------------------------------------------- Less distributions from: Net investment income...................................... (.35) (.34) (.47) (.09) Net realized gains......................................... (.70) (.30) (.06) -- In excess of net realized gains............................ (.41) -- -- -- -------------------------------------------- Total distributions......................................... (1.46) (.64) (.53) (.09) -------------------------------------------- Net asset value, end of year................................ $13.58 $18.25 $15.73 $13.97 ============================================ Total Return* Based on market value per share............................ (11.82)% 7.80% 21.11% (19.34)% Based on net asset value per share......................... (16.39)% 20.76% 16.89% (0.11)% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's)............................. $733,533 $985,719 $849,510 $754,227 Ratios to average net assets: Expenses................................................... 1.53% 1.50% 1.52% 1.54%** Net investment income...................................... 2.14% 1.93% 2.48% 2.99%** Portfolio turnover rate..................................... 13.59% 8.73% 7.81% -- Average commission rate paid ***............................ $.0014 $.0017 $.0018 --
*Total return is not annualized. **Annualized. ***Relates to purchases and sales of equity securities. Prior to fiscal year 1996 disclosure of average commission rate was not required. +For the period September 8, 1994 (commencement of operations) to March 31, 1995. See Notes to Financial Statements. 8 PAGE TEMPLETON DRAGON FUND, INC. STATEMENT OF INVESTMENTS, MARCH 31,1998
COUNTRY SHARES VALUE ------------------------------------- COMMON STOCKS 91.6% APPLIANCES & HOUSEHOLD DURABLES 1.4% Sanyo Universal Electric Public Co. Ltd..................... Thailand 190,500 $ 63,096 Sanyo Universal Electric Public Co Ltd., fgn. .............. Thailand 139,600 46,237 Semi-Tech Co. Ltd........................................... Hong Kong 30,851,418 3,304,812 *Semi-Tech Co. Ltd., wts..................................... Hong Kong 710,407 917 *Shanghai Narcissus Electric Appliances Co. Ltd., B.......... China 3,774,700 415,217 *Shanghai Shangling Electric Appliance, B.................... China 12,189,410 2,901,080 *Shanghai Vacuum Electron Devices Co. Ltd., B................ China 6,878,701 1,251,924 Shenzhen Huafa Electronics Co. Ltd., B...................... China 226,575 40,939 Shenzhen Konka Electronic Group Co. Ltd., B................. China 2,105,181 2,146,397 ------------ 10,170,619 ------------ AUTOMOBILES .6% Cycle & Carriage Ltd. ...................................... Singapore 91,000 411,331 Jardine International Motor Holdings Ltd. .................. Hong Kong 5,887,000 3,703,925 Oriental Holdings Bhd., fgn. ............................... Malaysia 41,000 85,604 Perusahaan Otomobil Nasional Bhd., fgn. .................... Malaysia 2,000 3,489 ------------ 4,204,349 ------------ BANKING 18.7% AMMB Holdings Bhd........................................... Malaysia 100,000 114,835 Bangkok Bank Public Co. Ltd................................. Thailand 998,400 2,073,111 Bank of Ayudhya Public Co. Ltd., fgn........................ Thailand 223,400 135,178 HSBC Holdings Plc........................................... Hong Kong 4,171,260 127,587,809 Philippine Commercial International Bank Inc. .............. Philippines 154,550 766,633 *Philippine National Bank.................................... Philippines 304,300 746,699 Public Bank Bhd. ........................................... Malaysia 358,000 174,082 Siam Commercial Bank Ltd., loc.............................. Thailand 808,900 1,092,273 Thai Farmers Bank Public Co. Ltd............................ Thailand 2,365,400 4,550,005 Thai Military Bank Ltd., fgn. .............................. Thailand 130,200 36,489 ------------ 137,277,114 ------------ BEVERAGES & TOBACCO .2% Fraser and Neave Ltd., fgn.................................. Singapore 119,000 504,737 Rothmans Industries Ltd. ................................... Singapore 1,000 4,458 *Tsingtao Brewey Co., H...................................... China 3,078,000 715,047 ------------ 1,224,242 ------------ BROADCASTING & PUBLISHING Times Publishing Ltd. ...................................... Singapore 74,000 147,542 ------------ BUILDING MATERIALS & COMPONENTS 1.6% Cement Industries of Malaysia Bhd. ......................... Malaysia 100,000 85,714 China Southern Glass Co. Ltd., B............................ China 14,317,963 3,104,446 K Wah International Holdings Ltd. .......................... Hong Kong 15,334,004 2,077,966 Sembawang Resources Ltd..................................... Singapore 134,000 182,539 Shanghai Yaohua Pilkington Glass, B......................... China 8,056,475 1,490,448
9 PAGE TEMPLETON DRAGON FUND, INC. STATEMENT OF INVESTMENTS, MARCH 31, 1998 (CONT.)
COUNTRY SHARES VALUE ------------------------------------- COMMON STOCKS (CONT.) BUILDING MATERIALS & COMPONENTS (CONT.) Siam Cement Public Co. Ltd. ................................ Thailand 355,300 $ 4,109,712 Tipco Asphalt Public Co. Ltd., fgn. ........................ Thailand 482,300 798,713 ------------ 11,849,538 ------------ CHEMICALS 1.3% Shanghai Chlor-Alkali Chemical Co. Ltd., B.................. China 10,374,200 1,784,362 Shanghai Petrochemical Co. Ltd., H.......................... China 42,214,000 6,374,351 *Shenzhen Petrochemical Shareholding Co. Ltd., B............. China 3,498,372 740,463 Singapore Petroleum Company, fgn. .......................... Singapore 61,000 33,616 Thai Petrochemical Industry Public Co. Ltd. ................ Thailand 667,800 197,788 Thai Petrochemical Industry Public Co. Ltd., fgn. .......... Thailand 1,877,300 556,016 ------------ 9,686,596 ------------ CONSTRUCTION & HOUSING 1.9% Hopewell Holdings Ltd....................................... Hong Kong 59,435,021 13,193,634 Italian-Thai Development Public Co. LTD., fgn............... Thailand 701,600 554,130 ------------ 13,747,764 ------------ ELECTRICAL & ELECTRONICS 1.4% Acer Computer International Ltd. ........................... Singapore 9,000 6,165 Acma Ltd. .................................................. Singapore 33,000 25,542 GP Batteries International Ltd. ............................ Singapore 719,000 2,359,567 *GP Batteries International Ltd., wts. ...................... Singapore 224,000 263,529 Great Wall Electronic International Ltd..................... Hong Kong 21,287,366 1,043,997 Hana Microelectronics Co. Ltd., fgn. ....................... Thailand 20,700 76,471 *Shanghai Automation Instrumentation Co., B.................. China 5,443,989 925,478 Shinawatra Computer & Comm. Public Co. Ltd.................. Thailand 893,500 5,463,439 ------------ 10,164,188 ------------ ENERGY SOURCES .8% Banpu Public Co. Ltd........................................ Thailand 56,200 329,325 *Inner Mongolia Yitai Coal Co. Ltd., B....................... China 1,943,000 695,594 *Petron Corporation.......................................... Philippines 670,000 106,069 *Yanzhou Coal Mining Company Ltd. ........................... China 13,800,000 4,808,797 ------------ 5,939,785 ------------ FINANCIAL SERVICES 1.1% Hong Leong Finance Ltd. .................................... Singapore 50,000 85,139 Industrial Finance Corp. of Thailand........................ Thailand 2,790,100 1,581,649 Industrial Finance Corp. of Thailand, fgn. ................. Thailand 16,400 9,610 JCG Holdings Ltd............................................ Hong Kong 9,943,000 5,100,916 Overseas Union Trust, fgn. ................................. Singapore 1,000 1,149 *Sun Hung Kai & Co. Ltd, wts. ............................... Hong Kong 4,342,320 112,084 Sun Hung Kai & Co. Ltd. .................................... Hong Kong 9,816,600 1,152,912 Thai Investments and Securities Ltd. ....................... Thailand 60,400 51,936 ------------ 8,095,395 ------------
10 PAGE TEMPLETON DRAGON FUND, INC. STATEMENT OF INVESTMENTS, MARCH 31, 1998 (CONT.)
COUNTRY SHARES VALUE ------------------------------------- COMMON STOCKS (CONT.) FOOD & HOUSEHOLD PRODUCTS .8% Boustead Holdings Bhd., fgn. ............................... Malaysia 70,000 $ 71,154 Charoen Pokphand Feedmill Public Co. Ltd.................... Thailand 13,900 20,186 Golden Resources Development International Ltd. ............ Hong Kong 23,536,000 1,761,790 RFM Corp. .................................................. Philippines 13,000 2,230 Saha Pathanapibul Public Co. Ltd., fgn. .................... Thailand 65,000 77,834 Serm Suk Public Co. Ltd. ................................... Thailand 13,200 125,106 Shanghai New Asia Group Co. Ltd., B......................... China 10,584,160 2,878,892 Tingyi (Cayman Islands) Holding Corp. ...................... Hong Kong 4,321,000 513,057 ------------ 5,450,249 ------------ HEALTH & PERSONAL CARE .1% *Zhuhai Sez Lizhu Pharmaceutical Group Inc., B............... China 1,970,454 508,616 ------------ INDUSTRIAL COMPONENTS .7% Kian Joo Can Factory Bhd. .................................. Malaysia 236,000 424,670 Leader Universal Holdings Bhd............................... Malaysia 565,000 262,321 *Shanghai Refrigerator Compressor Co. Ltd., B................ China 7,045,033 1,902,159 *Shanghai Rubber Belt Co. Ltd., B............................ China 2,079,126 311,869 Shanghai Tyre & Rubber Co. Ltd., B.......................... China 9,476,400 2,179,572 ------------ 5,080,591 ------------ INSURANCE Bangkok Insurance Public Co. Ltd. BKI....................... Thailand 18,500 136,688 ------------ LEISURE & TOURISM .9% CDL Hotel International Ltd. ............................... Hong Kong 186,000 69,015 Genting Berhad.............................................. Malaysia 7,000 24,038 Hinds Hotels International Ltd. ............................ Singapore 27,000 23,238 Hong Kong & Shanghai Hotels Ltd............................. Hong Kong 3,566,000 2,922,460 Overseas Union Enterprise Ltd. ............................. Singapore 216,000 516,260 Republic Hotels & Resorts Ltd. ............................. Singapore 75,000 31,115 Resorts World Bhd........................................... Malaysia 196,000 433,462 *Shanghai Jin Jiang Tower Co. Ltd., B........................ China 14,723,850 2,768,084 Shangri-La Hotels (Malaysia) Bhd............................ Malaysia 52,000 20,429 Shangri-La Hotels (Malaysia) Bhd., fgn...................... Malaysia 47,000 18,464 ------------ 6,826,565 ------------ MACHINERY & ENGINEERING .7% *China Textile Machinery Co. Ltd., B......................... China 2,588,300 238,124 Dalian Refrigeration Co., Ltd. ............................. Hong Kong 150,000 52,270 Guangzhou Shipyard International Co. Ltd., H................ China 622,000 81,881 *Keppel Philippine Holdings Inc., B.......................... Philippines 188,000 6,945 Northeast Electric Transmission & Transformation, H......... China 8,934,000 1,187,618 *Shanggong Co. Ltd., B....................................... China 7,885,910 851,678 +*Shanghai Erfangji Textile Machinery Co. Ltd., B............. China 23,675,734 2,083,465 *Shanghai Steel Tube Co. Ltd., B............................. China 5,705,300 604,762
11 PAGE TEMPLETON DRAGON FUND, INC. STATEMENT OF INVESTMENTS, MARCH 31, 1998 (CONT.)
COUNTRY SHARES VALUE ------------------------------------- COMMON STOCKS (CONT.) MACHINERY & ENGINEERING (CONT.) *Shanghai Zhenhua Port Machinery Co. Ltd., B................. China 330,000 $ 227,700 *Thai Engine Manufacturing Public Company Ltd. .............. Thailand 31,000 71,083 ------------ 5,405,526 ------------ MERCHANDISING 4.5% Dairy Farm International Holdings Ltd....................... Hong Kong 24,226,709 29,072,051 Fortei Holdings Ltd. ....................................... Hong Kong 3,978,000 243,866 Hour Glass Ltd. ............................................ Singapore 227,000 88,551 Joyce Boutique Holdings Ltd. ............................... Hong Kong 6,081,000 211,901 *Joyce Boutique Holdings Ltd., rts........................... Hong Kong 6,081,000 15,696 Robinson & Co. Ltd.......................................... Singapore 23,000 69,498 *Siam Makro Public Company Ltd., fgn. ....................... Thailand 1,158,300 2,080,513 *Wo Kee Hong Holdings Ltd. .................................. Hong Kong 34,802,000 1,235,181 ------------ 33,017,257 ------------ METALS & MINING .5% *Bengang Steel Plates Co. Ltd................................ China 9,500,000 1,998,503 Maanshan Iron & Steel Co. Ltd., H........................... China 12,692,000 1,294,049 Malayawata Steel Bhd., fgn.................................. Malaysia 144,000 54,593 Natsteel Ltd. .............................................. Singapore 251,000 390,099 *Philex Mining Corp., B...................................... Philippines 3,372,000 85,412 ------------ 3,822,656 ------------ MISC MATERIALS & COMMODITIES .1% *Luoyang Glass Co. Ltd., H................................... China 8,809,000 784,457 ------------ MULTI-INDUSTRY 21.1% Cheung Kong Holdings Ltd. .................................. Hong Kong 10,223,000 72,566,240 Jardine Matheson Holdings Ltd. ............................. Hong Kong 3,688,325 16,744,996 Jardine Strategic Holdings Ltd. ............................ Hong Kong 8,123,625 22,258,733 Lai Sun Garment International Ltd. ......................... Hong Kong 7,023,000 3,512,270 Swire Pacific Ltd., A....................................... Hong Kong 1,282,000 6,783,682 Swire Pacific Ltd., B....................................... Hong Kong 10,531,500 10,126,050 WBL Corp. Ltd. ............................................. Singapore 49,000 54,613 Wheelock and Company Ltd. .................................. Hong Kong 21,928,000 22,781,823 ------------ 154,828,407 ------------ REAL ESTATE 20.5% Hang Lung Development Co. Ltd. ............................. Hong Kong 22,584,000 32,790,419 Lai Sun Development Co. Ltd. ............................... Hong Kong 22,590,400 9,621,249 *Lai Sun Development Co. Ltd., wts. ......................... Hong Kong 2,909,000 16,519 New World Development Co. Ltd............................... Hong Kong 15,332,707 54,121,489 Shanghai Jinqiao Export Processing Zone Development, B...... China 6,364,730 2,113,090 *Shanghai Lujiaxui Finance & Trade Zn Dev Stock Co Ltd, B.... China 10,066,866 6,040,120 Shanghai Wai Gaoqiao Free Trade Zone Dev. Co., B............ China 1,465,900 603,951 *Shenzhen Properties & Resources Development Ltd., B......... China 3,361,180 581,286 Shenzhen Vanke Co. Ltd., B.................................. China 6,920,114 4,483,433
12 PAGE TEMPLETON DRAGON FUND, INC. STATEMENT OF INVESTMENTS, MARCH 31, 1998 (CONT.)
COUNTRY SHARES VALUE ------------------------------------- COMMON STOCKS (CONT.) REAL ESTATE (CONT.) Sun Hung Kai Properties Ltd. ................................ Hong Kong 5,611,000 $ 38,199,379 Tian An China Investments Co. Ltd. .......................... Hong Kong 8,675,000 492,624 United Industrial Corporation Ltd., fgn...................... Singapore 1,163,000 507,687 United Overseas Land Ltd. ................................... Singapore 918,000 699,158 ------------ 150,270,404 ------------ RECREATION & OTHER CONSUMER GOODS 2.4% KTP Holdings Ltd............................................ Hong Kong 1,599,750 148,655 *KTP Holdings Ltd., wts. .................................... Hong Kong 384,350 3,472 *Phoenix Co. Ltd............................................. China 6,366,830 764,020 *Shanghai Wingsung Co. Ltd., B............................... China 264,500 47,081 *Shenzhen China Bicycles Co. Ltd., B......................... China 13,322,500 2,304,009 Tanjong Plc. ............................................... Malaysia 61,000 149,148 Yue Yuen Industrial (Holdings) Ltd. ........................ Hong Kong 7,236,000 14,101,622 ------------ 17,518,007 ------------ TELECOMMUNICATIONS .8% *Digital Telecommunications Philippines Inc. ................ Philippines 417,000 21,565 Philippine Long Distance Telephone Co., ADR................. Philippines 16,000 446,000 *Thai Telephone & Telecommunication Public Co. Ltd........... Thailand 3,321,400 867,372 *Thai Telephone & Telecommunication Public Co. Ltd.,fgn. .... Thailand 10,783,100 2,747,287 Total Access Communication Public Co. Ltd. ................. Thailand 1,256,000 1,482,080 United Communications Industry Public Co. Ltd., loc. ....... Thailand 417,400 350,935 ------------ 5,915,239 ------------ TEXTILES & APPAREL 1.1% Goldlion Holdings Ltd. ..................................... Hong Kong 16,221,000 4,186,983 Laws International Holdings Ltd............................. Hong Kong 22,510,000 3,718,596 *Shanghai Kaikai Industrial Company Limited, B............... China 1,200,000 321,600 Tungtex (Holdings) Co. Ltd.................................. Hong Kong 1,130,000 107,920 ------------ 8,335,099 ------------ TRANSPORTATION 2.8% Chiwan Wharf Holdings Ltd., B............................... China 9,001,800 2,393,261 Cross Harbour Tunnel Co. Ltd. .............................. Hong Kong 1,254,000 2,055,393 Delgro Corp. ............................................... Singapore 131,500 157,149 Guangshen Railway Co. Ltd., ADR............................. China 246,400 2,926,000 Guangshen Railway Co. Ltd., H............................... China 7,744,000 1,779,012 Hai Sun Hup Group Ltd....................................... Singapore 43,000 17,573 Hai Sun Hup Group Ltd., fgn................................. Singapore 99,000 40,458 IMC Holdings Ltd. .......................................... Hong Kong 384,000 88,215 Malaysian Airline System Bhd. .............................. Malaysia 596,000 704,066 Neptune Orient Lines Ltd.................................... Singapore 437,000 208,353 Orient Overseas International Ltd........................... Hong Kong 2,599,000 1,073,371 Osprey Maritime Ltd. ....................................... Singapore 10,000 5,418 *SBS Bus Service Ltd., fgn.................................. Singapore 136,000 66,947
13 PAGE TEMPLETON DRAGON FUND, INC. STATEMENT OF INVESTMENTS, MARCH 31, 1998 (CONT.)
COUNTRY SHARES VALUE ------------------------------------- COMMON STOCKS (CONT.) TRANSPORTATION (CONT.) +*Shanghai Dazhong Taxi Shareholding Co. Ltd., B............ China 12,499,600 $ 8,849,717 TIBS Holdings Ltd. ....................................... Singapore 190,500 111,469 ------------ 20,476,402 ------------ UTILITIES ELECTRICAL & GAS 5.6% Guangdong Electric Power Development Co. Ltd., B.......... China 185,980 100,811 Guangdong Electric Power Development Co. Ltd., B, 144A.... China 2,035,200 1,103,189 Hong Kong Electric Holdings Ltd. ......................... Hong Kong 8,742,700 30,013,786 Shandong Huaneng Power Development Co. Ltd., ADR.......... China 898,600 6,627,175 Wing Shan International Ltd. ............................. Hong Kong 21,616,000 3,236,137 ------------ 41,081,098 ------------ WHOLESALE & INTERNATIONAL TRADE Metro Holdings Ltd., fgn. ................................ Singapore 91,000 116,073 ------------ TOTAL COMMON STOCKS (COST $677,682,089)................... 672,080,466 ------------ PRINCIPAL AMOUNT** -------- SHORT TERM INVESTMENTS (COST $66,400,048) 9.1% U.S. Treasury Bills, 4.965% to 5.32%, with maturities to 6/25/98................................................. United States $66,771,000 66,404,071 ------------ TOTAL INVESTMENTS (COST $744,082,137) 100.7%.............. 738,484,537 OTHER ASSETS, LESS LIABILITIES (.7%)...................... (4,951,924) ------------ TOTAL NET ASSETS 100.0%................................... $733,532,613 ============
*Non-income producing. **Securities traded in U.S. dollars. +The Investment Company Act of 1940 defines "affiliated companies" as investments in portfolio companies in which the Fund owns 5% or more of the outstanding voting securities. Investments in affiliated companies at March 31, 1998, were $10,933,182. See Notes to Financial Statements. 14 PAGE TEMPLETON DRAGON FUND, INC. Financial Statements STATEMENT OF ASSETS AND LIABILITIES MARCH 31, 1998 Assets: Investments in securities, at value (cost $744,082,137).... $738,484,537 Cash....................................................... 15,334 Receivables: Investment securities sold................................ 38,350 Dividends and interest.................................... 2,965,864 Organization costs......................................... 5,288 ------------ Total assets.......................................... 741,509,373 ------------ Liabilities: Payables: Investment securities purchased........................... 6,969,471 To affiliates............................................. 838,798 Accrued expense............................................ 168,491 ------------ Total liabilities..................................... 7,976,760 ------------ Net assets, at value........................................ $733,532,613 ============ Net assets consist of: Undistributed net investment income........................ $ 1,841,207 Net unrealized depreciation................................ (5,597,600) Accumulated net realized loss.............................. (22,005,953) Capital shares............................................. 759,294,959 ------------ Net assets, at value........................................ $733,532,613 ============ Net asset value per share ($733,532,613 divided by 54,007,093 shares outstanding)............................ $13.58 ============
See Notes to Financial Statements. 15 PAGE TEMPLETON DRAGON FUND, INC. Financial Statements (continued) STATEMENT OF OPERATIONS FOR THE YEAR ENDED MARCH 31, 1998 Investment Income: (net of foreign taxes of $4,480) Dividends.................................................. $27,516,175 Interest................................................... 6,267,349 ----------- Total investment income............................... $ 33,783,524 Expenses: Management fees (Note 3)................................... 11,499,336 Administrative fees (Note 3)............................... 1,379,920 Transfer agent fees........................................ 17,375 Custodian fees............................................. 362,935 Reports to shareholders.................................... 401,550 Registration and filing fees............................... 52,450 Professional fees (Note 3)................................. 231,637 Directors' fees and expenses............................... 60,600 Amortization of organization costs......................... 4,015 Other...................................................... 49,769 ----------- Total expenses........................................ 14,059,587 ------------- Net investment income........................... 19,723,937 ------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments............................................... 14,562,903 Foreign currency transactions............................. (849,598) ----------- Net realized gain...................................... 13,713,305 Net unrealized depreciation on investments............. (207,043,045) ------------- Net realized and unrealized loss............................ (193,329,740) ------------- Net decrease in net assets resulting from operations........ $(173,605,803) =============
See Notes to Financial Statements. 16 PAGE TEMPLETON DRAGON FUND, INC. Financial Statements (continued) STATEMENTS OF CHANGES IN NET ASSETS FOR THE YEARS ENDED MARCH 31, 1998 AND 1997
1998 1997 -------------------------------- Increase (decrease) in net assets: Operations: Net investment income..................................... $ 19,723,937 $ 18,092,946 Net realized gain from investments and foreign currency transactions............................................ 13,713,305 33,644,962 Net unrealized appreciation (depreciation) on investments.............................................. (207,043,045) 118,765,665 -------------------------------- Net increase (decrease) in net assets resulting from operations............................................ (173,605,803) 170,503,573 Distributions to shareholders from: Net investment income..................................... (18,632,447) (18,362,411) Net realized gains........................................ (37,941,920) (15,932,093) In excess of net realized gains........................... (22,005,953) -- -------------------------------- Net increase (decrease) in net assets................... (252,186,123) 136,209,069 Net assets: Beginning of year.......................................... 985,718,736 849,509,667 -------------------------------- End of year................................................ $ 733,532,613 $985,718,736 ================================ Undistributed net investment income included in net assets: End of year................................................ $ 1,841,207 $ 880,701 ================================
See Notes to Financial Statements. 17 PAGE TEMPLETON DRAGON FUND, INC. Notes to Financial Statements 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Dragon Fund, Inc. (the Fund), is registered under the Investment Company Act of 1940 as a closed-end, non-diversified investment company. The Fund seeks long-term capital appreciation by investing at least 45% of its total assets in the equity securities of "China companies," as defined in the Fund's prospectus. The following summarizes the Fund's significant accounting policies. a. SECURITY VALUATION: Securities listed or traded on a recognized national exchange or NASDAQ are valued at the latest reported sales price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices. Securities for which market quotations are not readily available are valued at fair value as determined by management in accordance with procedures established by the Board of Directors. b. FOREIGN CURRENCY TRANSLATION: Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities and income items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. When the Fund purchases or sells foreign securities it will customarily enter into a foreign exchange contract to minimize foreign exchange risk from the trade date to the settlement date of such transactions. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign currency denominated assets and liabilities other than investments in securities held at the end of the reporting period. c. INCOME TAXES: No provision has been made for income taxes because the Fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute all of its taxable income. d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS: Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Certain income from foreign securities is recorded as soon as 18 PAGE TEMPLETON DRAGON FUND, INC. Notes to Financial Statements (continued) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONT.) d. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS (CONT.) information is available to the Fund. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. e. ORGANIZATION COSTS: Organization costs are amortized on a straight line basis over five years. f. ACCOUNTING ESTIMATES: The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expense during the reporting period. Actual results could differ from those estimates. 2. CAPITAL STOCK At March 31, 1998, there were 100 million shares authorized ($0.01 par value). During the years ended March 31, 1998 and 1997, there were no share transactions; all reinvested distributions were satisfied with previously issued shares purchased in the open market. 3. TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES Certain officers of the Fund are also officers or directors of Templeton Asset Management Ltd. (TAML), and Franklin Templeton Services, Inc. (FT Services), the Fund's investment manager and administrative manager, respectively. The Fund pays an investment management fee to TAML of 1.25% per year of the average weekly net assets of the Fund. The Fund pays FT Services an administrative fee of 0.15% per year of the Fund's average weekly net assets, of which 0.10% is paid to Nomura Capital Management, Inc. (NCM). Included in professional fees are legal fees of $149,111 that were paid to a law firm in which a partner is an officer of the Fund. 19 PAGE TEMPLETON DRAGON FUND, INC. Notes to Financial Statements (continued) 4. INCOME TAXES At March 31, 1998, the net unrealized depreciation based on the cost of investments for income tax purposes of $745,232,714 was as follows: Unrealized appreciation..................................... $ 147,181,741 Unrealized depreciation..................................... (153,929,918) ------------- Net unrealized depreciation................................. $ (6,748,177) =============
Net realized capital gains differ for financial statement and tax purposes primarily due to differing tax treatments of wash sales and losses realized on the sale of securities subsequent to October 31. 5. INVESTMENT TRANSACTIONS Purchases and sales of securities (excluding short-term securities) for the year ended March 31, 1998 aggregated $117,136,714 and $108,522,799, respectively. 20 PAGE TEMPLETON DRAGON FUND, INC. Independent Auditor's Report THE BOARD OF DIRECTORS AND SHAREHOLDERS TEMPLETON DRAGON FUND, INC. We have audited the accompanying statement of assets and liabilities, including the statement of investments of Templeton Dragon Fund, Inc. as of March 31, 1998, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the two years for the periods then ended and the financial highlights for the periods indicated in the accompanying financial statements. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of March 31, 1998, by correspondence with the custodian and brokers. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Templeton Dragon Fund, Inc. as of March 31, 1998, the results of its operations, the changes in its net assets and the financial highlights for the periods indicated, in conformity with generally accepted accounting principles. McGLADREY & PULLEN LLP New York, New York April 24, 1998 21 PAGE TEMPLETON DRAGON FUND, INC. Annual Meeting of Shareholders, September 23, 1997 An Annual Meeting of Shareholders of the Fund was held at the Fund's offices, 500 E. Broward Blvd., Ft. Lauderdale, Florida, on September 23, 1997. The purpose of the meeting was to elect five Directors of the Fund, to ratify the selection of McGladrey & Pullen, LLP, as the Fund's independent auditors for the fiscal year ending March 31, 1998, to consider the approval or rejection of a shareholder proposal to request and recommend that the Board of Directors consider approving and submitting for shareholder approval, a proposal to convert the Fund from a closed-end fund to an interval fund, and in their discretion, to authorize the proxyholders to vote upon such other matters that may legally come before the meeting or any other adjournment thereof. At the meeting, the following persons were elected by the shareholders to serve as Directors of the Fund: John Wm. Galbraith, Edith E. Holiday, Betty P. Krahmer, Gordon S. Macklin, and Fred R. Millsaps.* The shareholders ratified the selection of McGladrey & Pullen, LLP, to serve as the Fund's independent auditors for the fiscal year ending March 31, 1998. The proposal to request and recommend that the Board of Directors consider approving, and submitting for shareholder approval, a proposal to convert the Fund from a closed-end fund to an interval fund was rejected by shareholders. No other business was transacted at the meeting. The results of the voting at the Annual Meeting are as follows: 1. The election of five (5) Directors for the terms set forth below:
% OF % OF OUTSTANDING OUTSTANDING TERM EXPIRING 2000: FOR SHARES WITHHELD SHARES - ------------------------------------------------------------------------------------------------------------------------- John Wm. Galbraith.......................................... 44,102,371 81.66% 2,813,257 5.21% Betty P. Krahmer............................................ 44,163,072 81.77% 2,752,556 5.10% Gordon S. Macklin........................................... 44,114,735 81.68% 2,800,893 5.19% Fred R. Millsaps............................................ 43,995,350 81.46% 2,920,278 5.41% TERM EXPIRING 1998: - -------------- Edith E. Holiday............................................ 44,008,938 81.49% 2,906,690 5.38%
2. The ratification or rejection of the selection of McGladrey & Pullen, LLP, as independent auditors of the Fund for the fiscal year ending March 31, 1998:
% OF % OF % OF OUTSTANDING OUTSTANDING OUTSTANDING FOR SHARES AGAINST SHARES ABSTAIN SHARES - ------------------------------------------------------------------------- 44,956,284 83.24% 1,324,959 2.45% 634,385 1.18%
3. The approval or rejection of a shareholder proposal to request and recommend that the Board of Directors consider approving, and submitting for shareholder approval, a proposal to convert the Fund from a closed-end fund to an interval fund.
% OF % OF % OF % OF OUTSTANDING OUTSTANDING OUTSTANDING BROKER OUTSTANDING FOR SHARES AGAINST SHARES ABSTAIN SHARES NON-VOTES SHARES - ----------------------------------------------------------------------------------------------------- 12,906,304 23.90% 14,443,892 26.74% 999,134 1.85% 18,566,298 34.38%
*Harris J. Ashton, Nicholas F. Brady, Martin J. Flanagan, S. Joseph Fortunato, Andrew H. Hines, Jr. and Charles B. Johnson are Directors of the Fund who are currently serving and whose terms of office continued after the Annual Meeting of Shareholders. 22 PAGE 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 ChaseMellon Shareholder Services, Investor Services, P.O. Box 3338, South Hackensack, NJ 07606-1938, to receive the Plan brochure. --To receive dividends or distributions in cash, the shareholder must notify Mellon Securities Trust Company (the "Plan Agent") at the address above or the institution in whose name the shares are held. The Plan Agent must receive written notice within 10 business days before the record date for the distribution. --Whenever the Fund declares dividends in either cash or common stock of the Fund, if the market price is equal to or exceeds net asset value at the valuation date, the participant will receive the dividends entirely in stock at a price equal to the net asset value, but not less than 95% of the then current market price of the Fund's shares. If the market price is lower than net asset value or if dividends and/or capital gains distributions are payable only in cash, the participant will receive shares purchased on the New York Stock Exchange or otherwise on the open market. --A participant has the option of submitting additional payments to the Plan Agent, in any amounts of at least $100, up to a maximum of $5,000 per month, for the purchase of Fund shares for his or her account. These payments shall be made by check or money order payable to "Mellon Securities Trust Co." and sent to ChaseMellon Shareholder Services, Investor Services, P.O. Box 382009, Pittsburgh, PA 15250-8009, Attn: Templeton Dragon Fund, Inc. The Plan Agent shall apply such payments (less a $5.00 service charge and less a pro rata share of trading fees) to purchases of Fund shares in the open market. --The automatic reinvestment of dividends and/or capital gains does not relieve the participant of any income tax which may be payable on dividends or distributions. --The participant may withdraw from the Plan without penalty at any time by written notice to the Plan Agent sent to ChaseMellon Shareholder Services, Investor Services, P.O. Box 3338, South Hackensack, NJ 07606-1938. Upon withdrawal, the participant will receive, without charge, stock certificates issued in the participant's name for all full shares held by the Plan Agent; or, if the participant wishes, the Plan Agent will sell the participant's shares and send the proceeds, less a service charge of $5.00 and less trading fees. --Whenever shares are purchased on the New York Stock Exchange or otherwise on the open market, each participant will pay a pro rata portion of trading fees. Trading fees will be deducted from amounts to be invested. 23 PAGE TEMPLETON DRAGON FUND, INC. SHAREHOLDER INFORMATION Shares of Templeton Dragon Fund, Inc. are traded daily on the New York Stock Exchange under the symbol "TDF". The Fund's shares are also listed and traded in Japan on the Osaka 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 dividends and shareholder accounts, call 1-800-416-5585. The daily closing net asset value as of the previous business day may be obtained when available by calling Franklin Templeton Fund Information after 10 a.m. Eastern Time any business day at 1-800-DIAL BEN (1-800-342-5236). If any shareholder is not receiving copies of the Reports to Shareholders because shares are registered in a broker's name or in a custodian's name, he or she can request that his or her name 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. 24 PAGE TEMPLETON DRAGON FUND, INC. Tax Designation Under Section 852(b)(3)(C) of the Internal Revenue Code, the Fund hereby designates the following amounts as capital gain dividends for the fiscal year ended March 31, 1998: 28% Rate Gain.............................. $ 7,531,770 20% Rate Gain.............................. 23,685,266 ----------- Total...................................... $31,217,036 ===========
25 PAGE This page intentionally left blank PAGE This page intentionally left blank PAGE This page intentionally left blank PAGE LITERATURE REQUEST For a free brochure and prospectus, which contain more complete information, including charges and expenses, call Franklin Templeton Fund Information at 1-800/DIAL BEN(R) (1-800/342-5236). Please read the prospectus carefully before investing or sending money. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be determined by the presence of a regular beeping tone. FRANKLIN TEMPLETON GROUP GLOBAL GROWTH Franklin Global Health Care Fund Mutual Discovery Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton Global Infrastructure Fund Templeton Global Opportunities Trust Templeton Global Real Estate Fund Templeton Global Smaller Companies Fund Templeton Greater European Fund Templeton Growth Fund Templeton Latin America Fund Templeton Pacific Growth Fund Templeton World Fund GLOBAL GROWTH AND INCOME Franklin Global Utilities Fund Franklin Templeton German Government Bond Fund Mutual European Fund Templeton Global Bond Fund Templeton Growth and Income Fund GLOBAL INCOME Franklin Global Government Income Fund Franklin Templeton Global Currency Fund Franklin Templeton Hard Currency Fund Franklin Templeton High Income Currency Fund Templeton Americas Government Securities Fund GROWTH Franklin Biotechnology Discovery Fund Franklin Blue Chip Fund Franklin California Growth Fund Franklin DynaTech Fund Franklin Equity Fund Franklin Gold Fund Franklin Growth Fund Franklin MidCap Growth Fund Franklin Small Cap Growth Fund GROWTH AND INCOME Franklin Asset Allocation Fund Franklin Balance Sheet Investment Fund* Franklin Convertible Securities Fund Franklin Equity Income Fund Franklin Income Fund Franklin MicroCap Value Fund* Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Rising Dividends Fund Franklin Strategic Income Fund Franklin Utilities Fund Franklin Value Fund Mutual Beacon Fund Mutual Financial Services Fund Mutual Qualified Fund Mutual Shares Fund Templeton American Trust, Inc. FUND ALLOCATOR SERIES Franklin Templeton Conservative Target Fund Franklin Templeton Moderate Target Fund Franklin Templeton Growth Target Fund INCOME Franklin Adjustable Rate Securities Fund Franklin Adjustable U.S. Government Securities Fund Franklin's AGE High Income Fund Franklin Floating Rate Trust Franklin Investment Grade Income Fund Franklin Short-Intermediate U.S. Government Securities Fund Franklin U.S. Government Securities Fund Franklin Money Fund Franklin Federal Money Fund FRANKLIN FUNDS SEEKING TAX-FREE INCOME Federal Intermediate-Term Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund Puerto Rico Tax-Free Income Fund Tax-Exempt Money Fund FRANKLIN STATE-SPECIFIC FUNDS SEEKING TAX-FREE INCOME Alabama Arizona** Arkansas*** California** Colorado Connecticut Florida** Georgia Hawaii*** Indiana Kentucky Louisiana Maryland Massachusetts+ Michigan** Minnesota+ Missouri New Jersey New York** North Carolina Ohio+ Oregon Pennsylvania Tennessee*** Texas Virginia Washington*** VARIABLE ANNUITIES++ Franklin Valuemark(R) Franklin Templeton Valuemark Income Plus (an immediate annuity) *These funds are now closed to new accounts, with the exception of retirement plan accounts. **Two or more fund options available: long-term portfolio, intermediate-term portfolio, a portfolio of insured municipal securities, and/or a high yield portfolio (CA) and a money market portfolio (CA and NY). ***The fund may invest up to 100% of its assets in bonds that pay interest subject to the federal alternative minimum tax. +Portfolio of insured municipal securities. ++Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by Allianz Life Insurance Company of North America or by its wholly owned subsidiary, Preferred Life Insurance Company of New York, and distributed by NALAC Financial Plans, LLC. The Franklin Valuemark Funds are managed by Franklin Advisers, Inc. and its Templeton and Franklin affiliates. 05/98 PAGE TEMPLETON DRAGON FUND, INC. 100 Fountain Parkway P.O. Box 33030 St. Petersburg, Florida 33733-8030 AUDITORS McGladrey & Pullen, LLP 555 Fifth Avenue New York, New York 10017-2416 TRANSFER AGENT Chase Mellon Shareholder Services 450 West 33rd Street New York, New York 10001 1-800/416-5585 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, and that the Investment Manager may make errors in selecting securities for the Fund's portfolio. Like any investment in securities, the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political, and other factors. The Fund and Fund investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept the risk of such losses 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 determined by the presence of a regular beeping tone. TLTDF A98 5/98 [LOGO]Printed on recycled paper -----END PRIVACY-ENHANCED MESSAGE-----